On 20 December 2021, the “Company Law of the People’s Republic of China (Draft for Revision) 中华人民共和国公司法(修订草案) (the “Draft”) was submitted to the Standing Committee of the National People’s Congress for deliberation and it was then made available for public comments. Enacted in 1993, China’s current Company Law has gone through many revisions including amendments to several provisions in 1999 and 2004, a comprehensive revision in 2005, and two important amendments to the company’s capital regime in 2013 and 2018.
The Draft contains 15 chapters and 260 articles seeking to modernize, make relevant and close the gaps in the current version (13 chapters and 218 articles) of the Company Law by revising or adding around 70 articles consisting of 30% of the Draft. The Draft specifically added two chapters on the “Incorporation of Companies” and “State-Funded Companies” by incorporating more detailed regulations.
The Company Law applies to all companies (both limited liability company and joint stock limited company) registered in China regardless of whether it has any foreign investor. The key revisions in the Draft affecting foreign-invested enterprises are as follows :-
Enhance company establishment system and dissolution procedures
A new chapter on “Incorporation of Company” has been added to clarify and simplify procedures for company establishment, registration of change of particulars and cancellation of registration of company. The company registration authority’s role is to optimize the registration process, improve efficiency and facilitate registration (see Articles 22 to 35 of the Draft).
The legal effect of electronic business licenses, announcements through unified enterprise information public system and resolutions made by electronic communications has been clarified (see Articles 26, 34 and 76 of the Draft). If implemented, the registration information will be opened to the public through the information public system.
The type of assets that can be used for capital contribution has been expanded to include share equity and loans (Article 43 of the Draft). Simultaneously, restrictions on the establishment of one-person limited liability companies have been relaxed by removing some clauses in the existing Company Law.
In a company’s liquidation, the duties and responsibilities of liquidators have been expanded, and provisions for simplified procedures of deregistration have been added. Article 235 of the Draft Revision allows a company to cancel its registration under the simplified procedures, provided that the company has incurred no debt during its operation or when all of the company’s debts have been paid off. This will greatly facilitate the closing of operations in China by foreign investors if necessary.
Increase responsibilities of shareholders and directors
More provisions have been added to the Draft on the duties of shareholders, directors, supervisors and senior management personnel (Article 180 of the Draft). The Draft imposes more obligations on shareholders and management when they are involved in any connected transactions with the company. The new amendment requires either group to disclose their interest to the company or the board voluntarily and to abstain from voting when shareholders or the board are resolving such connected transactions (Article 183 of the Draft).
If a shareholder or the management engages in any conduct that damages the interests of the company or other shareholders, cause losses to the company or other shareholders because of intentional or gross negligence, such as withdrawing capital contributions from the company or providing assistance for such action, they shall be liable in accordance with the law (Article 246 of the Draft).
Acceleration of Capital Contribution and Share Deprivation
A shareholder’s failure to pay the capital commitment on time or in full will now result in loss of shares. The Draft provides that where a shareholder fails to make the capital contribution in full within the time limit, or the actual value of the non-monetary property used as capital contributions is obviously lower than the amount the shareholder has subscribed for, or the shareholder fails to make payment when called upon to make the capital contribution within the notice period, the shareholder loses the equity right for the capital contribution not made.
If the company is unable to settle its debts, the creditors or the company will have the right to demand immediate payment of the capital contribution from the shareholders, even if the contribution deadline has not yet arrived. Article 48 of the Draft provides that “where a company is unable to pay off its debts and is insolvent, the company or the creditors shall be entitled to require the shareholders who have subscribed for their capital contributions but whose term for capital payment has not arrived to make the capital contributions earlier.”
Pre-emption Rights
The Draft proposes that the consent of a majority of the shareholders is not required for an equity transfer to an outside party. Upon expiry of the pre-emption notice period, the other existing shareholders shall only have the option to either purchase or renounce the purchase. The renunciation or failure to make a timely statement is deemed to be a waiver of the pre-emptive right. In addition, the Draft further states the main factors for the equivalent conditions under pre-emptive rights, namely the quantity, price and method of payment and time limit of the equity transfer.
Companies with 300 or more employees shall have employee representatives on their board of directors (see Article 63 of the Draft).
Shareholders who hold more than 1% of the shares for a continuous period of more than 180 days may appoint accountants or lawyers to investigate the company’s accounting information (see Article 113 of the Draft).
The period for public consultation of the Draft closed on 22 January 2022, and about 5,000 comments had been received online. It is expected that further revision to the Draft will be necessary before it will be finally implemented.
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