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Overview: The Second Revision Draft of the Company Law of China

On December 30, the National People’s Congress published the second revision draft of the Company Law (hereinafter referred as the “Second Revision Draft”). The Second Revision Draft maintains most of the revisions brought up by the first revision draft published one year before and refines some previous revisions. The revisions focus on strengthening shareholders’ responsibility for capital contribution, improving corporate governance structure, extending the liabilities of directors, supervisors and other senior management, and detailing and complementing the shareholders’ rights. This article will introduce the highlights of these main revisions.

  1. Shareholders’ responsibility for capital contribution

Shareholders’ capital contribution responsibility is further strengthened in the Second Revision Draft, reflected in the following aspects:

  • Call up capital and loss of equity: It is required that the board of directors should verify the capital contribution situation. If the board of directors finds that a shareholder has not fully paid its capital contribution on time, it should issue a notice of call to the shareholder. A grace period of more than 60 days could be stipulated in the notice of call. Failing of payment, the shareholder loses its unpaid equity as of the date when the notice of loss of equity is issued by the company. The equity should be transferred or canceled within 6 months, otherwise, the other shareholders should make up the capital contribution according to their ratio of contributions. The shareholder who fails to pay its capital contribution on time should compensate the loss suffered by the company therefrom (Article 51).
  • Acceleration of maturity of shareholders’ contributions: If the company is unable to pay off the due debts, the company or the creditors have the right to request the shareholders whose capital contribution period has not yet expired to pay the capital contribution in advance (Article 53). At present, the creditor can only request such capital contribution in certain cases, such as during enforcement procedures, and the capital contribution period is extended by the company after the debt occurs.
  • Supplementary liability of the transferor of the transferred equity: If a shareholder transfers the equity of which the capital contribution period has not yet expired, the transferee should pay the capital contribution and the transferor will bear the supplementary liability of such payment (Article 88).
  • Corporate governance structure

The Second Revision Draft further coherently stipulates the company’s organizational structure and its powers.

  • Committee of auditors: Most significantly, it is established that the committee of auditors could be set up within the board of directors (Article 69, Article 121). The committee of auditors will exercise the rights of the board of supervisors/supervisors and the board of supervisors/supervisors is no longer required if the company chooses to establish the committee of auditors.

For the joint stock company with the committee of auditors, it is further required that the committee of auditors should consist of more than 3 directors and the majority of the committee members should be independent directors with at least one accounting professional. Furthermore, the company can set up other special committees within the board of directors.

  • An employee representative in the board: At present, only stated-owned companies are obligated to include an employee representative in the board of directors. The Second Revision Draft intends to expand this obligation to companies with more than 300 employees unless its board of supervisors already has an employee representative (Article 68).
  • Duties and power of the board of shareholders: In general, the Second Revision Draft intends to centralize the operation and management power in the board of directors. To this end, certain duties and power of the board of shareholder relating to ordinary operation of the company lay in the current Company Law is deleted by the Second Revision Draft. Moreover, it is stipulated that the board of shareholders could decide to delegate parts of its power to the board of directors (such as issuing the corporate bond) (Article 59).  
  • Supervisor is not a must for limited liability companies: At present, small-scale companies are allowed to have one or two supervisors instead of a board of supervisors. The Second Revision Draft further weakens the position of the supervisor, stipulating that limited liability companies may decide not to set up a supervisor by unanimous consent of all shareholders (Article 83, Article 121).
  • Liabilities of directors, supervisors and other senior management

The Second Revision Draft details and completes the specific circumstances where the directors, supervisors and other senior management should bear liabilities.

  • Joint liability for compensation under certain circumstances: The current Company Law does not set up joint liability for the directors, supervisors, and other senior management, and the judicial interpretation only stipulates joint liability in the case where the directors, supervisors, and other senior management are negligent in liquidation. According to the Second Revision Draft, under the following circumstances, the directors, supervisors, and other senior management should bear the joint liability together with the shareholder concerned: (a) the actual value of the non-monetary property used by the shareholder as capital contribution is significantly lower than the subscribed capital contribution (Article 52, Article 107); (b) the shareholder withdraws the contributed capital illegally (Article 57); (c) the controlling shareholder or actual controller instructs the directors and other senior management to conduct activities that harm the company’s or shareholder’s interests (Article 191).
  • Other liabilities for compensation: The Second Revision Draft adds that under the following circumstances, the accountable directors, supervisors, and other senior management should bear the liability for compensation: (a) the company or its subsidiaries provide financial aid for other’s obtaining of the company’s stock in violation of laws and cause loss to the company (Article 163); (b) the company distributes profits to shareholders before making up losses and withdrawing statutory public reserve funds in violation of the laws (Article 207); (c) the company reduces its registered capital in violation of laws (Article 222).
  • The Second Revision Draft also brings up that the company can buy the directors’ liability insurance and should report the insurance amount, scope, and fees to the board of shareholders (Article 192).
  • Shareholders’ rights

The Second Revision Draft improves the shareholders’ rights in the following aspects:

  • Class stock: It is stipulated that joint stock companies can issue class stock in addition to common stock. In this case, the sequence of distribution of profits or remaining property of class stock, the number of voting rights of class stock, restrictions on the transfer of class shares, and measures to protect the rights and interests of minority shareholders should be stipulated in the articles of association (Article 144).
  • Shareholders’ rights to know: It is stipulated that shareholders can entrust a third party such as an accounting firm or law firm to consult the articles of association, the register of shareholders, minutes of shareholders’ meetings, resolutions of board of directors’ meetings, resolutions of board of supervisors’ meetings and financial and accounting reports (Article 56). For joint stock companies, shareholders who individually or collectively hold more than 3% of the company’s shares for 180 consecutive days or more can exercise the above-mentioned shareholders’ right to know (Article 110).
  • Right of preemption: At present, the transfer of shares to the outsider requires the consent of a majority of the other shareholders. The Second Revision Draft only requires written notification to other shareholders. If the other shareholders remain silent after 30 days upon receiving the notification, the right of preemption should be deemed waived (Article 84).

Even though the outcome of the final revision of the Company Law remains unknown, we can still explore the legislators’ inclination from these remarkable revisions Foreign enterprises, which are subject to the uniform application of the Company Law and obligated to update their articles of association to align with the Company Law by 2025, are suggested to pay close attention to the revisions. The revisions on the corporate governance structure, the different type of shares for joint stock companies and the responsibilities of directors, supervisors and senior management may closely impact the way of operation and long term development of FIEs in China.

LI Huini
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Alban Renaud
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Denis Santy
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