The "Company Law of the People's Republic of China" was revised and adopted at the 7th Meeting of the Standing Committee of the 14th National People's Congress of the People's Republic of China on December 29, 2023, and will be implemented on July 1, 2024. Since its promulgation in 1993, China's "Company Law" has undergone two major revisions and four amendments, with the 2023 revision being the second major revision. This revision includes many new and modified contents, which have a significant impact on companies. What issues should companies focus on during the transition period before the official implementation on July 1, 2024? And how should they respond? Below, the author will analyze them one by one. (Unless otherwise specified for limited liability companies or joint stock limited companies, the companies mentioned refer to both limited liability companies and joint stock limited companies.)

 

1. The "Company Law" revised in 2023 expands the scope of selection of legal representatives, adds rules for the resignation and replacement of legal representatives, and adds legal consequences for the actions of legal representatives. Companies should promptly amend their articles of association.

 

Article 10, Paragraph 1 of the "Company Law" revised in 2023 stipulates: "The legal representative of a company shall be a director or manager who represents the company in the execution of company affairs in accordance with the provisions of the company's articles of association." Compared with the "Company Law" before the revision, the legal representative shall be selected from the directors or managers who represent the company in the execution of company affairs.

 

Paragraphs 2 and 3 of Article 10 of the "Company Law" revised in 2023 stipulate: "If the director or manager serving as the legal representative resigns, it shall be deemed as resigning from the legal representative at the same time. If the legal representative resigns, the company shall determine a new legal representative within 30 days from the date of resignation of the legal representative.", adding new rules for the resignation and replacement of legal representatives.

 

Article 11 of the "Company Law" revised in 2023 stipulates: "The legal consequences of civil activities carried out by the legal representative in the name of the company shall be borne by the company. Restrictions on the powers of the legal representative in the company's articles of association or by the shareholders' meeting shall not be used to oppose bona fide counterparties. If the legal representative causes damage to others while performing his/her duties, the company shall bear civil liability. After the company assumes civil liability, it may seek recourse from the legal representative who is at fault in accordance with the law or the provisions of the company's articles of association.", the newly added Article 11 clarifies that the legal consequences of the legal representative's actions shall be borne by the company, clarifies that the company's articles of association or shareholders' meeting resolutions may impose certain restrictions on the powers of the legal representative but shall not be used to oppose bona fide counterparties, and clarifies the rules for recourse for torts committed by the legal representative in the course of his/her duties.

 

The author believes that in order to prevent the legal representative from abusing his/her powers and harming the interests of the company and shareholders, the company may assess the legal representative during the transition period; promptly amend the company's articles of association to add the newly added legal representative provisions in the "Company Law" revised in 2023 to the company's articles of association; and if the legal representative is found to have abused his/her powers, the legal representative may be changed after amending the company's articles of association.

 

2. The "Company Law" revised in 2023 adds that the application documents for the change of the company's legal representative shall be signed by the changed legal representative, and the company should promptly amend the company's articles of association.

 

Article 35, Paragraph 3 of the "Company Law" revised in 2023 stipulates: "If the company changes its legal representative, the application for change registration shall be signed by the changed legal representative."

 

Compared with the "Company Law" before the revision, the application for change registration for the change of the company's legal representative needs to be signed by the original legal representative. This provision breaks the deadlock that the company has to go through complicated litigation to request the change of company registration when the original legal representative does not cooperate with the change of company registration, and reduces the impact on the normal operation of the company.

 

The author believes that it is better to add the content of Article 35, Paragraph 3 of the "Company Law" revised in 2023 to the company's articles of association.

 

3. The company will be able to require shareholders who have not fully contributed to bear compensation liability to the company. The company can check and understand the capital contribution of shareholders during the transition period to prepare accordingly.

