Following its review of multiple draft amendment versions over the past three years, the Standing Committee of the National People’s Congress of China finally enacted the revised Company Law on 29 December 2023. It is set to take effect on 1 July 2024. Coincidentally, the amendment was passed on the 30th anniversary of the initial enactment of the Company Law, which was on 29 December 1993.
The latest revision represents the second and most comprehensive of its kind since the Company Law’s inception back in 1993. The amendment ushers in a cascade of sweeping changes, modifying core tenets underpinning Chinese corporate governance and capital contribution rules. In addition, it offers increased flexibility in various aspects, including allowing more variation in the corporate governance structure. Moreover, it aims to bolster the safeguarding of shareholder rights, thereby ensuring a more balanced and transparent corporate governance framework. As such, the updated Company Law carries far-reaching implications for all limited liability companies in China. It will impact both established and fledgling businesses alike.
This article provides a detailed exploration of the key changes brought about by the latest revision to China’s Company Law. Additionally, it examines the potential implications for businesses operating in China.
Overview: China’s Company Law overhaul
China’s overhauled Company Law consists of 266 articles in total, with the inclusion of over 70 new or heavily revised articles. The latest modifications to China’s corporate legal framework mark its first extensive revamp since 2005, incorporating many noteworthy changes. There are compelling reasons behind the major overhaul of China’s Company Law. One key objective is to fine-tune the corporate legal framework to foster a more favourable environment conducive to doing business. In addition, there is a necessity to resolve practical issues in the application of the Company Law as it stands. Further, the reform aims to promote transparency, accountability, and fairness in corporate decision-making and governance practices.
Here is a brief overview of the key highlights and notable changes introduced under the revamped Company Law:
- Capitalisation requirements: The period within which shareholders must make their capital contributions in full has been accelerated to five years from the date of incorporation.
- Optimisation of corporate governance structures: Companies are granted greater autonomy in sculpting their own governance frameworks. Emphasis is placed on promoting employee representation at the board of directors, in particular. The aim is to cultivate a more agile and responsive structure while promoting employee engagement and empowerment.
- Strengthening the accountability mechanisms governing shareholders, directors, supervisors, and senior company officers: New provisions have been added to enhance oversight and scrutiny of such individuals’ conduct. The amended Company Law clearly delineates the obligations imposed on them.
Capitalisation requirements
Maximum five-year capital contribution period
The 2013 amendment to the Company Law had removed statutory requirements for capital contribution deadlines and minimum registered capital. The previous reform aimed to incentivise investors by allowing considerable discretion regarding the timing of capital contributions. The latest revision, however, restores the time limit for shareholders to pay up the entirety of their subscribed capital. Shareholders must fully pay in their subscribed capital within five years from the establishment of the company. In addition, the contribution period should be clearly stated in the company’s articles of association.
Furthermore, if a company’s capital contributions or contribution period are deemed abnormal, the authorities may demand that the company take remedial measures to correct any irregularities.
For more information, consult our Guide to Registered Capital in China.
Three-year transition period for existing companies
On 6 February 2024, China’s State Administration for Market Regulation (“SAMR”) promulgated the Provisions of the State Council on the Implementation of the Registered Capital Registration and Management System Specified in the Company Law of the People’s Republic of China. The document provides practical direction on executing the provisions contained in the final draft amendment passed on 28 December 2023. The SAMR prescribes a three-year grandfathering arrangement for existing companies to comply with the new five-year capital contribution deadline. The grace period shall commence on 1 July 2024 and end on 30 June 2027.
During this timeframe, existing companies must adjust their contribution period to align with the newly prescribed five-year deadline. They will be required to complete their capital contribution before 30 June 2032 to ensure compliance. By the same token, companies with less than five years of their contribution period remaining after 1 July 2027 need not make any further adjustments.
Shareholders’ liabilities and obligations
Liability for unpaid capital contributions
The new Company Law provides for the event where a shareholder fails to fulfil their capital contribution obligation within the specified timeframe – either in whole or in part. Upon notification by the board of directors in the form of a payment notice, the shareholder is given a grace period of 60 days to take appropriate remedial action.
If the shareholder fails to pay up his subscribed capital after the grace period expires, they shall forfeit their equity interests equivalent to the unpaid amount. Equity interests that are forfeited will either be transferred to a third party or undergo deregistration via capital reduction.
It is important to note that the remaining shareholders share joint and several liability. This means that, alongside the non-compliant shareholder, the other founding shareholders bear legal responsibility for any shortfalls in capital contribution. Where the forfeited equity interests have not been transferred or deregistered within six months, the remaining shareholders must, in lieu of the defaulting shareholder, pay up the unpaid registered capital. The contribution should be made in accordance with each shareholder’s proportional ownership stake in the company.
