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Authors | Rachel Tao, Cheng Chen 

Hui Ye Law Firm

The newly revised PRC Company Law (“2023 Company Law”) was promulgated on 29 December 2023, and will take effect as of 1 July 2024. This 6th Revision of the 1993 Company Law has introduced significant changes to the current legislation (2018 Company Law), especially in terms of Registered Capital and corporate governance.

Since Foreign-Invested Enterprises (“FIEs”) are usually setup in the form of limited liability companies. Accordingly, this article will only address the To-Dos and opportunities for foreign-invested limited liability companies.

1. More Governance and Supervision on Registered Capital

1.1 General Provisions

In the past decades, the legislator has been loosening regulations on Registered Capital, including waiving the requirement for verification of capital injection and paid-in capital, except for companies in some highly regulated industries. The purpose of this is to boost the market economy. However, this also results in numerous shell companies and companies overstating or inflating their Registered Capital.

Therefore, Article 47[1] of the 2023 Company Law provides that shareholders must pay up their subscribed Registered Capital within five years after establishment. Failure to do so renders the shareholders directly liable for compensating the company for losses incurred therefrom (e.g., interests and loss of business opportunity). Such shareholders may also be subjected to fines of RMB 50,000 - RMB 200,000, or 5-15% of the unfulfilled amount, by the administration of market supervision and regulation (“AMR”). The same five-year time limit (including penalties) also applies to any increases in Registered Capital. Article 266 of the 2023 Company Law further provides that, companies established before 1 July 2024 (the “Existing Companies”) shall adjust their time limit for capital contribution in accordance with Article 47. The implementation details will be promulgated by the State Council.

A consultation draft of the Provisions on the Registered Capital Registration Management System for Implementing the PRC Company Law (the “Draft Provisions”) was issued for public comments until 5 March 2024. According to the Draft Provisions, from 1 July 2024, to 30 June 2027 (the “Transition Period”), the Existing Companies must adjust their time limit as follows.

• Existing      Companies with a remaining time limit of less than five years at the      expiry of the Transition Period (1 July 2027) are not required to make any      adjustment to their contribution periods;

• Existing      Companies with a remaining time limit of over five years at the expiry of      the Transition Period shall adjust their time limit to five years as of      expiry of the Transition Period.

Existing Companies that fail to adjust the time limit will be granted a 90-day grace period by AMR to adjust and will be marked on the National Enterprise Credit Information Publicity System (Article 14) until adjusted. All adjusted time limits must expire within five years of 1 July 2027.

In other words, all shareholders of Existing Companies shall pay up their subscribed Registered Capital by 30 June 2032.

1.2 Option to Reduce Registered Capital

Existing Companies may also choose to reduce their Registered Capital instead of paying up the Registered Capital. Under the Draft Provisions, a simplified capital reduction procedure may apply, if the following conditions are met:

• there is no existing debt, or the existing debts are significantly      lower than the paid-in capital;

• all shareholders undertake to bear joint and several liability for      debts incurred prior to the capital reduction, and such joint and several      liability shall be limited by the Registered Capital prior to the capital      reduction; and

• all directors undertake that such capital reductions will not harm      the company’s capability to pay off its debts and continuous operation.

Under this simplified procedure, the company will be exempted from notifying its creditors and the publication period will be reduced from 45 days to 20 days.

The Existing Companies may still reduce their Registered Capital pursuant to the ordinary procedure stipulated by Articles 224 and 225 of the 2023 Company Law, if the above conditions cannot be met.

1.3 Obligation to Disclose Information on Capital Contributions

A new chapter is introduced to the 2023 Company Law, titled “Company Registration”. This is the first time that a national legislation (other than administrative legislation) addresses the matters of company registration. This means that the company registration procedure will be more standardized.

Article 40 of the 2023 Company Law refers to an obligation to “make public the following matters via the National Enterprise Credit Information Publicity System as required”. It is worth noting that the status of and changes to capital contributions (amount, type, and date), which used to be included in the annual report only, shall be made public specifically via the National Enterprise Credit Information Publicity System as required. If a company fails to disclose the relevant information under Article 40 or untruthfully discloses information, the company and directly liable personnel will be liable under Article 251 of the 2023 Company Law.

