Chinese New Company Law – How the New Revision Could Impact FIEs in China

On December 29, 2023, the Standing Committee of the National People's Congress of China approved the revised Company Law, which will take effect on July 1, 2024. The new Company Law makes significant adjustments to the current Company Law in various aspects, such as corporate governance, strengthening shareholders' investment responsibilities, more legal liability of directors, supervisors, senior officers and shareholders. The revisions could lead to changes in the way FIEs are operated in China. We summarized the takeaways of the new Company Law as follows.

1.    Strengthening shareholder capital contribution responsibilities

1.1    Provisions regarding the deadline for shareholders of limited liability companies to make their subscribed capital contributions (Art. 47, Art. 266)

The current Company Law adopts a system where the registered capital of a limited liability company is recognized upon subscription, without any legal requirement for actual contribution timeline.  The new Company Law introduces provisions concerning the period for shareholders of limited liability companies to fulfill their subscribed capital. Unless otherwise specified by laws and regulations, shareholders are required to fully pay their subscribed capital within five years from the establishment of the company in accordance with the company's articles of association (AoA). 

Pursuant to Art. 266, for companies established and registered before July 1, 2024, with capital contribution periods that exceed the requirements set forth in the new Company Law, there should be a gradual adjustment to comply with the period set forth in the law. According to the official response issued by the State Administration for Market Regulation on December 30, 2023, the relevant departments will issue a transition period for existing companies. These companies shall gradually adjust the contribution periods in accordance with the requirements of the new Company Law and ensure that they fall within the specified periods of the new regulation. The specific implementation measures will be determined by the State Council. 

For existing FIEs that have not fully completed the actual payment of registered capital, it is advisable to assess the outstanding capital and the timeline for completion. At the same time, it is also important to keep abreast of subsequent regulatory actions.

1.2    Accelerated maturity for shareholders’ capital contribution obligation (Art. 54)

Under the legal framework before the new Companies Law, there was no general support for accelerating contribution deadlines. Acceleration of contribution deadlines was allowed only in exceptional situations, such as when the company entered bankruptcy proceedings, met the conditions for bankruptcy but did not file for bankruptcy, or deliberately extended contribution deadlines to avoid debts, etc. Based on Art. 54, if a company is unable to fulfill its outstanding liabilities, the company or its creditors have the right to request immediate capital contributions from shareholders who have subscribed but not yet made their capital contribution. 

This applies regardless of whether the agreed-upon term for capital contribution by these shareholders has expired or not. As a result, shareholders may face the risks associated with the acceleration of their capital contribution obligations, especially in cases where they initially intended to subscribe to capital contribution first and make the actual contribution in the future based on a predetermined schedule.
 

2.    Adjustments regarding corporate governance

2.1    Position of the legal representative

Art. 10 of the new Company Law stipulates that the legal representative of a company is appointed according to the AoA and can be held by a director or manager responsible for executing the company's business. 

The new Company Law no longer mandatorily designates the chairman of the board of the directors, executive director, or manager as the only person who can act as the legal representative, thereby granting the company autonomy and increasing flexibility in this regard. It remains open if the newly added wording “responsible for executing the company's business” has any deeper meaning with regards to the domicile of the legal representative (e.g. that the legal representative should be located in China).
 

2.2    Provide more flexibility in the allocation of powers to the board of shareholders, the board of directors and the manager of the company.

• The new Company Law reduces the statutory powers of the board of shareholders. Some matters previously within the exclusive competence of the board of shareholders can be allocated to the board of directors or the management for decision-making based on the actual circumstances of the company (Art. 59 and Art.67). For example, "determining the company's business direction and investment plans" and "review and approve the annual financial budget and financial accounting plan of the company" are no longer mandatory decisions to be made by the board of shareholders.

• The new Company Law does not specify the specific functions and powers of general managers. Instead, it provides a more general provision stating that general managers should exercise their functions and powers in accordance with the AoA or as authorized by the board of directors (Art. 74).

2.3    Supervisor position is no longer mandatory requirement.

Under the current Company Law, companies are required to establish a board of supervisors, or at least have one supervisor. According to Art. 69 of the new Company Law, limited liability companies have the option to establish an audit committee under the board instead. This audit committee would be composed solely of directors and would be responsible for overseeing the company's finances and accounting. If a company chooses to implement an audit committee, there would be no requirement to appoint supervisors. Simply including an additional clause in the AoA would be sufficient to establish the audit committee.

According to Art. 83 of the new Company Law, small-scale companies or those with fewer shareholders may choose not to have the position of supervisor or an audit committee with the unanimous consent of all shareholders. 

However, the criteria for determining what constitutes a "small-scale" company still needs further clarification.

3.    More liability for directors, supervisors and senior management

3.1 Strengthening of personal liability in cases where shareholders have not fully paid their subscribed capital

The current Company Law does not specifically provide for the obligation of the directors of a limited liability company to demand contributions if the shareholders have not fully complied with their contribution obligations, nor does it specify the liability for compensation in the event of non-compliance with this obligation. The new Company Law imposes strict liability on directors and senior management to safeguard the company's capital: 

• Article 51 of the new Company Law specifies that the board of directors shall verify the shareholders' capital contributions. Directors who fail to fulfill their obligation to verify the shareholders' capital contributions and cause losses to the company shall be held responsible and liable for compensation.

• Article 53 of the new Company Law stipulates that if the shareholder's withdrawal of contributions causes losses to the company, the responsible directors, supervisors, and senior management personnel shall bear joint liability with that shareholder.

3.2 Introduction of direct liability for directors and senior management towards third parties.

The current company law does not provide for a direct liability of the directors or senior management to compensate a third party. The new Company Law explicitly states that the company will be held responsible for any damages caused to third parties by directors or senior management while performing their duties. Additionally, if the directors and senior management are found to have acted intentionally or with gross negligence in the performance of their duties, they will be held personally liable together with the company. (Art. 191)

We recommend that companies promptly monitor the latest legal requirements and subsequent detailed regulations issued by the authorities and focus on determining whether the new Company Law will trigger mere technical adjustments to relevant organizational documents or result in material changes to existing business arrangements, such as provisions relating to directors and capital contributions.

We will keep you updated and please do not hesitate to contact us if you are interested in any of those topics.

Beijing, January 9, 2024