(By Huangfu Yuxuan) On 30 December 2022 the Company Law (Amendments for Second Deliberation) (“Amendments”) was published on the website of Chinese National Congress. The Amendments is to further modify and regulate shareholders’ responsibility to contribute capital, the company’s organizational structure, shareholders’ right to know, directors’ responsibilities, corporate governance of listed companies, company cancellation, etc. to address the problems of existing company laws that do not fit or match the market development. It is the third major amendment of the Company Law since its promulgation in 1993. Key points in the Amendments are as follows.
I. Shareholders’ responsibility of capital contribution to effectively protect creditors
1. The shareholders that fail to fully pay their subscribed capital on timewill face the risk of losing shareholder’s rights.
It is explicitly stated that the company’s board of directors has the right to ask the shareholders that fail to pay in full their subscribed capital on time and to deliver a notice of loss of shareholder’srights to the shareholdersthat have not paid their subscribed capital after the grace period for payment of the subscribed capital and the shareholders will be deprived of rights related to the subscribed capital that is due but unpaid as from the issuance date of the notice. In addition, the shares that the shareholders are deprived of should be legally transferred or canceled by the company by registered capital decrease. Shares that are not so transferred or canceled within six months should be purchased and fully paid in by other shareholders of the company in proportion to their capital contribution.
2. Shareholders’ subscribed capital should become due immediately when the company cannot pay its debts due .
If the company cannot pay its debts due, the company or creditors of such debts shall have the right to ask the shareholders to pay their unpaid subscribed capital before the payment date is due and the shareholders shall not refuse to pay the subscribed capital on the ground that the payment date is not due. In the enforcement proceedings, the person with legally confirmed creditor’s rights could request for enforcement of the early payment of the subscribed capital. This is to make the “enforcement” easier. In addition, this clause suggests that founding shareholders of a startup company should maintain its registered capital in an appropriate amount to reduce the risk of early payment of subscribed capital.
3. Share transferor has supplementary responsibility to pay the unpaid subscribed capital.
In general, the transferee should pay the subscribed capital that is not due. However, if the transferee fails to pay such subscribed capital on time, the transferor has supplementary responsibility to pay the same. The transferor could make arrangements for compensation between the parties regarding final payment of capital contribution at the signing of the share transfer agreement in order to improve the stability of the deal.
Relevant provisions:
Article 51 After the establishment of a liability limited company, the board of directors should check capital contributions by shareholders and send a written notice of payment of subscribed capital to the shareholders who are found to have delayed paying their subscribed capital.
The payment notice mentioned in the preceding clause may set out the grace period for payment of the capital contribution of no less than sixty days from the date when the company issues the payment notice. If the shareholder has not paid the subscribed capital after the grace period expires, the company can issue a written notice of loss of shareholder’srights and the shareholder will be deprived of rights related to the subscribed capital that is due but unpaid.
The shares that the shareholder is deprived of as set out in the preceding clause should be legally transferred or canceled by the company by registered capital decrease. Shares that are not so transferred or canceled within six months should be purchased and fully paid in by other shareholders of the company in proportion to their capital contribution.
Shareholders shall compensate for the company’s losses arising from their delayed or insufficient payment of the subscribed capital.
Article 53 If the company cannot pay its debts due, the company or creditors of such debts shall have the right to ask the shareholders to pay their unpaid subscribed capital before the payment date is due.
Article 88 If a shareholder transfers his or her shares before the date of payment of subscribed capital for such shares is due, the transferee should pay the subscribed capital. If the transferee fails to fully pay the subscribed capital after the payment date is due, the transferor should take the supplementary responsibility to pay the subscribed capital due but unpaid.
If the transferee knows or should know the transferor has not fully or timely paid the subscribed capital or the actual value of property (not cash) transferred as capital contribution by the shareholder is considerably lower than the subscribed capital, the transferee and the transferor should be severally and jointly responsible for paying the unpaid amount of the subscribed capital.
