PRC Company Law – the latest changes affecting limited liability companies

PRC Company Law is undergoing a major overhaul after five rounds of "beauty repairs" in 1999, 2004, 2005, 2013 and 2018. What does the latest consultation draft mean for limited liability companies?

In December 2021, The National People's Congress (NPC) Standing Committee issued a consultation draft (the "Draft Amendment") on the Company Law which proposes significant amendments. 

It contains more than 70 amendments - half are improvements or fine-tuning to the existing provisions, while the rest are newly introduced. As explained by the NPC in an explanatory note, the main goals of the new amendments are to:

• simplify corporate structure
• reduce the burden of investors
• ease market entry and ultimately stimulate investment.

Enhancing the supervision of shareholders and management is also a notable development reflected in the Draft Amendment. 

The Draft Amendment also attempts to consolidate provisions and rulings scattered in different laws or judicial practices like the Security Law, the State-owned Assets Law and various interpretations of the Company Law issued by the Supreme People’s Court (SPC). 

In this article we look at the major amendment and proposed developments which will affect limited liability companies (LLCs), with an upcoming article looking at those that will affect joint stock corporations (JSCs).

Simplifying regulatory requirements around corporate governance, share transfer, capital reduction and mergers

Amendments proposed to try and simplify regulatory requirements include:

• The supervisor is no longer a mandatory corporate body for companies who install an audit committee in the board of directors.
• For shareholders who intend to sell their shares, it's no longer a requirement to seek consent from other shareholders. The other shareholders nevertheless have pre-emptive rights.
• A simplified capital reduction procedure is introduced, allowing companies to reduce registered capital without individually notifying all creditors. Instead, a public announcement through the uniform enterprise information publicity system (administrated by the State Administration of Market Regulation (SAMR)) is sufficient.
• Under certain circumstances, a corporate merger won't require approval by a shareholders’ meeting from the merged company.
• For smaller companies, LLCs can have one director or manager. For LLCs with more than 300 employees, the board of directors shall allocate at least one seat for the employees’ representative selected by employees irrespective of whether the company is state-owned or not.

Tightening shareholder obligations on capital contribution

Amendments proposed to tighten shareholder obligations include:

• Shareholders who fail to make capital contributions may lose their shareholder rights associated with the relevant shares. The company may deregister relevant shares or can arrange for the shares to be transferred.
• Where a company is unable to pay off its due debts and is obviously insolvent, the company or the creditors can require shareholders to make capital contributions, even before the due date of debts.
• Where shareholders sells their shares which have not been fully capitalised, if the transferee knows or ought to know of above circumstance, the transferee shall bear the joint and several liabilities together with the transferring shareholder for the unfulfilled capital contribution.

Our take on the changes: Some of the proposed amendments above aren't entirely new but derived from the SPC’s third interpretations rule of the Company Law in 2011. Article 48 (acceleration of capital payment) also seems to follow the position of the SPC, as reflected in the SPC meeting minutes in 2019 addressing civil and commercial trials. There is however controversy surrounding the acceleration mechanism, as it may infringe shareholder expectation interests. Whether this clause will pass the second reading in the NPC remain to be seen.

Expanding directors’ duties and liabilities

Amendments proposed to expand director duties and liabilities include:

• The scope of the related party is further expanded. Related party transactions are subject to reporting to, and approval by, the board of directors or shareholders’ meeting.
• Directors shall be liable to take remedial measures in cases of failure when the director knows that a shareholder fails to make or withdraws its capital contribution.
• New circumstances are introduced in the Draft Amendment where directors will be jointly personally liable with shareholders or with the company. For example, if a director causes losses to a third party due to his/her fault, or if a director follows the instruction of the controlling shareholder to engage in any activities harming the interest of the company and other shareholders.

Substantiating company registration procedures

Amendments proposed to expand director duties and liabilities include:

• The Draft Amendment further substantiates company registration requirements, electronic business licenses and simplified deregistration procedures.
• Equity and creditor’s right are explicitly and officially mentioned as admissible forms of capital contribution.

Our take on the changes: Equity as capital contribution has been recognised under the SAMR Regulation on Registered Capital since 2014 subject to certain conditions. As for creditor’s right as capital contribution, it's been permissible under some local pilot programs before the Draft Amendment. However, under Article 43 of the Draft Amendment, there is one condition attached ie such creditor’s right can be evaluated. Such a requirement may in fact impose difficulty in term of license right, know-how and consultancy service. If this provision becomes the final law, we expect SAMR will need to issue more detailed implementation rules.