China’s current Company Law was first enacted on 29 December 1993. On its 30th anniversary of implementation, the Standing Committee of the National People's Congress of the People’s Republic of China (PRC) approved the 2023 revision of this law, which aims to create a more sophisticated and modern business environment with Chinese characteristics while ensuring a sound legal environment for business players in China.
The 2023 revision represents the second comprehensive update to the PRC Company Law since its promulgation. It introduces substantial changes to more than 100 articles listed there and is commonly called the new PRC Company Law, taking effect on 1 July 2024.
This article outlines some of the key changes to the new Company Law that are expected to significantly impact foreign-invested enterprises (FIEs) in China.
Key legislative changes and impact on corporate governance and senior officers
Firstly, the new Company Law specifies that the legal representative position of a company must be held by a director or manager who represents it to execute corporate affairs. This new requirement implies that the legal representative appointed by the shareholder must actively participate in the company’s business operations, including playing a role in the company’s decision-making process and attending to board of directors’ meetings etc.
Secondly, the new Company Law imposes new obligations for the board of directors in the aspects of capital verification, issuing notices for payment or forfeiture of shareholder equity, and more. Directors who fail to fulfil these obligations may face indemnity liability.
A similar compensation scheme also applies when directors fail to fulfil their obligations, such as when a shareholder illegally takes funds from the company’s registered capital, the company illegally reduces its registered capital, or distributes dividends to its shareholders.
Directors now have a duty to attend board meetings and exercise voting rights to make sure the board resolutions made thereof are valid as per the PRC corporate laws. Compared to the current version of the Company Law, the 2023 revision stipulates that directors should be the obligators in the event of company liquidation. If they fail to perform their liquidation duties in a timely manner, resulting in losses to the company or creditors, they will be held liable for compensation.
All these new requirements for senior officers to get substantially involved in the company’s operations highlight the need for a local resident director or manager who is experienced in corporate governance and familiar with the PRC corporate laws. This will help the company stay alert to any abnormal business activities or compliance risks.
Additionally, the new Company Law allows a board of directors to establish an audit committee of directors rather than a separate board of supervisors.
Fiduciary and diligence obligations for senior executives
The new Company Law clarifies the definition and specific requirements of fiduciary and diligence obligations for directors, supervisors and senior officers.
According to these requirements, directors, supervisors and senior officers shall take measures to avoid conflicts of interests between themselves and the company, and they shall not use their powers to seek improper interests. Furthermore, they are prohibited from conducting any business that competes with the company, either on their own behalf or on behalf of another person, without first reporting to the board of directors or at a shareholders' meeting and obtaining approval.
Company registration and reporting obligations
A new chapter on company registration was introduced in the 2023 revision of the PRC Company Law. This chapter incorporates provisions from the PRC Regulation on the Administration of the Registration of Market Entities (2022) and its implementing rules, some judicial interpretations and the PRC Civil Code.
If a company undergoes any corporate changes, such as a change in legal representative or registered address, the company should duly apply to the State Administration of Market Regulation (the “SAMR”) or its local counterparts in a timely manner. Failure to do so within the prescribed timeframe may result in administrative penalties and vulnerability when facing bona fide counterpart.
Article 40 of this new chapter stipulates that companies must disclose the following information on the National Enterprise Credit Information Publicity System of the SAMR:
- The amount of capital contribution subscribed for or paid by each shareholder, the method used, and the date of capital contribution
- Any changes to the shareholder’s equities
- Information on obtaining, modifying, and deregistering company licenses and permits
Companies must make sure that the information published as required above is authentic, accurate and complete. Failure to do so could result in the company being added to the SAMR’s “abnormal operation list” and incurring a fine of up to CNY 200,000.
Conclusions
The new Company Law imposes higher standards and requirements on FIEs in China regarding the establishment and maintenance of a robust corporate governance structure and compliance with legal obligations related to company reporting.
It is noteworthy that the new Company Law sets a five-year contribution term for shareholders to inject the registered capital. From a practical perspective, the national SAMR issued a consultation draft, on 6 February 2024, to grant existing companies a three-year transition period to adjust their capital contribution terms to meet the five-year requirement.
In the consultation draft, the transition period spans from 1 July 2024 to 30 June 2027. Limited liability companies that already exist may adjust their capital contribution terms to five years during this transition period and complete the capital injections before 30 June 2032.
As of the date hereof, the consultation draft has not been approved. Therefore, we would recommend that existing FIEs involve their in-house teams and professional consultants to explore possible options. This may include restating their articles of association, reducing the registered capital of the company, or making other financial arrangements as necessary for their business.
How Hawksford can help
With over a decade of experience in the Chinese market, we assist foreign businesses with company registration formalities, and provide ongoing administrative support, including accounting, tax, bookkeeping, and payroll solutions. This allows our clients to fully focus on their core businesses.
With our experience in assisting with multiple revisions of rules and regulations, we offer our clients customised solutions for market-entry strategies, changes in legal structures, corporate governance, compliance, and internal control.
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