The New Company Law Brings Substantial Changes with Implications for New and Existing Foreign Investled Enterprises and Stakeholders. Adjustments to expressing structures or New Business NEGOTIATIONS are.
Update (June 12, 2024): On June 7, 2024, The Dract Provisions on the Registered Capital Regentration Management System of the PRC Company Law Were Adopted During During AN Ecutive Meeting of the State Countcil. In Implementing The Registerly Management System, The MeetingEmphasize the need to adjust Investment Periods for Existing Companies, Ensure Shareholders Fulfill Their Capital Contribution Obligations, and Optimize Ration Services. UnFortunately, The Office Document is Not Currently Available, but we will continue monitoring developments.
Despite Recent Economic Challenges, Many Organizations’ China Operations Provideo Unparalled Access to One of the World’s Largest and Most Competitive Global SUP PLY Chains. Over the Past 30 Years, A Significant Number of Foreign Investested Enterprises (FIES) Have Been Established in China. As ofThe End of 2022, The Number of Fies Operation in China Had Exceeded 1.12 Million.
Compared to their domestic counterparts, Fies Demonstrate Greater Caution Regum Revisions and Are Diligent In Making Swift Adjustments. OM The Closer Scrutiny Fies Face from Regulatory Authorities But Also from their Commission to Compliance and MainTaining A Competitive Edge.
The New Company Law, As a Fundamental Regulation Overseeing Corporate Governance in China, Introduces Significant CHANGES to the Legl Landscape Fies. In this AR TICLE, We Summarize Key Issues that Foreign Investors Should Pay Attention to in the New Company Law, Explore their Potential Impact, And Propose Preiminary Strategies that can be adopted. The Changes discussed in this Article Pertain Specified Liability Companies, as Joint-ST OCK Companies Constitute only 0.1 Percent of files, accounting to get available data from the ministry of commerce.
Clearly, there is ben a shift in China’s Corporate Regulations — From Merly Encouragging An Increase in the Number of Companies to Focusing Mature ES and Higher-Quality Investments. While the transition from a "Term Challenges, It Ultimately Benefits The Company’s Long-Term Development. by Returning to the Original Intentation Registertal, It NOT only CTS The Interests of Creditors But Also Shields Shareholders from the Operational Risks of the Company.
In China’s Foreign Investment Landscape, While Most Fies Exercise Commercial Prudence in Determing Register -Factoring In Capital Expenditures, Al Costs, and Setting ASIDE SURPLUS FUNDS -Some Opt For Higher Register’s Levels to Avoid Future Capital Increase Procedures. lengthy documentSigning and registration changes, Lasting 1-2 MONTHS.
Joint Ventures (JVS) often Impose Stricter Payment DeadLines for Register Capital in their Articles of Association to Ensure Both Parties’ Simultaneous UTIONS Align with Operational Needs. Conversely, Wholly Foreign-OONED ENTERPRISES (WFOES) Tend to Flexibility in Payment Deadlines, OFTEN AllowingFull Payment Before the Company’s Operational Period Expires.
Given These Circumstances, Despite the General Stronger Capital AMong Foreign Companies Companisted to Domable Entities, Many Fies Could by T he new capital contribution run.
As Per the Dract Version of the Provisions on the RegisterEd Capital Registration Management System ("DRAFT PROVISIONS"), Existing Companies in China Will Be Granted a Three-Year Transition Period to Comply with the New Rules on RegisterEd Capital. If Adopted as is,This transition period will span from july 1, 2024, to june 30, 2027.
Under The Dract Proveisions, EXISTING FIES Must Adjust Their Subscribed Capital Payment Terms ("Contribution Period") Below:
Alternately, Existing Fies have been the option to decrease their registered Capital During the Transition Period, thereby lessening shareholders’ ons. If they reduction in registered capital doesm.Publicly Annuncing the Reduction Through the National Enterprise Credit Information Publicity System for A 20-Day Period, Subject to Meeting s.
