China’s Company Law Changes for Foreign-Owned LLCs. On July 1, 2024, the highly anticipated amended PRC Company Law (the “New Company Law”) has officially taken effect. The New Company Law ushers in some significant transformations in the way firms are established and run in China, a change that extends to foreign firms investing in the country. In this article, we will delve into the key amendments made to the provisions governing limited liability companies, considering that the majority of foreign-invested companies in China adopt this particular form.
China’s Company Law Changes for Foreign-Owned LLCs:
I Changes to Capital Contribution System
- Time Limit for Capital Contribution
The previous Company Law allows shareholders to have flexibility in determining the schedule for capital contributions in a company’s articles of association. In theory, shareholders are not required to fully pay the registered capital until the company’s business term ends, which could span several decades. However, the New Company Law introduces a significant change by imposing a 5-year time limit for capital contributions. Shareholders are now obligated to fully pay the registered capital within 5 years after the company is established. Additionally, the company is required to disclose the subscription and paid-up status of the registered capital through the registration information system, ensuring transparency to the public.
- Acceleration of Capital Contribution
In accordance with the aforementioned provision, the articles of association of a company can allow a timeframe of up to 5 years for shareholders to fully pay up their registered capital. However, it is important to note that the New Company Law introduces a caveat to this arrangement. If the company fails to repay any of its debts as they become due, both the company itself and its creditors have the right to demand that shareholders expedite their capital contributions. This requirement applies even if the scheduled payment of registered capital has not yet become due as specified in the company’s articles of association.
- Other Responsibilities Related to Capital Contribution
(1) According to the New Company Law, shareholders have not only the obligation to make their own capital contributions promptly, but they are also responsible for ensuring that other shareholders duly fulfill their contribution obligations as well. In cases where any shareholder fails to make the required contribution as specified in the articles of association, the other shareholders may be held jointly and severally liable.
(2) Directors have a duty to verify the capital contributions made by each shareholder and are required to urge shareholders to rectify any instances where their contributions are not made in full or in a timely manner, as specified in the articles of association. Directors may be held personally liable if they fail to properly fulfill this obligation.
(3) If a shareholder fails to make the contribution within the prescribed time frame and after urged by the directors, but still fails to pay within a grace period of no less than 60 days, the company’s board may forfeit such shareholder’s equity interests by issuing a forfeiture notice.
China’s Company Law Changes for Foreign-Owned LLCs:
II Changes to Provisions on Share Transfer
- Other Shareholders’ Consents Not Required by Law
Under the previous Company Law, any share transfers require obtaining consents from more than half of the shareholders. However, the New Company Law has eliminated this requirement. According to the new law, non-transferring shareholders now only have the right of first refusal but no veto power over proposed transfers by other shareholders. Although the shareholders’ consents are not required for the share transfer by the new law anymore, shareholders are entitled to different mechanism and limitations over the share transfer so long as these are specified in the articles of association of the company.
- Effective Date of Share Transfer
Under the new law, the shareholder register of a company carries greater importance, requiring it to record the dates when each shareholder becomes and ceases to be a shareholder. Additionally, the law specifies that a transferee of shares can exercise their shareholder rights once their name is officially entered into the shareholder register. As a result, the effective date of a share transfer is typically when the transferee’s name is recorded as the company’s shareholder in the register, which is also the date when the company issues the investment certificate to the transferee. There is no doubt that the provision in the previous law, which stipulates that amendments to the articles of association related to changes in shareholders and shareholdings do not necessitate shareholder resolutions, will gain enhanced enforceablility under the new law.
- Transfer of Shares with Corresponding Registered Capital Uncontributed
Similar to the previous Company Law, the New Company Law allows for share transfers even if the registered capital corresponding to those shares has not been fully contributed. However, the New Company Law now specifies that the transferee must contribute the full amount for the transferred shares in a timely manner. If the transferee fails to fulfill this obligation, both the transferor and transferee will be jointly and severally liable.
China’s Company Law Changes for Foreign-Owned LLCs:
III Protection of Minor Shareholders
- Redemption by Company
Under the new law, if the controlling shareholder abuses their shareholder rights and causes significant harm to the interests of the company or other shareholders, the other shareholders have the right to demand that the company redeem their shares at a reasonable price.
- Joint Liability of Controlling Shareholders
According to the New Company Law, if controlling shareholders instruct any directors and senior management personnel to engage in actions that harm the interests of the company and other shareholders, these shareholders will be held jointly liable along with those directors and senior management personnel.
China’s Company Law Changes for Foreign-Owned LLCs:
IV Corporate Governance
- Relaxing Corporate Governance Structure
Under the New Company Law, for small-sized companies or companies with few shareholders, it is now possible for the company to operate without the position of a supervisor, as long as all shareholders unanimously agree. This means that in such cases, a shareholder can appoint a single individual to be both the director and the general manager of the company concurrently. This provision acknowledges the flexibility required for small-sized companies and reduces the administrative burden on them.
For medium-sized companies or companies with many shareholders, it is not mandatory to have the position of a supervisor. Instead, these companies can choose to establish an audit committee within the board of directors which will fulfill the role similar to that of supervisors or board of supervisors. This committee will be responsible for overseeing financial reporting, internal controls, and other related matters, ensuring transparency and accountability within the company.
- Employee Representative at Board
It is mandated in the new law that if a company employs over 300 individuals, it must have an employee representative as one of its directors. This representative is required to be elected through a democratic method.
- Compensation for Departing Director
Under the provisions of the New Company Law, directors are granted the right to request compensation if they are removed from their position by the shareholder(s) without justifiable reasons. This provision aims to safeguard directors from arbitrary or unfair removals and encourages responsible decision-making by shareholders.
- Disqualification from Decisions on Connected Transactions
Under the New Company Law, if a director, supervisor, senior management personnel, or any relatives or affiliates of the aforementioned individuals enter into transactions with the company, they are required to report it to the board or shareholder’s meeting. These transactions can be direct or indirect.
When it comes to voting on resolutions related to these transactions, the directors involved in the transaction are disqualified from participating in the vote. This is to ensure impartiality and avoid conflicts of interest.
Additionally, if the number of unrelated directors present at a board meeting is less than three, the matter should be submitted for review and approval by the shareholder’s meeting. This requirement ensures that decisions regarding related transactions receive appropriate scrutiny and oversight.
For further information, please contact:
Simon Li, Partner, Anjie Broad
ixiameng@anjielaw.com