1.4 Earlier capital contributions

It has long been established that shareholders were liable to make immediate capital contributions where the company was liquidated or went bankrupt by judicial interpretation of the relevant Company Law and Bankruptcy Law.

Article 54 of the 2023 Company Law further extends the circumstances where capital contributions may be requested earlier than stipulated in the AoA to include those where a company is unable to pay off due debts.[2] Such requests may be raised by the company or the creditors of due debts.

2. More Flexibility in the corporate governance structure

2.1 Directors other than the Chairman may also serve as the Legal Representative

Under the 2018 Company Law, only the Chairman of the Board of Directors / Executive Director or the General Manager may serve as the legal representative of the company. However, in practice, other Directors, other than the Chairman, are in fact in charge of the operation of the company. This is more common with FIEs as the head of the Chairman of the parent company (the Foreign Investor) would usually also serve as the Chairman of the FIE to implement the governance structure of the parent company in the FIEs, while one director (usually the department head of the parent company) will take care of daily operations. This could lead to additional time being wasted, waiting for the Chairman’s signatures.

Article 10 of the 2023 Company Law allows other directors to serve as the legal representative.[3] FIEs whose directors are in charge of the daily operation may consider adjusting the designation of their legal representative in accordance with this revised provision and the practice.

2.2 Audit committee as an alternative for Supervisor(s) or Board of Supervisors

The purpose of Supervisor(s) or a Board of Supervisors is to monitor the conduct of directors and senior management personnel to protect the interest of the company and the shareholders. However, in practice, the role of a Supervisor is almost silent. Some SMEs may also lack suitable candidates for Supervisors as Supervisors are not permitted to concurrently serve as the director or senior management personnel of the company.

According to Article 69 of the 2023 Company Law, companies may establish an audit committee comprised of directors to fulfil the functions of the Supervisor(s) or Board of Supervisors[4]. However, there are no further provisions for the auditor committee. Furthermore, some also doubt the effect of this provision due to the potential conflicts of interest between audit committee members and other directors.

Therefore, we advise FIEs to be cautious in deciding whether to adopt an audit committee.

2.3 Reallocate the powers between the board of directors and the shareholders’ meeting

Chapter 3, section 2 of the 2023 Company Law introduces greater flexibility in the powers and authority of both the board of directors and the shareholders' meeting, which in fact reflects the practical reality. Primarily, the shareholders' meeting is relieved of its obligations to determine the business direction, investment plans, review, and approve the annual financial budget, and create the financial accounting plan of the company. Additionally, the shareholders' meeting is empowered to authorize the board of directors to make resolutions on certain matters within its jurisdiction, such as the issuance of corporate bonds. Consequently, FIEs may reassign company operational responsibilities and restructure their corporate governance framework accordingly.

For detailed alterations, please see the table below.

2.4 Constitution of the Board of Directors

The restriction that a board must consist of no more than thirteen board members under Article 44 of the previous Company Law has been removed. There is now no upper limit any more on the number of members of the board of directors (“three or more”).

Despite such freedom, a compulsory requirement, previously only for certain state-owned or state-funded companies, could now be mandatory for all companies: As per Article 68 of the 2023 Company law, any company employing more than 300 individuals must appoint employee representatives to the board of directors, unless the current board of supervisors already includes employee representatives.[5] Consequently, FIEs lacking a board of supervisors are obligated to incorporate employee representatives onto the board of directors.

If stability of the existing board is desired, companies could consider qualifying existing directors as employee representatives through due process. 

2.5 General manager’s authority no longer specified by law

With Article 74 of the 2023 Company Law deleting all statutory authority of the general managers, the board of directors now holds the authority to delegate functions and powers to the general manager by board resolutions, which no longer have to be included in the Articles of Association (“AoA”). As this mechanism is apparently more pragmatic, we recommend FIEs revisit and revise the delineation of authority for the managers within their AoA.[6]

3. Key clarifications and specifications

3.1 Clarification of compensation conditions and standards for the dismissal of directors

Under Article 71 of the 2023 Company Law, directors who are unjustly dismissed during their term of office are entitled to compensation from the company.[7] While detailed provisions regarding justifiable causes for dismissal and compensation amounts are pending, FIEs may proactively mitigate potential disputes by specifying conditions and standards for director dismissal compensation in the AoA.

