Decision of the Standing Committee of the National People’s Congress on Amending the Company Law of the People’s Republic of China (Mainland China)

2018.10.26
Joyce Wen

The Standing Committee of the National People’s Congress issued a decision on amending the Company Law of the People’s Republic of China (the “Decision”) on October 26, 2018. The Decision primarily amends and improves the share repurchase provisions in Article 142 of the current Company Law as highlighted below:

1. The circumstances in which share repurchase is allowed are added. The current language of “shares rewarded to the employees of the company” are changed to “shares used for employee stock ownership plans or equity incentives,” while adding two more where “shares used for conversion into convertible bonds issued by listed companies” and “shares needed for a listed company to maintain the company’s value and shareholders’ equity”.

2. The decision-making process for share repurchase is streamlined. With respect to the requirement that a company repurchasing shares shall call a shareholders’ meeting, make prior notification and public announcements as well as the deadlines, the current provisions are procedurally more complex. This will make it more difficult for listed companies to reasonably set a repurchase plan and cool off their active pursuit in implementing such buybacks. Therefore, the Decision stipulates that if it is necessary for a listed company to use shares for its employee stock ownership plan or equity incentives, or for conversion of its convertible bonds, and for maintaining the value of the company and that of its shareholders’ equity, the company may do so pursuant to a resolution adopted during a board meeting attended by over two-thirds of the directors with no need for a resolution adopted during a shareholders’ meeting, if mandated under the company’s articles of incorporation or the authorization of its shareholders or.  In addition, if a company’s shares are purchased under any of the above circumstances, the aggregate of the company’s shares held by the company shall not exceed 10% of the total outstanding shares of the company, and those shares shall be transferred or cancelled within three years.

3. Regulatory requirements for the repurchase of shares by a listed company are supplemented. To prevent listed companies from abusing the repurchase system and leading to tunneling such as market manipulation and insider trading, it is additionally stipulated that a listed company repurchasing its shares shall comply with the information disclosure obligations under the Securities Law. Except as otherwise required by the state, if a listed company seeks to purchase its shares for its employee stock ownership plan or equity incentives, or for conversion of its corporate bonds, and for maintaining its value and that of its shareholders’ equity, such transactions shall be open and centralized.

4. Per actual circumstances and needs, the requirement under the current Company Law for the funds used by a company to repurchase its shares to reward its employees to be paid out of the company’s after-tax profits is deleted.