On December 29, 2023, the Company Law of the People’s Republic of China (Revised in 2023) (“2023 Company Law”) was formally approved and published and shall come into force as of July 1, 2024. Compared with the Company Law of the People’s Republic of China (Revised in 2018) (“2018 Company Law”), 16 provisions are deleted and 228 provisions are added and modified, and certain provisions in the judicial interpretations on the PRC Company Law are introduced in the 2023 Company Law. This article will provide a general introduction to certain major amendments to the PRC Company Law and their influence on foreign-invested companies.

First, certain practices on company registration and deregistration are introduced by the 2023 Company Law. For corporate registration, application materials submitted for company establishment and registration are required to be genuine, legitimate and effective, and the company registration authority shall clarify materials to be supplemented and corrected at once if the submissions are incomplete or fail to comply with legal requirements (Article 30). It is the first time the law has permitted electronic business license to be issued, which shall have the same legal effect as physical business license (Article 33). Certain corporate information, including without limitation, amount, method and date of contributions made and shares held by shareholders, obtaining, change and cancellation of administrative licenses, shall be (Article 40), and announcements on merger and division may be (Articles 220 and 222), made available to the public on the National Enterprise Credit Information Publicity System (“NECIPS”). It is further highlighted in Article 41 that the company registration authority shall optimize formalities for company registration and adopt online procedures and other convenient methods in order to improve efficiency of and facilitate company registration. For company deregistration, the simplified company deregistration procedures set forth in relevant regulations are introduced in Article 240 of the 2023 Company Law, which means that the company having incurred no debt during its existence or paid off all its debts may, upon commitment by all its shareholders, be deregistered after the announcement on its deregistration has been published on the NECIPS for at least 20 days, and Article 241 provides that the mandatory deregistration procedures, i.e., deregistration after a 60-day announcement period on the NECIPS, shall apply if the company whose business license is revoked or which is ordered to close down or revoked has not applied to the company registration authority for deregistration. Those amendments, especially adoption of relevant electronic measures, may improve business environment in PRC and facilitate foreign investment in PRC and entry and exit of PRC market by micro, small and medium-sized foreign-invested companies.

Second, the capital contribution obligations of shareholders are highlighted in the 2023 Company Law. For the time limit for capital contributions, shareholders must pay up all contributions it subscribes pursuant to the articles of association (“AOA”) within 5 years upon the company establishment date (Articles 47 and 98) instead of within an indefinite term as allowed under the 2018 Company Law. For the methods of capital contributions, two new non-monetary properties (i.e., equity and creditor’s rights) as shareholders’ contributions are allowed in Article 48. When a shareholder fails to make contributions to the company within the time limit, it shall bear liability for compensating losses caused thereby to the company (Article 49) instead of bearing liability for breach to other shareholders having paid up their contributions in full and as scheduled under the 2018 Company Law. When a shareholder fails to make contributions in full, other shareholders existing at the company establishment shall bear joint and several liability with such shareholder to the extent of the contributions which have not been made (Article 50). In case of any shareholder who fails to make contributions within the time limit or in full, a written capital call which may specify a grace period of no less than 60 days shall be issued to such shareholder, and such shareholder may forfeit the shareholding corresponding to the unpaid contribution upon notification by the company if such shareholder fails to make contributions pursuant to the capital call (Articles 51 and 52). When a company is unable to pay off any debt when it falls due, the company or the creditor of the due claim may request the shareholder who has subscribed for capital contributions and the time limit for whose contributions has not expired to make such contributions in advance (Article 54). When a shareholder as transferor transfers its shareholding corresponding to the capital contributions subscribed by it and the time limit of which has not expired, the transferee shall be obliged to pay up the unpaid contributions, and the transferor shall bear supplementary liability for the contributions not paid up by the transferee as scheduled or in full; when a shareholder as transferor transfers its shareholding corresponding to the capital contributions which have not been paid up within the time limit under AOA or which is made in non-monetary property with an actual amount obviously less than the subscribed contribution, the transferor and the transferee shall be jointly and severally liable for the unpaid capital contributions, and the transferor shall be solely liable therefor if the transferee is not aware and had no reason to be aware of the above circumstance (Article 88). For any company that has been registered prior to the date of the 2023 Company Law becoming effective, if the time limit for the capital contribution is longer than 5 years, it shall gradually adjust such time limit in compliance with the 2023 Company Law, unless otherwise specified by laws, administrative regulations or the State Council; if the time limit or the amount for the capital contribution of such company is abnormal, the company registration authority may request it to make adjustments pursuant to laws. Accordingly, for compliance purposes, it is advisable for a foreign-invested company registered before the 2023 Company Law becomes effective to promptly adjust its shareholders’ capital contributions, including without limitation amending AOA, adopting resolutions of the shareholders’ meeting and completing formalities for change of registration with the Administration for Market Regulation (“AMR”), and to remind its foreign shareholders to strictly perform their capital contribution obligations. Foreign investors intending to invest in PRC are advised to have a comprehensive assessment of their investment strength and determine reasonable amount and schedule of capital contributions to companies registered in PRC.