II. Corporate governance and structure and powers of the board of directors and supervisors
1. Allocation of powers between the board of shareholders and the board of directors and authorization to make resolutions
It further clarifies powers of the board of shareholders and those of the board of directors, restates provisions relating to powers of the board of directors set out in the existing company law, specifies that the board of shareholders can authorize the board of directors to make resolutions of certain matters (such as issuance of corporate bonds) within the ambit of powers of the board of shareholders in order to increase the efficiency of corporate governance.
2. In a company with over three hundred staff members, there should be staff representatives on the board of directors.
It specifies that in a limited liability company with three hundred or more staff members, in addition to the board of supervisors, there should be staff representatives on the board of directors as well. Staff representatives should be elected by the staff representative or staff meeting or other democratic process.
3. Events in which a company may not have a supervisor or board of supervisors
A company establishing the audit committee with supervisor’s powers may not have a supervisor or board of supervisors. For the flexibility of corporate governance, a small limited liability company may not have board of supervisors or a supervisor subject to unanimous approval of all its shareholders.
Relevant provisions
Article 59 The board of shareholders have the following powers:
(1) to elect and change directors and supervisors and decide their remunerations
(2) to deliberate and approve reports of the board of directors
(3) to deliberate and approve reports of the board of supervisors
(4) to deliberate and approve the company’s profit distribution and loss recovery plans
(5) to make resolutions on the company’s registered capital increase or decrease
(6) to make resolutions on issuance of the company’s bonds
(7) to make resolutions on amalgamation, separation, dismissal, liquidation or change of the form of the company
(8) to amend the company’s articles of association
(9) other powers set out in the company’s articles of association.
The board of shareholders may authorize the board of directors to make resolutions on issuance of the company’s bonds.
Shareholders may directly decide matters set out in the first section of this article by unanimously agreeing on the same in writing and making a resolution bearing signatures or seals of all shareholders without convening a shareholder meeting.
Article 68 The board of directors should be comprised of over three directors. In a limited liability company with over three hundred staff members, the board of supervisors should be legally set up and have staff representatives and the board of directors should also have staff representatives. In other limited liability companies, the board of directors may have staff representatives. The staff representatives shall be elected by staff members at a staff representative or staff meeting or through other democratic process.
The board of directors shall have a chairman and may have vice chairman. The chairman and the vice chairman should be elected as set out in the articles of association.
Article 69 A limited liability company may have audit committee on the board of directors as set out in the articles of association. The audit committee exercises powers of the board of supervisors set out in this law in a company that does not have a supervisor or the board of supervisors.
Article 83 A small limited liability company may have one or two supervisors, rather than the board of supervisors, who exercise powers of the board of supervisors as set out in this law, or have no supervisor with unanimous approval of all shareholders.
III. Shareholder’s right to know and right to review evidence for keeping accounts
1. Shareholders have the right to review account books and evidence for keeping accounts.
Shareholders of limited liability companies have the right to know original evidence for keeping accounts on the basis of the right to know account books. A limited liability company’s shareholders can review original evidence for keeping accounts by filing a written request specifying their purpose with the company.
Shareholders of companies limited by shares have the right to know account books and evidence for keeping accounts, which for the efficiency of the running of the company, the Amendments impose the following limitations on. Only shareholders that have held more than 3% shares of the company individually or on aggregate for consecutive one hundred and eighty days can review account books and evidence for keeping accounts to the necessary extent by filing a written request with the company when they reasonably suspect the company does business by violating a law, an administrative law or the articles of association.
Relevant provisions
Article 56 Shareholders have rights to review and copy the articles of association, shareholder register, minutes of shareholder meetings, resolutions made on meetings of the board of directors, resolutions made on meetings of the board of supervisors and financial reports.
Shareholders may ask to review the company’s account books and evidence for keeping accounts by filing a written request specifying their purpose with the company. If the company reasonably believes that the shareholder asks to review account books or evidence for keeping accounts for an inappropriate purpose that could harm its legal interests, the company may refuse the shareholder’s request by replying to the shareholder’s written request with a description of reasons for the refusal within fifteen days from the request date. If the company refuses the above request, the shareholder may bring an action.
