If you're doing business in China, you better get yourself up to speed with all of these changes.
The new version of the China Company Law is changing the game for both old and new companies in China. It's giving more flexibility in areas like share issuance and corporate structure while also upping the protection of shareholder rights. If you're a foreign investor or company, we recommend you get familiar with the amended China Company Law to understand the impact on your investments.
The final version of the 2023 Company Law, which kicks in on July 1, 2024, comes after years of drafts and deliberations. In an interview, a rep from the NPC explained how the 2023 Company Law improves several areas of corporate governance, including the capital contribution system, shareholder rights, and corporate registration and liquidation systems, among many other areas.
If you're already doing business in China or looking to break into the Chinese market, you'll want to familiarize yourself with the latest changes to the Company Law to make sure you're up to speed with the latest requirements.
Let’s break down some of the key changes
Changes to company capital:
Article 47 states that shareholders of a Limited Liability Company (LLC) must pay their subscribed capital in full within five years of the company’s establishment. Companies established before the 2023 Company Law comes into effect that have subscribed capital payment terms exceeding this limit will need to adjust the contribution period to meet this requirement.
The 2023 Company Law introduces a new authorized capital system for joint-stock companies, where shareholders’ meetings can “authorize the board of directors to make a resolution on the issuance of corporate bonds” (Article 59).
The 2023 Company Law adds a new clause stipulating the different types of shares that a company limited by shares can issue, in addition to ordinary shares. These shares must comply with the company’s AoA.
The 2023 Company Law also clarifies the mechanisms for reducing the amount of registered capital. Companies are allowed to reduce their registered capital to make up for losses, but this can only be used if the company is still experiencing losses after having used its discretionary public reserve fund and statutory public reserve fund to make up for losses.
On to the changes in corporate governance structures
The 2023 Company Law allows LLCs and joint-stock companies to establish an “audit committee” within the board of directors.
Small joint stock companies or joint stock companies with few shareholders now have the option not to establish a board of directors.
The 2023 Company Law allows small LLCs or LLCs with few shareholders the option not to have supervisor(s), with the unanimous consent of all shareholders.
The 2023 Company Law makes it clear that the functions and powers of the board of directors are composed of three parts: statutory functions and powers, functions and powers prescribed in the AoA, and authorized powers granted by the board of shareholders or shareholders’ meeting.
Changes to provisions on shareholder rights
The 2023 Company Law enhances shareholders’ powers in several ways, enabling them to better protect their rights.
The 2023 Company Law allows shareholders to inspect and duplicate relevant materials of a wholly-owned subsidiary company.
Under Article 89 of the 2023 Company Law, shareholders have the right to request the company to acquire their equity at a reasonable price if a company’s controlling shareholder abuses shareholder rights and seriously damages the interests of the company or other shareholders.
Changes to company establishment and liquidation procedures
The 2023 Company Law expands the type of company that an individual can open on their own, and the number of companies that a single person can establish.
The 2023 Company Law makes it easier to start a company in multiple ways. For instance, it now allows one person to set up a joint-stock company. Under the 2018 Company Law, at least two people are needed to do so.
So, that's the rundown of the changes coming up in the China Company Law. If you're doing business in China, make sure you're familiar with all these changes to keep your business running smoothly.
Highlights
China has amended its Company Law, affecting company capital rules, corporate governance, liquidation procedures, and shareholder rights. The new law, effective July 1, 2024, impacts all companies in China and provides more flexibility in share issuance and corporate structure while strengthening shareholder rights protection.
Key Changes
Company Capital Shareholders of a Limited Liability Company (LLC) must pay their subscribed capital within five years of the company’s establishment. New requirements for companies to disclose their registered capital have been introduced, along with increased penalties for non-compliance.
Authorized Capital System The law introduces an authorized capital system for joint-stock companies, allowing the board of directors to issue some or all of the remaining shares at a later time if needed.
Share IssuanceThe law adds a clause outlining the different types of shares a company can issue, including preferred and subordinate shares, shares with special voting rights, transfer restricted shares, and others as specified by the State Council.
Registered Capital Reduction The law clarifies mechanisms for reducing registered capital to cover losses, with certain restrictions.
Corporate Governance The law allows LLCs and joint-stock companies to establish an audit committee, removes the need for a board of directors for small What You Need to Know about China’s Revised Company Law 4 joint-stock companies, and expands the scope for the appointment of legal representatives.
Shareholder Rights The law enhances shareholders' powers, expanding their right to information, rights to convene extraordinary general meetings, and rights to require share buybacks.
Company Establishment and Liquidation Procedures The law relaxes restrictions on one-person companies, allowing one person to set up a joint-stock company.
Companies operating in China are advised to familiarize themselves with these amendments to ensure compliance
