Navigating The New Terrain: Adapting To The Revised Company Law In China – Shareholders

The end of 2023 marked a significant milestone in Chinese
corporate law with the publication of the revised Company Law of
the People’s Republic of China, set to take effect on July 1,
2024. These comprehensive amendments are poised to have a profound
impact on foreign-invested enterprises (FIEs) in various sectors.
Key areas of change include capital contribution obligations,
corporate governance structures, and the responsibilities and
liabilities of senior management. This article highlights the
essential revisions and offers practical guidance for FIEs to align
with the new legal requirements.

Capital Contribution Obligations

A pivotal shift introduced by the revisions is the emphasis on
capital adequacy. Moving away from the flexible registered capital
framework established in 2014, the new law mandates the full
payment of capital within five years of subscription, applicable to
both new and existing companies. This change requires entities to
either amend their capital contribution schedules or opt for
capital reduction if unable to comply.

Furthermore, the revisions introduce a stringent capital
contribution due system, allowing creditors or the company to
demand advance contributions from shareholders. Additionally, the
board of directors is now tasked with verifying capital
contributions, holding directors accountable for ensuring
compliance and enabling the company to revoke share rights if
shareholders fail to meet their obligations.

Enhanced Governance Flexibility

The revised law offers increased flexibility in company governance,
allowing limited liability companies to opt for an audit committee
within the board of directors instead of a separate supervisory
board. This provision particularly benefits FIEs by potentially
eliminating the supervisory board, which has often served a more
ceremonial role. However, joint ventures may still find value in
maintaining a supervisory board for oversight and interest
protection.

Strengthened Duties and Liabilities

Significantly, the revisions bolster the duties of loyalty and
diligence for directors, supervisors, and senior management,
expanding their liability towards the company and third parties.
The law now explicitly defines the duty of diligence, urging the
appointment of individuals who are not only familiar with but
actively involved in the company’s operations, to directorial
and supervisory positions.

An innovative aspect of the revisions is the introduction of a
legal relief system for directors, safeguarding against unjust
dismissal. This change challenges the prevalent practice of at-will
director dismissal in FIEs, underscoring the need for valid grounds
for termination and meticulous documentation to avoid future
disputes.

Preparing for Transition

With the revisions on the horizon, FIEs must proactively adjust
their corporate documents, including articles of association and
shareholder agreements, to comply with the new law post-July 1,
2024. While the law does not specify a transition period, the
forthcoming implementation rules from the State Council will
provide further clarity.

Conclusion

The revisions to the Company Law introduce significant changes to
China’s corporate legal landscape, affecting FIEs across the
board. Companies are encouraged to thoroughly review their
operations and governance structures in light of these changes.
Engaging with professional legal services for comprehensive
guidance is advisable to navigate this transition smoothly. By
taking proactive steps now, enterprises can ensure compliance and
continue thriving under the new regulatory regime.

The authors would like to thank Zining Zhou, Jo Sun and Jeff
Shang for their assistance with the preparation of this
article.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.