(By Yu ZhiYuan) On 28 December 2013, the decision on amending the previous company law was promulgated by the National People’s Congress. The amendment this time will concentrate solely on changing the corporate capital system dramatically in the following three ways. First, the registered capital to-be-paid-in system will be launched. Second, the minimum registered capital will no longer be required. Third, the maximum proportion of intangible assets to the total registered capital will no longer be required. Obviously the amendment was made as a response of legislative authorities to the resolutions approved at the Third Plenary Session of the Eighteenth Central Committee. This article provides an analysis and brief comments on the amendment.

1．The registered capital to-be-paid-in system will replace the paid-in system

The difference between the paid-in registration system and the to-be-paid-in registration system is that under the paid-in system the amount of all shareholders’ paid-in capital shall be specified in corporate files to check how much capital is duly paid and how much is owed, while under the to-be-paid-in system, the amount of each shareholder’s capital to be paid in (payables), instead of the amount of paid-in capital, shall be specified in corporate files and the total amount of all shareholders’ capital to be paid in constitutes the company’s registered capital.

Based on the amendments, the new system differs from the old one in the following three respects.

First, the item ‘Paid-in Capital’ previously shown on the business license will be removed.

Second, capital verification will no longer be required in the course of incorporation, equity purchase, etc. Since the paid-in capital will no longer need to be registered, it will be unnecessary to verify capital subscribed into the company’s capital account. Thus capital verification reports will no longer be one of essential documents for business incorporation application.

Third, the amount of capital to be paid in, instead of ‘the amount of paid-in capital’, of shareholders shall be specified in the materials registered with an Administration for Industry and Commerce.

2．The minimum registered capital and the minimum paid-in registered capital will no longer be required.

First and foremost, after a number of decreases on amount of the minimum registered capital with the Company Law being amended for times, the minimum registered capital of ‘RMB 30,000’ (applying to limited companies), ‘RMB 100,000’ (applying to solely owned limited companies), ‘RMB 5,000,000’ (applying to limited companies by shares), etc. will no longer be required, unless ‘additional regulations on the minimum paid-in registered capital or the minimum registered capital exist according to laws, administrative rules and resolutions by the State Council’.

Second, the stipulation that the ‘initial paid-in capital’ shall be no less than 20% of the total registered capital to be paid in was abolished based on the amendment. It had been ‘generally accepted’ in the business market that upon establishment of a company shareholders (initiators) shall pay in at least 20% registered capital with the remaining unpaid part being fully paid in within 2 years. Despite the permission of establishing a company with ‘no initial paid-in registered capital’ based on the amendment, provisions on ‘the initial paid-in registered capital’ stipulated in the company’s Articles of Association, if any, shall be complied with.

Now that the minimum registered capital is no longer be required, the minimum registered capital after capital decrease shall abolished either accordingly.

3．The minimum paid-in registered capital in cash and the maximum proportion of intangible assets will no longer be required.

The Company Law before the amendment stipulated the total paid-in capital in cash shall be no less than 30% registered capital of a limited company, or in other words, intangible assets shall account for no more than 70% of total registered capital. Abolition of this stipulation after the amendment means permission of a higher proportion of intangible assets such as intellectual property in total assets of a company will be allowed in the future.

4．Brief Analysis

A series of officially launched reforms demonstrated innovation of decision making system and liberalization of the threshold of business incorporation. It’s predictable that the to-be-paid-in system will arouse chain reactions of the legal system and the business model in China, where the rigid paid-in system long prevailed.

I. Business Standing

The to-be-paid-in system has the most direct impact on structures of business standing. As for creditors and trading objects, ‘abundance’ of registered capital is a sign of strong power of a company. Prior to important transactions, pre-investigation was conducted to see the actual paid amount of the registered capital. However, under the to-be-paid-in system, the registered capital will become more and more meaningless. With paid-in equity status no longer being shown on the business license or materials registered with the administration for industry and commerce, contents and methods of the due diligence investigation need to be adjusted in a timely manner. As a result, methods for external credit enhancement will probably grow more important and commercial interaction models will be unconsciously adjusted.

II. Legal Rules

Institution of the to-be-paid-in system was a sign that functions and service principles of administrations for industry and commerce began to change. Under the to-be-paid-in system, the amount of paid-in registered capital will no longer appear on the business license, procedures of registered capital verification at the time of incorporation or capital increase will be cancelled and clauses on crimes of false capital subscription, withdrawal of subscribed capital, etc. relating to registered capital will become meaningless and need to be revised.

The existing civil laws may be more affected than those in administrative and criminal aspects. For example, the burden of responsibilities will be relieved that directors and high-level managerial staff shall supervise and urge shareholders to carry out their duties of subscribing registered capital and the joint responsibilities of shareholders for unfulfillment of duties of capital subscription will become vague after the to-be-paid-in system is introduced.

In addition to what are aforementioned, the significance of the to-be-paid-in system is that it helps to get rid of the inner ‘mistrust’ of the Chinese government in enterprises. Domestic and overseas practical examples repeatedly demonstrate assets with their nature of freedom need flexible and loose ruling systems.

You Yunting： Disclaimer of Bridge IP Law Commentary

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