China: Full Of Eastern Promise?

Last Updated: 14 March 2006
Article by Dale Fisher and Derek Roth-Biester

It has been four years since China became a member of the World Trade Organisation. During that time it has implemented a number of changes to its formerly command-based economy to open up its markets to foreign investment and competition. The latest move to "westernise" itself and improve the legal and business environment for foreign investors came at the start of 2006 when wholesale revisions to the Company Law of the People's Republic of China (PRC) came into force.

The revised Company Law has incorporated wholesale revisions to the regulation of Chinese corporate entities – the most significant of these include changes to registered capital requirements, corporate governance and the increased protection of minority shareholders. The revisions to the Company Law affect primarily the regulation of the two most common forms of domestic enterprise namely limited liability companies ("LLCs") and companies limited by shares, but will also have an incremental impact on the way foreign investors do business in China.

Foreign investment options

Foreign investment in the PRC is restricted by law to a limited number of corporate vehicles known generally as foreign-invested enterprises ("FIEs"). These FIEs most commonly take the form of wholly foreign-owned enterprises ("WFOE") or joint ventures (of which there are two types, namely equity and co-operative). Each type of FIE is subject to its own specific regulatory regime, which in each case contains restrictions on, for example, the minimum investment required from the foreign party, expatriation of profits and in the case of JVs the maximum percentage of equity which the foreign party may take .

FIEs are not only required to comply with the Chinese laws and regulations specific to the relevant form of FIE, but they will also be subject to the Company Law to the extent that there is no clear stipulation in the regulations specific to the type of FIE in question. Furthermore, FIEs themselves are permitted in certain circumstances to acquire interests in domestic PRC companies (such "reinvestments" being themselves subject to a specific regulatory regime). It is here where the revisions to the Company Law will have the greatest impact upon foreign investors.

Registered capital

The Company Law adopts a "true capital principle" which differs from the authorised capital provisions commonly seen in the west. This means that there is no gap between the registered capital and the capital actually contributed by investors. The revised Company Law lowers the minimum registered capital requirement for both limited liability companies (to RMB 30,000 (ca. GBP 2,100) and for companies limited by shares (to RMB 5,000,000 (ca. GBP 350,000), and broadens the methods by which registered capital may be contributed. Whilst the lowering of registered capital requirements may appear spectacular on paper, the amounts stated in the revised Company Law are indicative at best. In practice, authorities often require investors to contribute much higher amounts to registered capital in order to ensure that a company owns funds sufficient to carry on its intended business. In addition, regulations specific to foreign investment in certain industries may require higher amounts of minimum registered capital.

Instead of the previous rule that capital contribution in the form of intangible assets may not exceed 20% of the total registered capital, the revised Company Law stipulates simply that the cash contribution may not be less than 30% of the total registered capital, which means investors will be allowed to contribute as much as 70% of the total registered capital by such intangible assets as intellectual property rights (although any non-cash assets which can be monetarily valued and legally transferred can now be contributed). Regrettably, the revised Company Law does not clearly state whether shares can be contributed to the registered capital of companies.

Furthermore, in lieu of the previous provisions for the full payment of registered capital at the inception, the revised Company Law allows the registered capital of a company to be contributed in certain cases as much as two years after its establishment. These changes are expected to make it easier, and perhaps cheaper, for foreign parties to invest in or set up a company in the PRC.

Removal of the "50% rule"

Prior to the recent revisions, the Company Law provided that where a company invests in other companies, the aggregate amount of such investment is not allowed to exceed 50% of the net assets of the company. This cap on outward investment has been a significant barrier to many M&A activities, including those driven by foreign investors, as it meant that companies were unable to fully employ all of their assets and thus were seen as ineffective investment vehicles. This limitation has now been completely removed under the revised Company Law, leaving outward investment to the discretion of the shareholders of the company. It is anticipated that this will have the effect of simplifying the M&A market and facilitating acquisitions involving smaller companies (particularly the private LLCs) who need to inject most if not all of their assets into a proposed joint venture. Unfortunately, due to a similar restriction on inter-company investments by FIEs found in the Tentative Measures on Investments in China by Foreign-invested Enterprises (effective since 1st September 2000), FIEs will not be able to benefit from this relaxation until such restriction is repealed.

Corporate governance

The changes to corporate governance include restrictions on the authority of the Chairman of the Board (who is under Chinese law the legal representative of the company) and, at the same time, delegation of more authority to the board of supervisors, such as the right to call a shareholders meeting and the right to file lawsuits against directors or senior management who are in default. The revised Company Law also introduces the rules of conflict of interests where a controlling shareholder, effective controller, director or senior manager of a company incurs personal liability when taking advantage of a relationship with a third party which damages the interests of the company. Directors of listed companies are ineligible to vote on matters in which they have an interest. Notably, the revised Company Law imposes a stricter duty of care on the directors, supervisors, and senior management. This will give foreign investors, traditionally wary of granting too much power to appointees of their JV partners, some comfort that these senior staff can be held accountable for their actions.

Protection of minority shareholders

For the first time the revised Company Law enhances shareholder control over the company in that those holding 3% or more of a company’s shares may put forward proposals to the board of directors. Shareholders also now have a right to petition the court to revoke resolutions which were made in breach of the law, to sell their shares to the company at reasonable prices and to petition the court to liquidate the company under certain circumstances. Those holding 10% or more of a company’s shares have the right to petition to the People’s Court to liquidate the company when the company’s managerial problems threaten to damage shareholders’ interests. A certain percentage of shareholders are also now entitled to bring actions against directors, supervisors and/or senior management for breaches of the law or the company’s articles of association. This will be particularly important in the case of an FIE JV where the foreign party is a minority shareholder, which is common where the industry in which the JV is operating is deemed restricted by the Ministry of Commerce.

Other issues

The revised Company Law also brings in a variety of noteworthy changes such as introducing one-person companies, introducing the principle of "piercing the corporate veil", regulating transactions between affiliated companies, enhancing employees’ participation in the management of the company and amending the conditions for public listing and bond issue. However, it is by no means a complete panacea – it contains sufficient contradictions, omissions and ambiguities to cause headaches for lawyers advising clients looking to invest in the PRC. The legal community will therefore be looking to the Chinese government to promulgate further implementing regulations with the aim of clarifying the regulatory procedures - it may be that the full impact of these revisions can be fully assessed only after such clarification is provided. Besides, foreign investors should note that, in many respects, FIEs and domestically-invested companies are subject to different regimes and rules. Article 218 of the revised Company Law states that, where the laws governing foreign investment differ from the provisions of the revised Company Law, the former shall prevail. Consequently, the revised Company Law applies to foreign investors and FIEs only in circumstances where legislation on FIEs is silent. For this reason, few of the benefits of the revised Company Law will actually flow through to foreign investors and FIEs.

The authors are based in Pinsent Masons Hong Kong office

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.