3.2 Specification of duty of loyalty and duty of diligence

The duties of loyalty and diligence were not defined in the previous Company Law. Article 180 of the 2023 Company Law binds directors, supervisors, and senior executives to these duties and gives a statutory definition for both. In accordance with the duty of loyalty, measures must be taken to avoid conflict between personal and company interests and no improper interests may be sought. In accordance with the duty of diligence, reasonable care must be exercised to safeguard the best interests of the company.[8]

The statutory definitions may be expanded upon in the AoA, code of conduct (“CoC”), internal regulations, by-laws, etc., but nevertheless provide additional statutory norms concerning the duties of directors, supervisors, and senior executives.

3.3 Expansion of the scope of related party transactions

Pursuant to Article 182 of the 2023 Company Law, the transactions between the company and close relatives of the directors, supervisors or senior executives, the companies directly or indirectly controlled by the directors, supervisors, senior executives or their relatives, or other related parties of the directors, supervisors, or senior executives shall be approved by the Board of Directors or the Shareholders’ Meeting. This reflects the trend in most Joint-Venture contracts (“JVCs”) and CoCs of most Multinational Corporations. Although the scope of related parties under Article 182 will apply in a mandatory manner, FIEs are still suggested to review their AoAs and CoCs to ensure that the scope of related parties thereunder can cover the statutory scope, so as to avoid any potential violation. 

3.4 Dissolution and liquidation

Under Article 232, the directors, instead of the members of the liquidation group (which shall by default comprised by the directors rather than the shareholders in the 2018 Company Law), shall be the liquidated obligors to initiate the liquidation procedure. The directors shall be held liable if they delay in initiating the liquidation procedure. However, it remains flexible for the shareholders to appoint those who are not directors as the members of the liquidation group according to the AoA or by shareholders' resolutions. Moreover, if the members of the liquidation group, who are obligated to bear the duty of loyalty and diligence, fail to fulfil the liquidation obligations promptly and consequently cause losses to the company or creditors (instead of where there is wilful misconduct or gross negligence by the members under the 2018 Company Law), they shall be held liable for damages.[9] This reflects the emphasis on the protection of creditors’ rights as well as the current practice in JVC drafting and the design of AoA.

Furthermore, as per Article 230, the preconditions for continuation have been modified to include “remaining properties [which] has not been distributed to shareholders” with the acceptance of a resolution by the shareholders' meeting.[10] This offers an additional chance for the companies in voluntary liquidation procedure to “come back to life”.

4. Special Notes for JVs

4.1 Option to combine mandatory restructuring under the Foreign Investment Law

Under Article 44 of the Implementing Rules of the Foreign Investment Law, Joint Ventures (“JVs”) established before January 1st, 2020, must adjust their corporate structure before 1 January 2025, otherwise they may not make any other registration with the AMR.[11] JVs that have not yet completed the mandatory restructuring may consider a fundamental restructure under the Foreign Investment Law and the 2023 Company Law concurrently.

4.2  Easier equity transfers to third parties

Article 84 of the 2023 Company Law no longer by default requests prior consent of one half of non-transferring shareholders before sending notification of right of first refusal when one shareholder intends to transfer equities to third parties. Although the removal of the consent criterion will help alleviate some deadlocks, JVCs must still be carefully drafted to avoid unnecessary obstacles to the transfer. Attention shall also be paid to the Tag-along clause to ensure the non-transferring shareholders’ right to exit the JV where they cannot offer to purchase the transferred equities under the same terms and condition. 

4.3 Consistency between the JVC and AoA

Last but not least, any and all amendments with regard to the Registered Capital including its contribution, corporate governance structure, and any other aspects as mentioned in this article, shall be reflected not only in the appropriate corporate document including AoA and CoC, but also in the JVC in a consistent manner.  

注

[1] Article 47 The registered capital of a limited liability company shall be the amount of capital contributions subscribed for by all its shareholders as registered with the company registration authority. The capital contributions subscribed for by all shareholders shall be fully paid within five years of establishment of the company in accordance with the company's AoA.

