Company Law Changes to Capital Contributions in China
On December 29, 2023 the National People’s Congress revised and approved the sixth amendment to the Company Law of the People’s Republic of China, following many years of deliberation. According to the latest revision of the Company Law, the sixth amendment contributes 112 newly added or revised articles. These amendments address significant aspects, including corporate governance, capital contribution, management responsibilities. With an effective date of July 1, 2024, these amendments notably reshape the governance framework, specifically addressing changes to the regulation of capital contributions.
Previously, there was no specific time limit for shareholders of limited liability companies (LLCs) to pay their subscribed capital. The sixth amendment now mandates that shareholders must fully pay their subscribed capital within five years from the date of the company's establishment, as specified in the company's articles of association. This timeline requirement extends to capital increases, where capital increases must fulfill the increased registered capital payment within a five-year period, or within any shorter timeframe specified in the articles of association. Existing LLCs with capital contribution timelines exceeding five years are not exempt from these changes. The amendment introduces a transitional period, requiring such companies to gradually adjust to meet the new timeline, for which the State Council is tasked to issue implementation measures.
Additionally, the amendments introduce an acceleration of the capital contribution timeline under certain circumstances. If a company is unable to pay off due debts, the company or its creditors have the right to demand early capital contributions from shareholders, even if such contributions are not yet due for payment. This provision enables the acceleration of capital timelines during financial challenges and places a heightened emphasis on creditor protection in the governance framework.
Moreover, provisions for the forfeiture of shares have been strengthened. The board of directors can issue a written payment demand, and if a shareholder fails to comply within a 60-day grace period, the company may issue a notice of forfeiture in writing, leading to the loss of rights to the unpaid share capital. If shares are forfeited, they will be either transferred per the law or result in a reduction of registered capital. If this transfer or reduction isn't done within six months, other shareholders must fully cover the shortfall based on their contributions. Shareholders with objections must take legal action within 30 days of receiving the forfeiture notice. This mechanism aims to reinforce shareholder commitments and protect the interests of the company and its creditors.
The amendments also introduce measures to make the registered capital of an LLC more transparent and credible. Companies are now required to disclose both subscribed and paid-in amounts of capital through the National Enterprise Credit Information Publicity System. Failure to truthfully disclose this information may result in penalties ranging from RMB 10,000 to RMB 200,000, underscoring the importance of adherence to disclosure requirements. Moreover, if a shareholder doesn't fulfill its capital contribution obligation during the establishment of an LLC, the other shareholders at the time of establishment are collectively responsible and liable for covering the shortfall. The board of directors, after the establishment of an LLC, must confirm shareholders' capital contributions. If a shareholder fails to pay in accordance with the company's articles, the company issues a written demand for the outstanding amount. Directors failing to fulfill this obligation in a timely manner, causing losses to the company, may be held liable for compensation. Finally, should a shareholder transfer their equity interest in an LLC before completing the full payment of its capital contribution, both the buyer and the seller assume joint and several liability for any outstanding amounts.
In conclusion, the amendments to capital contributions under the sixth amendment to China's Company Law mark a shift towards a more transparent, accountable, and creditor-friendly corporate environment. Shareholders, directors, and management are advised to closely monitor and adhere to these new rules to ensure compliance and protect the interests of both the company and its stakeholders.