China: Amendments To The PRC Company Law

Key Points

• The PRC Company Law amended to adopt a new company registration system
• No requirements of minimum amount, contribution period and cash contribution in general
• Uncertainty of application to foreign investment upon the Amendments' effectiveness
• Optimistic expectation of application in future

Background

The Company Law of the People's Republic of China ("PRC Company Law") currently in force adopts a company registration system under supervision. Specific rules within the legislation cover a registered capital system requiring a minimum amount of registered capital, a certain capital contribution period and a minimum ratio of cash contribution.

On 28 December 2013, the Standing Committee of the National People's Congress of the People's Republic of China released its "Decision on Amending the Marine Environmental Protection Law of the People's Republic of China and Other Six Laws", deciding to amend the PRC Company Law for an adoption of a new company registration system, among others. This decision will take effect on 1 March 2014. This reform relaxed the governmental supervision required and will see significant innovations in the company registration system, especially in registered capital aspect.

Amendments to the Law

The amendments to the PRC Company Law ("Amendments") focus on the registered capital, being involved with three types of companies, namely limited liability companies, one person limited liability companies and companies limited by shares.

With regard to limited liability companies, the Amendments mainly cover:

In addition, the amended PRC Company law also does not require (1) the Minimum Amount of capital contribution as one of conditions to setting up a company; and (2) the Minimum Amount of registered capital to be maintained after a capital decrease.

However, exceptions may apply to the above changes. Under the amended PRC Company Law, if laws, administrative regulations or State Council's decisions provide otherwise in respect of the registered capital contribution and the minimum amount of registered capital, such provisions will prevail.

For one person limited liability companies, the amended PRC Company Law abolished (1) a minimum amount of RMB 100,000 of the registered capital; and (2) a capital contribution paid in full in one lump sum. For companies limited by shares, the amendments were made by following the same reform of registered capital as with limited liability companies.

Likelihood of Application to Foreign Investment

Currently, the registered capital of and the capital contribution in foreign invested enterprises ("FIEs") – here, referring to Sino-foreign Equity Joint Ventures ("EJVs") and wholly foreign-owned enterprises ("WFOEs")¹) – are regulated by:

In accordance with the PRC Company Law and the Implementation Rules on WFOEs as well as the Provisions, the shareholders of FIEs are generally required to contribute (1) all registered capital within six months in case of payment in a lump sum, or (2) at least 20% of the registered capital within three months and the remainder within two years after the establishment of FIEs in case of payment by installments.

• Legal perspective

Pursuant to Article 218 of the amended PRC Company Law, the amended PRC Company Law applies to foreign-invested limited liability companies and companies limited by shares, unless otherwise provided in laws on foreign investment. Further, in accordance with Article 26 of the amended PRC Company Law, the minimum amount of the registered capital, the capital contribution period and the minimum ratio of cash contribution are not required; unless otherwise provided by laws, administrative regulations or decisions of the State Council.

For WFOEs, the Implementation Rules on WFOEs were promulgated by the State Council. In accordance with Article 26 of the amended PRC Company Law, the registered capital and the contribution period of WFOEs is subject to the Implementation Rules on WFOEs. However, the Implementation Rules on WFOEs requires that the shareholders contribute at least 15% of the registered capital within 90 days and the remainder within three years after the establishment of WFOEs in case of payment by installments. Such requirements had been revised by the PRC Company Law since 2006. However, the Amendments now abolish the requirements of capital contribution but reapply the Implementation Rules on WFOEs. It seems that the requirements of the capital contribution for WFOEs step back to several years ago.

For EJVs, on conditions that the State Council neither makes decisions to restrict the implementation of such Amendments to EJVs nor restates that the Provisions remain in force, the Amendments could be applicable in consideration that:

Reportedly, an executive meeting of the State Council held in October 2013 announced the above company registration reform including an abolition of the minimum amount of registered capital and the capital contribution period, among others. Meanwhile, it also emphasized two exceptions to the abolition, namely where (1) laws or (2) administrative regulations provide otherwise. However, the Amendments promulgated two months later included an extra exception – namely, where the decisions of the State Council provide otherwise. As the Provisions were approved by the State Council, it is uncertain if such extra exception could have an effect to keep the Provisions remaining in force. Meanwhile, this uncertainty could imply that the likelihood of recent implementation of the Amendments to EJVs becomes lower.

• Practice perspective

Although the amended PRC Company Law liberated the registered capital, it does not change the approval regime in foreign investment. This means that the establishment and the changes of FIEs are still subject to the authorities' approval. From a practice perspective, it is possible for the authorities to pose requirements of a minimum amount of the registered capital and a certain contribution period for the shareholders of FIEs, even if the Amendments are applicable to foreign investment. The authorities might propose that the registered capital of FIEs and its contribution period should meet FIEs' business operation and development, for example, via a feasibility study report – one of required application documents for the establishment of FIEs.

Some local authorities hold a view that the Amendments are impossible to implement in foreign investment; others suggested waiting for new rules to be possibly released by the central government after the Amendments take effect. It seems that the Amendments are more favorable for domestic companies and it is uncertain whether the Amendments could be likewise implemented in foreign investment after 1 March 2014. We will keep close eyes on any updates in this regard.

Conclusion

Although it is uncertain if the Amendments could be implemented in foreign investment after 1 March 2014, we keep an optimistic expectation for the future.

On 1 October 2013, the China (Shanghai) Pilot Free Trade Zone ("PFTZ") was officially found. The PTFZ has adopted the above new company registration system to the companies domiciled in the area, including FIEs. It was reported that more and more provinces and cities had submitted an application to the central government for setting up a pilot free trade zone similar to that in Shanghai. If the central government approves those applications, the new company registration system would be gradually expanded to more provinces and cities and, thereafter, across the whole China.

Further, the Chinese government is always devoted to according foreign investors national treatment to its greatest extent in many areas. In addition, facing the increasingly fierce globe competition, the Chinese government has been driven to gradually loosen its restrictions on the company registration to provide a beneficial competition environment for Chinese companies.

It is therefore expected that a similar company registration system could also be adopted and implemented in foreign investment in future.

Footnote

^{1 Besides EJVs and WFOEs, FIEs also include Sino-foreign cooperative joint ventures ("CJVs"). As the PRC Company Law is merely involved with FIEs with incorporation formation and CJVs are generally established in a formation other than incorporation, FIEs under this article exclude CJVs.}

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