In addition, if a company becomes insolvent before the scheduled due date for contributions, either the company or its creditors have the right to demand shareholders to accelerate their payment.
Corporate veil-piercing mechanism strengthened
In a nutshell, “piercing the corporate veil” refers to the legal concept where a court disregards the legal separation between a company and its owners, shareholders, or members. Therefore, they can become personally liable for the company’s obligations. Usually, this principle is invoked where there are indications of corporate structure manipulation for fraudulent activities, avoidance of legal duties, or unjust protection of individuals from liability.
Corporate veil-piercing was addressed in the 2018 iteration of the Company Law. The revised Company Law enhances this mechanism – both vertically and horizontally. “Vertical” piercing occurs when shareholders are held liable for the company’s debts and liabilities. It ensures that shareholders cannot escape accountability by hiding behind the corporate structure. If the shareholder of a single-shareholder company cannot demonstrate the separation of the company’s assets from their own, they will bear joint and several liability for the company’s debts.
Conversely, “horizontal” piercing occurs when a shareholder abuses the separate legal identities and limited liability protection of multiple companies under their control to evade liabilities, significantly injuring the interests of creditors of these companies. In such cases, each company is held jointly and severally liable for debts incurred by the other companies.
Shareholders’ rights and interests
Access to corporate and financial documents
The updated Company Law allows shareholders to scrutinise the company’s accounting records or those of its wholly-owned subsidiary. The expanded scope of documents available for examination also includes the articles of association, audit reports, resolutions, and shareholders’ register. By granting supplementary statutory rights to access information, the law aims to safeguard the rights of minority shareholders.
Bolstering shareholders’ rights
The amended Company Law also strengthens the protection of other rights, including the below:
- If a controlling shareholder abuses their rights and significantly harms the company’s interests or those of other shareholders, shareholders possess the right to demand that the company repurchase their shares at a fair value.
- Shareholders reserve the right to take legal action against directors, supervisors, or senior management of a company’s wholly-owned subsidiaries if they are found to have contravened administrative regulations, laws, or the articles of association, resulting in losses for the company.
Corporate governance
Legal representative
The new Company Law provides for the flexibility to appoint any director managing a company’s affairs on its behalf to take on the role of the legal representative. Before the amendment, the position had to be assumed by the chairman of the board of directors, executive director, or general manager.
Composition of governance structure
Traditionally, Chinese companies adopt a two-tiered governance structure comprising a board of directors as well as a supervisory board. The supervisory board is made up of no fewer than three members, with no less than one-third being employee representatives. Its primary function is to oversee the activities of the board of directors and other senior executives in the organisation. In addition, it ensures that they are acting in compliance with the articles of association as well as relevant laws.
Prior to the latest amendment, a company could do away with a supervisory board if it was deemed a limited liability company and a small enterprise. In such cases, it could appoint one or two supervisors to fulfil the functions of the supervisory board. The revised Company Law allows for a further relaxation of the requirement, reducing the number of supervisors to just one. Alternatively, companies can dispense with the role of the supervisor entirely upon unanimous agreement among shareholders.
Audit committee
Given the relatively muted role of the supervisory board in corporate governance, the 2023 amendment introduces a new system of audit committees. Established within the board of directors itself, such committees assume the responsibilities traditionally undertaken by the supervisory board or supervisor. No specific requirements are imposed on the number or qualifications of members appointed to a limited liability company’s audit committee. However, the exclusively directorial composition of the committee could pose challenges, leading to potential conflicts of interest. The committee may find it difficult to carry out supervisory duties impartially if it consists solely of directors.
Employee representation
The revised Company Law places greater importance on the inclusion of employee representation within the board of directors. In the 2018 version of the Company Law, employee representation on the board of directors is mandated only for companies with specific state-owned interests. However, the latest revision broadens this obligation to include all companies with 300 or more employees. An exception applies where the supervisory board already has at least one employee representative. Additionally, employee representatives are permitted to sit on the audit committee. They are to be democratically elected by the company’s employees by way of employees’ congress, meeting, or other means.
How CW can help you
The revised Company Law has brought forth substantial amendments that profoundly impact many facets of corporate operations. These encompass key areas, such as capital contribution obligations, shareholder responsibilities, and corporate governance norms. In light of these sweeping alterations, it becomes crucial to meticulously evaluate the suitability of your capital contribution strategy, the effectiveness of your current corporate governance structure, and the procedural protocols in place.
With over three decades of expertise in guiding foreign investors from diverse backgrounds to establish their corporate foothold in China, our seasoned professionals from our China Consulting team are dedicated to safeguarding your interests. We will help you ensure strict adherence to the new regulatory requirements under the updated Company Law and proactively mitigate any associated risks.
Contact us to find out how we can assist you in confidently navigating these extensive changes with peace of mind.
