The consequences of the new China Company Law for both newly founded and existing companies will be covered in this blog article.
The China Company Law was amended and named the “2023 Company Law” by the Standing Committee of the National People’s Congress (NPC) on December 29, 2023.
The 2023 Company Law in its final form, which will take effect on July 1, 2024.
Significant modifications to firm capital requirements, corporate governance frameworks, shareholder rights, and other areas are included in the updated China firm Law.
Implications of the New China Company Law for New and Currently Established Companies
For both newly formed and already-existing businesses, the new China Company Law has several ramifications. The following are a few of the biggest adjustments:
Investment of Capital:
- Unless otherwise required by rules or regulations, shareholders of limited liability companies (LLCs) must now fulfill their whole subscribed capital contribution within five years of the company’s formation.
- In order to remedy previous abuses of flexibility in defining contribution timeframes, the amendment places a time restriction on capital contribution schedules.
- Companies that already exist must make adjustments to meet the new criterion; those with capital contribution schedules longer than five years are not exempt.
Legal Representation:
- The general manager or the chairman of the board can no longer serve as a Chinese company’s legal representation.
- There is now more flexibility in selecting top representatives since any director or general manager can act as the legal representative.
- A well-defined departure protocol is implemented, permitting the change of the legal representative to occur within 30 days following resignation.
Meeting of Shareholders:
- The powers of the shareholders’ meeting to decide on the company’s operating strategy, investment plans, and annual financial budget reviews are eliminated, simplifying the process.
- The board of directors may now determine whether to issue bonds with the approval of the shareholders’ meeting.
Directors’ Board:
- The board’s authority is essentially unaltered; adjustments are made in accordance with adjustments made at the shareholders’ meeting.
- Restrictions on the number of directors are loosened, giving freedom according to the size and number of shareholders of a corporation.
Supervisors:
- Exceptions to the supervisory board requirement are expanded, allowing Small Enterprises to have one supervisor or none at all if unanimously agreed upon by shareholders.
- The establishment of an audit committee can eliminate the need for a separate supervisory board or supervisor.
Joint Stock Business:
- Joint Stock Companies (JSCs) are exempt from some requirements, such as the one-year limit on founders’ share transfers.
- JSCs now have more flexibility in how they structure their capital because they can issue shares without a par value.
Different Share Classes:
- The capacity to issue several classes of shares gives JSCs more structural choices for defining the rights of founders and shareholders inside the firm.
Financial Support:
- For the first time, financial help is governed by explicit regulations that restrict gifts, loans, guarantees, and other forms of financial support to the purchase of shares, with employee stock ownership plans being an exception.
Fiduciary Obligation:
- The new law clarifies directors’, supervisors’, and senior managers’ fiduciary duties, highlighting the duties of vigilance and loyalty.
- There are specific guidelines that must be followed, including disclosing contracts and transactions, staying out of conflict of interest, and not doing business with the company without permission.
Actual Controller and Controlling Shareholder:
- Strengthened are the measures to counteract illegitimate intervention by actual controllers and controlling stockholders.
- Enhancements to the corporate veil piercing regulations include the imposition of joint and several accountability for debts and the introduction of “horizontal” piercing.
These significant adjustments are the result of a concerted effort to improve corporate governance in China by closing legal gaps, boosting transparency, and adjusting to changing business practices.
In order to ensure compliance, businesses doing business in China should carefully analyze these revisions and modify their organizational structures as necessary.