November 2023
Lihui Jiang and Teresa Huang
On September 1, 2023, the Standing Committee of the National People’s Congress released the ” Draft Bill to Revise the Company Law of the People’s Republic of China (For Third Review)” (the “Exposure Draft”) to solicit public comments. The consultation period has now ended. The main amendments proposed in the Exposure Draft are as follows:
I. Clarifying that the Subscribed Capital Shall Be Paid Up Within Five Years
Since the amendment of the Company Law in 2014, Mainland China has implemented a registered capital subscription system, eliminating the waiting period for capital contributions. While this system streamlines company formation and promotes entrepreneurial vitality, practical problems have arisen. Lengthy subscription periods for shareholders have affected the security of transactions and infringed upon the interests of creditors. The current Exposure Draft explicitly stipulates that all shareholders shall fully pay up their subscribed capital within five years from the date of the company’s establishment, as stipulated in the company’s articles of association.
II. Reinforcing Employee Representation in Directorship Roles
The current Company Law stipulates that only limited liability companies established by two or more state-owned enterprises or other state-owned investment entities should include employee representatives on their board of directors. Recognizing employees as important stakeholders and aiming to enhance the democratic management system of the company, the Exposure Draft stipulates that the board of directors of a limited liability company which consists of three or more members, may include employee representatives. For limited liability companies with three hundred employees or more, it is mandatory to have employee representatives on the board of .
III. Strengthening the Protection of Small and Medium-Sized Shareholders to Further Ensure Equal Property Rights
To further enforce the equality of property rights, the Exposure Draft strengthens the protection of the rights of small and medium-sized shareholders. For example, it provides that in cases where a controlling shareholder abuses its rights and causes substantial damage to the company or the interests of other shareholders, other shareholders have the right to require the company to repurchase their shares at a fair price. In addition, the Exposure Draft refines the rules on shareholders’ access to and copying of company documents, introduces prohibitions on increasing the percentage of shareholders proposing extraordinary motions, and requires companies that reduce their registered capital to reduce contributions or shares proportionately according to shareholders’ investment or ownership ratios..
IV. Enhancing Regulations for Controlling Shareholders and Actual Controller
In practice, there are cases where controlling shareholders and/or actual controllers, although not holding official positions in the company, exercise significant influence over the company’s affairs, sometimes to the detriment of the company’s interests. Therefore, Article 180 of the Exposure Draft explicitly states that controlling shareholders or actual controllers, even if they do not hold a director position, are still bound by fiduciary duties and duties of diligence when actually performing the company’s affairs. This provision serves to strengthen the rules governing the controlling shareholders and actual controllers.
V. Enhancement of Regulations Regarding Corporate Bonds
In response to the evolving dynamics of the bond market, the Exposure Draft introduces several modifications to the corporate bond chapter. These amendments include transferring the responsibility for the examination and approval of corporate bonds from the National Development and Reform Commission to the China Securities Regulatory Commission. It also explicitly states that corporate bonds may be issued either publicly or privately. It also replaces bond stubs with bondholder registers, extends the issuance of convertible bonds from listed companies to all companies limited by shares, and strengthens the provisions on bondholder meeting resolutions and the effectiveness thereof and the provisions of bond trustees.
VI. Emphasizing Principle of Good Faith and Enhancing Associated Legal Liabilities
In recognition of cases where companies secure registration by submitting falsified documents, the Exposure Draft introduces penalties for individuals directly involved in such actions. These penalties are aimed at cases involving misrepresentation of registered capital, submission of forged materials or the use of deceptive methods to conceal material information. The Exposure Draft also outlines administrative penalties for violations of the Law of the People’s Republic of China on Certified Public Accountants and the Asset Appraisal Law of the People’s Republic of China.
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