Amendments to the PRC Company Law Come into Effect

On December 29, 2023, China enacted amendments to the PRC Company Law which came into effect earlier this month on July 1, 2024. The amendments cover a wide range of corporate law issues, including capitalization, governance, shareholder rights and protection, duties of directors and officers, and streamlined registration and deregistration of companies. Some highlights of the amendments are discussed below.

Capital Contribution

Shareholders of a limited liability company (LLC) shall make full capital contributions of their subscribed registered capital within five years of an LLC’s incorporation. Promoters of a joint stock company (JSC) shall make full payment for their subscribed shares existing at the time of incorporation and that are authorized to issue by the company’s articles of association (AOA).

According to the implementing regulation issued by the State Council on and effective as of July 1, 2024, for companies incorporated before June 30, 2024, LLCs shall change the capital contribution schedule to five years before June 30, 2027, if the remaining time period for their shareholders to contribute their subscribed registered capital is more than five years from July 1, 2027, and the shareholders shall contribute fully their subscribed registered capital within the adjusted deadline. Effectively, this makes June 30, 2032, the deadline for the full capital contribution of LLCs incorporated before June 30, 2024. Promoters of JSCs shall contribute capital for all of their subscribed shares of the JSCs before June 30, 2027.

Shareholders failing to make full contribution on time shall be liable for the losses incurred by the company. The board of directors shall examine and verify the capital contribution status of shareholders, and the company may demand the shareholders who fail to make full contribution on time to make capital contribution.

Shareholders who fail to make capital contributions within the grace period of no less than 60 days may lose their equity rights with regard to the relevant capital not contributed after notice from the company based on a related board resolution. If a company fails to pay any debts that are due, the company or creditors of the debts may request the shareholders to expedite capital contribution that they subscribed for. The relevant deadlines have not yet been announced.

For equity transfers, where the transferor of equity in LLCs does not make capital contributions according to the contribution dates provided in the AOA, or the value of non-cash consideration is obviously less than the subscribed capital, the transferor and the transferee shall be jointly liable — unless the transferee does not know and shall not know the existence of such circumstances, in which case the transferor shall bear the liability.

Governance Structure

LLCs may establish a board of supervisors with three or more supervisors. LLCs of small scale or with a small number of shareholders may establish one supervisor or, upon unanimous consent of the shareholders, not establish a supervisor. Alternatively, LLCs may establish an audit committee within the board of directors (consisting of directors) instead of a board of supervisors or a single supervisor to exercise the powers of the board of supervisors or a single supervisor. LLCs may establish a board of directors with three or more directors (and there is no longer an upper limit of 13 directors for LLCs). LLCs of small scale or with a small number of shareholders may establish one director. The board of directors of an LLC with 300 or more employees shall have employee representation unless the LLC establishes a board of supervisors and has employee representation in the board of supervisors. JSCs of small scale or with a small number of shareholders may establish one director and one supervisor.

Shareholder Rights and Protection

Shareholders of LLCs may review and duplicate the shareholders register in addition to the AOA, shareholders meeting records, resolution of the board of directors, and resolution of the board of supervisors and financial reports, and they may review accounting vouchers in addition to the accounting books. Shareholders holding 3% shares of the JSCs (or a lower percentage provided in the AOA) continuously for 180 days individually or collectively may not only review but also duplicate the AOA, the shareholders register, shareholders meeting records, resolution of the board of directors, and resolution of the board of supervisors and financial reports, and they may review both accounting books and accounting vouchers of the JSCs. The relevant rights to information also apply to review and duplication of the relevant materials of the wholly owned subsidiaries of the companies.

Shareholders of LLCs have the right to request the company to acquire their equity at a reasonable price if the controlling shareholder of the company abuses its shareholder rights and seriously damages the interests of the company or other shareholders. Shareholders of LLCs and shareholders holding 1% shares of the JSCs continuously for 180 days individually or collectively have the right to file a lawsuit against the directors, supervisors or senior managers of the company’s wholly owned subsidiaries if they are found to violate laws, regulations or AOA that result in losses to the company. They may request the board of supervisors or board of directors of the wholly owned subsidiary to file a lawsuit or file a lawsuit in their own name.

Duties of Directors and Officers

The duty of loyalty is defined and clarified as taking measures to avoid conflicts between the private interests of the directors, supervisors and senior managers and the interests of the company and as not using their powers to seek improper interests. The duty of care in performing the roles of directors, supervisors and senior managers is defined and clarified as exercising reasonable care that managers ordinarily exercise in the best interests of the company.

Moreover, a controlling shareholder and actual controller who does not serve as a director of a company but actually executes the matters of the company shall have the same fiduciary duties as a director. If the controlling shareholder or actual controller of a company instructs a director or senior manager to engage in an act against the interests of the company or shareholders, the controlling shareholder or actual controller shall be jointly and severally liable with the director or senior manager.

The PRC Foreign Investment Law, effective as of January 1, 2020, granted a grace period to foreign invested enterprises (FIE) established before 2020 to keep their enterprise form and governance structure for five years, i.e., before December 31, 2024. FIEs established before 2020 will need to update their constitutional documents to conform with the 2023 amended Company Law before the end of 2024.