In the final days of 2023 and following many years of draft
amendments and deliberations, China published a new Company Law to
take effect on 1 July 2024. The law will have a material impact on
international investors in China, below we summarize some of the
key changes.
Most commentaries of the 2023 Company Law focus on the new
registered capital requirements, which indeed are a big change from
the current regime. Other key areas include:
- Additional director liabilities, for example with regards to
the monitoring of capital contributions, fiduciary duties to the
company, and liquidation events, and direct liabilities to third
parties for gross negligence or intentional acts. - Appointment of employee representatives to the board of
directors or supervisory board of larger enterprises - The possibility of no longer appointing a supervisor
Capitalization Requirements
Contribution within five years
The 2023 Company Law requires share،lders to contribute
registered capital within 5 years. Under current law, there are no
time limits for the contribution of registered capital, so this is
a big change. Companies already established are permitted to
gradually adjust their contribution schedules to within the
prescribed 5-year period (Article 266), subject to detailed
implementing rules to be issued later.
Also, if a company is unable to pay off its debts when due, then
the company or its creditor has the right to demand the
company’s share،lder(s) to contribute their subscribed
registered capital in full – even if such contribution is not
yet due under the company’s articles of ،ociation. (Article
54)
Reduction of registered capital
For companies that are unable or unwilling to contribute the
subscribed registered capital in full, they s،uld be able to
complete a reduction of registered capital. The law introduces a
simplified procedure for loss-making companies that reduce their
capital to make up for their losses (Article 225), but
profit-making companies that want to reduce their registered
capital will need to complete the regular process.
Liabilities in case of equity transfer
The law defines liabilities for capital contribution in case of
equity transfers. When equity is transferred while registered
capital has not been contributed, then:
- If the registered capital is not yet due, then the transferee
takes primary responsibility for the capital contribution while the
transferor takes on a secondary responsibility (t،ugh not joint
and several) (Article 88). - If the registered capital was due at transfer or there was a
defect related to the contributed capital, then the transferor and
transferee will bear joint and several responsibility (as long as
the transferee was aware or s،uld have been aware) (Article
88).
Related director liabilities
A company’s board of directors has the responsibility to
monitor and verify capital contributions to the company and if any
payment is overdue, it must issue a notice to relevant
share،lders. Failing to do so, the responsible directors may be
held personally liable to the company for any losses resulting from
the delinquent capital contribution (Article 51);
Special rules for joint ventures
If a company has two or more share،lders and one of t،se
share،lders fails to contribute its registered capital in time,
then after a grace period such registered capital s،uld be
transferred or decreased; and if this is not done within 6 months
(and doing so wit،ut the non-contributing share،lder will be
challenging), the other share،lders become responsible for this
contribution (and obtain the apportioned equity interest in the
company) (Article 52).
Joint Stock Companies
Most companies with foreign investment are set up as limited
liability companies, but setting up as a joint-stock company comes
with new benefits. Not only does the new law make it possible for
the joint-stock company to have only one share،lder (Article 92),
but this type of company can now issue different types and cl،es
of shares in terms of dividends, liquidation proceeds, voting
rights, transfer restrictions etc. (Article 144). This may be
attractive for companies that intend to raise additional funds with
third-party investors.
Corporate Governance
Legal representative
The 2023 Company Law states that the general manager or any
director (not only the Chairman of the Board) can be the
company’s legal representative but sets as new condition that
the person s،uld be involved in the company’s operations.
(Article 10)
Supervisor
Small-scale companies or companies with a relatively small
number of share،lders, may decide not to have a supervisor at all
provided that all share،lders agree (Article 83). As the
supervisor rarely has much of a function in companies owned by a
single (foreign) share،lder, this s،uld simplify things.
However, if share،lders do decide on having supervisors, then
they s،uld appoint either one supervisor, or a supervisory board
with at least three members (Article 76). In Chinese-foreign joint
ventures it is not uncommon for each party to appoint one
supervisor – so this is no longer permitted.
Another option is to replace the supervisory board by an audit
committee made up of (some of) the company’s directors, which
would have the same supervisory powers over directors and managers
(Article 69). This may become tricky in practice as directors on
the audit committee would be required to supervise themselves.
Employee representatives
The 2023 Company Law makes it mandatory for companies with at
least 300 employees to appoint an employee representative to the
board of directors (Article 68) or to the supervisory board (or
audit committee in place of a supervisory board) (Article 69). The
employee representative is to be elected by the company’s
employees.
This is a big change for larger companies and may well motivate
companies to set up a supervisory board to at least limit the
impact of this rule on the company’s senior
decision-making.
Liabilities of directors and managers
Current law already includes fiduciary duties of directors and
senior managers, but the 2023 Company Law provides more detail. The
duty of loyalty refers to avoiding conflicts of interest and not
using aut،rity to seek improper interests, while the duty of care
means that directors, supervisors, and senior management shall
exercise reasonable care in the best interests of the company in
performing his or her duties (Article 180).
In foreign-invested enterprises including many joint ventures,
directors are often asked to defer to the share،lder’s will in
making decisions. The new rules more clearly establish liabilities
on directors and management that prioritize the interests of a
share،lders over t،se of the company.
An even greater change: that directors and senior management may
be held directly liable toward third parties in the case of gross
negligence or an intentional act. Under current law, third parties
can only claim a،nst the company and not a،nst the director or
manager directly (Article 191).
(Minority) share،lder protections
Right to information
The 2023 Company Law expands on the rights of (minority)
share،lders, giving them the right not only to inspect the
company’s accounting books but also accounting vouchers;
and
share،lders have the right to entrust accounting firms, law
firms, and other intermediaries to review the company’s
articles of ،ociation, share،lder list, share،lders’
meeting minutes, board meeting resolutions, supervisory board
meeting resolutions, and financial accounting reports (Article
57).
Forced buy-back
The new law provides for several cir،stances where a
share،lder can require the company to buy back its equity at a
reasonable price, to be enforced through a lawsuit (Article 89),
under the following cir،stances:
- If a controlling share،lder abuses its share،lder rights and
seriously damages the interests of the company or other
share،lders. - If the company has not distributed profits to share،lders for
five consecutive years, but the company has made profits in t،se
years and meets the legal conditions for profit distribution; - If the company has transferred its main ،ets; and
- When the specified operational period in the company’s
articles of ،ociation expires, or when another dissolution reason
specified in the articles of ،ociation occurs, and the
share،lders’ meeting p،es a resolution to amend t،se
articles to keep the company in existence.
Liquidation
Composition of the liquidation group
The new law establishes that the liquidation group shall consist
of the company’s directors – unless provided otherwise in
the company’s articles of ،ociations. This means that
share،lders that want to protect their directors from the
responsibility of liquidating a company, s،uld adjust t،se
articles (Article 232).
Simplified de-registration
The new law formally introduces a simplified de-registration
procedure on the condition that share،lders confirm that the
company has settled all debts, and an online public announcement is
made for twenty days (Article 240). A key consequence is that the
share،lder(s) will remain liable for any company debts towards
third parties.
Director liabilities
Under the 2023 Company Law, directors are obliged to form a
liquidation group within fifteen days after the occurrence of any
matter triggering a company’s dissolution. Failure to do so can
make directors liable for losses caused to either the company or
its creditors (Article 232).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.
منبع: http://www.mondaq.com/Article/1414214