China plans to revise and update its Company Law

Since its latest update in 2018, the China’s Company Law is scheduled to be re-evaluated this year. The revised draft, which includes 260 articles over 13 chapters, will be discussed by the Chinese Legislative Affairs Commission authorities.

This new version of the Company Law would add 42 articles (from 218 to 260) and an additional 28 revisions to the existing rules primarily focusing on several areas of the legislation.

Some of these areas include: an increased party control over State-Owned Enterprises, provisions for state funding, incorporation and liquidation regulations, corporate governance regulations and company’s capital regulations.

Similarly, there will be revisions on the liability of shareholders and management,

and the corporate social responsibility.

Foreign companies with a presence in China will have particular interest in the updates to increase party control over State-Owned Enterprises, incorporation and liquidation, corporate governance, capital investment, and liability of shareholders and management.

Article 145 states that the organizations of the Communist Party of China in state-funded companies shall play a leading role in accordance with the provisions of the Constitution of the Communist Party of China, study and discuss major operation and management matters of the company and support the shareholders' meeting and the board of directors, the board of supervisors, and senior management personnel exercise their functions and powers in accordance with the law.

Regarding incorporation and liquidation, articles 26, 34 and 76 of the revised Company Law refer to the optimization of the incorporation procedures, further digitalizing these procedures, as well as the receipt of decisions and announcements and resolutions communicated through the unified enterprise information publicity system by electronic means.

Articles 43 and 100 further expand what may be used as capital contributions to include equity rights and creditors' rights.

Shareholders may contribute capital in currency, and may also use physical objects, intellectual property rights, land use rights, equity rights, creditor's rights, etc. to be ascribed a value in currency and transferred to the company.

Article 93 permits the establishment of a one-person joint-stock company to reduce restrictions on joint-stock company incorporations.

Articles 229, 234 and 235 added that all shareholders may cancel their registration through a simplified procedure after making a commitment to the performance of their debts.

Regarding corporate governance, article 62 establishes the role of the board of directors in the corporate structure, and clearly establishes that the board is the executive body of the company, except when the shareholders meeting is required by the company AoA or by law.

Article 63 stipulates that a board of directors shall be three or more. A limited liability company with more than 300 employees must have representatives of the company's employees among its board members. The employee representatives on the board of directors shall be democratically elected by the employees of the company through the employee congress, the staff congress or other forms.

Article 64 establishes the role of an audit committee composed of directors to be responsible for supervising the company's finances and accounting.

A limited liability company (LLC) that has an audit committee on the board of directors does not require a supervisor or board of supervisors.

Article 70 allows for a small enterprise to establish a company with a sole director or manager.

In the area of company capital regulations and reduction of capital, article 97 establishes that the authorized capital system in joint-stock companies, whereby only the portion of the shares that need to be issued must be issued, and the remaining shares may be issued in accordance with the company’s AoA and through the board's resolution.

Article 164 states that where the articles of association of the company or the shareholders' meeting authorize the board of directors to decide on the issuance of new shares, the resolution of the board of directors shall be passed by more than two-thirds of all directors.

If the number of voting rights represented by the issuance of new shares exceeds 20% of the total number of voting rights represented by the company's issued shares, it shall be resolved through a shareholders' meeting.

Article 220 provides for a company which reduces its capital and requires the company to prepare a balance sheet and list of assets. The company shall notify the creditors within 10 days from the date on which the shareholders' meeting makes a resolution to reduce the registered capital, and within 30 days, it shall be announced in a newspaper or in the unified enterprise information publicity system.

The creditor has the right to require the company to pay off its debts or provide corresponding guarantees within 30 days from the date of receipt of the notice and within 45 days from the date of the announcement if it has not received the notice.

Article 221 refers to the reduction of registered capital; however, the company may not distribute dividends to the shareholders until the provident fund exceeds the registered capital.

Regarding liability of management, article 190 holds liable both company directors and senior management who inflict a tort on others through intentional or gross negligence.

Article 191 stipulates that where the controlling shareholder or actual controller of a company takes advantage of its influence on the company to instruct the directors or senior management personnel to engage in acts against the interests of the company or other shareholders, they shall share joint and several liability with the directors and senior management.

The revised draft will be evaluated first by the legislative affairs commission, and probably will be subject to further changes before a call for public comment is announced. This would be the last step in the legislative process, after which the law will come into effect.

According to the Company Law in China (2018 revision), the country recognizes two types of companies: Limited liability company (LLC), the most common type of entity used by a firm with foreign investment, and Joint Stock Limited Company (JSLC), which are companies limited by shares (CLS) and therefore the procedures to set them up as well as their regulatory compliance are more stringent than the LLC. 

A Wholly Foreign Owned Enterprise (WFOE) has higher establishment requirements and can conduct a full range of business activities including signing contracts, collecting payments and issuing special tax invoices (Fapiao) in RMB. A WFOE is an LLC and has separate liabilities from the parent company.

A Joint Venture (JV) is generally an LLC formed between a foreign company or investor(s) with a Chinese company in which the foreign company owns more than a 25% share of the business entity. The ratio between foreign and Chinese capital is based on industry type.