Author: JIANG Fengwen, Zou Yongzhong, Joseph LI
Beijing Chancebridge Law Office
January 12th, 2024
On December 29, 2023, the latest revision of the Company Law of the People’s Republic of China, which has attracted wide attention, was finally adopted and promulgated by the Seventh Session of the Standing Committee of the National People’s Congress, with the effective date on July 1, 2024 (hereinafter referred to as the new “Company Law”). This is the sixth amendment to the current Company Act since its enactment on December 29, 1993. Previously, the Company Law underwent amendments to partial provisions in 1999 and 2004, a comprehensive revision in 2005, and two important amendments to issues related to the company’s capital system in 2013 and 2018. Usually, a draft law is submitted to the vote after deliberation at three meetings of the Standing Committee of the National People’s Congress, but this time the Standing Committee of the National People’s Congress made an exception to the Company Law, having taken nearly five years and four cumulative reviews and deliberations before being adopted by a vote, from the establishment of a drafting group for the revision of the Company Law by the Legislative Affairs Committee of the National People’s Congress in early 2019. This has demonstrated its extraordinary importance and the fact that certain provisions had been clearly contested during the review process. This Sixth Amendment is the most significant and most comprehensive amendment based on the basic framework and system of the current Company Law. In the most comprehensive and profound revision, 16 sections in the current Company Law were deleted, 228 articles were added or amended, of which 112 articles were substantively amended, and thereby the final version with a total 15 chapters and 226 articles were formed. The new Company Law is important for establishing and improving a modern company legal system in line with China’s national conditions, strengthening corporate governance and compliance, further improving the company capital system, Standardizing the responsibilities of controlling shareholders, actual controllers and directors, supervisors and senior management, deepening the reform of state-owned enterprises, optimizing the business environment, strengthening the protection of property rights, protecting legitimate shareholders and creditors, and promoting the healthy and orderly development of the capital market are of great practical significance and far-reaching historical significance.
This paper focuses on the core points of the new Company Law in the corporate governance system, the core points of the corporate capital system, the obligations of directors, supervisors and senior management, and the actionable reform and its impact on limited liability companies (including foreign-invested enterprises), as well as the compliance transition of such companies to the new Company Law, and the time frame for such companies to fully comply with the requirements of the new Company Law, so that their joint venture contracts and articles of association and other relevant legal documents are fully compliant with the new Company Law.
Core Points of the New Company Law in Corporate Governance
Compared with the current Company Law, the new Company Law has been revised in the following six aspects to strengthen corporate governance, including: the choice of legal representative, resignation and dismissal of directors, strengthening shareholders’ capital contribution obligation and perfecting the system of shareholders’ loss of rights, improve and optimize corporate governance and enhance the responsibility of company directors for the company’s capital safety, strengthen the responsibility provisions of directors, supervisors and senior management, amend and improve the provisions of state-funded companies, and added the simple di-registration and compulsory di-registration of companies, as follows:
(1) The appointment and resignation of the legal representative and the removal of the directors
Article 10 of the new Company Law stipulates that the legal representative of a company shall, in accordance with the provisions of the articles of association of the company, be a director or manager who performs company affairs on behalf of the company. Article 13 of the current Company Law stipulates that… “the chairman, executive director or manager shall serve as the legal representative…” In practice, the legal representative of most companies is the chairman of the board. For large companies, especially foreign-investment enterprises (hereafter the “FIEs), managers (or general managers, unless it is concurrently a director or chairman of the board of directors), usually do not enter the board of directors, naturally will not serve as chairman, its authority is limited to responsible for the company’s daily management activities, attend the meeting of board of directors, report to the board of directors, implement the resolutions of the board of directors. This author believes that the provisions of Article 10 of the new Company Law are equivalent to expanding the scope of the legal representative, that is, the legal representative may not be the chairman of the board of directors, but any director or manager who represents the company to carry out the company’s affairs. This provides a legal basis for smaller companies without a board of directors or a chairman to appoint a legal representative. It also echoes the provisions of Article 75 of the new Company Law: “A small scale company may not have a board of directors, but may have a director to exercise the functions and powers of the board of directors as prescribed in this Law, and the director may concurrently serve as the company manager.”
This Article 10 also provides that “ If a director or manager acting as the legal representative resigns, he shall be deemed to have resigned his legal representative at the same time. If the legal representative resigns, the company shall appoint a new legal representative within 30 days from the date of resignation of the old legal representative. ” In practice, especially in the practice of FIEs, the gap between the resignation of the legal representative of the company and the arrival of the new legal representative can be resolved by stipulating in the employment contract between the legal representative and the company that the resignation or dismissal of the legal representative should be given to the other party a few months’ notice period; In the case of dismissal, the company will usually secretly search for a successor in the market immediately after the intention of dismissal is determined. After finding a successor and completing the entry formalities, the company will announce the appointment of the new legal representative and the departure of the old legal representative at the same time. And quickly apply for the government change registration procedures, so as to avoid the above-mentioned 30-day blank period (there maybe special circumstance exceptions).
