Essential Liability Updates: China’s 2024 Company Law for Foreign Investors

Shareholders of a Limited Liability Company, (LLC) or also known as Wholly Foreign Owned Enterprise (WFOE), must now note that they must make the required capital contribution in full within five years of incorporation (cf. Art. 47 and 266). If the registered capital is increased, the additional capital contribution must also be made in full within 5 years.

If the contribution is not made or is incomplete after the expiry of the said period, the shareholder is liable for any damage caused to the company because of his delay (cf. Art. 49).

Moreover, the co-shareholders who have duly fulfilled their capital contribution are also jointly and severally liable for the lack of capital contribution of the defaulting shareholder (cf. Art. 50).

The following should also be noted: After the expiry of a given period for the capital contribution, the company can demand that the defaulting shareholder surrender the shares in the company in the amount of the capital contribution not made (cf. Art. 51 and 52).

If the shareholder intends to sell his shares before the expiry of the given period for capital contribution, he must note that he is secondarily liable in the amount of the acquirer’s unpaid contribution in the event of default (cf. Art. 88).

Both the creditor and the company can demand payment of the capital contribution from the shareholder if the company’s debts are due, even if the deadline has not yet expired (cf. Art. 54).

In many already existing companies, especially Foreign-Invested Enterprise (FIE), longer periods of time for capital contribution are already stipulated in the articles of association. However, according to a draft that has not yet been enacted, a transitional period is planned from July 01, 2024, to June 30, 2027. The following would be applied:

• No measures are necessary for companies which, according to their articles of association, will receive their capital contribution from the shareholders in less than 5 years after incorporation.
• Companies which, starting from July 01, 2027, will receive the capital contribution from the shareholder in more than 5 years according to their articles of association, must adapt their articles of association so that they receive the capital contribution in no more than 5 years and by June 30, 2032.
• Certain companies (which fulfil certain requirements) must have adjusted their capital contribution deadline within 6 months after a order from the government and must also receive the capital contribution by June 30, 2032.

The Board of Directors (BoD) is responsible for monitoring the capital contribution by the shareholders. Its liability risks have also changed because of the new amendments. For example, the members are also personally liable for the incurred damage, if the shareholders do not pay the capital contribution on time.

Regarding decision-making, it should be noted that a regulated order must now be established. Especially for foreign shareholders who are abroad, it can lead to the requirement to develop new meeting regulations. The director can also demand compensation from the shareholders in the event of unlawful dismissal.

For senior management (directors, supervisors and executive officers) there are new possible liability risks. For example, a new set of duties of loyalty and due diligence is standardised in the law. For any breach of them, the senior management is also personally liable for the resulting damage.

For the sale of shares in the company, it is now mandatory to send a detailed notification to all other shareholders and they must agree to the sale. Silence is now considered as consent.

For new foreign investors, this means an increased cautious way of working. Care must be taken to ensure that the respective capital investment can be fulfilled, but also to obtain detailed information about the capital amount and composition of the respective company. Moreover, existing articles of association and the positions set out therein should be subject to an assessment to compare their compatibility with the new rules. If necessary, adjustments should be made promptly to minimise possible liability risks. However, these tasks should be manageable with good legal advice.

We would be happy to assist you with every tax, accounting or legal questions you may have. Our team at Ecovis Heidelberg and Ecovis Shanghai are at your service with our legal and tax knowledge and experience in China and in Germany. Contact us now!