 

Article 49, Paragraph 3 of the "Company Law" revised in 2023 stipulates: "If a shareholder fails to pay the capital contribution in full on time, in addition to paying the full amount to the company, he/she shall also be liable for compensation for the losses caused to the company." The "Company Law" before the revision stipulates that if a shareholder fails to pay the capital contribution in full on time, in addition to paying the full amount to the company, he/she shall also be liable for breach of contract to the shareholders who have paid the capital contribution in full, while the "Company Law" revised in 2023 stipulates that shareholders who have not paid the capital contribution in full on time shall be liable for compensation for the losses caused to the company.

 

The author believes that the company can check and understand the capital contribution of shareholders during the transition period to prepare accordingly.

 

4. The company will have to accept shareholders' requests to inspect accounting books and accounting vouchers. The company should further strengthen financial management during the transition period.

 

The "Company Law" revised in 2023 stipulates that shareholders of both limited liability companies and joint stock limited companies can request to inspect accounting books and accounting vouchers. In particular, accounting vouchers are important financial documents. Non-standard companies may lack management of accounting vouchers, and thus cannot provide shareholders with access, which may result in lawsuits by shareholders.

 

The author believes that the company should further strengthen financial management and improve the financial system during the transition period to avoid future disputes.

 

5. The company will be able to disqualify shareholders who have not fully contributed. The company can check and understand the capital contribution of shareholders during the transition period and prepare accordingly, such as amending the company's articles of association.

 

Article 52 of the "Company Law" revised in 2023 stipulates: "If a shareholder fails to pay the capital contribution by the date of capital contribution stipulated in the company's articles of association, the company may specify a grace period for paying the capital contribution in the written demand for payment issued in accordance with the provisions of the first paragraph of the preceding article; the grace period shall not be less than sixty days from the date the company issues the demand for payment. If the shareholder still fails to fulfill the obligation of capital contribution upon the expiration of the grace period, the company may issue a notice of forfeiture to the shareholder upon a resolution of the board of directors, and the notice shall be issued in writing. From the date of issuance of the notice, the shareholder shall lose the equity for which he/she has not paid the capital contribution. The equity lost in accordance with the provisions of the preceding paragraph shall be transferred in accordance with the law, or the registered capital shall be reduced accordingly and the equity shall be cancelled: if it is not transferred or cancelled within six months, the other shareholders of the company shall pay the corresponding capital contribution in full according to their capital contribution ratio. If a shareholder has any objection to the forfeiture, he/she shall file a lawsuit with the people's court within 30 days from the date of receiving the notice of forfeiture."

 

This provision clarifies that the company can disqualify shareholders who have not fully contributed, including voting rights, and resolves the past disputes over the scope of restrictions on the rights of shareholders who have not fully contributed. Before the revision of the "Company Law", the Interpretation III of the Supreme People's Court stipulates that if a shareholder fails to perform or fully perform the obligation of capital contribution or withdraws capital contribution, the company may make corresponding reasonable restrictions on the shareholder's right to request profit distribution, right to preempt new shares, right to request distribution of remaining property, and other shareholder rights according to the company's articles of association or shareholders' meeting resolutions. This interpretation clarifies that the scope of right restrictions is the right to request profit distribution, the right to preempt new shares, and the right to request distribution of remaining property, and does not clearly stipulate the voting right. Article 52 of this revision resolves the dispute in judicial practice over whether the voting rights of shareholders who have not fully contributed can be restricted.

 

In the author's opinion, in addition to verifying and understanding the capital contributions of shareholders during the transition period, the company should also pay attention to adding a detailed removal system to the company's articles of association when amending the articles of association, especially the grace period should be clearly stipulated.

 

6. In terms of governance structure, the company will be able to choose a unitary system or retain a dual system. During the transition period, the company can plan the choice of the company's governance mechanism in the future according to actual needs.