Article 11 of the new Company Law is a new addition, which stipulates that the legal representative engages in civil activities in the name of the company, the legal consequences thereof shall be borne by the company. The restrictions imposed by the articles of association or the shareholders’ meeting on the legal representative shall not confront a bona fide counterpart. If the legal representative causes damage to others due to his performance of duties, the company shall bear civil liability. After a company has assumed civil liability, it may, in accordance with the law or its articles of association, recover the loss from the legal representative at fault. This provision is consistent with Articles 61 and 62 of the PRC Civil Code and is very important in practice, which means that the legal representative should not be dominant in the process of performing his duties, and must act within the scope of laws and regulations, the articles of association and rules and regulations or the shareholders’ meeting, otherwise he may be held personally liable for violations of laws and regulations by the company; but on the other hand, the internal rules and regulations of the company and the restrictions on the legal representative of the shareholders meeting cannot be used against the bona fide third party, which is needed to protect the bona fide third party. The bona fide third party, according to Article 18 of the “Nine Minutes” [1] , means that the counterpart does not know or should not know that the legal representative has overstepped his authority to conduct civil activities. In the current social practice, the internal rules and regulations or restrictions of the company are generally not publicized on the public information disclosure system. Therefore, the third party is usually unable to check the company’s internal rules and regulations or resolutions or restrictions, and its review of the company’s internal rules and regulations or resolutions is generally limited to formal review, and only requires the necessary duty of care. Therefore, it is of great significance to stipulate that the internal rules and regulations of the company cannot be used against the bona fide third party in practice.
Article 71 of the new Company Law also stipulates that if a company dismisses a director before the expiration of his term of office without justifiable reasons, the director may demand compensation from the company. This may not apply to foreign investment companies where most of the directors are appointed to the board because of a position he/she holds in the company. He/she will not receive any remuneration as a director in addition to his remuneration for his normal work, but shall only be reimbursed for expenses incurred in connection with his participation in the Board of Directors meetings. Moreover, in FIEs, especially for joint ventures, the parties to the joint venture usually agree that either party may nominate or remove their members of the board of directors at any time, and the shareholders meeting shall make the final appointment. Therefore, the dismissal of directors before the expiration of the term of office is a frequent occurrence, as long as the company does not remove him/her form their normal work duties without course, the dismissed director should not claim for compensation from the company just because he is removed from the board of directors. In order to avoid unnecessary disputes between a director and the company, the company will normally arrange for the director to sign the necessary written confirmation in a timely manner of his resignation and that he/she does not have any outstanding disputes or debts with the company in respect of his office as a director.
(2) Strengthen shareholders’ capital contribution obligation and improve the system making shareholders losing rights under certain circumstance
In aspect of shareholders’ capital contribution obligations，the new Company Law introduces and improves the system of shareholders’ loss of rights, aiming at urging shareholders to fulfill their contribution obligation timely. For the shareholders who fail to pay the capital contribution on time, the first is for the board of directors to call for payment, give a grace period of 60 days, and after 60 days he still not paid the capital contribution, the board of directors shall make a resolution of loss of rights, and the shareholder shall lose the equity interest of the unpaid capital contribution from the date of the resolution; the equity portion he/she failed to pay shall be transferred within 6 months or reduced for capital cancellation, if failed, then thus equity shall be purchased by other shareholders in proportion of their shares; where a shareholder fails to pay his capital contribution in full on time and causes losses to the company, he/she shall be liable for compensation to the company; If the company is unable to pay off the debts due, the capital contribution subscribed by the shareholders shall be accelerated to maturity; where a shareholder has subscribed for capital contribution but fails to complete its capital contribution obligation within the time limit for capital contribution, on the basis of the assignee’s obligation to make capital contribution, if the assignee fails to make full capital contribution within the time limit, the assignor shall assume supplementary liabilities for the portion of capital contribution that the assignee fails to make within the time limit. More importantly, the new Company Law clearly provides for the first time “The amount of capital contribution subscribed by all shareholders of a limited liability company shall be fully paid by the shareholders within five (5) years from the date of establishment of the company in accordance with the provisions of the articles of association of the company ” (Article 47).
