Navigating the New Terrain: Adapting to the Revised Company Law in China

The end of 2023 marked a significant milestone in Chinese corporate law with the publication of the revised Company Law of the People’s Republic of China, set to take effect on July 1, 2024. These comprehensive amendments are poised to have a profound impact on foreign-invested enterprises (FIEs) in various sectors. Key areas of change include capital contribution obligations, corporate governance structures, and the responsibilities and liabilities of senior management. This article highlights the essential revisions and offers practical guidance for FIEs to align with the new legal requirements.

Capital Contribution Obligations
A pivotal shift introduced by the revisions is the emphasis on capital adequacy. Moving away from the flexible registered capital framework established in 2014, the new law mandates the full payment of capital within five years of subscription, applicable to both new and existing companies. This change requires entities to either amend their capital contribution schedules or opt for capital reduction if unable to comply.

Furthermore, the revisions introduce a stringent capital contribution due system, allowing creditors or the company to demand advance contributions from shareholders. Additionally, the board of directors is now tasked with verifying capital contributions, holding directors accountable for ensuring compliance and enabling the company to revoke share rights if shareholders fail to meet their obligations.

Enhanced Governance Flexibility
The revised law offers increased flexibility in company governance, allowing limited liability companies to opt for an audit committee within the board of directors instead of a separate supervisory board. This provision particularly benefits FIEs by potentially eliminating the supervisory board, which has often served a more ceremonial role. However, joint ventures may still find value in maintaining a supervisory board for oversight and interest protection.

Strengthened Duties and Liabilities
Significantly, the revisions bolster the duties of loyalty and diligence for directors, supervisors, and senior management, expanding their liability towards the company and third parties. The law now explicitly defines the duty of diligence, urging the appointment of individuals who are not only familiar with but actively involved in the company's operations, to directorial and supervisory positions.

An innovative aspect of the revisions is the introduction of a legal relief system for directors, safeguarding against unjust dismissal. This change challenges the prevalent practice of at-will director dismissal in FIEs, underscoring the need for valid grounds for termination and meticulous documentation to avoid future disputes.

Preparing for Transition
With the revisions on the horizon, FIEs must proactively adjust their corporate documents, including articles of association and shareholder agreements, to comply with the new law post-July 1, 2024. While the law does not specify a transition period, the forthcoming implementation rules from the State Council will provide further clarity.

The revisions to the Company Law introduce significant changes to China's corporate legal landscape, affecting FIEs across the board. Companies are encouraged to thoroughly review their operations and governance structures in light of these changes. Engaging with professional legal services for comprehensive guidance is advisable to navigate this transition smoothly. By taking proactive steps now, enterprises can ensure compliance and continue thriving under the new regulatory regime.

The authors would like to thank Zining Zhou, Jo Sun and Jeff Shang for their assistance with the preparation of this article.

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