 

Article 69 of the revised "Company Law" in 2023 stipulates: "A limited liability company may, in accordance with the provisions of the company's articles of association, establish an audit committee composed of directors in the board of directors to exercise the powers of the board of supervisors stipulated in this Law, without establishing a board of supervisors or supervisors. Employee representatives among the members of the company's board of directors may become members of the audit committee." Paragraph 1 of Article 76 stipulates: "A limited liability company shall establish a board of supervisors, unless otherwise provided in Articles 69 and 83 of this Law." Paragraph 1 of Article 121 stipulates: "A joint stock limited company may, in accordance with the provisions of the company's articles of association, establish an audit committee composed of directors in the board of directors to exercise the powers of the board of supervisors stipulated in this Law, without establishing a board of supervisors or supervisors." Paragraph 1 of Article 130 stipulates: "A joint stock limited company shall establish a board of supervisors, unless otherwise provided in Paragraph 1 of Article 121 and Article 133 of this Law." The aforementioned provisions will give limited liability companies and joint stock limited companies the choice of governance model, and they can continue to retain the dual structure of the board of directors and the board of supervisors, or they can not establish a board of supervisors, but an audit committee must be established in the board of directors to exercise the powers of the board of supervisors; the joint stock company also emphasized that more than half of the members of the audit committee must be independent directors.

 

In the author's opinion, corporate governance is the top priority of company development. The innovative choice of a unitary system or retention of a dual system in the revised "Company Law" in 2023 is significant in that it helps foreign companies come in and Chinese companies go out, and connect with international standards; second, it adapts to the different requirements of different companies. Therefore, during the transition period, companies can consider the advantages and disadvantages of the two mechanisms and choose a unitary system or a dual system corporate governance model according to their own needs.

 

7. The company will be able to choose a simple capital reduction, and during the transition period, the company can plan the choice of future financing methods according to business needs.

 

Article 225 of the revised "Company Law" in 2023 stipulates: "If the company still has losses after making up for losses in accordance with the provisions of Paragraph 2 of Article 214 of this Law, it may reduce its registered capital to make up for the losses. If the registered capital is reduced to make up for losses, the company shall not distribute to shareholders, nor shall it exempt shareholders from the obligation to pay capital contributions or share payments. If the registered capital is reduced in accordance with the provisions of the preceding paragraph, the provisions of Paragraph 2 of the preceding article shall not apply, but it shall be announced in the newspaper or the National Enterprise Credit Information Publicity System within 30 days from the date when the shareholders' meeting makes a resolution to reduce the registered capital. After the company reduces its registered capital in accordance with the provisions of the preceding two paragraphs, it shall not distribute profits before the cumulative amount of the statutory reserve fund and the discretionary reserve fund reaches 50% of the company's registered capital." This article adds a simple capital reduction system for companies.

 

In the author's opinion, in terms of company financing, the way of company financing under the "Company Law" before the revision was to transfer equity first and then increase capital, while the way of company financing under the revised "Company Law" can be simple capital reduction and then capital increase. The advantage of this method is that it is more convenient for financing and reduces unnecessary capital reduction costs and risks. During the transition period, the company can plan the choice of future financing methods.

 

8. Limited liability companies should prepare to accept shareholders' capital contributions in the form of non-monetary property such as equity and creditor's rights.

 

Article 48, paragraph 1 of the revised "Company Law" in 2023 stipulates: "Shareholders may make capital contributions in currency, or they may make capital contributions in the form of non-monetary property that can be valued in currency and legally transferred, such as physical objects, intellectual property rights, land use rights, equity, and creditor's rights; however, property that is prohibited from being used as capital contributions by laws and administrative regulations is an exception." This article stipulates that shareholders of limited liability companies can make capital contributions in the form of equity and creditor's rights.

 

In the author's opinion, the non-monetary property contributions of equity and creditor's rights accepted by limited liability companies should go through strict evaluation procedures and complete the corresponding transfer and rights transfer procedures before the capital contribution is legal and effective; if limited liability companies intend to accept equity and creditor's rights contributions during the transition period, they can start the evaluation process first.

