Hong Kong: Major Changes to PRC Company Law Now in Effect

In line with company law reforms in other major commercial jurisdictions and with a greater awareness of corporate governance and small investor’s rights, China has recently made substantial amendments to its Company Law as part of its continuous effort to develop its legal system. The amended PRC Company Law came into effect on 1 January 2006.

The amendments are significant for foreign investors as they affect some core principles applicable to PRC foreign invested enterprises. The following is a brief overview of the main changes and related issues that deserve attention.

The amended Company Law repeals the former differences in minimum registered capital by reference to the business nature of limited liability companies. Instead, Article 26 of the amended Company Law provides for a uniform minimum registered capital of RMB30,000 compared with the previous minimum of RM100,000 for limited liability companies.

Whilst such development is of course welcomed from a foreign investor’s perspective as it substantially lowers the minimum registered capital required, it should however be noted that the same is indicative at best.

Experience has shown that in practice, authorities often require investors to contribute registered capital in amounts much higher than the minimum required for the establishment of foreign invested enterprises and there is no reason to expect such practice to cease after the amendment.

Further, there is always the possibility that other laws or regulations may specify a higher minimum registered capital for a specific industry or business.

Important changes have been made in Article 27 of the amended Company Law as to the percentage of non-monetary assets which can be valued and transferred to the PRC Company as capital contribution.

Such non-monetary assets may now be used to contribute up to 70% of a company’s total registered capital compared to the former maximum of 20%.

Under the old PRC Company Law, only the chairman of the board of directors could be the legal representative of a PRC company. Article 13 of the amended Company Law provides that a managing director or manager may also serve as the legal representative of the Company.

Article 58 of the amended Company Law allows the establishment of a domestic limited liability company by a single shareholder.

Although this development is more relevant to domestic investors than to foreign investors in general, it also offers more flexibility for cooperating with a PRC party in a sino-foreign joint venture.

Current PRC joint venture laws do not allow a PRC natural person to be the PRC party and the former Company Law does not allow for the establishment of a domestic limited liability company with one shareholder. As such, it was formerly not possible for a single PRC natural person to be the PRC party in a sino-foreign joint venture.

Although the relevant provisions of the PRC joint venture laws have not changed, a PRC natural person may now be the PRC party to a joint venture through the use of a single shareholder company established under the amended Company Law.

The amended Company Law introduces a new chapter (Chapter 3) on the transfer of equity interest in a limited liability company by a shareholder to an outside third party and imposes a time period during which the remaining shareholder must voice his dissent if he opposes the proposed transfer to the outside third party. A remaining shareholder failing to indicate his dissent within 30 days from receipt of notice is deemed to have consented to the proposed transfer of equity interest to the third party by the other shareholder.

One of the major improvements in the amended Company Law is the increase in transparency and better corporate governance of companies by providing public access to company records.

This is achieved by providing in Article 6 of the amended Company law that the public may apply to the registration authority (i.e. State Administration of Industry and Commerce) for a company’s registration record and the registration authority must provide search facilities to the public.

It has been a common understanding in the PRC that where the provisions of the Company Law conflict with those in the laws and regulations governing foreign investments (e.g. laws and regulations on joint ventures and wholly foreign owned enterprises), the provisions governing foreign investments will prevail. This position is now explicitly stated in Article 218.

Lawyers in our China Business Practice Group regularly advise clients on foreign direct investments, mergers and acquisitions and PRC Company Law issues. For more information on the above issues or a copy of the amended Company Law, please contact us.

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.