China's New Company Law from 1 July 2024 – What shareholders, supervisory board members, board members and managers should know

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published on 29 January 2024 | reading time approx. 3 minutes


On 29 December 2023, China passed a reform of its Company Law that extends to all limited liability companies and joint stock companies. After a legislative process lasting several years, the comprehensively revised law will come into force on 1 July 2024. It will bring significant changes that apply not only to purely Chinese companies, but also to foreign-invested companies in China. Under the existing Foreign Investment Law, older foreign investment companies still have until 31 December 2024 to adapt their organizational form to the new provisions.

Important changes for limited liability companies are highlighted below as examples:

Key changes relate to the capitalization of companies. In the future, the registered capital, but also a capital increase, must be paid in within five years. This represents limitations compared to previous, more flexible regulations. Shareholders should examine the potential effects at an early stage. Transitional regulations for existing companies about payment deadlines are still pending. Both the company itself and creditors can also demand early payment of the registered capital in the event of outstanding claims. The registered capital actually paid in must be published in the social credit system. If a shareholder in a joint venture does not make its contribution on time or at a reduced value, the other shareholders are jointly and severally liable.

The capital contributions are subject to increased scrutiny by the Board of Directors. In the event of default, the defaulting shareholder must be reminded in writing at least 60 days in advance. If the capital contribution is not made on time, the company can order the equity to be cancelled by resolution of the Board of Directors. The defaulting shareholder then loses all rights associated with the unpaid capital contribution. The cancelled equity can either be transferred or the registered capital is reduced accordingly. The Board of Directors is liable for damages caused by a failure to check capital contributions.

There is a new flexibility in the internal structures of companies. The rights of the internal bodies remain essentially unchanged. However, a newly introduced "Audit Committee" within the Board of Directors can in future take over the tasks of the Supervisory Board or the individual Supervisor, which then no longer exist. Care must be taken here to avoid conflicts of interest. Alternatively, smaller companies also have the option of dispensing with the establishment of a Supervisory Board or Supervisor altogether, provided that all shareholders agree. There is no longer an upper limit for the number of Directors in the Board, which must still consist of at least three members. For smaller companies, a single "Director" (previously: "Executive Director") can replace the Board. In future, any member of the Board of Directors can be appointed as a Legal Representative in addition to any manager, provided that such body is responsible for the operational business. Previously, this was limited to the Chairman of the Board and the General Manager.

Co-determination will be strengthened, especially for companies with 300 or more employees. In such case, the Board of Directors must in future include at least one democratically elected person to represent the employees, provided there is no employee representation on the supervisory board (the wording is somewhat unclear in this respect). This employee representative can also be a member of the new "Audit Committee" in the Board of Directors.

Restructuring of companies, including mergers, splits, equity transfers, capital increases and reductions as well as liquidations, are regulated more precisely in the amended law. A new shareholder can already exercise his rights upon entry in the internal list of shareholders - i.e., even before registration. Consent to the transfer of equity to third parties by the other shareholders is no longer required; however, the new law contains more detailed - dispositive - rules on statutory pre-emption rights. In the case of mergers with subsidiaries in which 90 percent or more of the equity is held, in future only a Board decision will be required instead of a shareholder resolution. In the event of the transfer of equity of which the registered capital has not yet been paid up, a differentiated liability rule applies: in the case of overdue capital contributions, the seller and purchaser of the equity are jointly and severally liable. In the case of contributions that are not yet due, the seller is only additionally liable. In certain cases, a shareholder may also have a legally enforceable claim to the transfer his equity back to the company if he has voted against a decision of the shareholders' meeting that is unfavorable to him. The liquidation of the company is possible under certain conditions via a simplified procedure.

The information rights of shareholders have been strengthened. These can also be exercised by authorized representatives such as auditors or lawyers. If the company refuses an inspection, there is the possibility of an action for information. In future, shareholders will also have the same rights with regard to the information of wholly owned subsidiaries.

Liability rules for Board Directors, Legal Representatives, Supervisory Board Members, Managers and shareholders have been fine-tuned. Explicit duties of loyalty and due diligence, comparable to German law, are intended to reduce the risk of conflicts of interest and increase due diligence in the exercise of office. In the event of breaches of duty, Board Members, Supervisory Board Members and Managers can be held liable. The company is generally liable for actions of the Legal Representative that cause damage, but can also take recourse against the Legal Representative if necessary. In future, special rules will also apply to self-dealings. Shareholders can also demand that the relevant bodies enforce rights in court against other infringing bodies or third parties, and can also demand this directly from the relevant bodies of wholly owned subsidiaries.

On the other hand, the company is liable to a board member for damages resulting from premature dismissal "without good cause". The extent to which supplementary provisions in the articles of association can reduce this liability risk is still unclear.

Formal aspects are also being adapted. Refined regulations concern, for example, the resignation of Legal Representatives, Board Members and Supervisory Board Members. Decisions can now be made electronically unless the articles of association contain provisions to the contrary. In future, board resolutions will require the participation of the majority of Directors as a quorum.

Recommendations

Measures that may be necessary for your China company depend on the individual case. In particular, the aspects of capitalization and possible employee participation should be examined at an early stage. A "Corporate Health Check" can determine whether there is a compelling need for change and whether adjustments are also required in formal aspects, documentary and company law processes. Optionally, the optimization of older articles of association can also be considered.

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