 

9. Limited liability companies will be able to require shareholders who have subscribed for capital contributions but have not reached the deadline for payment to pay capital contributions in advance. During the transition period, limited liability companies can verify and understand the company's debt situation and shareholders' capital contributions, and prepare for corresponding amendments to the company's articles of association.

 

Article 54 of the revised "Company Law" in 2023 stipulates: "If the company cannot pay off its due debts, the company or the creditor of the due debt has the right to require the shareholder who has subscribed for capital contributions but has not reached the deadline for payment to pay capital contributions in advance."

 

In the author's opinion, in addition to verifying and understanding the company's debt situation and shareholders' capital contributions during the transition period, limited liability companies should also pay attention to adding a detailed system for accelerating the maturity of capital contributions to the company's articles of association when amending the articles of association.

 

10. Joint stock limited companies will be able to establish one-person companies, adopt a paid-in capital contribution method, issue shares without par value, and authorize the board of directors to decide on additional issuance of shares through the company's articles of association or shareholders' meeting. Joint stock limited companies can make plans and preparations for the aforementioned matters during the transition period.

 

Article 92 of the revised "Company Law" in 2023 stipulates: "To establish a joint stock limited company, there shall be one or more than two hundred promoters, of which more than half of the promoters shall have domicile in the People's Republic of China." Article 98 stipulates: "The promoters shall pay the full amount of share payments according to the shares they have subscribed for before the establishment of the company. The capital contributions of the promoters shall be subject to the provisions of Article 48 and Paragraph 2 of Article 49 of this Law regarding the capital contributions of shareholders of limited liability companies." Article 142 stipulates: "The capital of the company shall be divided into shares. All shares of the company shall adopt par value shares or shares without par value according to the provisions of the company's articles of association. If par value shares are adopted, the amount of each share shall be equal. The company may convert all of the issued par value shares into shares without par value or convert all of the shares without par value into par value shares according to the provisions of the company's articles of association. If shares without par value are adopted, more than one-half of the share payments obtained from the issuance of shares shall be included in the registered capital." Article 152 stipulates: "The company's articles of association or the shareholders' meeting may authorize the board of directors to decide to issue no more than 50% of the issued shares within three years. However, capital contributions made in the form of non-monetary property shall be subject to the resolution of the shareholders' meeting. If the decision of the board of directors to issue shares in accordance with the provisions of the preceding paragraph causes changes in the company's registered capital and the number of issued shares, the amendment of the record of this item in the company's articles of association does not need to be voted on by the shareholders' meeting again."

 

In the author's opinion, the above four newly added legal provisions bring both opportunities and challenges to joint stock limited companies. Joint stock limited companies can make plans and preparations for the aforementioned matters during the transition period.

 

 

About the author

 

Lawyer Xu Xiaoye, female, Master of Laws from Guangxi Normal University, partner of Guangxi Tongwang Law Firm, member of the Company Law Professional Committee of Guangxi Lawyers Association, rated as a company law professional lawyer by Guangxi Lawyers Association, station lawyer of the Public Security Police Legal Service Center Workstation of Guangxi Police Association, and lawyer of the Guangxi High-quality Farmers Training Legal Service Base.

 

Attorney Xu Xiaoye specializes in corporate governance, investment and financing, contracts, equity, mergers and acquisitions, due diligence, and civil and commercial litigation. He has served as legal counsel for several banks, state-owned enterprises, and large enterprises. He has provided clients with special legal services such as due diligence, equity transfer, and mergers and acquisitions on multiple occasions. He is also good at analyzing various legal relationships from a litigation perspective, which can effectively help clients gain a favorable position in the litigation process. With nearly ten years of practice and rich practical experience, Attorney Xu Xiaoye is good at providing clients with professional customized solutions for various problems in investment and financing, corporate governance, mergers and acquisitions, and civil and commercial litigation.