The Chinese government has finalized major amendments to its Company Law, with revisions coming into force on July 1, 2024. Foreign companies already doing business in China, as well as those considering entering the Chinese market would be wise to examine the new developments closely, and the earlier – the better.
Why?
Companies that are well-versed in updates affecting company registration in China and its ongoing management will be best positioned to adjust their policies, steer clear of risks, and gain momentum to increase their competitive advantage.
Before we dig in, it’s important to mention that the final version of the Company Law (which will take effect this summer) includes 112 newly added or revised articles. Yet, in this post, we discuss only five key highlights that are more relevant to our clients.
Capital contribution within five years
The registered capital, also known as subscribed capital, refers to the total amount of capital injected in full by the investors into the company, and registered with the Chinese authorities. Historically, there were no formal legal requirements specifying a minimum threshold for registered capital or a timeframe for its payment. This allowed companies to comfortably register higher capital, aiming to facilitate convenient operations until profitability and demonstrate the company’s commitment to doing business in China. However, this approach led to over-subscribed capital and prolonged payment terms, resulting in capital never being fully paid.
To address this issue, the law amendments stipulate that shareholders of a Limited Liability Company in China (LLC) must now pay the committed registered capital within five years from the company’s establishment. For companies established before the enforcement of these legal changes, there will be a transitional period to gradually adjust. Failure to meet this deadline will result in the investment being deemed a “false investment,” leading to fines ranging between 5-15% of the outstanding capital amount.
Public information disclosure
Piggybacking on the previous point, another new provision in the Company Law amendments is for companies to publicly disclose details on their registered capital:
- The amount of registered capital and shareholder contributions
- The payment date and method
- Modifications to the equity and shareholder share information in LLCs
Along with mandated disclosures, heftier penalties will apply for non-compliance or inaccurate reporting. Specifically, companies face fines ranging from RMB 10,000-50,000, escalating up to RMB 200,000 for serious violations (over $28,000). Individuals directly responsible for the violation can also incur personal fines from RMB 10,000-100,000 (up to $15,000).
While these two amendments might seem draconian, they, in fact, cultivate greater integrity and accountability in the business landscape and strengthen the function of registered capital as an important credit tool.
Changes to company governance – Increased internal supervision
The recent amendments to China’s Company Law pay significant attention to strengthening corporate governance requirements. The driving force behind these changes is to ensure proper and transparent operations of companies in China for a more secure business environment and sustainable economy.
To start, new provisions mandate private companies with over 300 employees to include at least one employee representative on the board of directors or supervisory board. The representative employee will be elected by the company’s employees themselves.
Additionally, companies can now establish a dedicated audit committee within the board of directors as an alternative to an internal board of supervisors. It’s noteworthy that companies in China today are legally required to set up a supervisory system, but in practice, those have proven to be mostly inactive. So, with the enforcement of the new amendments, the special audit committee will have the legal authority to exercise the traditional responsibilities of the board of supervisors and effectively monitor the company’s activities. A small LLC or one with a few shareholders can eliminate the supervisor position upon unanimous approval by all shareholders.
Greater flexibility in appointing a legal representative
The legal representative is the employee who possesses the legal authority to execute the powers and duties of the company, and is accountable for them. Consequentially, this individual is a key figure involved in all aspects of the company’s operations and serves in practice as one of the company’s executives. As of today, the legal representative can serve as the company’s chairman, executive director, or managing director, in addition to filling the legal representative position.
The new law amendments broaden the pool of candidates for this position, permitting any director or manager who carries out the company’s affairs on its behalf to serve as its legal representative. In case the legal representative resigns, a successor must be appointed within 30 days. Given the legal representative’s significant responsibility and virtually unlimited power, this law modification provides international companies doing business in China with greater flexibility in selecting a legal representative whom the overseas HQ truly trusts.
Streamlined company deregistration
The recent revisions to China’s Company Law introduce new procedures that make it easier for qualified companies to shut down their WFOE. Companies that have not incurred any debts during their existence, or paid off all their debts simply need to announce their intent publicly for 20 days. If no objections are raised, they can complete deregistration within 20 more days by applying to authorities. This straightforward process saves time and resources compared to more complex alternatives.
In addition, the law amendments introduce new forced deregistration mechanisms for “zombie companies” – companies who are no longer permitted to operate but have failed to complete deregistration. Suppose a company’s business license is revoked, and the liquidation process drags on for over three years. In that case, the company can publicly announce its intent to close the company in China for 60 days. If no objections are raised, the authorities will officially deregister the company.
Start preparing today
One of the most distinctive characteristics of the Chinese market lies in its constant and swift rollout and modification of regulations. The recent revisions to China’s Company Law underscore the necessity for companies aspiring for long-term and successful growth in China to remain vigilant and up-to-date with changes in the legal landscape. As the regulatory framework evolves, staying informed and adapting to these changes will be imperative for companies to navigate the intricacies of the Chinese business environment and ensure compliance with the latest legal requirements.
At PTL Group, we are helping global companies enter and expand in China. Our multicultural team combines a comprehensive understanding of foreign businesses’ objectives along with a profound familiarity with the local business environment and culture in China. We’d be happy to help you too. Get in touch today to embark on your China journey.
