China's 2023 Company Law- A Comprehensive Overview
The People's Republic of China introduced significant amendments to China company law ("2023 Company Law") in December 2023. These amendments changed the company capital provisions, enhanced the rights of shareholders, and revised the corporate governance structures and liquidation procedures. These amendments to the 2023 Company Law took effect on July 1, 2024.
This article will delve into each of these aspects in detail, providing a comprehensive overview of each of these changes and their implications for businesses. The amendment to the company law introduces.
KeyChanges to the Company Capital Provisions
The 2023 Company Law requires shareholders to fully pay their subscribed capital within a specific time frame. It mandates a company to disclose the shareholding details and further introduce changes to the different types of shares that can be issued. These provisions are explained herein below: -
- Subscribed Capital Payment terms for LLC
Article 47 of the 2023 Company Law requires shareholders of a Limited Liability Company(LLC) to fully pay their subscribed capital within five years of the company's establishment. The subscribed capital is the registered capital of the company, which needs to be registered with the company registration authority upon establishment.
This measure was introduced to address the issues of oversubscribing capital and prolonged payment terms exercised by the shareholders at the initial stage.
- Disclosure requirements and penalties
Article 40 to the 2023 Company Law requires the LLC to disclose the amount of capital contribution subscribed and paid by shareholders, the method of capital contribution, and the number of shares subscribed by the promoters of a joint stock company. This information must be disclosed through the ' National Enterprise Credit Information Disclosure System' introduced by the 2023 Company Law.
Article 251 of 2023 Company Law prescribes penalties for failure to disclose this information, the penalty may range from RMB 10,000 - RMB 50,000 or, in certain cases RMB 50,000 - RMB 200,000.
- Changes to the different types of shares
The 2023 Company Law provides that in addition to ordinary shares, the company is entitled to also issue the following shares
- Preferred and subordinate shares
- Shares with special voting rights
- Transfer restricted shares and
- other types of shares specified by the State Council
These shares need to comply with the company's AoA (Articles of Association). Further, the listed companies may choose to divide their shares into par and no-par value shares in accordance with the provisions of AoA itself.
Enhancementof the rights of the shareholders
The 2023 Company Law provides the shareholders of a company to protect their rights by granting them the power to convene board meetings, rights to require share buybacks and institute lawsuits against executives of the wholly owned subsidiaries.
These provisions are explained herein below.
- Shareholders right to access information.
Article 57 of the 2023 Company Law now allows shareholders of an LLC to inspect the accounting vouchers. Further, under the new law, the shareholders of an LLC have the power to entrust law firms to review the companies' materials, more specifically, the minutes of the shareholder's meeting, shareholders list, board meeting resolutions and financial report, and the AoA.
Shareholders of the joint-stock companies who hold individually or collectively shares more than 3% of the company's shares for more than 180 consecutive days are entitled to review the company's accounting books and vouchers. Further, the shareholders of these companies are also entitled to duplicate the company's materials as mentioned above.
Lastly, the 2023 company law also allows shareholders to inspect and duplicate relevant materials of a wholly-owned subsidiary company.
- Right to request share buybacks
Article 89 of the 2023 company law specifies that the shareholders of an LLC have a right to request the company to acquire their equity (buy-back) at a reasonable price on the condition that the controlling shareholder abuses the rights of other shareholders and damages the interest of the shareholders.
- Right to file lawsuits against executives and management of wholly-owned subsidiaries
Article 189 of the 2023 Company Law grants a shareholder to institute a lawsuit against directors, supervisors, or senior managers of a company wholly-owned subsidiary if they cause loss to the company or if they do not comply with the company's AoA and administrative relations.
The shareholders of an LLC or of a joint stock company who hold more than 1% of the company's share for over 180 days can request the supervisory board or board of directors to file a lawsuit or, in certain cases, may also institute themselves.
Revisions to Corporate GovernanceStructures
The 2023 Company Law reconstructs the organizational structure and provides an enhanced comprehensive framework to govern a company through the mechanisms mentioned below.
- Establishment of an Audit Committee
The 2023 Company Law contains a provision where the LLCs and joint stock companies establish an audit committee within the board of directors, if this committee is established LLCs will not be required to establish a board of supervisors as was being established under the erstwhile company law.
The audit committee in an LLC can be composed of a board of directors. In the case of a joint stock company, the committee must have at least three members whereas at least two members do not hold any other positions within the company other than of a director.
- Flexibility for small joint companies to establish a board of directors
The 2023 Company Law allows small joint stock companies with few shareholders an option not to establish a board of directors. Where this option is exercised, a single director will exercise the board functions.
- Delegation of Powers to the Board of Directors
The 2023 Company Law specifies that the board of shareholders or shareholders meeting can delegate certain resolutions to the board of directors, such as issuing corporate bonds to the board of directors.
Further, under the new law, the functions and powers of a board of directors include statutory powers, those prescribed in the Articles of Association, and powers authorized by the board of shareholder or shareholder's meeting.
- No requirement for a supervisor for smallLLCs
The2023 Company Law allows LLCs/ LLCs with few shareholders the option not to have supervisor(s) with the unanimous consent of all shareholders.
- Expanded scope of appointment of Legal Representatives
The 2023 Company Law expands the scope of selecting legal representatives, where a director or a manager who carries out the legal affairs of the company can be appointed as a legal representative. Thus, the role of a chairman, executive director, or manager is increased owing to this new responsibility.
- Disregard of corporate personality
Disregarding a corporate personality or piercing a corporate veil of a company is a doctrine used to prevent the shareholders from abusing their limited liability to harm the interest of the creditors.
The 2023 Company Law prescribes that where a shareholder uses two or more companies under their control to evade debts and damage the creditors' rights of any company, each company shall have joint and several liabilities to settle or set off the debts of any company.
Amendments to the company establishment and liquidation procedures
The 2023 CompanyLaw prescribes significant provisions within itself to streamline the corporate governance of any company through the mechanisms listed below.
- Removing Restrictions on One-Person Companies
The 2023 Company Law allows a single person to establish a joint stock company. Further, a stock company can be established with 1-200 founding members and more than half of the founding members must reside in China.
- Simplified Deregistration Procedures
Article 240 of the 2023 Company Law allows companies that have no debts or have settled their debts to take advantage of a simplified deregistration. An announcement needs to be made through the National Enterprise Credit Information Disclosure System for a minimum of 20 days, after which the company can apply for deregistration.
- Forced deregistration mechanisms
Article 241 of the 2023 Company Law adds a provision on "forced deregistration" to deal with inactive companies that do not complete liquidation within three years of having their business license revoked. Under this provision, their license can be deregistered by the authorities by serving a 60-day notice.
- Recovery rule for voluntary dissolution
Article 230 of the 2023 Company Law stipulates a recovery rule applicable to the situation where a company may be permitted to continue its operations after a voluntary dissolution. This is permitted when a company amends its AoA through a resolution passed by a two-thirds majority of votes cast by its shareholders in an LLC and in the case of joint-stock companies through a resolution passed by the two-thirds members present in the shareholder meeting.
Conclusion
The amendments to China’s Company Law are a significant evolution in corporate governance and operational frameworks. These reforms aim to foster transparency, accountability, and flexibility in business operations and streamline liquidation procedures, which reflects not only China's commitment to modernising its corporate landscape but also provides businesses with clear guidelines to navigate regulatory compliance and strategic decision-making. As businesses navigate these changes, their alignment with the new legal framework will be pivotal in fostering innovation and enhancing competitiveness in China'sdynamic market landscape.
