Company Law in China: Navigating the Key Changes

China recently updated its company legislation, with changes set to take effect from July 2024. Shanghai K-insight Law Firm outline the key amendments, which aim to enhance operational efficiency and safeguard the interests of companies, shareholders and creditors.

Company Law in China (the “2018 Company Law”) was amended on October 26, 2018. This amendment was then adopted on  December 20, 2023, and will take effect in July 2024 (the “2024 Company Law”). There are some key changes impacting how limited liability companies operate:

1. Registered Capital

1.1 Term of Capital Contribution

According to the 2018 Company Law in China, a shareholder must pay – in full and on time – the amount of capital he or she has subscribed, as set out in the company’s articles of association. The term of the capital contribution can be as long as 20 to 30 years.

Under the 2024 Company Law, the registered capital of a limited liability company must be fully paid up within 5 years of the company’s establishment.

1.2 New Forms of Capital Contribution

The 2024 Company Law has added that equity and creditor’s rights, as well as other non-monetary assets, can be contributed at an agreed value.

2. Corporate Governance

2.1 Legal Representative

Under the 2018 Company Law in China, the legal representative of the company is the chairman of the Board of Directors, the sole executive director if there is no Board of Directors, or general manager as stipulated in the company’s articles of association.

The 2024 Company Law has widened the pool of candidates for the position of legal representative so that any director who handles company affairs on behalf of the company or the general manager can serve in this position. If the legal representative resigns, a new legal representative shall be appointed within 30 days from the date of the legal representative’s resignation.

 2.2 No Mandatory Supervisor

Under the 2024 Company Law, supervisors are no longer mandatory for a limited liability company that is small in size or has a small number of shareholders. A Board of Directors audit committee can also be a substitute for a Board of Supervisors.

3. Shareholders’ Right

3.1 Shareholders’ Right to Know

The 2024 Company Law strengthens the shareholders’ right to information, clearly stipulating that shareholders have the right to access and copy documents such as the company’s articles of association, meeting records, financial statements, etc., and may request to inspect the company’s accounting books and records. At the same time, it specifies the time limit for a response and the grounds on which a company may refuse inspection, and grants shareholders the right to initiate litigation.

3.2 The Forfeiture of Shareholder Rights

Provisions regarding the forfeiture of shareholder rights have been added. If a shareholder fails to make a capital contribution by the date specified in the company’s articles of association, and the company issues a written demand for capital contribution in accordance with the provisions of the preceding paragraph, it may specify a grace period for payment; the grace period shall be no less than 60 days from the date the company issues the demand.

If, at the end of the grace period, the shareholder still fails to fulfil his obligation to make a capital contribution, the company may, upon resolution of the Board of Directors, issue a written notice of forfeiture to the shareholder. From the date on which the notice is issued, the shareholder shall forfeit the equity corresponding to the unpaid capital contribution.

4. Transfer of Equity Interests in a Limited Liability Company

The consent of the non-transferring shareholder(s) is no longer required for the transfer of shares to a non-shareholder. A right of pre-emption applies. The transferring shareholder shall inform other shareholders in writing of the quantity, price, payment method and schedule of the potential equity transfer. Non-transferring shareholders who do not respond within 30 days of receiving the written notice will be deemed to have waived their pre-emptive rights.

The updated Company Law in China will help to improve the operational efficiency of enterprises, protect the interests of companies, shareholders and creditors, and promote sustainable enterprise development.