The above provisions have no precedent in the history of the Company Law. Under the 1993 Company Law, full subscription was implemented, the 2005 Company Law provides for partial subscription + time limit (20% down payment, the remaining amount to be paid in two years), in 2013 the Company Law was amended to a full subscription system, canceling the period of capital contribution, the minimum registered capital and the proportion of initial capital contribution, reducing the company’s entry threshold, the result is to facilitate the establishment of companies, with the number of companies increased significantly, but at the same time, there are many shortcomings, such as giant baby companies with “diluted registered capital” and companies with unlimited term of capital contribution, and also these shareholders can transfer their shares before the expiration of their subscription period, which greatly affect the transaction safety and damage the interests of creditors. When Article 47 of the third review draft first appeared requiring “the amount of capital contributions subscribed by all shareholders of a limited liability company shall be fully paid by shareholders within five (5) years from the date of establishment of the company in accordance with the provisions of the articles of association of the company”, it caused strong reaction among the academic and business circles, academia is relatively rational, but the business circle is of greater opposition, but the final version of the Company Law still retains the… “five years to pay full” provisions, it has demonstrated the determination of the government to rectify the shortcomings of the comprehensive subscription system, to restrain shareholders’ capital subscription from the macro level, to prevent inflated registered capital, unlimited long-term contribution period and irrational subscription commitments. However, for those existing companies established before the promulgation of the New Company Law who have much longer term for shareholders’ capital contribution, Article 266 of the New Company Law also gives them time and outlet to carry out compliance rectification so that they can gradually adjust their term of capital contribution to comply with the requirement of the New Company Law，return to rationality and more rationally assess the company’s business needs and investment risks and consider the reasonable expectations of creditors to be repaid when determining their investment obligations. For the companies who have clearly unusual term and amount of capital contribution, the government registration authority will require them to adjust thereof timely according to the New Company Law. These are very necessary and imperative to protect the legitimate rights and interests of the company’s law-abiding shareholders and creditors, safeguard social fairness and justice, and optimize the business environment.
(3) Improve the corporate governance structure and its functions and powers.
Corporate governance is mainly the system mechanism of power distribution, operation and mutual checks and balances among the shareholders’ meeting, the board of directors, the board of supervisors (or the audit committee) and the management (hereinafter referred to as the “three committees and one management layer”) and its implementation process. The new Company Law has further amended and improved the establishment and terms of reference of the corporate governance structure:
First, the division of powers between the shareholders’ meeting and the board of directors has been further clarified – – Article 59 stipulates that the shareholder’s meeting of a limited liability company is composed of all shareholders, and the shareholders’ meeting is the power organ of the company and exercises the following powers in accordance with this law.
(1) to elect and replace the directors and supervisors, and to decide their remunerations;
(2) to examine and approve the report of the board of directors;
(3) to examine and approve the report of the board of supervisors;
(4) to deliberate and approve the profit distribution plan and the plan for making up losses of the company;
(5) to make resolutions on the increase or decrease of the registered capital of the company;
(6) to make resolutions on the issuance of corporate bonds;
(7) to make resolutions on the merger, division, dissolution, liquidation or change of the company form;
(8) to amend the articles of association of the company;
(9) Other functions and powers prescribed in the articles of association of the company.
After this amendment, “decision on the company’s business plan and investment plan” and “deliberation and approval of the company’s annual financial budget plan and final accounts plan” are no longer matters that must be decided by the shareholders’ meeting. This may have some impact on FIEs, where both of the above two items are considered strategic decisions that require approval by the Shareholders meeting and / or the Board of Directors. Fortunately, the new Companies Law has put the power to “determine the company’s business plan and investment plan” back to the power of the board of directors (see next paragraph). However, the important power of “considering and approving the company’s annual financial budget plan and final accounts plan” is still not stipulated within the scope of the shareholders’ meeting or the board of directors’ authority. The author believes that since Article 59 stipulates that the shareholders’ meeting is the authority of the company, it seems that such an important power should not be left blank in both the powers of the shareholders’ meeting and the board of directors, and in practice such an important power should not be decided by the management. Therefore, if the company considers these two items must be approved by the shareholders’ meeting and / or the board of directors, it may provide so in the company’s articles of association for implementation.
The new “Company Law” in Article 67 still returns to the enumeration of the powers and functions of the board of directors, and in the final version, the “determining the company’s business plan and investment plan” deleted from the second and third review drafts has been added back to the powers of the board of directors (which is consistent with the amendment proposal put forward by the author in the previous article), as follows:
(1) to convene the shareholders’ meeting and report its work to the shareholder’s meeting;
(2) to implement the resolutions of the shareholders’ meeting;
(3) to decide on the company’s business plan and investment plan;
(4) to formulate the company’s profit distribution plan and the loss recovery plan;
(5) to formulate the company’s plans to increase or decrease its registered capital and issue corporate bonds;
(6) to formulate plans for the merger, division, dissolution or change of the company form;
(7) to decide the establishment of the internal management organization of the company;
(8) to decide the appointment or dismissal of the manager of the company and his remuneration, and to decide on the appointment or dismissal of the deputy manager and the CFO of the company based on the nomination of the manager, and decide their remuneration ;
(9) to formulate the basic management rules of the company;
(10) Other functions and powers prescribed in the articles of association of the company or conferred by the shareholders’ meeting.