[2] Article 54 Where a company is unable to pay off the due debts, the company or the creditors of the due credits may request the shareholders who have subscribed for the capital contributions but whose time limit for capital contributions has not expired to make capital contributions in advance.

[3] Article 10 The legal representative of a company shall be a director or manager who executes the affairs of the company on behalf of the company in accordance with the provisions of the articles of association.

[4] Article 69 A limited liability company may, in accordance with the provisions of its articles of association, set up an audit committee consisting of directors in the board of directors, exercising the powers and functions of the supervisory board as provided for in this Law, without having a supervisory board or supervisors. Employee representatives among the members of the board of directors of a company may become members of the audit committee.

[5] Article 68 The board of directors of a limited liability company shall consist of three or more members, and there may be representatives of the company's employees among its members. In a limited liability company with more than 300 employees, except for a board of supervisors established in accordance with the law and with employee representatives, the board of directors of the company shall include employee representatives. Employee representatives on the board of directors shall be democratically elected by the employees of the company through the employees' congress, employees' meeting or other forms.

[6] Article 74 A limited liability company may have a manager, who shall be appointed or dismissed by the board of directors.

The manager shall be responsible to the board of directors and exercise his powers in accordance with the provisions of the articles of association or the authorization of the board of directors. The manager attends the meetings of the board of directors.

[7] Article 71 The shareholders' meeting may resolve to terminate the appointment of a director, and the termination shall take effect on the date the resolution is made.

If a director is dismissed before the expiration of his/her term of office without justifiable reasons, the director may request the Company to compensate him/her.

[8] Article 180 Directors, supervisors and senior executives shall assume the obligation of loyalty to the company and take measures to avoid the conflict between their own interests and those of the company and may not seek any improper interests by taking advantage of their powers.

The directors, supervisors and senior executives shall assume the duty of diligence to the company. When performing their duties, they shall, for the best interests of the company, exercise the reasonable care that shall be generally possessed by a manager.

The provisions of the preceding two paragraphs shall apply to the controlling shareholder or actual controller of a company who does not serve as a director but actually executes the affairs of the company.

[9] Article 232 If a company is dissolved as a result of the provisions of subparagraphs 1 (a), (b), (d) and (e) of paragraph 1 of Article 229 of this Law, it shall be liquidated. The directors shall be the obligors for the liquidation of the company and shall form a liquidation group to carry out the liquidation within fifteen days from the date when the cause of dissolution arises.

The liquidation group shall consist of the directors, unless otherwise provided in the articles of association or the shareholders' meeting resolves to elect another person.

If the liquidation obligor fails to fulfill the liquidation obligation in time and causes losses to the company or creditors, he shall be liable for compensation.

[10] Article 230 If a company is in the situation described in the first paragraph of the preceding article and the second paragraph of the preceding article, and has not yet distributed its property to its shareholders, it may survive by amending its articles of association or by a resolution of the shareholders' meeting.

Amendments to the articles of association or resolutions of the shareholders' meeting in accordance with the preceding paragraph shall be passed by shareholders holding more than two-thirds of the voting rights in the case of a limited liability company, or by shareholders attending the shareholders' meeting in the case of a joint-stock company, by more than two-thirds of the voting rights of shareholders attending the shareholders' meeting.

[11] Article 44 Foreign-invested enterprises which were established prior to the implementation of the Foreign Investment Law, in accordance with the Law on Sino-Foreign Equity Joint Ventures of the People's Republic of China, the Law on Wholly Foreign-owned Enterprises of the People's Republic of China, and the Law on Sino-Foreign Contractual Joint Ventures of the People's Republic of China(hereinafter referred to as the existing foreign-invested enterprises), may make changes to their corporate forms and structures within five years of the implementation of the Foreign Investment Law in accordance with the Company Law of the People's Republic of China and the Law of the Partnership Enterprise of the People's Republic of China, and go through relevant procedures and make the necessary changes for compliance. They may also retain their existing corporate forms and structures.

This article is provided by Hui Ye Law for educational and informational purposes only and is not intended and should not be construed as legal advice. This article solely reflects the authors' understanding on the captioned matter under PRC law and from PRC jurisdiction point of view. This article shall not be shared with third parties, reproduced and/or distributed without the prior written consent of the authors. In case of any further questions, please do not hesitate to contact the authors.