Third, there are dramatic amendments to corporate governance. Greater flexibility will be granted to the organizational structure and the division of duties and powers under the 2023 Company Law. For example, a limited liability company may set up an audit committee composed of directors to exercise the duties of the board of supervisors, without having a board of supervisors or supervisors (Article 69), and a limited liability company with small scale or a small number of shareholders may have no supervisor upon approval by all the shareholders (Article 83); the shareholders’ meeting may grant certain duties to the board of directors (Article 67), and the general manager shall exercise the duties fully subject to the AOA or as authorized by the board of directors, as all the statutory duties of general manager listed in the 2018 Company Law are deleted. As in practice the foreign investors of many foreign-invested company depend on their directors and general managers to actually decide and manage daily business operation, those amendments will enable the foreign-invested companies to optimize their governance structure. Certain mandatory provisions on the rules of procedure are added to the 2023 Company Law. For example, resolutions of the shareholders’ meeting of a limited liability company shall be passed by the shareholders representing more than half of the voting rights (Article 66), and the meeting of the board of directors of a limited liability company may be held only when over half of the directors are present, and resolutions thereof shall be passed by over half of all the directors (Article 73). As adoption of effective resolutions of the shareholders’ meeting and the board of directors is of great significance to the smooth operation of a foreign-invested company, it is advisable for the foreign-invested company to pay great attention to whether there will be further relevant implementing regulations or judicial interpretations so as to determine whether it is necessary to amend the rules for procedure already specified in its AOA for the compliance purpose.

Fourth, the duties and liability of directors, supervisors and senior officers are also greatly amended and highlighted in the 2023 Company Law. For example, the duties of loyalty and of care of the directors, supervisors and senior officers are expressly defined and will be applicable to the controlling shareholder and actual controller who do not act as director but actually implement corporate affairs (Article 180). The director who fails to perform the obligation of capital call shall compensate for losses caused to the company (Article 51); the director, supervisor and senior officer who shall be liable for illicit withdrawal of capital contributions by a shareholder shall bear joint and several liability with such shareholder for compensating losses of the company (Article 53). In case of any illegal profit distribution to shareholders, the shareholders involved and the directors, supervisors and senior officers who shall be liable therefor shall compensate losses caused to the company (Article 211). If a shareholder illegally reduces the registered capital, causing losses to the company, such shareholder and the directors, supervisors and senior officers who are found liable shall make compensation (Article 226). If the directors and senior officers cause damage to others due to their willful misconduct or gross negligence in the performance of their duties, they shall be liable to make compensation (Article 191). The directors shall be obliged to establish a liquidation group and complete liquidation procedures, failing which the directors shall compensate losses caused to the company or the creditors (Article 232). Accordingly, it is advisable for foreign investors to have a full understanding of and legally perform the duties and liability of directors, supervisors and senior officers if they take up such positions. It is also advisable that the foreign-invested company may purchase or (if already purchased) adjust coverage of applicable insurance for directors’ compensation liability as specified in the 2023 Company Law.

In summary, the 2023 Company Law will bring profound influences on business practices in PRC, and it is advisable that foreign-invested enterprises and other companies registered in PRC should pay close attention to implementing regulations and judicial practices following effectiveness of the 2023 Company Law and promptly make effective adjustments to the organizational structure and internal procedures, so as to ensure compliance and smooth business operation.