China’s legislature has adopted sweeping amendments to the Company Law, significantly altering company capital rules, corporate governance structures, liquidation procedures, and shareholder rights. The new version of the Company Law, effective July 1, 2024, introduces flexibility in share issuance and corporate structure while enhancing shareholder protection. These changes are crucial for both domestic and foreign companies operating in China.
Key Updates on the New Company Law
Implementation and Judicial Interpretations
Supreme People’s Court Interpretations: Effective from July 1, 2024, these interpretations clarify how the new Company Law applies alongside old laws, addressing the temporal effect of the law in judicial proceedings. The interpretations include eight articles covering general provisions, retroactive rules for civil legal acts and contract performance, new provisions, detailed regulations, liquidation responsibilities, final judgments, and the effective date.
Important Provisions and Changes
Company Capital Rules
Subscribed Capital Payment Terms for LLCs
Article 47: Shareholders of a Limited Liability Company (LLC) must pay their subscribed capital in full within five years of establishment. This aims to address issues with long or unpaid capital contributions.
Transitional Period: Existing companies with longer payment terms must adjust to meet this requirement.
Capital Rule | New Requirement |
Subscribed capital payment | Full payment within five years |
Corporate Governance Structures
Audit Committee Establishment
New Provision: LLCs and joint-stock companies can establish an audit committee within the board of directors, potentially replacing the board of supervisors. This committee must have at least three members, with more than half being independent directors.
No Board of Directors for Small Companies
New Option: Small joint-stock companies and those with few shareholders can opt not to establish a board of directors, instead appointing a single director.
Governance Change | Details |
Audit Committee | Can replace the board of supervisors |
Single Director Option | Available for small joint-stock companies |
Shareholder Rights Enhancements
Expanded Rights to Access Information
Article 57: Shareholders of LLCs can now inspect accounting vouchers and books. Shareholders of joint-stock companies holding more than 3% of shares for over 180 days can inspect and duplicate various company documents.
Right to Request Share Buybacks
Article 89 & 161: Shareholders can request the company to buy back shares under certain conditions, such as non-distribution of profits for five years despite profitability, transfer of main assets, or amendments to extend the company’s operational period.
Shareholder Right | New Provision |
Information Access | Inspection of accounting vouchers |
Share Buyback | Under specific conditions |
Liquidation Procedures
Simplified Deregistration
Article 240: Introduces simplified procedures for companies with no debts or that have paid all debts, allowing deregistration through a 20-day announcement period.
Forced Deregistration
Article 241: If a company fails to liquidate within three years after license revocation, the registration authority can deregister it after a 60-day notice period.
Liquidation Rule | Details |
Simplified Deregistration | For companies with no or paid debts |
Forced Deregistration | For companies not liquidating within three years |
Detailed Changes in Company Law
Changes to Company Capital
Authorized Capital System for Joint-Stock Companies
Article 59: Allows shareholders’ meetings to authorize the board to issue corporate bonds and shares, providing flexibility in capital management.
Disclosure and Penalties
Articles 40 & 251: Companies must disclose capital registration details, with penalties ranging from RMB 10,000 to RMB 200,000 for non-compliance.
Capital System | New Provision |
Authorized Capital | Flexible issuance by board authorization |
Disclosure Penalties | Increased penalties for non-compliance |
Corporate Governance Enhancements
Transfer of Powers
New Clause: The board of shareholders can authorize the board of directors to make decisions on certain matters, such as issuing bonds.
Expanded Scope for Legal Representatives
New Clause: Legal representatives can now be any director or manager conducting company affairs, broadening the pool of eligible candidates.
Governance Enhancement | New Provision |
Transfer of Powers | Board can authorize directors |
Legal Representative Scope | Broadened to any director or manager |
Ensuring Compliance
Companies established in China or planning to enter the Chinese market must thoroughly understand these changes to comply with the latest legal requirements. Foreign investors, in particular, should assess the impact on their investments and adjust their strategies accordingly.
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