This article also stipulates that the restrictions on the power of the board of directors by the articles of association shall not be used against the bona fide third party, which is consistent with the provisions of Article 11 of the new Company Law.
The second is to improve the relevant provisions on employee representatives among members of the board of directors, and no longer take whether it is “state-owned assets” as a criterion for judgment. It clearly stipulates that any company with more than 300 employees shall have employee representative on its board of directors, except for those that have established a board of supervisors in accordance with the law and already have employee representatives. There are two different understandings about this requirement: one is that a limited liability company with more than 300 employees should have both employee supervisors and employee directors; the second is that a limited liability company with more than 300 employees does not necessarily need to have additional employee director if it already has employee supervisors. I prefer the latter understanding. Therefore, a limited liability company (including FIE) may need to set up employee director or employee supervisor if it meets the aforesaid 300 employee requirements, and the company shall pay attention to such requirements and make reasonable arrangements in advance.
Article 69 expressly provides that a limited liability company may, in accordance with the articles of association, set up an audit committee composed of directors within the board of directors to exercise the functions and powers of the board of supervisors as provided in the new Company Law, without setting up a board of supervisors or appointing a supervisor. This confirms that a limited liability company can choose a single – layer governance model, that is, under the premise of setting up an audit committee under the board of directors, it is no longer necessary to set up a board of supervisors in a traditional corporate governance structure.
Fourth, article 176 stipulates that a solely state – owned company shall set up an audit committee composed of directors on the board of directors to exercise the functions and duties of a board of supervisors provided for in this law, and there shall be no board or such supervisors.
Fifthly, the flexibility of corporate governance has been further enhanced — a limited liability company with a relatively small scale or a small number of shareholders may not have a board of supervisors, but may have one supervisor to exercise the functions of the board of supervision as provided for in this law, and may also not have any supervisor if all shareholders unanimously decide.
Sixth, it is stipulated that a limited liability company should have a manager (general manager). Appointed or dismissed by the board of directors, responsible to the board of directors, but did not list the powers of the manager (general manager) as in the current Company Law, but clearly provided that the manager (general manager) shall exercise its authority in accordance with the provisions of the Articles of Association or as authorized by the Board 。 This requires that the articles of association of the company should clearly stipulates the authorities of the manager (general manager) , or the board of directors should give the manager (general manager) express written authorization to specify his/her terms of authorities, so as to make the board of directors and the manager (general manager) to have clear division of works and duties and also cooperate with each other, and promote and protect the healthy and compliant profitable development of the company.
(4) Improving the provisions on the responsibilities of shareholders and directors, supervisors and senior management, and enhancing the duties of directors of companies on the safety of the company’s capital
The current Company Law is very vague and not detailed and lack of maneuverability in the liability of shareholders, directors, supervisions and senior management, which makes it difficult to enforce liability in case of their violations of the law.
The new Company Law has expanded and refined the responsibilities of shareholders and directors, made detailed and strict regulations and strengthened their obligations, and profoundly reflected the spirit of “If you want to wear a crown, you must bear its weight.” For example:
Articles 22, 23, 26 and 27 respectively stipulate that shareholders, actual controllers and directors, supervisors and senior management shall not damage the interests of the company by using affiliated relationships. If they violate these provisions and causes losses to the company, he/she shall be liable for compensation. Where a shareholder of a company abuses the independent status of the company as a legal person or the limited liability of the shareholders to evade liabilities and seriously harms the interests of the creditors of the company, he/she shall bear joint and several liability for the liabilities of the company; Where a shareholder of a company takes advantage of two or more companies to commit acts as prescribed in the preceding paragraph, each company shall bear joint and several liability for the liabilities of any company; In the case of a company with only one shareholder, if the shareholder fails to prove that the property of the company is independent of his own property, he shall bear joint and several liability for the debts of the company; Where the convening, voting or resolution of the shareholders’ meeting or the board of directors of a company violates any law or regulation, the shareholders who have not been notified to attend the meeting may, within 60 days from the date when they know or should know that the resolution has been made, request the people’s court to revoke it; the new Company Law has also clearly specified the following four situations in which the resolutions shall be void: the resolution was made without convening the shareholders’ meeting or the board of directors meeting; no vote was taken on the matter of the resolution; a quorum is not present at the meeting or the number of voting rights held not met with the requirement of this Company Law; or the number of persons consenting to the resolution or the number of voting rights held does not reach the number of persons or voting rights stipulated in this Company Law or the Articles of Association.
