Chinas NEW Company Law! What you need to know!

266 articles, this will be the lengths of the new Chinese company law. The current version with 218 articles in total will get a full make-over with over 70 articles being added or substantially revised. As this is the first ever major revision of the Company Law, there will be considerably large changes to China’s corporate and legal system.

This law will come into force on 1 July 2024! And these are the most significant changes:

1. Capital participation and capital contributions:

Shareholders of a WFOE/Ltd. must make their full capital contribution within five years of the company’s establishment (counting from the day of establishment of the company), unless otherwise stated (Art. 47). For companies registered and established prior to the implementation of the revised law and whose capital contribution period exceeds the period stipulated in this law, there will be a transition period. This rule also applies to capital increases.

In the event of insolvency before the capital contributions fall due, the company or its creditors can demand early payment.

Besides, LLCs are now required to publish both the subscribed capital and its paid-in amount in the National Enterprise Credit Information Publicity System (Art. 40).

2. Legal representative:

Any director who manages the company’s business, or the general manager, can now act as legal representative (Art. 10), giving companies more flexibility in choosing their main representatives. Before, only the companies general manager or the board of directors’ chairman had this power.

3. Shareholders’ meeting and management board:

Duties and powers of the shareholders’ meeting and the management board have been optimized. The shareholders’ meeting remains the highest authority in the company.

4. Supervisory board/supervisor:

1. Greater flexibility for small companies: Small companies can now operate with only one director who assumes the functions of the supervisory board/supervisor.
2. Exemptions from the supervisory board/supervisor obligation: Under certain conditions, the establishment of a supervisory board/supervisor can be waived.
3. Monitoring function: The supervisory board/supervisor continues to monitor the activities of the management board and senior executives.

5. Public limited companies:

Various requirements for public limited companies have been relaxed. For example, the rule that founders may not sell their shares within one year of founding the company has been dropped.

6. Multiple classes of company shares:

Public limited companies are now allowed to issue different classes of company shares.

7. Financial assistance:

The new law introduces clear rules for financial assistance for the first time. Companies may now provide financial assistance under certain conditions.

A summary

• Liability for capital contributions: shareholders are obliged to make their capital contributions within the specified deadlines. Failure to do so can have financial and legal consequences.
• Extended duties of loyalty and care: Directors, supervisory board members/supervisors and senior managers are subject to extended duties of loyalty and care. They must avoid conflicts of interest and may not use their positions to gain unlawful advantages.
• Liability for breach of duty: In the event of a breach of their duties, Management Board members, Supervisory Board members/supervisors and senior managers may be held liable, including financial recourse claims.
• Controlling shareholders and actual controllers: Controlling shareholders and actual controllers can be held jointly liable with the relevant directors or managers for instructions that harm the interests of the company or its shareholders.

These changes to Chinese company law mark a significant step towards greater transparency, accountability and flexibility in corporate governance and structure. They have far-reaching implications for domestic and foreign companies in China.