On December 29, 2023, significant amendments to China's Company Law were enacted by the National People’s Congress, with implementation set for July 1, 2024. These changes bear critical implications for both existing companies and new market entrants in China.
The alterations are designed to streamline corporate operations, safeguard shareholders, and enhance regulatory compliance, all while maintaining a competitive business environment in one of the world's largest economies.
Understanding these modifications is crucial for compliance and optimizing strategic operations within the Chinese business landscape.
Check here our podcast episode discussing the updated Company Law (article continues below video):
Under the new Article 47, all shareholders of a Limited Liability Company (LLC) are required to fully pay their subscribed capital within five years of the company's establishment. This represents a shift from the previous flexibility in the 2018 law where shareholders could set their own timelines in their Articles of Association.
For companies established before this new mandate, there's a three-year grace period until June 30, 2027, to adjust to these new requirements, ensuring that all capital contributions are scheduled for five years or less from July 2027, unless already compliant.
To protect the company and creditors’ interest, new rules are introduced to ensure shareholders pay up their full capital contribution. Article 54 allows creditors and management of the company to demand immediate payment of any unpaid capital contributions if the company faces insolvency.
Additionally, there are penalties for non-disclosure of capital information. Companies must now disclose their capital registration through the National Enterprise Credit Information Disclosure System, detailing the amount, method of contributions, and shares subscribed. Failure to comply can attract fines ranging from RMB 10,000 to RMB 200,000.
Significant changes under Article 84 now facilitate the transfer of equity interests. If an LLC shareholder wishes to transfer their equity to someone outside the existing shareholders, the prior requirement for majority shareholder approval has been removed. Instead, shareholders are simply notified, and if there is no response within thirty days, their right of first refusal is considered waived.
The updated law introduces more flexibility in the types of shares a company can issue, such as preferred shares, subordinate shares, and shares with special voting rights. This change provides companies, especially listed ones, greater leeway in managing their capital structure.
Articles 83 and 133 provide smaller-scale companies greater flexibility in corporate governance by allowing them to choose not to appoint a board of supervisors, instead possibly appointing a single supervisor or none at all. For corporate oversight, an audit committee within the board of directors can be established under Articles 69 and 121 to fulfil these supervisory functions.
There’s an expanded scope for shareholder rights, particularly around accessing financial and operational documents. This includes the right for LLC shareholders to inspect company accounting vouchers, a step further than the previously allowed access to accounting books.
With Article 10, the designation of legal representatives in small companies is broadened to include any director or general manager who manages company affairs, diverging from the previous limitation to specific executive roles. This amendment facilitates greater flexibility in appointing key operational roles within foreign-invested enterprises.
Changes to decision-making processes are clarified under Articles 116 and 124, with new stipulations that shareholders' meetings resolutions and board of directors' resolutions must pass with a majority of voting rights and directors, respectively. This ensures clearer governance and decision-making protocols.
The newly added Chapter 2 in the Company Law outlines streamlined processes for company registration, changes, and deregistration.
Simplified deregistration procedures are available to companies without debts or those that have settled all debts and it requires unanimous agreement from all shareholders. Deregistration should be announced via the National Enterprise Credit Information Disclosure system with a minimum announcement period of 20 days. If no objections are received, the company can apply to cancel the company registration within 20 days after the announcement period.
The Forced Deregistration Mechanism targets "zombie companies" that remain legally active but are non-operational. Triggered by Article 241, it applies to companies failing to liquidate within three years after their business license is revoked.
The deregistration process begins with a public announcement from the company registration authority, followed by a 60-day response period. If no objections are received, the company’s registration is cancelled. Despite deregistration, the responsibilities of shareholders and liquidators remain unchanged, ensuring accountability for any remaining liquidation duties.
Since its introduction in 2020, the Foreign Investment Law (FIL) has unified the regulatory framework for foreign-invested enterprises (FIEs) in China, including wholly foreign-owned enterprises and joint ventures, under the PRC Company Law.
Existing FIEs established before January 2020 have until December 31, 2024, to align with the new law, while those established afterward must comply by July 1, 2024. FIEs are advised to consolidate changes, such as updating external equity and legal representatives, in a single effort to simplify compliance.
The 2023 amendments to China's Company Law mark a significant shift in the regulatory environment, enhancing transparency, protecting stakeholders, and streamlining operations for both domestic and foreign enterprises. As China continues to attract global business interest, understanding and adapting to these new regulations is crucial for companies looking to succeed in this dynamic market.
For expert advice and strategic guidance, contact Fidinam to manage these changes effectively and ensure your business’ compliance. Get in touch via the form below or at info@fidinamgw.com.