In late December, several changes were made to the Company Law. These changes, taken as a whole, remove requirements regarding the payment and verification of capital contributions. This is a welcome liberalization, and should bring corporate law and practice another step closer to the approach commonly seen in other jurisdictions. Once these changes are rolled out, rules that protect investors and third-party rights, and a market approach to evaluating the credit standing of a particular company, will become more significant.
This Haiwen Alert summarizes the most significant changes.
The specific changes
The changes to the Company Law address various requirements for registered capital, including general minimum registered capital requirements, payment terms and the need for paid-in capital to be verified as paid in by a Chinese qualified accounting firm.
No longer will paid-in capital be set out as an item in the business license of a company. One implication is that third parties will need to rely more heavily (or perhaps exclusively) on the accuracy of audit reports and financial statements provided by the company. That being said, the prior inclusion in a business license of the registered capital figure could often be misleading. That figure was a static figure, and for operating companies, paid in registered capital alone did not indicate cash on hand or creditworthiness.
The minimum registered capital requirements for general purpose companies are now simply what is set out in the company's articles of association. Again, it appears that this change is intended to shift fundamental decisions regarding capitalization to the investors, and ultimately, to the market. If accompanied by developments relating to thinly capitalized companies, this should mean that market forces rather than the government will eventually judge whether a company is sufficiently capitalized.
Similarly, the changes simplify reporting requirements. With these changes, a company need only file the amounts of capital subscribed by the investors.
Consistent with the general thrust of these changes, the revised Company Law eliminates the need to file an accountant's report verifying the actual payment of capital. Previously, this verification report was critical for a number of other regulatory matters, including the ability to incur debt (and register and service foreign exchange debt). Presumably, as the Company Law changes are rolled out, these indirect effects on other regulatory procedures and requirements will be clarified and made consistent.
However, there are exceptions. For various regulated businesses, including many types of financial institutions, licensed engineering and construction companies and others, separate laws and rules set out requirements regarding minimum capital amounts, time limits for the payment of capital and the need to have paid-in capital verified as such by a Chinese accounting firm. Those specific laws and rules will remain in force, and are not affected by the liberalizing changes to the Company Law.
For sole proprietorships, the prior minimum capital of RMB100,000 has been eliminated. Viewed against the background of the last several decades, and the very early history of creating individual enterprises (getihu) as a separate business entity, this change seems to signal further relaxations that should encourage the growth and regularization of small to medium size enterprises.
Companies limited by shares and formed by promoters continue to be treated with care. Specifically, until the promoters have fully paid in their respective capital subscriptions, the company may not raise capital from any other source. However, the time for paying in one's capital is now determined by the company's articles of association. Payments in kind, rather than cash, will continue to be handled in accordance with pre-existing rules. Those rules cover, among other things, the types of property that can be used as payment for subscribed capital. The changes to the Company Law also expressly require a transfer of title to the company when a payment in kind is made. Other changes require the board (working in conjunction with the supervisory committee) to register the company limited by shares once the promoters' contributions have been made.
Finally, although not directly relevant to setting up a company, the changes to the Company Law also eliminate minimum capital requirements if a reduction in capital occurs.
All in, these changes to the Company Law are a welcome development. They represent another type of liberalization by largely doing away with the capital requirements for general purpose companies. Regulatory oversight of capital contributions has also been simplified, reduced, and in some cases, eliminated. All of these changes point to a policy of increased reliance on market forces, audits and financial statements as bases on which to make decisions when one is dealing with a Chinese corporate entity generally.
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.