Since the enactment of China’s Company Law in 1994, the country’s corporate landscape has taken off in a phenomenal way. To date, more than 40 million companies have been established, and almost 10,000 public companies are listed on the three major stock exchanges.
However, the law has not been majorly updated since 2005, drawing criticisms that the legislation being outdated and inadequate in the wake of China’s economic take-off in the past decades.
In response, the revised Company Law entered into force on July 1. Marking the most comprehensive overhaul in two decades, its sweeping changes encompass various aspects of corporate operations, including company capital rules, governance structures, liquidation procedures, and shareholder rights.
Lawyers say the new law will modernise China's corporate landscape and align it more closely with global best practices, as it offers increased flexibility in areas such as share issuance and corporate structure while simultaneously strengthening shareholder protections.
WHAT ARE THE MAJOR UPDATES AND WHY DO THEY MATTER?
Yuxin Shen, a Beijing-based partner at Freshfields Bruckhaus Deringer, notes that the latest amendments to the Company Law are designed to bring it more into line with global best practices and strike a better balance between state regulation and market autonomy.
“As the Company Law is a fundamental law for business entities and given the comprehensiveness of the 2023 amendment, all stakeholders in China Inc. need to carefully review and assess the implications of the amendment to ensure that they comply with the new Company Law but also take advantage of the opportunities it offers,” Shen adds.
The updated law has brought a spate of changes, including changes to companies’ corporate governance structure, capitalisation system, and shareholder liability.
Companies now have more flexibility in setting up their corporate governance structures. “For instance, if the relevant conditions are met, a joint stock company (JSC) may now have a sole director, and both limited liability companies (LLCs) and JSCs may have no board of supervisors or supervisor at all,” explains Shen.
Other important changes include elevated fiduciary duties and personal liabilities facing directors, supervisors, and senior officers. Additional rules have also been introduced to prevent and deter illegitimate interference by controlling shareholders and actual controllers of a company.
Furthermore, the new Company Law introduces stricter capitalisation requirements, enhanced protection for minority shareholders, and greater emphasis on the interests of employees, notes Shen.
“All these changes will enhance the integrity and vibrancy of Chinese companies,” he adds.
WHO WILL THE NEW LAW IMPACT THE MOST?
The latest version of the Company Law will impact all companies incorporated in China, including foreign-invested companies.
Shen believes the most immediate changes will be observed in existing companies, which, at the minimum, need to review their current capital commitments, corporate governance structures, and internal documents (such as articles of association, shareholders’ agreements, and employment contracts).
Also, “Any structures or provisions that no longer comply with the mandatory provisions of the new Company Law should be amended, and additional details that the new Company Law leaves to the discretion of companies need to be included in the articles of association or shareholders’ agreements to avoid potential confusion or even disputes,” Shen adds.
Foreign-invested companies, meanwhile, are advised to improve corporate governance by the end of this year as required by the Foreign Investment Law.
On a positive note, Shen believes the new legislation could serve as a confidence boost to foreign investors doing business in China by stipulating improvements in corporate governance structure, the incorporation and liquidation procedures, and share capital structure for joint stock companies (JSCs).
The stricter capitalisation requirements and strengthened creditor protection are also highlighted as beneficial in facilitating business dealings between foreign investors and Chinese companies under the new law.
“That being said, foreign-invested companies also need to make adjustments, particularly regarding shareholders’ capital contributions, corporate governance practice, and duties of directors, supervisors, and senior officers,” adds Shen.
As such, it’s crucial for companies to familiarise themselves with these new opportunities and requirements while gearing up for a lengthy transition. “This will involve considerable investment of time and resources, including engagement with specialist legal counsel,” Shen says.
WILL THE LAW HELP CHINA’S ECONOMY?
Even though some see the transitional period as lengthy, Shen is confident that China’s economy will gain from the modernised Company Law in the long run.
Take changes to share capital as an example. Under the new law, shareholders of an LLC are now required to pay their entire subscribed capital contribution within five years, while a JSC can issue multiple classes of shares with differentiated shareholders’ rights.
Shen believes the new rules will turn JSCs into a more popular corporate form by bringing the capital structure of JSCs in line with international practice.
