In February 2023, the draft revision of the Company Law of the People’s Republic of China (hereinafter referred to as the “Company Law”) was formally submitted to the Standing Committee of the National People’s Congress for the second review draft (hereinafter referred to as the “Second Review Draft”). deliberate. The second review draft contains some major amendments to the current Company Law, which will affect the practice of companies when passed.
This article will focus on the main revisions of the second review draft in terms of shareholder capital contribution responsibilities, director responsibilities and corporate governance.
1. Responsibilities for shareholder capital contribution
(1) Clarify the obligations of the transferee and the transferor for unpaid and insufficient capital contributions in the equity transfer
According to Article 88 of the second review draft, for a shareholder to transfer the capital contribution that has been subscribed but not paid in full:
(a) If the time limit for capital contribution has not expired at the time of equity transfer, the transferee shall bear the obligation to pay the capital contribution. However, if the transferee fails to pay the capital contribution in full on time, the transferor shall assume supplementary responsibility to pay the due capital contribution. Supplementary responsibilities are not defined in the second review draft. Typically, supplementary liability applies only if the primary responsible party does not have sufficient capacity to fulfill its obligations. In such case, the party with supplementary liability will be liable for the unfulfilled portion. Supplementary liability is not a joint liability.
(b) If the time limit for capital contribution has expired at the time of equity transfer, and the transferee knows or should know the existence of this situation, the transferee shall bear joint and several liabilities with the transferor to the extent that the capital contribution is insufficient.
(c) If the actual value of the non-monetary property contributed by the transferor is significantly lower than the subscribed capital contribution, and the transferee knows or should know that there is such a situation, the transferee shall be within the scope of insufficient capital contribution Jointly and severally liable with the transferor.
(2) Accelerated maturity of subscribed capital contributions
Article 53 of the second review draft stipulates that if the company cannot pay off the due debts, the company or the creditors of the due debts have the right to require shareholders who have subscribed for the capital contribution but the capital contribution period has not yet expired to pay the capital contribution in advance. This is a major revision of the Company Law in the second review draft, which protects the interests of the company’s creditors.
2. Responsibilities of directors
(1) Liability for compensation
Article 190 of the second review draft stipulates that if a director has intentional or gross negligence in performing his duties and causes damage to others, the director shall be personally liable for compensation.
In addition, under any of the following circumstances, directors may be personally liable for compensation to the company:
(a) The directors of a limited liability company violate the provisions of the Company Law by allowing the company to provide financial assistance for others to acquire shares in the company (except for companies implementing employee stock ownership plans), causing losses to the company (Article 163 of the second review draft) ;
or
(c) The company reduces its capital in violation of the provisions of the Company Law, causing losses to the company (Article 222 of the second review draft).
(2) Joint and several liability
In addition, under any of the following circumstances, the director and the offending shareholder shall jointly bear joint and several liability for compensation to the company:
(a) The actual price of the non-monetary property used as capital contribution is significantly lower than the subscribed capital contribution, causing losses to the company (Article 52 of the second review draft);
(b) Shareholders evade their capital contributions and cause losses to the company (Article 57 of the second review draft); and
(c) The controlling shareholder or actual controller of the company instructs the directors to engage in acts that harm the interests of the company or shareholders (Article 191 of the second review draft).
(3) Directors liability insurance
The second review draft confirmed directors’ liability insurance (Article 192) in the Company Law for the first time. According to this clause, the company can purchase liability insurance for the directors’ liability for compensation due to the performance of the company’s duties during the director’s tenure. After the liability insurance is purchased or renewed, the board of directors shall report to the shareholders’ meeting the insured amount, scope of coverage and premium rate of the liability insurance, among others.
3. Corporate Governance
(1) Establishment of Audit Committee
The second review draft stipulates that the company can set up an audit committee under the board of directors without having a supervisor or a board of supervisors. The Audit Committee exercises the functions and powers of the Board of Supervisors stipulated in the Articles of Association.
(2) Cancel the mandatory requirement for appointing supervisors
The current “Company Law” stipulates that the shareholders of the company shall appoint at least one supervisor. According to Article 83 of the second review draft, a small-scale limited liability company may not have a supervisor with the unanimous consent of all shareholders. However, the “Company Law” and the second review draft did not stipulate the “smaller scale” standard. In practice, the registration authority may make a definition with reference to factors such as the number of employees, operating income, and total assets of the company. The abolition of the supervisory post has been discussed for some time.
(3) Employee representatives on the board of directors
According to the provisions of the second review draft, for a limited liability company with more than 300 employees, its board of directors shall have employee representatives, unless the company has established a board of supervisors in accordance with the law and there are employee representatives on the board of supervisors. Employee representatives are members of the board of directors and are elected by employees.
The above mainly highlights some potential major revisions (not an exhaustive interpretation) of the second review draft on the above issues, and these changes may affect the subsidiaries of foreign investors in China. Some of these changes are quite significant. We expect a formal revised version to come out soon after the second deliberation by the Standing Committee of the National People’s Congress, possibly this year. We will continue to follow up on major developments in the Company Law. If you have any questions on corporate governance issues, please feel free to contact us.
