The new Company Law which will take effect on July 1, 2024, contains significant changes of the capital contribution as well as the corporate governance. that are likely to affect every foreign-invested company in China: companies will be required to pay in the registered capital within five years while the impact on existing companies is unclear now.
I. Tightened Capital Contribution Timeline
1. The registered capital shall be paid in full within five years from the establishment of the company
Article 47 of the Revised Company Law states that all shareholders of a limited liability company shall pay up the registered capital in full within five years from the date of the establishment of the company in accordance with the Articles of Association.
This provision will affect both new and existing companies. According to Article 266 of the new Company Law, existing companies whose capital contribution period exceeds the 5-year period stipulated in the new Company Law shall “gradually adjust” their capital contribution period to comply with the new Company Law.
To clarify how existing companies shall adapt to the new regulations, we still need to wait for further implementing rules or interpretation of the Chinese government.
2. Stricter rules on outstanding capital contributions
- If the shareholder does not fulfill his obligation to make the capital contribution upon expiration of the grace period stated in the written notice of call by the Board of Directors, the shareholder shall forfeit his equities for which the capital contribution has not been paid upon issuance of a written notice of forfeiture by the resolution of the board of directors.
Such forfeited equities shall be transferred according to law, or the registered capital thereof shall be reduced, and the equities shall be written off. If the equities are not transferred or written off within 6 months, other shareholders of the company shall make corresponding capital contributions in full amount in proportion to their capital contributions.
- Shareholders may be held liable to the company itself for losses caused to the company due to capital contributions not being made in full or in time.
- Shareholders may be held liable for unpaid or insufficient capital contributions of co-shareholders up to the amount of the unpaid or insufficient capital contribution portion.
II. Regulatory Changes to the Corporate Governance Structure
1. Audit committee
Currently, the corporate governance structure has a two-tier board system consisting of the board of directors and the board of supervisors (or a supervisor). The new Company Law allows companies to choose a one-tier board system by setting up an audit committee in the board of directors. This audit committee can replace the board of supervisors or the supervisor.
2. Small companies may further simplify their corporate governance structure
In addition to the option of a supervisor instead of a board of supervisors in the current Company Law, for limited liability companies with a small scale or a relatively small number of shareholders, the new Company Law introduces the option of not having a supervisor if all the shareholders of the company reach a consensus. (Article 83)
3. Employee representative
Limited liability companies with more than 300 employees shall include employee representative(s) in their board of directors unless the board of supervisors has been established with an employee representative included. Such employee representative(s) on the board of directors shall be democratically elected by the company’s employees. This will further ensure the involvement of the employee representative in the management system.
III. Regulatory changes to the Shareholders’ Powers and Obligations
1. Shareholders may request to inspect the accounting vouchers of the company themselves or through external firms
In addition to the accounting books, the new Company Law states that shareholders may request to inspect the accounting vouchers and may authorize an accounting or law firm to assist them in inspecting the relevant materials. This provision further enhances shareholders’ right to information.
2. Profit shall be distributed within six months upon resolution by the shareholders’ meeting
The Board of Directors shall distribute the profit within six months after the shareholders’ meeting has passed the resolution on the distribution of profit. (Article 212)
IV. Regulatory Changes to the Responsibilities of the Management
1. Shifting in management responsibilities
- The responsibility to decide on the company’s business policies and investment plans has been shifted from responsibility of the shareholders’ meeting to the responsibility of the board of directors.
- The responsibilities of the general manager are not included in the new Company Law, which provides greater flexibility in determining the functions of the general manager.
2. Stricter liability rules for directors and senior management
The new Company Law contains several new provisions that impose stricter diligence requirements and greater liability exposure on directors and senior management of the companies in China. For example,
- Directors, supervisors, and senior managers have a duty of diligence to the company, and they shall exercise reasonable care normally expected of managers for the best interests of the company when performing their duties.
- Directors have a duty to verify the capital contributions made by the shareholders of the company and to issue reminders in case of undue or insufficient contributions.
- When a director, supervisor or senior manager directly or indirectly enters into a contract or conducts a transaction with the company, he/she shall report the matter to the board of directors or shareholders’ meeting for resolution.
- No directors, supervisors or senior managers shall take advantage of his/her position to seek for himself/herself or any other person any business opportunity that belongs to the company except under certain circumstances permitted by the law.
- No director, supervisor or senior executive shall engage in any business that is similar to that of the company for himself/herself or for any other person, unless he/she reports the matter to the board of directors or the shareholders’ meeting and obtains the approval by resolution.
V. Other regulatory changes
1. Legal liability of the company for the activities carried out by its management
- The company is liable for the legal consequences of the civil activities carried out by the legal representative on behalf of the company.
- If a director or senior manager causes any damage to any other person in the performance of his or her duties, the company shall be liable for compensation. If a director or senior manager acts with intent or gross negligence, he/she shall also be liable for compensation.
2. Possibility of making capital contributions in the form of stock rights and creditor’s rights
The new Company Law introduces two additional options of non-monetary assets for capital contribution: stock rights and creditor’s rights.
3. Shareholders’ meeting and board meeting by means of online correspondence
The convening and passing of resolutions at shareholders’ meeting and board meeting may be carried out by means of online correspondence, unless otherwise provided under the Articles of Association (“AoA”).
4. Quorum requirements
The new Company Law introduces mandatory quorum requirements for the convening and the passing of resolutions at the shareholders’ meeting or the board meeting. Pursuant to these requirements,
- More than half of the equity interest of a company needs to be represented when passing a resolution at the shareholders’ meeting. (Article 66)
- More than half of the directors need to be present at a board meeting and a resolution is passed by the affirmative vote of more than half of the directors. (Article 73)
Conclusion
Although there are still uncertainties and room for interpretation regarding some of the changes under the new Company Law, we advise shareholders and management of foreign-invested companies to review their current set-up and to consider and discuss the possible adaptations under the new Company Law well in advance. Particular attention should be the capital contribution obligations and the governance structure of the company. Following the first draft of the revised Company Law published in December 2021, a second draft in December 2022 and a third draft in August 2023, the final draft of the revised Company Law of the People’s Republic of China was approved on 29 December 2023 during the 7th Session of the Standing Committee of the 14th National People’s Congress. The law will take effect on July 1, 2024.
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