These provisions are made by the state according to the developing social practice and judicial practice, and are necessary for the protection of law-abiding shareholders and creditors. In practice, it is true that there are such major shareholders who abuse their position as major shareholders and forge board meetings resolutions. As a result, the company has not distributed profits for many years despite of profits, and they also use the intellectual property rights of minority shareholders to gain profit for themselves, thereby seriously infringing on the interests of minority shareholders, although the minority shareholders won the lawsuit, but they still can not dissolve the company as they wish, because this company was established according to the old “sino-foreign joint venture law”, according to this law, dissolution of a company require the unanimous approval of all board of directors, which was impossible under the circumstance at that time, the result of this case was immersed in the dead loop that does not have any solution. Now there is finally the new Company Law which stipulates that such resolutions are void from the very beginning. This is gratifying and protecting the interests of law-abiding shareholders, improving the country’s business environment and social fairness and justice.
Articles 51 and 52 of the new Company Law add the following provisions: After the establishment of a limited liability company, the board of directors shall verify the capital contributions of the shareholders. If it is found that a shareholder fails to pay the capital contribution in full as stipulated in the articles of association, as mentioned in Article (2) of the “I. Core Points of the New Company Law on Corporate Governance” section, the first is for the board to urge the shareholder to pay the capital contribution, and give them a grace period of 60 days, if the shareholder fails to pay the capital contribution after the 60 days, a resolution of loss of rights shall be made at the board meeting, and the shareholder shall lose the equity that he has not paid the capital contribution from the date when the resolution is issued. For the equity that he/she has lost rights, it shall be transferred or written off by reducing the capital within 6 months. If failed, other shareholders shall buy it in proportion to their capital contribution. If the failure to perform the aforesaid obligations in a timely manner causes losses to the company, the responsible director shall be liable for compensation. If a shareholder withdraws his capital contribution after the establishment of the company and causes losses to the company, the responsible director, supervisor and senior management shall bear joint and several liability together with the shareholder.
These provisions are also unprecedented, and are necessary to protect the health and sustainability of law-abiding shareholders and capital markets. It strengthens the protection of the rights and interests of law-abiding shareholders, has a significant positive impact on investors, and is of great significance for promoting the long-term sustainable and healthy development of the national economy on the right track.
Articles 179 to 188 of the new Company Law respectively stipulate that directors, supervisors and senior management shall abide by laws and regulations and the articles of association of the company, and stipulate that they have the duty of loyalty and diligence to the company, and enumerate the specific acts that violate the duty of loyalty or diligence (Articles 181-184). It also clarifies the meaning of the duty of loyalty and diligence in Article 180, that is, the duty of loyalty is to avoid conflicts between their own interests and the interests of the company, and not to seek improper interests by taking advantage of their authority; the duty of diligence refers to the performance of duties should be the best interests of the company to do the managers usually should have reasonable attention, and provides that the controlling shareholder of the company, the actual controller does not serve as a director of the company but the actual implementation of the company’s affairs are also applicable to the provisions of the duty of loyalty and diligence. This is the first time that China has clearly defined the meaning of the duty of loyalty and diligence at the level of law, providing a clear standard of conduct on how to fulfill the duty of loyalty and diligence in the process of performing duties, and also helps the judicial organs to judge the behavior of directors and supervisors in case of violation of the duty of loyalty and diligence in practice.
In contrast, although the current Company Law has provided the director of loyalty and diligence obligations, the provisions are too vague and difficult to enforce in case of violations.
With regard to the liability of shareholders and directors, supervisors and senior management for losses caused to the company by violation of laws and regulations, the new Company Law also stipulates in Article 211 and Article 226 that, profits are distributed to shareholders before making up for losses and drawing down statutory common reserve funds in violation of the law, the shareholders shall return to the company the profits so distributed to them, and if losses are caused to the company thereby, the shareholders and the responsible directors and supervisors shall be liable for compensation; where the registered capital is reduced in violation of the provisions of this Law, the shareholder shall refund the funds it has received; where losses are caused to the company, the shareholders and the responsible directors, supervisors and senior management shall be liable for compensation.
The new Company Law also adds in Article 191 for the first time the provision that directors and senior management should be liable for the losses of the third party (mainly the creditors), and clearly stipulates that if directors and senior management cause damage to others in the performance of their duties, the company shall be liable for compensation, and directors and senior management should also be liable for compensation if they have intentional or gross negligence, this gives the third party the right to recover compensation directly from the directors and senior management in fault.
(5) The director’s liability insurance system has been introduced
The new Company Law expands and refines the powers, duties and obligations of directors, which means that directors serving as directors of companies may be liable for unforeseeable and incalculable compensation liabilities. There is no doubt that it will lead to the imbalance of personal benefits and risks of directors, as well as the concern about the risks of being a director and even hesitation about whether to accept the appointment of directors. For this reason, the new Company Law introduces the system of directors’ liability insurance, and stipulates in Article 193 that a company may purchase insurance for directors’ liability during their term of office. This is in line with international customs and usage, as most multinational companies provide such liability insurance for their directors and officers, so that they do not have to worry about while legally acting on behalf of the company.
