As of July 1, 2024, significant changes in China’s Company Law have come into effect, impacting businesses across the country. The updates, marking the sixth revision since the law’s introduction in 1993, are focused on enhancing transparency and strengthening accountability. Additionally, they aim to improve the overall business environment, with a particular emphasis on supporting start-ups and small businesses. The amendments cover various areas, such as capital contributions, corporate governance, and shareholder responsibilities. In this article, we’ll walk through the key changes, which are now fully implemented and already shaping company registration in China.
New Capital Contribution Rules: No More Delays
One of the most significant changes in the new law is the way companies handle capital contributions. Previously, shareholders could delay their capital payments for extended periods, which sometimes led to risks for the company and its creditors. Under the old subscribed capital system, shareholders had the flexibility to contribute their capital based on the company’s operational needs.
As of July 2024, this has changed. Shareholders in LLCs are now required to fulfil their capital commitments within five years of the company’s establishment. This rule applies to both new and existing companies, requiring all businesses to comply with the changes. Companies with longer schedules for capital contribution must adjust accordingly to meet the new deadline. Failure to meet this requirement could result in penalties, including the loss of equity interest.
The new rules aim to ensure that businesses are financially stable from the outset which increasing confidence among creditors and business partners.
Legal Representatives: Simplified Transition and Flexibility
Every company in China must appoint a legal representative, who acts on behalf of the company in civil matters. Under the revised law, companies now have more flexibility in choosing this person. Previously, only certain roles, like the chairman of the board, could serve as the legal representative. Now, any director or general manager can take on this responsibility, giving companies greater freedom to decide who should represent them.
In addition, the law now provides an automatic transition when a legal representative resigns. Upon resignation, they are automatically considered to have stepped down as the legal representative, and the company must appoint a new representative within 30 days. This ensures smooth transitions and clear accountability for legal matters.
Changes to Shareholders’ Meetings: Less Complexity
In the past, shareholders’ meetings were responsible for tasks that weren’t always necessary or practical for small businesses, such as approving annual financial budgets and final account plans. The new law simplifies these requirements by removing the need for shareholders to:
- Determine operating strategies and investment plans.
- Approve annual financial budgets and final account plans (which may not be relevant for smaller companies).
This streamlining of duties allows shareholders to focus on more essential decision-making processes. For single-shareholder companies, shareholders can now make decisions in writing without needing to hold a formal meeting, further reducing administrative burdens.
Board of Directors: More Flexibility for Small Businesses
The board of directors remains a key governing body for Chinese companies, but the new law offers more flexibility, especially for small businesses. Previously, there were restrictions on the number of directors a company could have. Under the new rules, there is no set maximum number of directors, though LLCs and Joint Stock Companies (JSCs) must still have at least three directors.
For small businesses, the law allows for the appointment of a sole director, making governance more straightforward and reducing the need for a full board in smaller enterprises.
Supervisory Board: Exemptions for Small Enterprises
China’s corporate governance traditionally included a supervisory board to ensure that the company complied with legal requirements. However, many small businesses found this structure too cumbersome. The new law now provides exemptions for small companies, which can either have a single supervisor or even eliminate the supervisory board entirely if they establish an audit committee made up of directors.
This change helps small businesses reduce administrative costs while maintaining oversight and compliance.
New Rules for Joint Stock Companies (JSCs)
The 2024 law brings several changes to Joint Stock Companies (JSCs), giving them more operational flexibility. Key updates include:
- The restriction preventing founders from transferring shares within one year of establishment has been removed.
- JSCs can now be formed by a single person, compared to the previous requirement of at least two founders.
- The law allows JSCs to issue multiple classes of shares, offering more flexibility in how shares are structured, including variations in voting rights and profit distribution.
These changes aim to encourage more businesses to consider the JSC model, particularly for companies looking to list on the stock exchange or attract different types of investors.
Clearer Guidelines on Financial Assistance
Previously, the rules surrounding financial assistance were unclear, causing uncertainty for businesses. The new law establishes clearer guidelines, prohibiting companies from providing financial aid (such as loans or guarantees) for the purchase of shares, unless it benefits the company directly, such as through employee stock ownership plans.
These rules help prevent misuse of company funds and ensure that financial assistance is used responsibly.
Fiduciary Duties: Strengthened Accountability
Chinese law now imposes stricter fiduciary duties on directors, supervisors, and senior managers in companies. They must act in the best interests of the company, avoid conflicts of interest, and not use their positions for personal gain. If the conditions are not fulfilled, they will incur liability.
This change strengthens corporate governance and ensures that leaders are more accountable to both the company and its shareholders.
Controlling Shareholders: Higher Standards of Responsibility
The law also introduces stricter requirements for controlling shareholders. Controlling shareholders must now act with the same duty of loyalty and diligence as directors. If they misuse their power or interfere in company operations in a way that harms the company or other shareholders, the law will hold them jointly liable for damages.
This update protects minority shareholders and ensures that controlling shareholders act in the company’s best interests.
Conclusion: A More Transparent and Accountable Business Environment
The 2024 amendments to China’s Company Law represent a major step forward in creating a more transparent and accountable business environment. By introducing stricter rules on capital contributions, governance structures, and shareholder responsibilities, the new law aims to support the growth of start-ups and small businesses while ensuring that all companies operate with greater integrity.
For businesses operating in China or planning to enter the market, understanding and complying with these new regulations is essential for success in the evolving Chinese business landscape.
