Highlights of 2023 Revision to Company Law of China
On December 29, 2023, marking the 30th anniversary of the enactment of the Company Law, China released the Company Law of the People’s Republic of China (2023 Revision), introducing adjustments to various aspects, including shareholder capital contributions, organizational structure of companies, liabilities of senior officers, etc. The implementation of this revision is scheduled to commence on July 1, 2024. This article provides an overview of the noteworthy changes to the Chinese corporate system resulting from this revision.
On December 29, 1993, the Company Law of the People's Republic of China (the “Company Law”) was enacted and was formally implemented on July 1, 1994. Through more than 30 years of development, the Company Law has undergone four amendments and two revisions, among which, the first revision was made in October 2005, and the second revision is the current release on December 29, 2023, i.e. the Company Law of the People's Republic of China (2023 Revision) (the “Revision”).
The Revision, finalized after five years and four rounds of discussions, will be formally implemented from July 1, 2024, including addition and modification to over 200 articles, of which more than 100 articles have been substantively amended. Here, we highlight some most noteworthy changes in the Revision.
Change 1: Time limit for contribution of registered capital by shareholders
The registered capital of a limited liability company is the total amount of the capital contribution subscribed by all shareholders as registered before the company registration authority in China. As one of the core issues in the operation of a company, the timeline for contribution of registered capital has undergone a series of changes in light of the changing social and economic development and demands since the first enactment of the Company Law in 1993.
Under the Company Law of 1993, the registered capital of a limited liability company was required to be paid in full upon establishment of the company. In 2005, the timeline for capital contribution was extended to 2 years, and in 2013, no specific requirement for capital contribution was stipulated.
Given the removal of statutory time limit for capital contribution since 2013, it has been common for shareholders to subscribe a substantial amount of registered capital and/or contribute for an excessively long period of time.
According to the Article 47 of the Revision, it imposes a limit on the contribution period for the registered capital of limited liability companies. It stipulated that "all shareholders' subscribed capital shall be paid in full by the shareholders in accordance with the provisions of the articles of association within 5 years from the date of incorporation of the company", thereby mandating a maximum contribution period of 5 years.
Furthermore, the Revision clarifies that the laws, administrative regulations and the decisions by the State Council may stipulate special provisions regarding the period of shareholders' contributions, thereby leaving systematic space to set up a subscription period shorter than 5 years for the key industry sectors.
In line with the Revision, for companies already registered for establishment before the effective date of this Revision, if the capital contribution period exceeds the period stipulated in the Revision, they are required to gradually make adjustments to comply with the Revision. In cases where the contribution period or amounts are significantly abnormal, the company registration authority may, in accordance with the law, require timely adjustments. The specific implementation measures will be provided by the State Council.
Based on the above, the 5-year capital contribution timeline will be applicable to all companies, including those incorporated before the implementation of the Revision. It is advisable to closely monitor the forthcoming implementation measures to be promulgated by the State Council.
Change 2: Non-monetary form for capital contribution
In Article 48 of the Revision, it is explicitly clarified that equity and creditor’s rights are supplementary forms of non-monetary contribution of registered capital of companies.
Regarding the forms of capital contribution, previously there were judicial interpretations or department rules indicating equity and creditor’s rights could be used as forms of capital contribution, e.g. The Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (III) has specified that equity could be used for capital contributions by shareholders, whereas in the Implementing Rules for the Administrative Regulations of the People's Republic of China on the Registration of Market Entities, it is provided that in cases where capital contribution is made with equity or creditor’s right, the ownership shall be clear, capabilities shall be complete, and such equity and creditor’s right may be assessed and transferred in accordance with the law, complying with the provisions of the articles of association. In this Revision, it is formally established that equity and creditor’s right are legitimate forms of capital contribution.
Change 3: Payment demand and forfeiture of unpaid capital shares
Article 51 of the Revision: After the establishment of a limited liability company, the board of directors shall verify the shareholders' capital contributions. If it is found that a shareholder has not timely and fully paid the contribution as stipulated in the company's articles of association, the company shall issue a written payment demand to that shareholder for the outstanding amount.
Article 52 of the Revision: If a shareholder fails to pay contributions by the date specified in the company's articles of association, and the company issues a written payment demand, the company may specify a grace period for the payment in the written payment demand; the grace period shall not be less than 60 days from the date the company issues the payment demand. Upon expiration of the grace period, if the shareholder still fails to fulfill the contribution obligation, the company, through a resolution of the board of directors, may issue a notice of forfeiture to the shareholder, and such notice shall be in writing. From the date of the notice, the shareholder loses the rights to the unpaid capital shares.
The Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (III) already provided similar mechanisms. This Revision further refined and clarified the remedies available for the companies and shareholders for addressing instances of capital contribution failures by other shareholders.
Change 4: Qualification of legal representatives of companies
As per the Company Law, a company is required to appoint a person as its legal representative, authorized with the rights to engage in civil activities on behalf of the company. This individual will be registered with the relevant authority and indicated on the company’s business license.
According to Article 10 of the Revision, in accordance with the company’s articles of association, the previous restriction of the qualification of legal representatives that “only the chairman, executive director or manager can be the legal representative of a company” is changed into "a director or manager who executes the affairs of the company on behalf of the company can be the legal representative of a company”. Namely, the scope of candidates for the legal representative has been expanded, a director (not necessarily the chairman or executive director) will be allowed to be the legal representative as long as such qualification of legal representative is clearly stipulated in the company's articles of association.
Moreover, the Revision has added a new provision that the resignation of a director or manager serving as a legal representative shall be deemed to resign as a legal representative as well. In previous practice, there were circumstances in which the person concerned resigned from the position of chairman, executive director or manager, but still retained the position of legal representative. However, such a scenario will no longer be permissible with the introduction of this new provision.
Change 5: Organization structure of the company
Article 68 of the Revision removes the upper limit on the number of directors of a limited liability company. Based on the Revision, the managing body of a limited liability company could be the board of directors with a minimum of 3 members, or 1 director for the limited liability company with a smaller scale or fewer shareholders.
Regarding the supervisor, in accordance with the Revision, a limited liability company is allowed not to establish a board of supervisors or supervisor, and alternative mechanisms are provided in the Revisions as follows:
Article 69: A limited liability company may, as stipulated in its articles of association, establish an audit committee within the board of directors composed of directors to exercise the functions and powers prescribed for the board of supervisors by this Law, without establishing a board of supervisors or supervisor.
Article 83: A limited liability company with a smaller scale or fewer shareholders may have a single supervisor without establishing a board of supervisors to exercise the functions and powers prescribed for the board of supervisors, upon unanimous consensus of all the shareholders, the company may have no supervisor.
Change 6: Liabilities of senior officers
In this Revision, there has been a further strengthening and clarification of the liabilities for directors, supervisors, and other senior officers. The Revision explicitly outlines the fiduciary and diligence duties of senior officers, including specifying compensation liabilities in certain circumstances. For a detailed exploration of the liabilities of senior officers, please refer to another newsletter prepared by Garrigues.
The 2023 Revision to the Company Law of China marks a noteworthy milestone in the evolution of corporate governance within the country. The changes introduced not only enhance the rights and liabilities of shareholders and internal management bodies, but also promote transparency and accountability in business operations. As we navigate this new landscape, it is crucial for companies to understand and adjust to these changes to ensure compliance.
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