China: the registered capital shall be paid within 5 years from the establishment of the company.

Some amendments to the Company Law effective as of 1^st July 2024.   

On 29 December 2023, the Standing Committee of the 14^th National People’s Congress concluded its seventh session, during which China officially adopted some amendments to the current Company Law. The provisions introduce significant changes on company law relating to the governance of the companies in China and, in particular, to the capital contribution which shall be fully paid within five years from the establishment of the company. This legislative intervention mainly aims to close some gaps in the field of corporate governance and to prevent financial risks. The new provisions will take effect on 1^st July 2024.

Company Law – 2023 Edition: short analysis  

On December 29, the updated version of the Company Law of the People’s Republic of China was officially approved. The 2023 edition, which paves the way for important changes in company law, will take effect from 1^st July 2024.

The new provisions concern aspects considered by the legislator as indispensable for the proper operation of companies established in China. In particular, the main changes concern the capital contribution in limited liability companies, the organizational structure of limited liability companies and joint-stock companies, powers and responsibilities of corporate bodies.

1. Limited liabilities companies: capital contribution (Art. 47)

The new Company Law will require shareholders to pay the entire capital within five years from the date of incorporation of the company. The capital contribution shall be done also in accordance with the provisions contained in the articles of association of the company.

The 2014 reform eliminated the previous two-year restriction on the payment of share capital, leaving this to be determined by the parties.

However, while on the one hand the flexibility introduced by the 2014 reform encouraged the investments in China, on the other hand the Chinese legislator has considered that there have been episodes of “abuse” of this flexibility, generating cases of 盲目认缴 (literally “blindly subscribe the registered capital”) or excessively long investment plans (up to fifty or one hundred years). In order to address these kinds of events, the new Company Law provides for a strengthening of the capital contribution system, with a view to ensuring greater security of transactions and protecting the interests of creditors.

At the same time, the Company Law clarifies that companies incorporated before 1 July 2024 and with an investment plan that exceeds the time limit set by the new law (five years), shall “gradually” adapt this plan to the time limits set by the new Company Law, except for special cases that will be regulated by specific legislative provisions. It will be crucial to understand how the term “gradually” – used by the legislator – will be interpreted and whether any indications will be given as to the timeframe for already established companies to pay share capital.

Article 40 of the Company Law contains a further provision concerning share capital. It provides that limited liability companies shall disclose on the National Enterprise Credit Information Publicity System not only the amount of subscribed capital, but also the amount of capital already paid up. This was already foreseen before the 2014 reform and will certainly improve the possibility for operators to assess the financial strength of an interlocutor.

2. Organizational structure of limited liability companies and joint-stock companies.

As far as the organizational structure of limited liability companies and joint-stock companies is concerned, the new Company Law has introduced certain provisions that aim to ensure greater flexibility.

Specifically, the previously imposed maximum limit on the number of directors has been removed, while the minimum limit of three directors has been maintained. In the case of small joint-stock companies, the presence of a sole director exercising the powers of the board of directors is permitted (Art. 75). This possibility was previously only allowed for limited liability companies.

Chinese companies are based on a so-called “two-tiered” system of governance, which implies the presence of a body similar to the board of auditors, in addition to the board of directors. However, unlike the Italian law, as there are no particular professional requirements for the members of the board of auditors, the new Company Law allows companies to establish an audit committee – in place of the board of auditors – composed of an undefined number of directors from the board of directors and responsible for supervising the financial and accounting matters of the company.

The new Company Law also contains further provisions and innovations concerning the figure of the legal representative, the powers of the shareholders’ meeting and the board of directors or, again, the manner in which shares are issued.  For this reason, we reiterate the utmost importance of remaining constantly up to date on the current legislation in order to operate in full compliance with it.

For any information, please do not hesitate to contact our China Desk or our Firm’s Shanghai office.

Avv. Luigi Zunarelli (luigi.zunarelli@studiozunarelli.com) e Avv. Sabrina Gao  (sabrina.gao@studiozunarelli.com), Zunarelli Law Firm – China Desk – Shanghai Office