China's updated company law will take effect on
March 1. Leo Zhou Liang, senior partner at Dacheng Law Offices,
highlights the key changes for corporates.
There are four key revisions in China's new Company Law,
which comes into effect on March 1. The new rules are intended to
simplify the company registration process and lower financial
requirements for establishing a company.
Specifically, four key new provisions will take effect: First,
the required minimum amount of registered capital for companies
will be removed.
Second, the mandatory requirement of proportion of initial
capital contribution and the proportion of capital contribution
paid in cash will be eliminated.
Third, the new regulations will remove mandatory requirements
for capital contribution, including the amount, the method and the
time limit. Instead, these issues will be determined by
shareholders and recorded in the company's articles of
Fourth, a capital verification report will no longer be
necessary at the time of registration.
Of course, the above-mentioned amendments are applicable to
general companies only. Enterprises in special industries such as
foreign-owned enterprises and those in the financial industry are
still required to comply with stricter company registration
More holding companies: The removal of required
minimum amount of registered capital for companies will reduce the
need for capital paid-in. Hence, more holding companies and special
purpose vehicles can be set up to facilitate multilevel financing
and the arranging of complex transaction structures.
More hi-tech companies: The removal of the
mandatory requirement of the proportion of capital contribution
paid in cash may enable investors to more flexibly allocate various
types of assets for capital contribution, including technology,
intellectual property and physical assets, to better suit the
features of a particular industry and meet the real needs of the
Flexibility in the arrangement of capital contribution may offer
opportunities for development of hi-tech companies and startups.
Shareholders who are making capital contributions by means of
non-monetary assets should pay attention to the proper assessment
and verification of the valuation of those non-monetary assets. If
the actual value thereof is found to be apparently lower than what
is set forth in the company's articles of association, the
shareholder who has offered the non-monetary property will be
liable for making up the difference, and other shareholders of the
company at the time of establishment may also be held liable.
Need for more due diligence: Due to the removal of the need for
actual paid capital and the absence of any requirement for annual
inspection of companies, enterprises ought to pay closer attention
to and take steps to ensure they are adequately protected as
creditors in transactions. More prudent legal and financial due
diligence on counterparties in transactions is recommended to
prevent transaction risk. Proper use of guarantee measures are also
Be careful when setting registered capital at establishment:
Despite the removal of the requirement for the actual paid capital,
the full payment of registered capital is still vital for the
capital increase of joint stock limited companies, which are
established by promotion. In accordance with the new law, this type
of company is prohibited from offering new shares to others before
its promoters have fully paid up all the shares they have
As a result, companies that are to be established by promotion
are recommended to prudently set the amount of registered capital
at the time of establishment. Unless the laws and regulations
requirements state otherwise, joint stock limited companies
established by promotion should not set an amount of registered
capital significantly higher than the companies' actual needs
at the current stage to avoid potential barriers to methods of
capital increase in the future, thus overburdening promoters.
Regulatory updates to watch out for: The amendments signify
China's will thoroughly reform the company registration and
regulation system. Other related regulations, such as those on the
Administration of Company Registration, are likely to be amended in
the first quarter of 2014.
But the relaxation of registration requirements related to
companies' registered capital calls for reinforcement of the
protection of creditors in transactions through legislative and
administrative measures. The State Council executive meeting on
October 25, 2013 suggested establishing an enterprise credit system
easily accessible by the public. This indicates new regulations may
be adopted which affect companies' ongoing information
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.
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Lawyers are pretty good at figuring it out quietly and amicably among themselves, without recourse to a public courtroom.
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