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As we introduced in our January 2024 newsletter, China's New Company Law was amended and took effect on July 1. However, there are many cases where the investment obligations under the New Company Law are burdensome in practice, and there are some unclear aspects of the application of the New and Old Company Laws in practice, so China has enacted administrative regulations and judicial interpretation, which were promulgated in June, to ease the burden of implementing the New Company Law and partially resolve questions.
1. Administrative Regulations Related to the Investment Period
As we introduced in our January 2024 newsletter, the New Company Law requires that a company's shareholders pay up their capital in full (for limited liability companies only) within five years from the date of incorporation.
However, in consideration of the reality that the above amendment makes it burdensome to pay the capital in full, the “Regulations on the Implementation of the Capital Registration Management System of the Company Law” (hereinafter referred to as the “Capital Registration Regulations”) have been further enacted to establish a three-year transitional period for the above five-year investment period, the main contents of which are as follows:
1) For limited liability companies established before June 30, 2024, if the remaining contribution period exceeds five years from July 1, 2027, the company's articles of association must be amended no later than June 30, 2027 to adjust the remaining contribution period to within five years, and the shareholders must pay in full the capital within the adjusted period (joint-stock companies are omitted here as foreign-invested enterprises in China rarely take this form),
2) If the contribution deadline or registered capital of a company is significantly abnormal, the competent department may require adjustment in consideration of the company's business scope, management status, shareholders' contribution capability, main business, asset size, etc,
3) After the adjustment of shareholders' capital contribution amount, contribution method, contribution period, etc. is made, the company shall make a public announcement on the National Business Credit Data Disclosure System within 20 business days.
2. Judicial Interpretation on the Application of the Company Law
The Supreme People's Court of China has issued a judicial interpretation regarding applying the New and Old Company Laws in civil and commercial dispute cases (the “Regulations on Temporal Effect Regarding the Application of the Company Law,” hereinafter referred to as the “Judicial Interpretation on the Company Law”).
The Judicial Interpretation of the Company Act once again emphasized the “non-retroactive principle” of the law and stipulated cases in which the new Company Act is applied retroactively, including:
1) Cases where the legislative purpose is better served by applying the New Company Law:
- A shareholder who was unable to attend the shareholders' meeting because the procedures of the shareholders' meeting prior to the enforcement of the New Company Law were not lawful may exercise his/her right to request the shareholders' meeting resolutions to be canceled.
- In the event of a dispute between shareholders regarding unequal capital reduction prior to the enforcement of the New Company Law, unless agreed by all shareholders or otherwise agreed between shareholders, apply the equal capital reduction principle under the New Company Law.
- In other cases where it is favorable to the company's compliance, protection of minority shareholders, principle of capital integrity, etc.
2) Cases where there is no explicit provision in the old Company Law:
- Liability allocation between the transferor and transferee in the event of a transfer of shares corresponding to unpaid capital whose contribution period has no yet expired
- Exercise of the right of other shareholders to purchase shares if the controlling shareholder of a limited liability company abuses the rights of shareholders and infringes on the interests of the company or other shareholders
- Liability of controlling shareholders or actual controllers who are not directors in the execution of the company's affairs
- Other disputes regarding the new provisions of the New Company Law
3) Cases where there are special provisions:
- In principle, the Old Company Law applies to liquidations prior to the enforcement of the New Company Law, but the New Company Law applies to liquidations based on reasons that occurred within 15 days prior to the enforcement of the New Company Law.
1. Administrative Regulations Related to the Investment Period
As we introduced in our January 2024 newsletter, the New Company Law requires that a company's shareholders pay up their capital in full (for limited liability companies only) within five years from the date of incorporation.
However, in consideration of the reality that the above amendment makes it burdensome to pay the capital in full, the “Regulations on the Implementation of the Capital Registration Management System of the Company Law” (hereinafter referred to as the “Capital Registration Regulations”) have been further enacted to establish a three-year transitional period for the above five-year investment period, the main contents of which are as follows:
1) For limited liability companies established before June 30, 2024, if the remaining contribution period exceeds five years from July 1, 2027, the company's articles of association must be amended no later than June 30, 2027 to adjust the remaining contribution period to within five years, and the shareholders must pay in full the capital within the adjusted period (joint-stock companies are omitted here as foreign-invested enterprises in China rarely take this form),
2) If the contribution deadline or registered capital of a company is significantly abnormal, the competent department may require adjustment in consideration of the company's business scope, management status, shareholders' contribution capability, main business, asset size, etc,
3) After the adjustment of shareholders' capital contribution amount, contribution method, contribution period, etc. is made, the company shall make a public announcement on the National Business Credit Data Disclosure System within 20 business days.
2. Judicial Interpretation on the Application of the Company Law
The Supreme People's Court of China has issued a judicial interpretation regarding applying the New and Old Company Laws in civil and commercial dispute cases (the “Regulations on Temporal Effect Regarding the Application of the Company Law,” hereinafter referred to as the “Judicial Interpretation on the Company Law”).
The Judicial Interpretation of the Company Act once again emphasized the “non-retroactive principle” of the law and stipulated cases in which the new Company Act is applied retroactively, including:
1) Cases where the legislative purpose is better served by applying the New Company Law:
- A shareholder who was unable to attend the shareholders' meeting because the procedures of the shareholders' meeting prior to the enforcement of the New Company Law were not lawful may exercise his/her right to request the shareholders' meeting resolutions to be canceled.
- In the event of a dispute between shareholders regarding unequal capital reduction prior to the enforcement of the New Company Law, unless agreed by all shareholders or otherwise agreed between shareholders, apply the equal capital reduction principle under the New Company Law.
- In other cases where it is favorable to the company's compliance, protection of minority shareholders, principle of capital integrity, etc.
2) Cases where there is no explicit provision in the old Company Law:
- Liability allocation between the transferor and transferee in the event of a transfer of shares corresponding to unpaid capital whose contribution period has no yet expired
- Exercise of the right of other shareholders to purchase shares if the controlling shareholder of a limited liability company abuses the rights of shareholders and infringes on the interests of the company or other shareholders
- Liability of controlling shareholders or actual controllers who are not directors in the execution of the company's affairs
- Other disputes regarding the new provisions of the New Company Law
3) Cases where there are special provisions:
- In principle, the Old Company Law applies to liquidations prior to the enforcement of the New Company Law, but the New Company Law applies to liquidations based on reasons that occurred within 15 days prior to the enforcement of the New Company Law.
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