China – Changes to Company Law

Summary:

The heavily amended PRC Company Law will take effect on July 1, 2024. Please find below a summary of some of the important novelties embodied by this amended Company Law, which may have a significant impact on the rights and duties of the shareholders and management of a limited liability company (“LLC”).

The businesses active in the PRC may be interested in carefully reviewing their corporate documents (including the Articles of Association) in light of the amended Company Law and deciding necessary adaptive measures for compliance/optimization purposes during the transition period leading to the effective date of the said amended Company law.

Capital contribution.

The amended Company Law provides that the subscribed capital of an LLC shall be paid up as per its Articles of Association within a time period up to 5 years from its incorporation (NB: The previous law does not set a time limit for the capital contribution.). This requirement will retroactively apply to the companies incorporated prior to July 1st, 2024.

Despite the foregoing, a creditor or the company shall be entitled to request the shareholder(s) concerned to accelerate its/their capital contribution ahead of the due date for capital contribution should the company be unable to settle due debt(s) with its own assets.

The equity and credit may be used for the capital contribution.

Duties of directors/senior managers

The directors shall bear the obligation to form the “liquidation team,” which shall proceed with the liquidation within 15 days of the occurrence of a number of statutory circumstances substantiated in Article 229 of the Company Law. The directors shall be held liable for losses incurred by the company or creditor(s) arising from their failure to fulfill the above liquidation obligation on time.

The director(s)/senior manager(s) shall be held liable (along with the company itself) for compensating others should they cause any damages to the latter due to their intentional acts or gross negligence in the course of performing their duties.

The board of directors of an LLC shall regularly check the status of capital contributions by the shareholders. It shall cause the company to issue written reminders to the shareholder(s) failing to make capital contributions on time. Should the shareholder fail to honor its subscribed capital contribution despite the reminder, subject to a specific board resolution and a written notification with immediate effect, the company may declare that the shareholder is disqualified from making the capital contribution.

Corporate governance

An LLC may set up an “audit commission” composed of directors to exercise the function of supervisor or supervisors’ committee as per its Articles of Association. In such cases, the company may no longer need to set up separate supervisors’ committees or appoint supervisors.

However, the board of directors of an LLC having more than 300 employees shall have employees’ representative(s) elected through the democratic process unless the same LLC has a Supervisors’ Committee in place and such Committee already has the employees’ representative(s).