China: Highlights of Envisaged Amendments to PRC Company Law

On December 30, 2022, Standing Committee of the National People’s Congress released the Second Draft Amendment to the Company Law of the People’s Republic of China to solicit comments from the public. This was the second version of the draft amendment to the Company Law within the last two years, having made further amendments based on public comments to the previous draft version which was released in December 2021, while the latest amendment to the Company Law was released and became effective in 2018.

This Second Draft Amendment has provoked many discussions, especially in legal profession. Here, we highlight some most noteworthy changes in the proposed amendments.

Change 1:  Qualification of legal representatives of companies

Under the PRC Company Law, a company shall designate an individual as its legal representative, who will be registered with the registration authority, be recorded on the company's business license and has the authority to conduct civil activities and sign legal documents on behalf of the company.

In Article 10 of the Second Draft Amendment, the original restriction of the qualification of legal representatives that “only the chairman, executive director or manager can be the legal representative of a company” is changed into "a director or manager who executes the affairs of the company on behalf of the company can be the legal representative of a company in accordance with its articles of association”. Namely, the scope of candidates for the legal representative has been expanded, a director (not necessarily the chairman or executive director) will be allowed to be the legal representative as long as such qualification of legal representative is clearly stipulated in the company's articles of association.

Change 2: “Company veil lifting” for one-shareholder companies

In accordance with Article 63 of the Company Law, where the shareholder of a one-shareholder limited liability company is unable to prove that the property of the company is independent of the shareholder's own property, the shareholder shall be jointly and severally liable for the debts of the company.

In the First Draft Amendment, the above provision was deleted. In the Second Draft Amendment, it was reinstated.

Change 3:  Creditor’s right as a new legal form of capital contribution

In Article 48 of the Second Draft Amendment, the legalization of creditor’s right as contribution of capital is a major highlight, which undoubtedly broadens the legal alternatives of shareholders' capital contributions.

Change 4: Loss of shareholders' rights

According to Article 51 of the Second Draft Amendment, after the incorporation of a limited company, the board of directors shall verify the capital contribution of the shareholders, and if it is found that the capital contribution has never been paid in full and on time, a written reminder shall be issued to demand the capital contribution. The company’s reminder may contain a grace period (from the date of issuance of the reminder, the grace period shall not be shorter than 60 days), when the grace period is expired, if the shareholders still fail to fulfill the obligations of contributions, the company may issue a notice of loss of rights to the shareholders (the notice shall be made in writing). The shareholders will lose the equity interest corresponding to the unpaid capital since the date of the notice.

Change 5: The accelerated due of shareholders' capital contribution obligation when the company cannot settle its debts

According to Article 53 of the Second Draft Amendment, if the company cannot pay off its due debts, the company or the creditors of the matured claims shall have the right to request the shareholders who have not fully contributed their subscribed capital contributions to pay their capital contribution in advance. In order to thoroughly protect the company's creditors, the provisions in the First Draft Amendment which limited condition of exercise the creditors’ right “obvious lack of solvency” has been deleted, which means as long as the company can not pay its due debts, the undue capital contribution obligation of its shareholders shall become immediately due and payable.

Change 6: Additional mandatory condition for the adoption of resolutions at shareholders' meetings

In addition to the mandatory requirement that any amendment of articles of association, any increase or reduction of registered capital, or any merger, division, dissolution or transformation of the company shall be passed by shareholders representing two thirds or more of the voting rights, in the Second Draft Amendment, it is added a new provision as follows: "resolutions made by the shareholders' meetings shall be passed by shareholders representing one-half or more of the voting rights."

Change 7: Audit committee as an alternative of the board of supervisors

Article 69 of the Second Draft Amendment provides that, in a limited liability company, an audit committee may be set up in the board of directors in accordance with the provisions of its articles of association to exercise the functions of the board of supervisors as provided for the Company Law, under which circumstance there could be no board of supervisors or supervisor.

Change 8: Allocation of responsibilities between the transferee and the transferor in case of equity transfer with insufficient capital contribution

Article 88 of the Second Draft Amendment stipulates the supplementary liability of the transferor for the transferee's unpaid capital contribution, in the case of a transfer of a shareholder's equity interest for which the capital contribution has been subscribed but it was undue and unpaid when the transfer occurred.

The proposed amendments to the Company Law may have certain impact on the compliance operation of companies in China including the foreign-invested companies. Although the Second Draft Amendment is still a draft, there is uncertainty whether the relevant amendments will be implemented in the end. It may be necessary for the investors to be prepared for the potential changes to shareholder’s responsibility, the changes to the allocation of responsibilities and functions regarding corporate governance structure etc. In the follow-up, we will continue to pay attention to and track the revision of the PRC Company Law.