China: Summary Of The Latest Amendments To The Company Law And Their Positive Significance

Amendments to the existing Company Law were considered and approved at the Sixth Meeting of the Twelfth Session of the NPC Standing Committee on 28 December 2013.The amended Company Law will officially come into force from 1 March 2014. Although the amendments only cover twelve provisions of the Company Law, they are related to a major reform of the company registration regime.

Q: What are the major amendments to the Company Law?

A: Major modifications were made to the registration system for registered capital in the following three aspects:

(1) the paid-up registered capital registration system was revised to a subscription registration system

The "paid-in capital" requirement was removed from the amended Company Law, which means a shareholder (sponsor) is no longer required to actually contribute capital during the establishment of a limited liability company or a joint stock company. The compulsory requirements were also abolished for a shareholder (sponsor) to pay up the registered capital within two years after a company is founded (within five years in case of an investment company) and the initial capital contribution is no less than 20%of the registered capital, and for a one-person limited liability company to make full capital contribution on a lump-sum basis. Unless laws, administrative regulations and the State Council's decisions otherwise provide, the shareholders (sponsors) of a company can agree among themselves in the articles of association on the amount of and deadline for subscribed capital contribution.

(2) the requirements for minimum registered capital and ratio of cash contribution were abolished

The requirements were cancelled for a limited liability company to have a minimum registered capital of RMB30,000, a one-person limited liability company to have a minimum registered capital of RMB100,000, and a joint stock company to have a minimum registered capital of RMB5 million, unless laws, administrative regulations and the State Council's decisions otherwise provide.

The requirement was also removed for the amount of capital contribution in currency to be no less than 30% of the registered capital of a limited liability company.

(3) the company registration items were simplified

During the formation of company, it is not required to engage a capital verification agency to conduct capital verification and submit capital verification documents to a register office. Paid-in capital will no longer be stated on the business license of a company. The company register office will no longer register the amount of capital contribution by shareholders. As a result, the simplified company registration process will substantially improve the efficiency of the registration of a company setup.

Q: What is the positive significance of these amendments?

A: The Company Law was modified against the background of the market-oriented reform currently underway in China, which is conducive to strengthening the responsibilities of market players, promoting enterprises' autonomy of will, stimulating entrepreneurial enthusiasm in the private sector and improving market efficiency.

Firstly, the threshold for setting up a company was lowered by abolishing the minimum registered capital and paid-up capital requirements to make the company setup easier because the sponsors of a company will not have to be subject to high registered capital. Secondly, the capital verification procedures were abolished to make a company setup worry-free and to save money, thus further reducing the costs of setting up a company. Thirdly, following the cancellation of the ratio of cash contribution, a company founder may choose any statutory contribution methods such as contribution in kind (such as real estate, machinery and equipment), and of land-use rights or intellectual property, without any restrictions on the ratio. This will be a major favourable factor for start-up and high-tech companies because in theory even they have no cash, they can apply for the establishment of a company as long as they have the technologies available for pricing.

In short, as a result of the modification of the Company Law, the shareholders (sponsors) of a company are given more autonomous rights, and the procedures for the establishment of a company are simplified. These will considerably enhance the level of convenience for, and minimize the costs of a company setup.

Q: How does the revised Company Law converge with other laws and regulations?

A: It should be noted that the registered capital subscription system and the cancellation of the minimum registered capital under the revised Company Law are not applicable in all cases because a relevant clause is retained in Article 26 of the revised Company Law that "where laws, administrative regulations and State Council's decisions otherwise provide for the paid-up registered capital and the minimum registered capital of a limited liability company, they shall be observed". Article 80 of the revised Company Law also contains similar provisions for joint stock companies. For example, under the current Chinese legal and regulatory regime, the establishment of banks, securities companies, insurance companies and other financial institutions as well as real estate companies and film production companies is required to follow the regulatory laws or rules of relevant sectors on specific minimum registered capital and paid-up capital requirements.

The pressing task is to modify the supporting administrative regulations, such as the Regulations Governing Company Registrationand the Rules Governing Registration of the Registered Capital of Companies, because the amendments to the Company Law have resulted in substantial changes in the existing industrial and commercial registration procedures and work processes. Thus if necessary, the relevant rules for the subscription of the amount of capital contribution as well as the methods and deadlines for capital contribution should be cancelled or modified.

The registered capital subscription system and the cancellation of deadlines for making capital contribution involved in the amendments to the Company Law are in conflict with the existing legal requirements for foreign-invested enterprises. Due consideration has also to be given during the process currently underway for amending the laws on the foreign-invested enterprises.

Moreover, it is certainly necessary to strengthen the monitoring of corporate integrity as a result of the cancellation of the paid-up registered capital requirement. How to effectively safeguard the interests of the creditors of a company will become a new research topic.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.