(6) In order to solve such the difficulties in deregistration of companies and “zombie companies” in practice, the contents of simplified deregistration procedures and compulsory deregistration are added in light of the practical experience of various localities
As the main body of the market, the company withdrawing from the market according to law should have been their important civil rights, but in China, this is not the case and there have been many practical problems making the dissolution of a company much more difficult than its establishment. Article 240 of the new Company Law stipulates that if the company has not incurred any debts or has paid off all debts during the existence of the company, it may cancel the industrial and commercial registration through simple procedures upon the commitment of all shareholders, such simple procedure of deregistration of withdrawal does not require liquidation of the company, it only requires the commitment of all shareholders and the announcement that the company has not incurred any liabilities or has paid all debts in full. If the shareholders make any false commitment in the simple procedure of deregistration, they shall bear joint and several liability for the debts of the company exist before its deregistration. This is conducive to urging companies to voluntarily pay off corporate debts before the “end of life,” protecting the interests of creditors and reducing liquidation costs.
Article 241 of the new Company Law also stipulates that “zombie companies” that have had their business licenses revoked or ordered to close down but have not applied to the company registration authority for deregistration of the company for three years, the company registration authority may make an announcement through the National Enterprise Credit Information Publicity System for not less than 60 days, if there is no objection after the expiration of the 60-day period, the company registration authority may cancel the company registration.
To a large extent, the above regulations have solved the long-standing problem of difficulty in deregistering companies and the problem of “zombie companies,” which is beneficial to investors and the improvement to the country’s investment environment, which is also the objective need of the country’s supply-side structural reform.
I. Relevant provisions on strengthening legal liability
The new Company Law not only stipulates the legal liability of the company, but also adds the specific amount of penalty to the directly liable person in Chapter 14. These violations include, but are not limited to, making a false report of registered capital, submitting false materials or obtaining company registration by other fraudulent means to conceal important facts (in addition to being ordered to correct, a fine of 5% -15% of the amount of the false report of registered capital shall be imposed); the promoter or shareholder of the company makes false capital contributions, fails to pay the monetary or non-monetary property as capital contributions on time (in addition to being ordered to correct, a fine of 5% -15% of the false capital contributions shall be imposed); The promoters and shareholders of the company withdraw their capital contribution after the establishment of the company (in addition to being ordered to correct, a fine of 5% -15% of the amount of the funds withdrawn shall be imposed); In addition to the statutory accounting books, providing false records or concealing important facts of the financial accounting report (in accordance with the Accounting Law of the People’s Republic of China and other regulations punishment); the company fails to notify or announce creditors in accordance with the law during merger, division, reduction of registered capital or liquidation (in addition to being ordered to correct, a fine of RMB 10,000-100,000 yuan shall be imposed); the company conceals property during liquidation, makes false records on the balance sheet or property list, or distributes company property before paying off debts (a fine of 5% -10% of the amount of the company property for concealing property or distributing company property before paying off debts); where an institution undertaking asset appraisal, capital verification or verification provides false materials or reports with major omissions, the capital verification or verification certificate is false, where losses have been caused to the creditors of the company, the company registration authority register an application for registration that does not meet the conditions required in this Law, or refuse to register an application that meets the conditions required in this Law, where the superior authority of the company registration authority forces the company registration authority to register the registration application that does not meet the conditions required in this Law, or refuse to register the registration application that meets the conditions required in this Law, etc., the specific penalty provisions for the subject of liability and the person directly responsible are stipulated. These provisions will enable the company and the relevant responsible parties to have laws to follow and to be prosecuted for violating the law, and also provide a clear legal basis and standard for the judiciary authority to adjudicate cases. They will no longer have to handle on a case-by-case basis or only relying on judicial interpretations or the “Nine Minutes”[1], it is also very important and timely to strengthen corporate governance, improve the social environment and business environment, and protect legitimate shareholders and creditors.
In summary, compared with the current Company Law, the new Company Law has made unprecedented amendments, expansions and refinements in corporate governance, further separating property rights from management rights, and helping to eliminate or reduce agency costs and compliance costs. It optimizes the corporate governance structure, strengthens and refines the responsibilities of directors, supervisors and senior managers, and provides clear legal requirements and institutional guarantees for urging directors, supervisors and senior managers to maximize the interests of the company. At the same time, it introduces the director liability insurance system to balance their interests and responsibilities. In this regard, limited liability companies must amend their existing (joint venture) contracts and articles of association and other relevant legal documents in accordance with the new Company Law to fully comply with the requirements of the new Company Law.
II. Focus and Deadline for the Compliance Transformation of Limited Liability Companies into the New Company Law
For domestic companies within limited liability companies, the compliance transformation to the new Company Law is relative simple, i.e., mainly to transform the company from the current Company Law system to the new Company Law system, their joint venture contract (if any) and articles of association, as well as other relevant legal documents can be amended by referring to the core elements of the new Company Law in this article. The compliance transformation should be completed before the new Companies Law comes effective (i.e. 1 July 2024), so that the company can be in full compliant with the requirements of the new Companies Law.
