New Company Law under legislative review

The Company Law of the People’s Republic of China is set for further revisions in 2022, following on from the previous legislative update of the Company Law in 2018.

The revised draft is before the National People’s Congress Standing Committee Legislative Affairs Commission for internal debate and review, the revised draft includes 260 articles over 13 chapters, an increase from the current 218 articles. Along with the addition of 42 new articles there is an additional 28 revisions to the existing rules primarily focusing on the following areas of company law:

i. Increased party control over State Owned Enterprises

ii. Provisions for state funding

iii. Incorporation and liquidation regulations

iv. Corporate governance regulations

v. Company’s capital regulations

vi. Liability of shareholders and management

vii. Corporate Social Responsibility

Of particular note to foreign enterprises invested in China are the changes to (i) Increased party control over State Owned Enterprises (iii) Incorporation and Liquidation (iv) Corporate Governance (v) Capital Investment and (vi) Liability of Shareholders and Management.

Increased party control over State Owned Enterprises

Article 145 The organizations of the Communist Party of China in state-funded companies shall play a leading role in accordance with the provisions of the Constitution of the Communist Party of China, study and discuss major operation and management matters of the company, and support the shareholders' meeting and the board of directors, the board of supervisors, and senior management personnel exercise their functions and powers in accordance with the law.

Incorporation and Liquidation

Articles 26, 34 and 76 of the revised Company Law relate to the optimisation of the incorporation procedures, further digitalising incorporation procedures, and the receipt of decisions and announcements and resolutions communicated through the unified enterprise information publicity system by electronic means.

Articles 43 and 100 expand the scope of what may be use as capital contributions to include equity rights and creditors rights.

Shareholders may contribute capital in currency, and may also use physical objects, intellectual property rights, land use rights, equity rights, creditor's rights, etc. to be ascribed a value in currency and transferred to the company.

Article 93 reduces restrictions on joint stock company incorporations by allowing for the establishment of a one-person joint stock company.

Articles 229, 234 and 235 added that all shareholders may cancel their registration through a simplified procedure after making a commitment to the performance of their debts.

Corporate Governance

Article 62 establishes the role of the board of directors in the corporate governance structure, and clearly establishes that the board is the executive body of the company, except where the Shareholders meeting is required by the company AoA or by law.

Article 63 stipulates that a board of directors shall be three or more. A limited liability company with more than 300 employees shall have representatives of the company's employees among its board members. The employee representatives on the board of directors shall be democratically elected by the employees of the company through the employee congress, the staff congress or other forms.

Article 64 establishes the role of an audit committee composed of directors to be responsible for supervising the company's finances and accounting.

A limited liability company that has an audit committee on the board of directors does not require a supervisor or board of supervisors.

Article 70 allows for a small enterprise to establish a company with a sole director or manager.

Company Capital Regulations and reduction of Capital

Article 97 governs the authorised capital system in joint stock companies, whereby only the portion of the shares that need to be issued must be issued, and the remaining shares may be issued in accordance with the company’s AoA and through the boards resolution.

Article 164 stipulates that where the articles of association of the company or the shareholders' meeting authorise the board of directors to decide on the issuance of new shares, the resolution of the board of directors shall be passed by more than two-thirds of all directors. If the number of voting rights represented by the issuance of new shares exceeds 20% of the total number of voting rights represented by the company's issued shares, it shall be resolved through a shareholders' meeting.

Article 220 provides for a company which reduces its capital and requires the company to prepare a balance sheet and list of assets. The company shall notify the creditors within 10 days from the date on which the shareholders' meeting makes a resolution to reduce the registered capital, and within 30 days, it shall be announced in a newspaper or in the unified enterprise information publicity system. The creditor has the right to require the company to pay off its debts or provide corresponding guarantees within 30 days from the date of receipt of the notice and within 45 days from the date of the announcement if it has not received the notice.

Article 221 provides for the reduction of registered capital; however, the company may not distribute dividends to the shareholders until the provident fund exceeds the registered capital.

Liability of management

Article 190 introduces joint and several liability with the company for directors and senior management personnel who inflict a tort on others through intentional or gross negligence.

Article 191 stipulates that where the controlling shareholder or actual controller of a company takes advantage of its influence on the company to instruct the directors or senior management personnel to engage in acts against the interests of the company or other shareholders, they shall share joint and several liability with the directors and senior management.

It is noted that the draft is for review before the legislative affairs commission, and is likely to undergo further review and drafting before a call for public comment is sought, which is typically the final process in legislative drafting in China.