New Draft Amendments to China’s Company Law and Their Potential Effects on Enterprises

The National People’s Congress released a second set of proposed amendments to the Company Law of the People’s Republic of China (“Company Law”) on December 30, 2022, and will accept public feedback on these changes until January 28, 2023.

After receiving feedback from the general public on a previous draught version released in December 2021 (the “first draught amendments”), the Company Law was revised again and released as a second version (the “second draught amendments”) in the last two years.

Decentralization, reforming the administrative approval system, optimising public services, and improving investors’ rights are just a few of the measures proposed to amend the Company Law in an effort to improve the ease of doing business in China and stimulate market activity.

We discuss how some of the major changes outlined in the latest draught revisions to the Company Law might affect Chinese businesses below.

Adaptations to the role of shareholders in providing initial funding
Shareholders are expected to make larger capital contributions under the latest draught of the revised Company Law. This is achieved in a few crucial ways.

If the capital contribution is not paid, the shareholder’s rights will be revoked.
Shareholders who are delinquent on capital contributions will have their voting rights revoked as outlined in the second draught amendments. The Article 51 of the LLC Agreement states that if a shareholder fails to pay the capital contribution within the prescribed time and subsequent grace period, the shareholder may lose the equity of the unpaid capital contribution.

The Supreme People’s Court’s Provisions on Some Issues Concerning the Implementation of the Company Law of the People’s Republic of China (3) (“Implementation Provisions 3”) contain a similar provision. If a shareholder of a limited liability company fails to fulfil their capital contribution obligation or withdraws all capital contributions, and the company urges the shareholder to pay or return the capital contribution, and the shareholder still fails to pay or return the capital contribution within a reasonable period of time, the company shall disqualify the shareholder as a shareholder by resolution of the shareholders’ meeting. This is stated in Article 17 of Implementation Provisions 3. If a shareholder asks a people’s court to rule that the termination was invalid, the court cannot grant the request.

 "loss of shareholders rights

Although it may seem similar to the “loss of shareholders rights,” the aforementioned clause applies only when a shareholder fails to fulfil or withdraws their entire capital contribution and not when a shareholder fails to fulfil or withdraws only a portion of their obligations or capital contribution. As such, the purpose of the most recent amendment is to shut a loophole that has been exploited by certain shareholders.

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Contributions to the capital that have been subscribed will mature sooner.
In the event that a limited liability company is unable to pay off its debts by the due date, the second proposed amendments would allow the company to accelerate the maturity of its subscribed capital.

Article 50 of the revised draught provides that shareholders who have subscribed for the capital contribution but whose payment deadline has not yet passed must pay the capital contribution in advance if the company is unable to pay off due debts.

If a company defaults on its debts, its creditors can ask the shareholders who haven’t contributed enough to cover the full amount of those debts with the capital they have already contributed plus interest. The maturity of the subscribed capital contribution cannot be accelerated, however. In the event the company is unable to pay its debts, this means that shareholders are generally released from their capital contribution obligations.

As a result of the proposed change, creditors’ rights would be better protected and business dealings would be more secure.

Defining who is responsible for what in a stock transfer’s capital contribution
The second proposed amendment sets forth the duties of shareholders who either transfer or receive unpaid capital contribution-subscribed equity.

Article 88 of the revised draught states that “where a shareholder transfers the equity for which they have subscribed through capital contribution but which has not yet expired, the person receiving the transfer shall bear the obligation to pay the capital contribution; if the person receiving the transfer fails to pay the capital contribution in full [and] on time,” making the shareholder who made the transfer liable for the capital contribution in addition to the person receiving it.

By prohibiting shareholders from evading their obligations to pay subscribed capital by transferring the equity to another person, this amendment will serve to further protect the interests of the company and its creditors as well as the other shareholders that have paid their capital contributions in full.

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