China’s Company Law was initially enacted in 1993, and was subsequently amended in 1999, 2004, 2013, 2018, and 2005. On December 29, 2023, the Standing Committee of the National People’s Congress approved a comprehensive amendment to the Company Law (as amended, the “New Company Law”). The New Company Law will come into effect on July 1, 2024. Under the New Company Law, 228 articles have been amended, which will impact many aspects of the governance and operations of Chinese companies, including but not limited to a company’s capital structure, corporate governance, shareholders’ obligation to contribute capital, duties of directors and officers, the effects of corporate resolutions, corporate bonds, the registration of a company, etc. In this and a few subsequent posts, we will explain in more detail the changes introduced under the New Company Law.
This post will focus on the changes relating to a company’s capital structure.
1. Mandatory Deadline for the Contribution of Subscribed Capital
The New Company Law mandates a five-year deadline for shareholders to contribute the capital they have subscribed in a limited liability company (“LLC”). In an LLC, each shareholder subscribes a percentage of the registered capital of the company and commits to pay such capital to the company within a period of time specified in the articles of association of the company (the “Contribution Period”). The New Company Law requires that the Contribution Period should be five year or less.
Certain transition period for compliance of this rule is available. If such a company has a current Contribution Period of more than five years, the New Company Law states that it should gradually adjust the Contribution Period to be five years or less.
Meanwhile, the competent authority reserves the right to require a company to make timely adjustments to its Contribution Period requirement, if the authority determines that the Contribution Period or contribution amounts of such company’s shareholders are inappropriate.
Regarding the interpretation of “gradually” and “inappropriate”, the State Administration for Market Regulation (“SAMR”) issued the “Provisions on the Implementation of the Registration Capital Registration Management System of the PRC Company Law (“Exposure Draft”)” on February 6, 2024, which specifies the approach existing companies should take the adjust the Contribution Period:
- Existing LLCs whose shareholders are subject to a Contribution Period of more than 5 years are required to adjust the Contribution Period to be less than 5 years during a 3-year transition period following the implementation of the New Company Law, effective as of July 1, 2024. Shareholders of joint-stock companies should pay the subscribed capital in full within this 3-year transition period.
- Companies that will be established after July 1, 2024 are subject to the following rules:
- Shareholders of LLCs shall fully pay the registered capital within 5 years from the date of establishment, in accordance with their articles of association.
- Shareholders of joint-stock companies shall fully pay the subscribed capital before the registration of establishment.
- In addition, for capital increases:
- Shareholders of LLCs shall fully pay the newly subscribed registered capital within 5 years.
- For joint-stock companies, the increase in registered capital shall be registered only after the shareholders have fully paid the capital.
- The rules relating to the assessment of “inappropriate” Contribution Periods and amount of subscribed capital are as follows:
- Companies whose shareholders are subject to a Contribution Period of more than 30 years or a contribution amount of more than RMB 1 billion will undergo a comprehensive assessment to be performed by the relevant PRC authority.
- The authority will either organize professional institutions to conduct evaluations in connection with such comprehensive assessment, or conduct such comprehensive assessment in collaboration with relevant governmental departments.
- Upon obtaining approval from the provincial-level SAMR, the authority will require the company to adjust its Contribution Period and amount of subscribed capital within 6 months.
- If the proposed registered capital of a company is highly excessive, the authority may refuse to register such subscribed capital.
There are some exceptions to the above rules in the Exposure Draft. For example, certain special companies approved by the competent authorities may permit their shareholders to follow the original Contribution Period.
2. Introduction of an Authorized Capital System
The New Company Law introduces an authorized capital system. A joint-stock company is no longer required to have all shares fully subscribed at the time of its establishment. Instead, such a company can authorize certain number of shares as its authorized but unissued capital, and the board of directors, with due authorization, can approve the company to issue shares out of the authorized capital. Specifically, the company’s articles of association or the shareholders’ meeting may grant the board of directors the power to issue shares out of the authorized capital of the company within 3 years following the grant of such power, provided the shares so issued should not exceed 50% of the company’s issued shares, and provided further, that the relevant board resolutions should be approved by more than two-thirds of the directors of the company.
This amendment allows companies to issue shares incrementally based on the company’s actual operations and market conditions, reducing the difficulty of company establishment, simplifying the share issuance process, and enhancing the flexibility and efficiency of the company’s capital raising activities.
3. New Forms of Capital Contribution Permitted
The New Company Law permits shareholders to make contribution of registered capital via non-monetary forms including equity or debentures with a resolution of the shareholders’ meeting, except that for joint-stock companies with an authorized capital system as described above, shareholders’ contribution of registered capital must be in monetary forms.