Amendments to Company Law in China

On 29 December 2023, the latest amendment of the Company Law of the People’s Republic of China (“the New Company Law”)[1] was passed and will come into effect on 1 July 2024. It introduced many significant changes to China’s corporate law regime. The last amendment to China’s Company Law prior to this was made in 2018 (“the 2018 Company Law”). On 6 February 2024, the PRC State Administration for Market Regulation (“SAMR”) also issued the draft Provisions of the State Council on the Implementation of the PRC Company Law on the Registration of Registered Capital Management System (“Implementation Provisions”)[2] which details the supporting administrative regulations for the New Company Law. This note will briefly introduce the key changes investors should take note of.

1.  Capital Contribution Timeline

The 2018 Company Law provides that shareholders could determine their capital contribution timeline freely in their articles of association. Under the New Company Law, shareholders must pay their entire subscribed capital contribution within five years of the company establishment date, unless otherwise provided in other laws and regulations (Article 47).

In the Implementation Provisions, a three-year transition period (from July 1, 2024 to June 30, 2027) has been established to allow companies with capital contribution periods exceeding five years to adjust to five years or less. Moreover, limited liability companies established before the implementation of the New Company Law will not be required to adjust the capital contribution period if the remaining capital contribution period is less than five years from July 1, 2027.

2. More Stringent Rules on Outstanding Capital Contributions

To protect the company and creditors’ interest, new rules are introduced to ensure shareholders pay up their full capital contribution. Therefore, if the company is unable to pay its debts, creditors and management of the company can require shareholders to pay any unpaid capital contribution, even if it is before the deadline for the shareholder’s payment (Article 54).

The Implementation Provisions provide that, if the company has a contribution period of over 30 years and capital amount of more than RMB one billion, the SAMR has the right to examine and validate these companies, taking into account the ability of the shareholders to make capital contributions, their main business and the size of their assets, and has the right to request them to make rectification if they consider the registered capital and the contribution period to be clearly abnormal.

3. Transfer of Equity Interest

When transferring equity interest in a limited liability company to a person other than a shareholder, the requirement for approval by a majority of shareholders has been removed in the New Company Law. The exiting shareholder can now notify shareholders of their intended transfer, and if no one responds within thirty days, their right of first refusal will be deemed to be waived (Article 84).

4. Supervisors

It is required under the 2018 Company Law that a company must have one or two supervisors or a board of supervisors that oversees the affairs of the company. Now, smaller-scale limited liability companies can choose not to have a board of supervisors, appoint one supervisor, or not have supervisors at all; and smaller-scale joint stock companies can choose not to have a board of supervisors and appoint one supervisor (Article 83 and Article 133).

Instead, an audit committee composed of directors may be set up to exercise the functions of the board of supervisors (Article 69 and 121).

5. Legal Representatives

Under the 2018 Company Law, only the chairman, executive director or general manager could be the legal representative of a company. Now, this has been amended so that the legal representative of a company could be a director or general manager who executes the company's affairs on behalf of the company in accordance with the provisions of the company's articles of association (Article 10).

6. Board of Directors

For small joint-stock limited companies, the New Company Law allows the option of not having a board of directors, and appointment of a single director will suffice. The 2018 Company Law only allowed limited liability companies this option (Article 128).

7. Board and Shareholders’ Resolutions

In relation to passing board and shareholder resolutions in a limited liability company, the general resolution of shareholders' meetings shall be passed by the shareholders representing more than half of the voting rights (Article 116), while the resolution of the board of directors shall be passed by more than half of all directors (Article 124). This is newly added to the New Company Law.

8. Company Registration and Liquidation

Chapter 2 of the New Company Law is a new chapter on company registration, outlining procedure for establishment, change and deregistration of a company. The New Company Law also improves the liquidation system, stating that directors have an obligation to form a liquidation group for liquidation, which consists of all directors, unless otherwise stated in the articles of association or shareholders’ meeting (Article 232).

9. Protecting Shareholders’ Rights

The 2018 Company Law allows the articles of associations, shareholders’ register, corporate resolutions, accounting books and financial audits to be reviewed by shareholders. The New Company Law will enhance shareholders’ right to review documents, allowing them to review the underlying accounting documents of the company and any of the aforementioned documents of a wholly owned subsidiary of the company (Article 57 and 110).

Further, if a controlling shareholder of a company abuses shareholder rights and materially harms the interests of the company or other shareholders, shareholders will have the right to request the company to purchase their shares at a fair price (Article 89).

Summary Table of Key Changes

[1] Latest Amendment of the Company Law of the People’s Republic of China （中华人民共和国公司法）

[2] Draft Provisions of the State Council on the Implementation of the PRC Company Law on the Registration of Registered Capital Management System（市场监管总局关于公开征求《国务院关于实施〈中华人民共和国公司法〉注册资本登记管理制度的规定（征求意见稿）》意见的公告）