Shareholders may review the above materials through intermediaries such as accounting and law firms.
Shareholders and their intermediaries such as accounting and law firms should review and copy related materials in compliance with laws and administrative laws relating to state secret, trade secret, personal privacy, personal information.
IV. Director’s responsibilities
1. Senior management should be responsible for paying damages arising from the performance of their job duties.
Aside from the company, directors and senior management should also be responsible for paying damages arising from deliberate acts or serious negligence in the performance of their job duties. This provision stresses the director’s and senior management’s duty to work with diligence.
2. Mechanism for insuring against the director’s responsibility to pay damages arising from the performance of their job duties.
Based on the director’s responsibility to pay damages, to reduce risks directors face when performing their job duties, the Amendments specifies that the company may insure directors against their responsibility to pay damages arising from the performance of their job duties during their term in office and the board of directors should report details of the insurance to the board of shareholders after the company takes out the insurance policy.
Relevant provisions
Article 190 The company should be responsible for damages arising from the performance of job duties by directors and senior management. The directors and senior management should be responsible for paying damages arising from their deliberate acts or serious negligence.
Article 192 The company may insure directors against their responsibility to pay damages arising from the performance of job duties assigned by the company during their term in office. After the company takes out or renews the insurance policy against the director’s responsibility, the board of directors should report to the board of shareholders the insured amount, coverage, premium, etc. of the insurance.
V. Corporate governance of listed companies
1. Restrictions on holding shares on behalf of real shareholders
Listed companies should legally disclose authentic, accurate and complete information about shareholders and actual controllers and holding shares of listed companies on behalf of real shareholders is prohibited by laws or administrative laws in response to the regulatory requirement that shares of listed companies should be clear and free from major ownership disputes.
2. Restrictions on cross-shareholding in listed companies
Listed company controlled subsidiaries must not acquire shares of the controlling company or exercise the right to vote in shares of the controlling company passively acquired from merger, exercise of a pledge, etc. and must eliminate the event of holding the shares of the controlling company for special reasons based on listing rules of Shanghai Stock Exchange and Shenzhen Stock Exchange.
Relevant provisions
Article 140 Listed companies should legally disclose authentic, accurate and complete information about shareholders and actual controllers and holding shares of listed companies on behalf of real shareholders is prohibited by laws or administrative laws.
Article 141 Listed company controlled subsidiaries shall not acquire shares of the controlling company.
Listed company controlled subsidiaries shall not exercise the right to vote in shares of the controlling company acquired from merger, exercise of a pledge, etc. and shall timely dispose such shares.
VI. Compulsory cancellation of zombie companies
1. The administration for market regulation can administer compulsory cancellation of companies that do not legally complete the liquidation process within three years.
The compulsory cancellation means the company registration authority can make announcements (no less than sixty days) of companies failing to complete the liquidation process within three years from the termination of the business license, an order of closure or involuntary cancellation on the uniform business information publicity system. When the announcement period expires, in case of no opposition during the announcement period, the company registration authority may cancel the company registration without affecting responsibilities of the compulsorily canceled company’s original shareholders and liquidation obligors.
Relevant provisions
Article 237 The compulsory cancellation means the company registration authority can make announcements of companies failing to complete the liquidation process within three years from the termination of the business license, an order of closure or involuntary cancellation on the uniform business information publicity system. When the announcement period of no less than sixty days expires, in case of no opposition during the announcement period, the company registration authority may cancel the company registration.
The company registration cancellation mentioned in the preceding provision will not affect responsibilities of the compulsorily canceled company’s original shareholders and liquidation obligors.
Generally, this Amendments to the Company Law makes major changes to meet the national targets of continuously optimizing the business environment and improving corporate governance. We hope that the awaited new Company Law will further boost the market vitality and protect the safety of dealings in legal ways.
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