The New Company Law has adopted
changes made under the third draft amendment which were discussed in our
previous newsletter “Piercing through the draft amendments to the PRC Company
Law from perspective of foreign investor – an update” (Issue: 10-2023). In this article, we will provide an overview
of the major changes brought about by the New Company Law to limited liability
companies (“LLC”), which foreign investors should pay particular attention:-
1. Capital
Contribution Timeline
The New Company Law
has adopted the capital contribution requirement described under the third
draft amendment namely, shareholders of a LLC must fully pay up their
registered capital contribution within 5 years from the company’s date of
incorporation.
Further, investors
should note that the new capital contribution requirement extends its
application to companies established prior to the Effective Date. Companies
established before the Effective Date must gradually align their capital
contributions to comply with the new requirement. These companies will be given
a transition period from 1st July 2024 to 30th June 2027
to make such adjustments.
This change is set to
have a substantial impact on FIEs. At present, contribution to the registered
share capital can be spread over a long period of time as stipulated in the
Articles of Association, which can be as long as 30 years. With the removal of
such flexibility on timing for contribution, it is imperative for investors to
proactively undertake measures to ensure due compliance with the revised
capital contribution requirements.
2. Default
in Fulfilling Capital Contribution Obligation
Where a
shareholder has failed to fulfil its capital contribution obligations within
the stipulated timeframe, the board of directors may issue a notice demanding
payment. The shareholder will then be given a grace period of at least 60 days
to settle the outstanding amount. If the shareholder still fails to make the
payment, all of their rights associated with the unpaid registered capital will
be forfeited. Further, investors should bear in mind that the New Company Law
imposes joint and several liability on the other shareholders at the time of
incorporation to the extent the capital contributions are insufficient.
3. Accelerated
capital contribution
A new provision has
been introduced in the New Company Law whereby if a company is unable to pay off its debts when they become due,
the company itself or creditors may request shareholders to accelerate their
unpaid capital contributions. At the
moment, the details of how this works are still unclear. However, shareholders with unpaid capital
contribution will have to be aware of the actual implementation of this
provision.
4. Capital
Contribution Liabilities in Equity Transfer
Equity transfer to a
third party no longer requires consent from other shareholders save as required
under the Articles although pre-emptive rights still apply. A written notice of
the intended transfer will have to be issued to the other shareholders and if
there is no reply within 30 days of receipt of the notice, the pre-emptive
right will be deemed as waived.
The New Company Law provides
for the contribution obligations of the transferor and transferee involved in
an equity transfer in a LLC involving unpaid contribution. In short, the
transferee shall be responsible for non-contributed equity of the transferor.
Where the transferee fails to make its capital contribution, the transferor
shall bear a secondary liability for such outstanding capital contribution.
Given the newly
implemented provisions, it is of paramount importance to conduct thorough due
diligence when engaging in equity transactions. Parties involved must exercise
caution and diligence to ensure that equity contributions are diligently
fulfilled and fully paid in.
5. Reduction of Capital Contribution
Under the provisions of the New Company Law, a company is
mandated to reduce the amount of capital contribution in proportion to the
respective holdings of the shareholders, unless otherwise stipulated by law or
unanimously agreed upon by all shareholders. In other words, the New Company
Law explicitly recognizes the possibility of disproportionate capital
reductions among shareholders.
In the event that a company undergoes a registered
capital reduction in contravention of the New Company Law, the shareholders are
required to reimburse any funds received from the capital reduction process,
and the capital contributions must be reinstated to their original state.
Furthermore, shareholders, along with relevant directors, supervisors, and
senior management, assume liability for any losses incurred by the company as a
result of such actions.
6. Changes
to Corporate Governance Rules
(a) Legal Representative
Under the existing Company Law, it is
mandatory for the legal representative to hold the position of chairman of the
board, executive director, or general manager.
However, the New Company Law broadens the
scope of eligible individuals who can serve as legal representative. It now
includes any director or general manager who possesses the necessary authority
and responsibilities to handle the company's day-to-day operations.
The legal representative may bear personal
liability for any company liabilities arising from his or her own negligence.
This reflects the heightened level of accountability outlined in the New
Company Law.
(b) General Manager
The New Company Law no longer sets out the
statutory authorities of the general manager. Instead, the duties of the
general manager will be entirely subject to the articles of association or
authorization of the board of directors.
(c) Board of Directors
The New Company Law
encourages directors to act more independently. Notable changes include:-
- The board of directors is no longer
responsible to the shareholders;
- Directors are delegated with the powers to
supervise the capital contribution of shareholder(s);
- The minimum number of directors remains three
but there is no limit on the maximum number of directors, which was previously
capped at 13;
- Shareholders’ power to remove directors has
been restricted. The dismissed director may bring a claim for compensation
against the company if there is no legitimate reason to justify the early
termination of the appointment; and
- Directors may resign by written notice.
However, where there are less than 3 directors remaining in the board of
directors, the resigning director shall continue to perform his/her duties
until the replacement assumes office.
(d) Board of Supervisors
Under the New Company Law,
it is no longer obligatory for small-sized LLCs to have supervisors. Moreover,
companies of any size now have the option to establish an audit committee
within the board of directors, which assumes the responsibilities and functions
traditionally assigned to the supervisory board. Consequently, there is no
requirement to establish a separate supervisory board or appoint individual
supervisors in such cases.
(e) Shareholders' Meeting
The New Company Law reduces the authority of
the shareholders' meeting by excluding its authority over the following: (1)
determining operational policies and investment plans, and (2) reviewing and
approving the company's annual financial budgets and final accounts. This
revision aims to alleviate shareholders from the responsibility of overseeing operational
matters, which are more appropriately managed by the board of directors.
Conclusion
The New Company Law introduces
significant changes in key areas such as the company capital system, governance
framework, shareholders' obligations regarding capital contribution, and
safeguards for their rights and interests. The implementation of the New
Company Law will entail increased responsibilities for shareholders and
directors of companies operating in China. It is expected to have a
far-reaching impact on all businesses within the PRC, including FIEs.
About
Us
Vivien
Chan & Co. is a full-service law practice with offices in Hong Kong (1985)
and Beijing (1993). We are consistently recognized as a premier law firm for
and in Greater China. With over 35 years of doing business in Greater China,
our Hong Kong and China teams have an in-depth understanding and knowledge of
the legal culture and market dynamics.
Our
long established licensed law offices in Greater China have allowed us to
develop deep local roots and an integrated global perspective necessary to help
domestic businesses and multinational companies alike seamlessly manage even
the most complex local and cross border transactions.
We
have advised on some of the most significant acquisitions, arbitrations, real
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particularly evident from our leading position in areas such as intellectual
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Our ability to collaborate across practices and borders with ease allows us to
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