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Subsequent to the release of the second draft amendment (the “Second Draft Amendment”) to the Company Law of the People’s Republic of China (“Company Law”) in December 2022, a third draft amendment (the “Third Draft Amendment”) was released on September 1, 2023 for public comment. The proposed amendments introduce significant changes to the Company Law aimed at enhancing corporate governance practices and protecting the rights of shareholders.

Compared to the Second Draft Amendment, the key highlights of the Third Draft Amendment are as follows:

1. Regarding shareholders capital contribution liabilities, the Third Draft Amendment provides that the registered capital of limited liability companies must be fully paid within five years from the date of a company’s establishment, unless an earlier date is set in the company’s articles of association. In addition, directors who fail to fulfil their obligations to verify the contributions made by shareholders and pursue the payment of any outstanding contributions that have not been paid in full on time shall be held liable to the company for compensation.

2. Regarding the protection of shareholders’ rights, the Third Draft Amendment has placed strong emphasis on:

  1. improving shareholders of companies limited by shares’ right to review and copy relevant company materials;
  2. prohibiting companies from increasing the percentage of shareholding required to propose a shareholders’ proposed resolution;
  3. introducing provisions to address situations where controlling shareholders abuse their rights and significantly harm the interests of the company and other shareholders. In such cases, minority shareholders are granted the right to require the company to acquire their shares at a reasonable price; and
  4. requiring a company to proportionally reduce the capital contribution or shareholding of shareholders when it reduces its registered capital, unless otherwise specified by law.

3. Controlling shareholders and actual controllers who do not serve as directors but who effectively control the company’s operations shall be subject to a director’s fiduciary duties and diligence obligations towards the company.

4. The Third Draft Amendment strengthens the democratic management of the Company.  It proposes the establishment and enhancement of a democratic management system, with the employee congress as the fundamental form. Furthermore, the inclusion of employee representatives in the board of directors is suggested in the Third Draft Amendment for all companies while inclusion shall be mandatory for companies with over 300 employees that do not have a board of supervisors, as set out in the Second Draft Amendment.

5. Regarding  corporate bonds, the Third Draft Amendment confirms the permissibility of the public and private issuance of corporate bonds, clarifies  the authority responsible for registering enterprise bonds, replaces bond certificates with a bond holder registry, expands the types of companies that can issue  convertible bonds from public companies to all companies limited by shares, and introduces provisions on the rules and effectiveness of bondholder meetings and includes regulations pertaining to bond trustees.

6. The Third Draft Amendment also introduces provisions to reinforce legal liabilities and penalties for non-compliance. It imposes fines ranging from 10,000 to 50,000 yuan on individuals directly responsible for fraudulent practices, such as providing false information during company registration. Moreover, violations of accounting laws and asset evaluation regulations will be penalized in accordance with relevant laws and regulations.

The Third Draft Amendment reflects the Chinese government’s ongoing commitment to improving corporate governance practices and protecting shareholders’ rights. We will continue to monitor developments with respect to the amendment of the Company Law. Should you have any questions or concerns regarding corporate governance matters, please do not hesitate to reach out to us.

WRITTEN BY

Deacons
For further information, please contact:

Edwarde Webre – Consultant – Corporate Commercial, Deacons
edwarde.webre@deacons.com

Edwarde specializes in cross-border transactional and operational matters in Greater China.  He has over twenty years experience handling Hong Kong transactions and assisting foreign investors in China. He has assisted both foreign and domestic parties with inbound and outbound transactions involving the PRC.  He advises both operational and financial investors, including venture capital and private equity funds on portfolio investments.  He handles public and private mergers and acquisitions, reorganisations and direct investment transactions.

He has acted across a range of industries sectors and has handled major projects in manufacturing, electronics, pharmaceuticals, chemicals, medical devices, hotel/hospitality, technology, financial services, tobacco, energy and advertising industry sectors.   Transactions handled have included major green field projects and the acquisitions on non-circulating state owned shares, block share acquisitions of listed shares, negotiated acquisitions of registered capital and the conversion of non-circulating shares into listed shares.

He also advises on clean energy projects and has handled biogas, natured gas, hydro power and wind energy projects.  He has advised on PRC regulatory requirements and ERPA issues with respect to the acquisition of CERs under the Kyoto Protocol and other arrangements.

At an operational level, Edwarde advises on technology licensing and transfers, operational and distribution arrangements, anti-corruption investigations, treasury functions, general commercial agreements and labour matters.

Edwarde was resident in Beijing for three years.  He frequently spends time in the Deacons China offices.

Highlights

  • Assisting a French multinational with the establishment of major reconstituted tobacco joint venture production facility in Yunnan in a project that involved multiple PRC investors, including major state-owned enterprises, and required specialized industry sector approvals.
  • Assisting the Bankruptcy estate of a major European auto manufacturer with the sale of its European production assets to a Chinese lead consortium, including multi-national investors with significant security arrangements.
  • Assisting a major Japanese multinational in the acquisition of a controlling interest in a service business as an integral part of a strategic alliance with a major Hong Kong listed company which relationship included cross-holding of equity interests in each others subsidiaries in Hong Kong and China.  The transaction was a notifiable transaction under the rules of the Hong Kong Stock Exchange.
  • Assisting a major Brazilian mining conglomerate with PRC anti-monopoly clearance for a minority investment by a major Japanese multi-national in the development and exploitation of an integrated iron ore mining project in the State of Minas Gervias in Brazil.  This project did not involve any PRC entities.
  • Assisting a major Japanese multinational on litigation and settlement arrangements related to the discontinuation of a major product line and the termination of the related processing contracts and distribution arrangements.  Disputes were handled both in the PRC and Hong Kong. 
  • Assisting a European private equity fund with the reorganization of its Hong Kong and PRC operations as a part of global reorganization and assisting with the review of portfolio investments.
  • Assisting a French energy multinational with the review of seventeen 49.5 MW wind firm projects in Northern China and combined cycle power plants in Central and Southern China in connection with a green house gas emission reduction projects.

More about Edwarde Webre

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