The amended Company Law of the People's Republic of China (“the New Company Law”) was adopted by the National People's Congress of China and published on December 29, 2023, effective on July 1, 2024. This new legislation brings forth a host of transformative changes that will change companies’ operation in China and also will have a strong effect as they will be effective also retroactively.
The Revival of Registered Capital Contribution Timeline
Under the original Company Law, the shareholders may decide by themselves the time to contribute the capital contribution through company's articles of association without mandatory rules under the law. However, before that there was a deadline obligation for registered capital within 2 years after the company’s establishment.
The new change stipulates a clear deadline for the capital contribution:
- For a limited liability company by equity, each shareholder shall contribute the amount of capital subscribed by the shareholder in accordance with the provisions of the articles of association within five years from the date of establishment of the company, subject to the specific provision of laws etc.
- For a limited liability company by shares (public companies), the deadline for the payment of the share capital shall be the incorporation of the company.
The rule applies retroactively to companies established prior to the implementation of the New Company Law. Where they have a longer period of capital contribution, it shall be gradually adjusted to meet the requirement of the New Company Law; where the period of capital contribution or the amount of capital contribution is obviously abnormal, the company registration authority may, in accordance with the law, require it to make adjustments in a timely manner.
The New Company Law places a greater responsibility on directors to verify shareholders' capital contributions. Shareholders who fail to contribute capital within the specified timeframe will face repercussions, including the loss of certain shareholder rights. Moreover, in cases where a company is unable to meet its financial obligations, the law empowers the company and its creditors to demand capital contributions even before payment is due. These measures promote financial integrity and safeguard the interests of all stakeholders.
The law also assumes more Responsibility for Capital Contribution after an Equity Transfer: Transfer of equity with unpaid capital contribution which is not due: the transferee assumes obligation; if the transferee fails to contribute on time, the transferor shall bear the supplementary liability.
Transfer of equity with due but unpaid contribution or undervalued contribution: transferor and transferee are jointly and severally liable, unless transferee was unaware or could not have known about the shortfall.
Equity Transfers: Preemptive Rights and Procedures
Equity transfer in limited liability companies no longer requires consent from non-transferring shareholders when transferring to non-shareholder parties. A preemptive right exists, with notice provided to other shareholders. Failure to respond within 30 days waives preemptive rights. Written notification to the company is required to update the register of shareholders, granting transferees full shareholder rights.
Limited Liability of the Legal Representative
China's Amended Company Law has expanded the eligibility for the position of legal representative, allowing any director or general manager who handles company affairs to serve in this role. In case of resignation, a new legal representative must be appointed within 30 days. The company bears the legal consequences of the representative's actions, and restrictions on their powers cannot be invoked by third parties. Personal liability may be incurred for negligence.
Director Changes: Resignations, Decision-Making, and Compensation
Under the amended law, directors must provide written notice of resignation, with the resignation taking effect upon receipt by the company. Resigning directors continue their duties until a replacement is appointed, if fewer than three directors remain. Small limited liability companies can have a single director with board powers. Dismissed directors may claim compensation if the termination lacks a legitimate reason. Board resolutions require a majority vote.
Flexibility for General Managers: Delegated Duties
The amended law removes the statutory duties of general managers, enabling their responsibilities to be determined in the company's articles of association or delegated by the board of directors. This change offers greater flexibility in defining the scope of the general manager's role.
No Mandatory Supervisor
Under the New Company Law, limited liability companies that are small in size or have a small number of shareholders are no longer required to have supervisors. Instead, they have the option to establish a Board of Directors audit committee as a substitute.
