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China Issues Judicial Interpretations on the New Company Law’s Applicability and Retrospective Effect

China’s Supreme People’s Court (SPC) has provided new judicial interpretations to clarify the temporal effect of the New Company Law (the Interpretations). These interpretations, effective from July 1, 2024, will guide the application of the New Company Law, aligning with its implementation date.

As a cornerstone regulation for corporate governance in China, the New Company Law introduces substantial changes, impacting both domestic and foreign-invested enterprises. A clear understanding of its application relative to previous laws is essential for businesses.

Key Components of the Interpretations

The Interpretations encompass eight articles that outline specific guidelines on the temporal effect of the New Company Law in judicial proceedings. These articles address general provisions, retroactive rules for civil legal acts, contract performance, and liquidation responsibilities, among other aspects.

General Provisions

  • Post-Implementation Disputes: Civil disputes arising after the implementation of the New Company Law will be governed by its provisions.

  • Pre-Implementation Disputes: Civil disputes arising before the implementation will adhere to the laws and judicial interpretations effective at that time.

Retroactive Rules for Better Legal Purposes

The Interpretations stipulate that if applying the New Company Law better achieves its legislative purpose, certain provisions can apply retroactively. This includes scenarios such as improper convening of shareholders’ meetings or disputes over shareholders’ capital contributions.

Pre-Implementation Situation

Applicable Provision of the New Company Law

Improperly convened shareholders’ meeting with unresolved disputes

Article 26, Paragraph 2

Invalidated resolutions leading to legal disputes

Article 28, Paragraph 2

Disputes over methods of capital contributions

Article 48, Paragraph 1

Equity transfer disputes to non-shareholders

Article 84, Paragraph 2

Compensation liability due to profit distribution or capital reduction violations

Articles 211 and 226

Disputes over the timing of profit distribution

Article 212

Disputes over capital contributions or shares during capital reduction

Article 224

Retrospective Rules for Invalid Acts Under Old Laws

Civil legal acts considered invalid under previous laws but deemed valid under the New Company Law will be retroactively governed by the new provisions.

Pre-Implementation Situation

Applicable Provision of the New Company Law

Disputes over company’s joint liability for invested enterprise’s debts

Article 14, Paragraph 2

Effectiveness of resolutions using capital reserve funds to offset losses

Article 214

Merger resolutions involving companies with over 90 percent shareholding

Article 219

Retrospective Rules for Contract Performance

Contracts entered into before the New Company Law's implementation, with ongoing performance, will be governed by the laws in effect at the time of entry for pre-implementation disputes. Post-implementation performance disputes will adhere to the New Company Law.

Pre-Implementation Situation

Applicable Provision of the New Company Law

Contract for holding shares on behalf of others

Article 140, Paragraph 2

Contract for controlling subsidiary to acquire parent company's shares

Article 141

Financial assistance contracts for acquiring shares

Article 163

Blank Retroactive Rules for New Provisions

Where no specific provisions existed in old laws but the New Company Law introduces new ones, these new provisions will apply retroactively.

Pre-Implementation Situation

Applicable Provision of the New Company Law

Share transfer responsibilities before the end of the contribution period

Article 88, Paragraph 1

Abuse of shareholder rights harming the company or other shareholders

Article 89, Paragraphs 3 and 4

Shareholders’ request for company to purchase shares after voting against resolutions

Article 161

Civil liability for controlling shareholders not serving as directors

Article 180

Liability for instructing harmful activities

Article 192

Retrospective Rules for More Detailed Provisions

Specific detailed provisions of the New Company Law will retroactively apply to pre-implementation disputes where old laws were silent.

Pre-Implementation Situation

Applicable Provision of the New Company Law

Share transfer restrictions in articles of association

Article 157

Compensation for prohibited acts by company supervisors and executives

Articles 181, 182 (Paragraph 1), 183, 184

Determination of related entities and nature of related transactions

Articles 182 and 265 (Item 4)

Retrospective Rules for Liquidation Matters

Disputes arising from liquidation responsibilities will be governed by the laws in effect at the time of the legal facts requiring liquidation. If such facts occurred within 15 days of the New Company Law’s implementation, the new law’s provisions apply.

Retrospective Rules for Retrial of Civil Cases with Final Judgements

For finally adjudicated civil disputes before the New Company Law’s implementation, retrials will adhere to the laws effective at the time of the original judgment.

Conclusion

The SPC's judicial interpretations provide crucial clarity on the applicability and retrospective effect of the New Company Law, ensuring a smoother transition for businesses navigating these significant legal changes. Understanding these guidelines is essential for legal compliance and strategic planning in the evolving regulatory landscape.

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