China Company Law Revised Effective July 2024

China’s legislative landscape is undergoing a significant transformation by adopting amendments to the Company Law, effective July 1, 2024

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China makes welcomed changes to its Company Law

The Standing Committee of the National People’s Congress (NPC) formally ratified the amendment to the China Company Law,

A Message from the CEO

Corporation China, a significant player in the Chinese business landscape, emphasizes the importance of understanding the nuanced changes brought about by the revised Company Law. The amendments not only promote corporate governance but also reflect an alignment with contemporary corporate disclosure standards. Marco Pearman-Parish from Corporation China asserts, “These revisions signify a pivotal moment for businesses operating in China, necessitating a thorough understanding of the updated legal landscape to ensure continued compliance.”

Marco Pearman-Parish on BBC news live from Shanghai - Marco
Marco Pearman-Parish
CEO Of Corporation China

Revised China Company Law: Key Changes Taking Effect July 1, 2024

China’s legislative landscape is undergoing a significant transformation by adopting amendments to the Company Law, effective July 1, 2024. The revisions encompass a broad spectrum of changes, impacting company capital regulations, corporate governance frameworks, liquidation processes, and shareholder entitlements, among other crucial facets. This updated iteration of the China Company Law introduces substantial implications for both existing and emerging companies in China, granting increased flexibility in areas such as share issuance and corporate structure while concurrently fortifying safeguards for shareholder rights. It is imperative for foreign investors and corporations, including those associated with Corporation China, to acquaint themselves with the revised China Company Law to evaluate potential impacts on their investments.

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Business and Investment

Positive Signs Abound

On December 29, 2023, the Standing Committee of the National People’s Congress (NPC) formally ratified the amendment to the China Company Law, denoted as the “2023 Company Law.” Set to take effect on July 1, 2024, this final version culminates a multi-year process involving draft amendments and deliberations that commenced in late 2021.

These amendments align the China Company Law with recent corporate disclosure requirements stipulated by the corporate social credit system.
Corporation China, a significant player in the Chinese business landscape, emphasizes the importance of understanding the nuanced changes brought about by the revised Company Law. The amendments not only promote corporate governance but also reflect an alignment with contemporary corporate disclosure standards. Marco Pearman-Parish from Corporation China asserts, “These revisions signify a pivotal moment for businesses operating in China, necessitating a thorough understanding of the updated legal landscape to ensure continued compliance.”

China Company Law Revised Effective July 2024

For companies already established in China or those eyeing entry into the Chinese market, a comprehensive understanding of the latest modifications to the Company Law is imperative to ensure adherence to the evolving regulatory framework. Marco Pearman-Parish’s statement underlines the significance of proactive engagement and compliance for corporations navigating the evolving Chinese legal landscape.

China Company Law Revised Effective July 2024 -What do shareholders need to know.

The People’s Republic of China has substantially revised its Company Law, significantly impacting established and new businesses operating within the country. These changes aim to achieve a multifaceted approach, including:

  • Strengthening shareholder rights and protections: This encompasses increased transparency, expanded information access for shareholders, and the ability to request share buybacks under specific circumstances.
  • Enhancing corporate governance flexibility: Companies are granted greater autonomy in board structure, share issuance options, and capital contribution timelines.
  • Reinforcing creditor protection: Measures such as stricter capital contribution rules, introducing the “horizontal disregard” concept, and forced deregistration for inactive companies aim to safeguard creditor interests.

Capital Contribution:

  • New Requirement: A critical change for Limited Liability Companies (LLCs) is the requirement for shareholders to fully contribute their subscribed capital within five years of the company’s establishment. This replaces the previously open-ended timeframe.
  • Grace Period and Transition: Existing companies exceeding this new timeframe will be granted a grace period to adjust their contribution schedules and comply with the revised regulations.
  • Increased Transparency and Accountability: Companies must disclose capital registration information through the National Enterprise Credit Information Disclosure System. Additionally, stricter penalties are in place for non-compliance, emphasizing the importance of transparency.
  • Joint-Stock Companies:
    • Introducing an authorized capital system allows joint-stock companies to initially issue only a portion of their shares. This flexibility lets them issue the remaining shares later based on their liquidity needs.
    • However, promoters of joint-stock companies must still pay their subscription in full before the company is officially established.
  • Liability for Unpaid Capital: To address outstanding capital contributions, the new law introduces a provision holding shareholders liable for damages to the company if they fail to pay their contributions on time.

Share Issuance:

  • Enhanced Flexibility: LLCs are now granted more flexibility in issuing various types of shares beyond just ordinary shares. These additional share options, outlined in the company’s Articles of Association (AoA), can include preferred and subordinate shares, shares with special voting rights, transfer-restricted shares, and other types approved by the State Council.
  • Par Value Option: Limited companies can issue shares with or without par value, offering them another layer of flexibility in their financial structure.
  • Listed Companies: However, listed companies face restrictions on issuing shares with voting rights that differ from ordinary shares, except for cases where these shares were issued before the company went public.

Reduced Registered Capital:

  • Clarification: The revised law clarifies the process for companies to reduce their registered capital. Companies can only do so to make up for losses and only after exhausting other designated reserve funds.
  • Restrictions and Safeguards: The reduced capital cannot be distributed to shareholders or exempt them from their capital contribution obligations.
  • Notification and Transparency: While companies do not need to notify creditors within 10 days as in other situations, they must still announce the reduction within 30 days through a newspaper or the National Enterprise Credit Information Publicity System. Additionally, the contribution amount or share reduction should be made proportionally based on the existing shareholder contributions or holdings, with exceptions outlined in the law.
  • Post-Reduction Restriction: After reducing their registered capital, companies are prohibited from distributing profits until the cumulative amount of their statutory and discretionary reserve funds reaches 50% of their registered capital. This measure aims to ensure financial stability after a reduction.

Corporate Governance:

  • Audit Committee: A significant change in corporate governance structures is the introduction of the optional audit committee. LLCs and joint-stock companies can establish an audit committee within their boards of directors, eliminating the need for a separate board of supervisors. This committee, composed of directors, exercises the powers previously held by the board of supervisors. Specific provisions are outlined in the law for deliberation and voting procedures within the audit committee.
  • Streamlined Board Structures: Small joint-stock companies and those with few shareholders can now opt for a single director who exercises the functions and powers of a board of directors. This director can also serve as a company manager, further streamlining the company’s management structure.
  • Flexibility in Supervisory Boards: Similarly, small LLCs with few shareholders can choose not to have supervisors with the unanimous consent of all shareholders. This allows smaller companies to adapt their governance structure based on size and needs.
  • Transferring Powers: The revised law clarifies that the board of directors’ functions and powers are composed of three parts: statutory functions, functions prescribed in the AoA, and authorized powers granted by the board of shareholders or shareholders’ meeting. This allows for a more collaborative approach to decision-making within

 

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