Introduction
Company law is a key area of business and commercial markets’ development, and ultimately economic growth.
In the current Chinese dynamics and after a handful of drafts seeking public comments were submitted, a new Company law in the People’s Republic of China (PRC) was finally promulgated on December 29, 2023, set to become effective as of July 1, 2024, just thirty years after the first Chinese Company law. Comprising of 266 articles spread out through 15 chapters, it brings notable changes, significantly impacting China-based companies and their stakeholders, including foreign ones.
Before digging into it, it is interesting to understand the rationale displayed behind this new Company law (article 1), that aims at:
- Regulating the organization and activities of companies, while protecting companies, their shareholders, employees, and creditors’ interests, and developing entrepreneurship.
- Improving modern Chinese enterprise system, while maintaining social and economic order and promoting the socialist market economy.
Considering these, here’s a quick non-exhaustive teaser of what is going to change for Chinese companies’ stakeholders, including shareholders, employees and creditors mentioned above.
For the purpose of this informative article, LLC means Limited Liability Company, JSC means Joint Stock Company, BoD means Board of Directors and BoS means Board of Supervisors.
Shareholders
One of the main changes brought by this new company law is that for an LLC, shareholders now need to fully pay their capital subscription within 5 years from the establishment of the company (article 47). The same might be going as well for capital increases according to article 228.
Articles 50 and 52 even go further. The first one establishes the joint and several liability of other shareholders in case one fails to pay their actual contribution. The second one states that in case the capital has not been subscribed on time, the company might submit a capital forfeiture notice to the defaulting shareholder.
Therefore, existing companies now need to gradually adjust their capital payment schedule to match the new requirements (article 266). If it remains to be seen how this will be implemented in practice, these measures overall aim at giving a stronger financial structure to companies, generating in turn trust in the whole corporate system.
BoD
As before, whether for an LLC or a JSC, the minimum number of directors seating in the BoD remains 3, while there is no more maximum limit, unless the company is of “small scale” or with a “relatively small number of shareholders”, where a sole director can be empowered (articles 75 for LLCs and 128 for JSCs).
In terms of powers, there is not much change. The BoD can now be authorized by the shareholders to issue corporate bonds, according to article 59 of the new Company law.
Supervisors and Audit Committee
The supervising body is arguably one of the categories where there have been significant changes.
First, “small scale” JSCs or those with a “relatively small number of shareholders” are now also allowed to a sole supervisor, according to article 133 of the new Company law.
The legislator even goes further for “small scale” LLCs or those with a “relatively small number of shareholders”, which can now have no supervisor at all upon the unanimous approval of all their shareholders (article 83).
Instead of a supervisor or a BoS, the company may also set up an audit committee with directors from the BoD, assuming the same role as those of the supervisor or the BoS (articles 69 for LLCs and 121 for JSCs).
Supervisors and BoS hence seem to be left in the background to some extent.
Legal representatives
The new Company law has now broadened the scope of candidates that can pretend to be legal representatives to any “director or manager” representing the company in executing corporate affairs (article 10). We assume here that by the manager, and as for the previous company law, it is the legal manager of the company that is intended for this role, considering the liabilities that ensue.
In terms of liabilities precisely, to avoid extending their scope unnecessarily, the same article now clearly states that the resignation from such director or manager position is deemed as a resignation from the legal representation, and the company shall make haste to announce a new appointee, within 30 days of the resignation.
Employees
Employees’ representation in corporate governance is also increased, since at least one of them now needs to sit in the BoD if the company has 300 employees and more, and if they are not already represented in the BoS (article 68 for LLCs and 120 for JSCs).
Creditors
The protection of companies’ creditors is reinforced as well with the new Company law.
Creditors are allowed to request shareholders to pay their capital contributions early in case the company is unable to pay off due debts (article 54).
Moreover, to protect the interests of creditors, according to article 23, not only the shareholders of the company can be jointly and severally liable by piercing the corporate veil in case they evaded debts, but also two or more companies controlled by the faulty shareholder in case they used those for the same purpose.
The new obligation for LLCs to publish through the National Enterprise Credit Information Publicity System, the amounts of capital contributions subscribed and actually paid as well as change of equity or shares (article 40), also acts as a protection system for creditors and the public in general, who will be better informed.
Other stakeholders
When engaging in business operations, article 20 mentions social responsibilities of the company in considering different stakeholders, namely the employees, the consumers, the public and other stakeholders’ interests, as well as the protection of the ecological environment.
It seems the legislators made a point to enhance the social responsibility of the company, which seems quite large, encompassing different items. This is overall aligned with ESG (Environmental, Social, and corporate Governance) emphasis and growing concerns in China and elsewhere.
Conclusion
In conclusion, many previous provisions of the Company law were shaken up to reaffirm the strength of the Chinese corporate system and facilitate business overall, all the while making sure that different stakeholders were considered.
Companies are impacted in terms of corporate governance and liabilities, and they clearly need to take action now: LLCs need to check their capital structure and contribution schedule, and all companies need to review their articles of association, to make sure they comply with the new rules.
These changes are timely. They fall the same year Wholly Foreign-Owned Enterprises and Joint-Ventures need to update their status towards LLCs, with a deadline fixed to end 2024, according to the PRC Foreign Investment Law.
Companies and their management need to get to work NOW, there is much to be done!
