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PRC Company Law – the latest changes affecting limited liability companies

The PRC Company Law is undergoing a major overhaul after five rounds of “cosmetic repairs” in 1999, 2004, 2005, 2013 and 2018. What does the latest draft mean for limited liability companies?

In December 2021, the Standing Committee of the National People’s Congress (NPC) published a consultation draft on the Companies Law.

It contains more than 70 amendments – half are improvements or fine-tuning of existing provisions, while the rest are newly introduced. As outlined by the NPC in an explanatory note, the main objectives of the new amendments are,

  • Simplify the corporate structure,
  • reduce the burden on investors,
  • to make it easier to enter the market.

Improving shareholder and management oversight is also a notable development reflected in the draft amendment.

The draft amendment also seeks to consolidate provisions and rulings that are regulated but scattered in various laws or court practices such as the Security Law, the State Assets Law and various interpretations of the Supreme People’s Court (SPC) Company Law.

Below, we present the main amendments and proposed developments that will affect limited liability companies (LLCs).

 

Regulatory requirements relating to corporate governance, share transfer, capital reduction and mergers to be simplified

Among the changes proposed to simplify the regulatory requirements are:

  • The supervisor is no longer a mandatory body for the company installing an audit committee on the board of directors.
  • It is no longer necessary for shareholders who intend to sell their shares to obtain the consent of other shareholders. However, the other shareholders have a subscription right.
  • A simplified capital reduction procedure is introduced that allows companies to reduce the share capital without notifying all creditors individually. Instead, a public announcement through the Unified Company Information Publicity System (administered by the State Administration for Market Regulation (SAMR)) will suffice.
  • In certain circumstances, a corporate merger does not require the approval of a general meeting of the merged company.
  • For smaller companies, LLCs may have a director or manager. For LLCs with more than 300 employees, the board of directors allocates at least one seat to the employee representative elected by the employees, regardless of whether the company is state-owned or not.

 

Tightening of shareholder obligations for capital contributions

Proposed amendments that constitute a tightening of shareholder obligations include:

  • Shareholders who do not make capital contributions may lose their shareholder rights attached to the relevant shares. The company may cancel relevant shares or arrange for the shares to be transferred.
  • If a company is unable to pay its debts as they fall due and is manifestly insolvent, the company or creditors may require shareholders to make capital contributions before the date on which the debts fall due.
  • If the shareholder sells its shares that have not been fully capitalised, the acquirer bears the joint and several liability with the contributing shareholder for the unfulfilled capital contribution if the acquirer knows or should have known of the above circumstance.

 

→ Note by IAC GmbH: Some of the changes proposed above are not entirely new, but are derived from existing interpretative rules of company law in 2011.

Article 48 (acceleration of payment of capital) also appears to follow the position of the Supplementary Protection Certificate as expressed in the 2019 Supplementary Protection Certificate Meeting Minutes on Civil and Commercial Proceedings. However, there is controversy surrounding the acceleration mechanism as it may hurt shareholders’ expectation interests. It remains to be seen whether such a clause will pass in parliament.

 

Extension of Directors’ Duties and Liabilities

Proposed amendments to expand the duties and liabilities of directors include:

  • The scope of related party will be further expanded. Related party transactions are subject to reporting to and approval by the board or shareholders’ meeting.
  • Directors are required to take remedial action in the event of a default where the director is aware that a shareholder is failing to make or withdrawing its capital contribution.
  • The draft amendment introduces new circumstances in which directors are jointly and severally personally liable with shareholders or with the company. For example, if a director causes losses to a third party due to his or her fault, or if a director follows the direction of the controlling shareholder to engage in activities that are detrimental to the interests of the company and other shareholders.

Justification of the registration procedures for companies

Proposed amendments to expand the duties and liabilities of directors include:

  • The draft amendment fleshes out the requirements for company registration, electronic business licences and simplified deregistration procedures.
  • Equity and creditors’ rights are explicitly and officially mentioned as permissible forms of capital contribution.

 

→ Note by IAC GmbH: Equity as a capital contribution has been accounted for under the SMAR Equity Regulation since 2014 under certain conditions. As for the creditor’s right as capital contribution, it was allowed under some local pilot schemes before the draft amendment. However, under Article 43 of the Draft Amendment, a condition is attached, namely that the right of such creditor can be valued.

Such a requirement may indeed create difficulties in terms of licensing rights, know-how and consultancy services. If this provision becomes final law, we expect that SAMR will have to issue more detailed implementing regulations. This will then contain the targeted requirements and implementation guidance. We will keep you informed.

 

Source: Submission of amending decree to the NPC in December 2021, China

 

 

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