However, as a part of a limited liability company, FIEs conversion into the new Company Law (including their joint venture contract, articles of association and other relevant legal documents) is a very complex project, as it will be a transformation from the old FIE laws and regulations into the new Company Law within the 5 year grace period (from January 1, 2020 to the end of 2024) as provided in the PRC Foreign Investment Law (which took effect on 1 January 2020). Now, as the new Company Law will come into effect on July 1, 2024, the transition of FIEs from the old FIE laws into the new Company Law should, at least in theory or in best practice, also be completed by July 1, 2024.
The “old FIE Law” means the Law on Chinese-foreign Equity Joint Ventures, the Law on Chinese-foreign Contractual Joint Ventures, the Law on Foreign Invested Enterprises and their respective implementing regulations (all of which were repealed on December 31, 2019). Since then, all the relevant rules implementing the old FIE laws governing FIEs have also been abolished.
This change represents a major change in corporate governance and other aspects of FIEs, and the workload for such transformation is huge. Prior to the effectiveness of the PRC Foreign Investment Law on January 1, 2020, all FIEs were governed by the FIE Laws and their implementing regulations and rules, and the transition from such old FIE laws and regulations to the new Company Law had the greatest impact on Sino-foreign joint ventures (hereinafter the “joint ventures”), because there are many specific provisions in the Law on Sino-Foreign Equity Joint Ventures and its implementing regulations were very different from the corresponding provisions in the current Company Law or the new Company Law. In contrast, the corporate governance requirements in the Foreign Enterprise Law governing wholly-foreign owned enterprises, especially since 2006, have converged with the current Company Law to a large extent, so the compliance transformation of wholly foreign-owned enterprises to the new Company Law is relatively simple, basically from the current Company Law to the new Company Law. But for joint ventures, the compliance transformation to the new Company Law will be a huge burden in terms of both “quality” and “quantity.” In the case of a joint venture contract, e.g.,there may be as many as 130 terms that need to be amended, including but not limited to: changes in applicable laws and regulations, changes in examination and approval and registration authorities, changes in legal representatives, changes in shareholders meeting, board of directors and board of supervisors, and changes in their powers and obligations, (the most obvious is that matters requiring “unanimous approval” of the board of directors in the old FIE law now only requires approval by shareholders with 2/3 or above the voting rights in the shareholders’ meeting in the new Company Law), changes in the audit committee, executive director, manager (or general manager), scope of business, capital structure and subscription and contribution periods, distribution of profits, resolution of deadlocks, etc., must be comprehensively amended in the JV contract and articles of association (hereinafter referred to as the “compulsory amendments”).
According to the release by the State Administration for Market Supervision on November 11, 2021, the number of FIEs in China reached 668,000 by the end of August 2021[2]. According to the China Foreign Investment Statistical Bulletin 2023, China has cumulatively established 1,126,357 FIEs from 1979 to 2022[3] . .(current remaining numbers yet to be confirmed). For such a large number of FIEs, it is not easy to complete all the transformation work by the end of 2024 if they start the compliance transformation work from the beginning of the five-year transition period on January 1, 2020. However, it is understood that four (4) years have passed since the five-year (5) transition period, and so far most FIEs have not substantially carried out the transformation work to comply with the Company Law. Now, with the new Company Law coming into effect on July 1, 2024, it is theoretically and strictly speaking equivalent to the acceleration of the 5-year grace period (although the relevant government authorities may not issue a formal amendment to shorten the 5-year grace period). And such transformation work, in addition to the above “compulsory amendment”, there are also “should be amended” and “may be amended”. Only when all proper amendments are in place can the revised contracts and articles of associations fully comply with the provisions of the new “Company Law” and consistent with each other. Furthermore, not only a large number of contract and articles of association amendment work should be done, but also to complete the communication with the company’s internal leadership and the negotiation with the joint venture partners, therefore The shorter the remaining time, the more likely it is that the negotiations with the joint venture partner will become passive and fail to achieve the desired outcome, and will most likely end up having to accept a compromise position.
According to information obtained from the relevant government authorities, For FIEs that fail to complete the above-mentioned transformation after the expiration of the transition period, the market supervision and administration authority will not handle their other registration items applied for by them, this will mean: FIEs will not be able to handle the registration of changes, such as changes in legal representatives, directors, domicile, registered capital, changes in the business scope, changes in equity transfer or increase or decrease of registered capital, and the highest power body of an FIE may not be able to make important decisions normally, thus it is difficult to guarantee the legitimacy of the enterprise’s business decisions, which will fundamentally have a serious impact on the operation of such FIEs.
