China Amends Company Law

On 29 December 2023, China passed amendments to the PRC Company Law. The changes, which will come into effect on 1 July 2024, were mostly prefigured in one or more of the rounds of draft revisions released over the last few years. While some amendments do nothing more than codify already existing judicial rules and regulatory practices, others may affect how companies in China are run in the coming years. The most important changes for limited liability companies (the corporate form for most foreign investment) are summarized below.

Shareholder Subscribed Capital and Liability

The existing Company Law does not set a specific time limit for a company’s registered capital to be paid in, but rather leaves it to the company’s articles of association to specify (though other laws and regulations have had other requirements in this respect for companies in certain industries, e.g., banking, securities, and insurance). Under the amended Company Law, shareholders must pay in registered capital no later than five years after the establishment of the company.

Companies established before the amendments come into effect must “gradually adjust the payment timeline to be in compliance” (if they are not already in compliance). While this provision is not precise, the amended Company Law provides that the company registries may require such companies to make adjustments to the payment timeline; however, companies may wish to pay in their registered capital sooner, e.g., by 1 July 2024, to avoid being called on by PRC officials.

Under the amended Company Law, if a shareholder fails to pay in subscribed capital on time, the shareholder will lose its equity corresponding to the unpaid capital, after the shareholder has been given notice and a grace period. In the meantime, the shareholder is liable to the company for any losses from the failure to make the full capital contribution. For deficiencies in capital contribution at the time of incorporation, the other incorporating shareholders will be jointly and severally liable alongside the shareholder that fails to pay in its capital contribution.

Equity Transfer and Redemption

For a shareholder to transfer its equity, the existing Company Law requires the consent of a majority of the other shareholders, although if they object, they must purchase the equity to be transferred. Under the amended Company Law, the transferring shareholder only needs to notify the other shareholders in writing of the quantity, price, method of payment, and time limit for the transfer of equity, and the other shareholders may buy the equity before any third-party buyer acquires it on those terms.

An additional scenario has been added for (minority) shareholders to require the company to redeem equity: if the controlling shareholder of the company abuses its shareholder rights and seriously harms the interests of the company or other shareholders. No details are specified about the scenario, e.g., the abuses or the seriousness of the harm, and the redemption price is qualified only as “reasonable”.

Management Organization and Liability

The amended Company Law provides more flexibility in organizing the management of a company, although some new requirements are also added. There is no longer a maximum number of directors, though the minimum remains three, except if the company is “relatively small in scale and number of shareholders”, in which case it can have just one director (called “sole director” instead of the current title “executive director”). On the other hand, a company with 300 or more employees must have at least one director selected by the employees and acting as their representative.

Instead of a supervisor or board of supervisors, under the amended Company Law, a company can set up an audit committee comprised of an unspecified number of directors of the board and responsible for supervising the company’s financial and accounting matters. The general manager’s powers and functions are no longer specified in the law, but rather may be as set out in the articles of association or as delegated by the directors, and a general manager can even take the place of a sole director.

The amended Company Law has expanded the liability of directors, supervisors, and senior management. For example, if the directors fail to pursue deficient capital contributions, they may be liable to compensate losses to the company. Further, when a third party suffers losses due to an intentional or grossly negligent performance of a director’s or senior officer’s functions, the director or senior officer will be jointly and severally liable with the company to compensate the losses.

Takeaways

While the above may be considered the most important changes, under the amended Company Law, for limited liability companies generally, there are several more new or adjusted rules, requirements, etc., including for particular situations such as mergers and acquisitions, reduction of registered capital, and liquidation. Overall, however, very few amendments require companies to take immediate action as a general matter, e.g., to pay in all registered capital (if not done already) and to add an employee-representative director (if the company has 300 or more employees).

Instead, most amendments call for companies and management to keep in mind new rules, particularly on their powers, duties, and potential liability. Companies also have a few new options to consider, e.g., doing away with the supervisor position or setting up a general manager to serve as a sole director. Considering that the Company Law was last revised in 2018 and there have been many developments in PRC legislation and the reality on the ground since then, the amendments are rather few and conservative, which should be welcome by most businesses.