China’s Company Law underwent significant amendments, effective July 1, 2024. These changes bring about crucial shifts in corporate governance, registered capital contribution, and equity structures.
Shortened Deadline for Capital Contribution
The regulatory framework concerning capital contributions in China has undergone multiple revisions. In the latest iteration, minimum contribution amounts and payment deadlines were abolished, reducing creditor protection.
Article 47 of the revised Company Law mandates that shareholders fully contribute their registered capital within a maximum period of 5 years for newly established companies. This deadline also applies to subsequent capital increases. For existing companies with contribution deadlines exceeding 5 years, adjustments must be made to comply with the newly stipulated timeframe. However, specific implementation measures are still pending.
This revision is one of the major changes that will significantly impact foreign-invested companies.
Joint Liability Upon Establishment
In cases where a shareholder fails to meet its capital contribution obligation during the establishment of a limited liability company (LLC), other participating shareholders are collectively responsible for covering the shortfall (joint and several liability) (Article 50). This underscores the importance of addressing such scenarios in shareholders’ agreements to enhance control and establish resolution mechanisms, thus excluding defaulting shareholders. It also encourages shareholders to align the registered capital amount with their financial capacity.
Joint Liability in Case of Sale of Equity
When a shareholder sells its equity interest in an LLC before fulfilling the capital contribution, both the buyer and seller are jointly and severally liable for the outstanding unpaid amount (Article 88).
Changes in Corporate Governance Structures
The revised Company Law strengthens corporate governance structures, impacting how foreign-invested entities establish and maintain their governance practices.
- Legal Representative
The Legal Representative plays the main role in the company formation as each PRC company must appoint one who will be endowed with the statutory authority to represent the company in its civil activities, subject to any constraints outlined in the articles of association and/or decisions made by shareholders’ meetings.
Previously, only the chairman of the board of directors, the sole executive director (if applicable), or the general manager were eligible to act as a legal representative. However, an amendment introduced some flexibility by allowing any director overseeing the company’s operations or the general manager to assume the role of legal representative (Article 10).
Considering the potential personal liabilities associated with the position of the legal representative, the New Company Law incorporates a clear mechanism for the transition. If a director or the general manager serving as the legal representative resigns, the resignation from the position of legal representative is automatic, and the company must appoint a new legal representative within 30 days (Article 10). This provision addresses concerns about the legal representative being indefinitely tied to the position without a successor in place.
- Supervisory Structures
Before, limited liability companies were required to establish an internal supervisory body, which could be either a board of supervisors or, exclusively for small-scale companies with a limited number of shareholders, the appointment of one (or two) supervisor(s).
To address concerns that the powers and functions of these supervisory bodies were often nominal, Article 83 of the Company Law 2024, allows for either a supervisory board or only one supervisor, while small companies can entirely forego establishing a supervisory body.
Previously, joint ventures involving domestic and foreign partners often opted for appointing two supervisors one from each side. Now following the adjusted regulations many existing joint ventures must decide whether to appoint a supervisory board or a sole supervisor.
- Employees’ Participation
The New Company Law expands employee involvement in Chinese companies. Now, companies with 300 or more employees must appoint at least one employee representative to the board of directors, unless the company has a board of supervisors that includes employee representatives (Article 68).
This may lead to a shift in preference towards establishing a supervisory board (consisting of a minimum of three members) to avoid employee representation at the board of directors level, a less favored choice among investors who have typically preferred the appointment of individual supervisors.
- Enhanced Executive Accountability
The New Company Law significantly elevates the responsibilities of formally appointed executives and those in positions of authority. Detailed provisions have been added concerning the duties of loyalty and diligence expected from directors, supervisors, and senior executives. Additionally, if a controlling shareholder or actual controller of a company, who is not a director, actively oversees the company’s operations, they are also obligated to adhere to the duties of loyalty and diligence.
Furthermore, if a controlling shareholder or actual controller instructs a director or senior executive to engage in actions detrimental to the company’s interests or those of the shareholders, they bear joint and several liability alongside the implicated director or senior executive.
Article 240 of the amended law introduces simplified procedures for companies without debts, easing the process of deregistration.
The streamlined deregistration process involves announcing the deregistration via the National Enterprise Credit Information Disclosure System for a minimum of 20 days. Following the conclusion of the announcement period, if no objections are received, the company can then apply to the company registration authority to cancel its registration within 20 days.
The recent updates to China’s corporate legislation offer opportunities for improved governance and transparency. Nevertheless, these revisions require careful analysis and adaptation. To ensure adherence to the revised regulations, we strongly recommend connecting with our expert team as we can offer 20+ years of valuable guidance to facilitate a smooth and compliant business operations. Reach out to us today to leverage our knowledge and ensure a successful and legally sound venture in the Chinese business landscape.
S.J. Grand is a full-service accounting firm focused on serving foreign-invested enterprises in Greater China since 2003. We help our clients improve performance, value creation and long-term growth.