Footpoints：
[1] “the Nine Civil Minutes” refers to the Minutes of the PRC National Court’s Civil and Commercial Trial Work Conference issued by the Supreme People’s Court on September 11, 2019.
[2] See “South American Overseas Chinese News Network” report of October 11, 2022.
[3] See China’s Foreign Investment Statistical Bulletin 2023 issued by the Foreign Investment Bureau of the PRC Ministry of Commerce on 2023-09-26.
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Author’s Profile
Jiang Fengwen
Senior International Consultant, Beijing Chancebridge Law Firm
Senior VP and Senior Expert, docQbot
Tel: 8610 8587 0068
Email: fengwen.jiang@chancebridge.com
Practice: Corporate Governance & Compliance，Cross-Border Investment & M&A，Corporate restructuring and Legal Technology.
Graduated from Peking University School of Law and University of California at Berkeley School of Law with LL.M. and Jurisdoctor. She has licensed to practise law in China and USA, and obtained China Senior Corporate Counsel Certificate and Senior Corporate Compliance Certificate. She has worked in China and Asia Pacific for nearly 30 years in well-known law firm in U.S. and Fortune 500 companies in U.S and Europe, served as Senior Vice President and General Counsel for Legal and Compliance for China / North Asia, and Asia/Middle East/Africa region.
Ms. Jiang has accomplished hundreds of FIEs establishment, M&As, company restructurings, corporate governance and compliance projects, helped FIEs to design and implement legal technology solutions to restructure JV contracts and articles of association to comply with the Company Law, and directly led the development of the contract content of docQbot. She also collaborated with the In-House Counsel Community to conduct a series of compliance webinars on PRC Foreign Investment Law and Company Law together with Robert Lewis; and participated in the Oriental Legal System Lecture “Under the Background of Foreign Investment Law, Effectively Respond to the New Challenges of Transformation of FIEs” online lecture; She was also a guest speaker at the “Next Generation of Foreign-related Lawyers Training Program” jointly sponsored by East China University of Political Science and Law and Shanghai Lawyers Association. Se was also invited to teach at the Hong Kong University of Science and Technology EMBA class on the theme of “Corporate Legal and Compliance Risk Management,” and served as a member of judges of the “Best Legal Team of the Year 2021” organized by the “Global In-House Counsel Association.
Zou Yongzhong
Partner, Beijing Chancebridge Law Firm
Practice: FDI cross-border investment and M& A infrastructure / energy / natural resources financing
Tel: 8610 8541 9626
Email: yongzhong.zou@chancebridge.com
Mr. Zou Yongzhong is the Partner in Charge of the Corporate Practice Department of Chancebridge law Firm. His practice focuses on corporate matters and cross-border investment and financing, with particular expertise and rich experience in foreign direct investment, outbound investment, cross-border investment / M&A and financing, energy / infrastructure and project finance. Mr. Zou has been involved in numerous cross-border transactions, including domestic and overseas investment, cross-border mergers and acquisitions, M&A financing and infrastructure project financing transactions. Be able to provide practical legal services to all kinds of clients, and be good at guiding the parties to the transaction through negotiation. Previously, Mr. Zou was counsel at a leading international law firm and has advised multinational corporations, foreign companies, Chinese state-owned and private enterprises, international and domestic banks and other financial institutions in hundreds of cross-border investment and financing transactions.
Joseph J. Li, Partner, Beijing Chancebridge Law Firm
Practice: Cross border investment and M&A, government affairs and compliance, data security and privacy protection, intellectual property
Work phone number: 8621 6859 0516
Email: joseph.j.li@chancebridge.com
Lawyer Li , Managing partner of Chancebridge Law Firm Shanghai Office, is a certified Anti Fraud Auditor (CFE) from the American Anti Fraud Review Association (ACFE) and an ISO 37301 Compliance Management System, and Compliance Officer certified by the British Standards Institute (BSI). Lawyer Li’s practice area mainly focus on data security and privacy protection, brand and trade secret protection, cross-border investment and mergers and acquisitions, as well as anti-corruption and anti commercial bribery compliance. Lawyer Li has accumulated rich theoretical and practical experience in the professional fields of network security, data compliance, and personal information protection. He is a registered information system auditor (CISA) of the Information Systems Audit and Control Association (ISACA), a registered information privacy expert and academician (CIPP/CIPM/CIPT/FIP) of the International Association for Information Privacy (IAPP), Registered Data Management Specialist (CDMP) from the International Association for Data Management (DAMA) and Registered Personal Information Protection Professional (CISP-PIP) certified by the China Information Security Evaluation Center. Lawyer Li currently provides compliance services in data security and personal information protection for multinational corporations, high-tech enterprises, pharmaceutical enterprises, consumer goods enterprises, as well as enterprises and institutions such as Shenzhen Data Exchange, Shanghai Data Exchange, and Suzhou Big Data Exchange.
