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Revision to China’s Corporate Law: Key Changes and Implications for Businesses

Revision to China’s Corporate Law

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China is set to implement significant changes to its company law, reflecting the evolving landscape of corporate governance and business practices within the country. The latest amendment to the China Company Law was adopted by the Standing Committee of the National People’s Congress on December 29, 2023, marking a definitive step in a series of legal reforms that began in 2021. These modifications aim to modernize the legal framework for companies operating in China, address pressing issues such as corporate governance, shareholder rights, and obligations, and reflect international best practices in business.

The revised law, which will take effect on July 1, 2024, has been a topic of interest among businesses, legal practitioners, and policy analysts. It touches upon substantial elements of corporate operation, including foreign investment regulations, compliance requirements, and the liability of company directors. This move by the Chinese legislature demonstrates the country’s commitment to aligning its business environment with global market demands, fostering a more attractive investment climate, and encouraging responsible business conduct.

Anticipated as one of the most comprehensive overhauls of China’s Company Law since its inception, the amendments are expected to have far-reaching implications for both domestic and foreign enterprises. This will improve corporate governance standards and legal transparency, and it is imperative for stakeholders involved in the Chinese market to navigate and comprehend the implications of these changes.

Overview of China’s Amended Corporate Law

China’s Company Law has undergone a significant transformation with the adoption of the Amended Company Law by the National People’s Congress to modernize corporate practices and adjust to international standards.

Evolution of Company Law in China

The Company Law of the People’s Republic of China, initially enacted on December 29, 1993, has been a cornerstone for corporate governance. The law has been subject to multiple revisions, with the first major revision in October 2005

Fast-forward to December 29, 2023, when the Standing Committee of the National People’s Congress adopted an Amendment to the China Company Law, which integrates over 30 years of development and international corporate practices.

Key Objectives of the Revised Law

The key objectives of the Amended Company Law, effective from July 1, 2024, are multifaceted. It aims to improve the flexibility of corporate structures, reduce regulatory burdens, and strengthen governance mechanisms. The amendment aligns closely with international standards and addresses the dynamics of foreign investment within China’s borders. The New Company Law redefines the legal framework for companies in China, affecting both domestic enterprises and foreign investors operating under the Foreign Investment Law. The changes suggest a significant effort to enhance corporate compliance and formalize enterprise operations in the PRC.

Impact on Business Formation and Governance

The recent overhaul of China’s Company Law, effective July 1, 2024, introduces significant changes impacting business formation and governance, particularly for Limited Liability Companies (LLCs) and Joint-Stock Companies. These revisions target company establishment procedures, capital contributions, and corporate governance structures and enhance transparency through corporate information disclosure.

Changes to Company Establishment Procedures

The streamlined procedures reduce the bureaucratic burden of establishing a company. For LLCs, the need for pre-approval of the company name has been removed. Instead, simultaneous name verification and registration with the Company Registration Authority expedite the process.

Adjustments to Capital Contribution and Registration

Revisions to capital contribution requirements include implementing a more flexible approach to the registered capital for LLCs and Joint-Stock Companies. This encompasses reducing entry barriers by eliminating the minimum registered capital and promoting diverse ways to measure capital contributions.

Revisions to Corporate Governance Structure

Corporate governance structures have been revamped to bolster management efficiency and accountability. For instance, modifications to the Articles of Association allow greater flexibility in defining the roles and responsibilities of Directors, the Board of Directors, and Supervisors.

Transparency and Corporate Information Disclosure

The revised law enhances corporate transparency by mandating improved corporate information disclosure practices. Companies are now required to disclose more comprehensive information, including but not limited to corporate bonds and changes in share capital. Additionally, establishing an independent Audit Committee has been accentuated for Joint-Stock Companies to ensure accountability and protect investors’ interests.

Shareholder Rights and Protections

The revised Company Law in China marks a significant step forward in reinforcing shareholder rights and protections. It focuses on increasing transparency, accountability, and fairness in corporate governance.

Enhanced Rights for Minority Shareholders

Minority shareholders in China have historically faced challenges in exerting influence within companies. However, the revised law places a stronger emphasis on their interests. Notably, minority shareholders now have improved supervisory power, ensuring their voices can be heard in crucial company decisions. They also gain enhanced voting rights, especially in events about related party transactions and other significant corporate matters.

Furthermore, corporate directors and supervisors are required to uphold a duty of care and loyalty toward the company. By promoting ethical management practices, they indirectly benefit all shareholders.

Regulations on Share Transfers

To promote a fair business environment and protect investments, the new law establishes clearer regulations on share transfers. For publicly listed companies, transfers of transfer-restricted shares must follow stringent guidelines to prevent undisclosed, premature, or coercive transactions that could harm the company or its shareholders.

Additionally, the right of first refusal ensures that existing shareholders have a priority claim over external parties when equity transfers occur, safeguarding their ownership stakes against dilution.

Duties and Liabilities of Controlling Shareholders

Controlling shareholders plays a pivotal role in corporate governance. The revised law recognizes this influence and enforces stricter duties and liabilities to prevent abuses of power. It decrees that controlling shareholders must not use their ownership to infringe upon the company’s or other shareholders’ lawful interests, especially minority shareholders.

Provisions also aim to hold controlling shareholders accountable for related party transactions that may present conflicts of interest or risk to the company. The law ensures that the rights associated with these equity classes are firmly protected for companies with different classes of shares, including those with preferred shares.

Furthermore, stringent compensation and corporate governance regulations also discourage controlling shareholders from undertaking actions that prioritize personal gain over the company’s welfare.

Legal Implications and Compliance

The revisions to China’s Company Law introduce substantial changes for entities operating within the country. These changes notably impact foreign-invested enterprises, enforce corporate social responsibilities, and set clear compliance timelines for the transition.

Obligations of Foreign-Invested Enterprises

Foreign-Invested Enterprises (FIEs) must now adhere to new capital rules and a streamlined registration process. Directors, referred to as “de facto directors,” and the legal representative of FIEs are subject to stricter joint and several liability provisions, emphasizing the importance of due diligence in operations and management. The amendments mandate that investors’ capital contributions are to be fully paid up as pledged, ensuring compliance with financial investment commitments.

Corporate Social Responsibilities and Penalties

The amended law expands the scope of corporate social responsibility (CSR) for businesses, including state-owned companies. They are now expected to integrate CSR within their core operations, emphasizing sustainable environmental practices and ethical governance. Failure to fulfill these responsibilities leads to increased penalties and reflects on the overall credibility of the business. The employee representative mechanisms will be strengthened, ensuring compliance and shared responsibility in profit distribution and social contributions.

Transition and Implementation of Amendments

Entities have been given a clear time limit for compliance with transitional measures detailed in the new law. During liquidation or dissolution processes, the law outlines notice requirements and procedures to protect the interests of creditors and investors. The transition period until the Effective Date allows businesses to adjust their internal structures, establish appropriate transitional measures, and adopt necessary modifications for full compliance with the new legal framework.