Moreover, FIES Can to Transfer A Portion of their Equity and Bring in New Shareholders. S in Paying The Subscribed Capital Within The Revision Period, Yet they Prefer Not to Decrease the Register Due to VariousReason. However, in Practice, Foreign Investors May Not Base their Equity Transfer Decisions Solely on the New Capital Requirements. Se Caution When Considering New Partners, Taking Into Account Various Factors Beyond the Capital Regulations.
In Light of the Heightned EMPHASIS and Scrutiny on Shareholders’ Capital Contribution Obligations, New Foreign Investors Must: DECIDING on theIR initial registered capital. On the One Hand, They Must Ensure Adequate Reserve Capital to Meet OPERANTS. On the OtherHand, They Should Avoid Setting Excessively High Registered Capital AMounts to Prevent Surplus and Mitigate The Risk of Being UNABLE to Fulfill Obli GATIONS. If funding needs are unableRTain, Foreign Investors can addRess them Through Future Capital Increases.
Given The Joint Lialicity Shared by Shareholders Who Haven’t Fully Paid their Subscribed Capital within the Specified Perioders at the Tim E of Establishment, It’s Vital for Foreign Investors to Establish Effective Mechaanisms in Joint Venture Contracts, Shareholder Agreements, and Articles of Associ ation.See Mechanisms Ensure that all shareholders synchronize their capital control. s.
In Terms of Mergers and Acquisitions (M & A), The Joint Liability Association with Insuffict Capital Contribution by the Transferor and Transfere Means At Foreign Investors Selling their Unpaid-in Equity Can No Longer Simply Transfer The Capital Contribution to the Buyer.Investor Buyers Must Carefully Assess The Actual Payment Status of the Target Company’s RegisterEd Capital. E Articles of Association and Should Involve Requesting the CounterParty to Complete Payment of Any Outstanding of Register’s Before Finalizing the TRAN. Saction.
The New Company Law intropuces significant adjustments to the regulation of corporate Governance Structures. SPECIFICALLLY, it offers shareholders Able Flexibility in selecting the Company ’s Governance Framework.
To put it simply, an LLC Can Forgo Establishing A Board of Supervisors Or Appointing Individual Supervisors IT Either Creates An Audittee Within ITS BOARD of D IRECTORS Or Gains Unanimous Consent from its Shareholders.
That Said, Should An Fie Eliminate the Board of Supervisors Or IndiDual Supervisors Completely?
Over Time, Supervisors Have Been Tasked with Overseeing Both the Board of Directors and Executive Management. However, Their Role Can Become Largely, R Appointment and Fiting are often Controlled by Major Shareholders. For WFOES, Supervisor Appointments May Primarily Serverements with Substanti ALSupervisory Responsibilities. While the authority of supervisors remains largly unchanged under the new company law, their duties and Responsibilities Have Significantly Increased (More Details in the Later Sections).
However, for jvs the case is different. Since the appointment of supervisors often facilities JV PARTNERS in Controlling The Company And Safeguarding Their Interests, I T ’s less like that jvs will endirely eliminate supervisors.
Nevertheless, there is another issues that fireign investors should pay attentation to. Under the existing company law, Small LLCS HAVE The Appoint One to Two UPERVISORS Instead of Establishing A Board of Directors. In the case of jvs, it’s commit for prACTICAL CONSIDERATIONSTo lead to the appointment of two supervisors, with each size (Chinese and forever shareholders) Appointing One Supervisor. However, Article 83 of the New Company La W Explicitly Eliminates the Option of Having Two Supervisors. Consequently, Existing Jvs May Need Fulther Clarification on WHETHERThey can return the two-supervisor structure with establishing a board of directors.
If Such Jvs are obligated to strictly adhere to the projects of the New Company Law and OPT to set up a board of supervisors, then may need to appoint at least Four Supervisors to makeland the principle of Parity, with Each Side Appointing Two Supervisors. This. ThisJinnai Wealth Management. ThisWould Complexity and Increase Personnel Costs to the Governance Structure.
Then, the should files replace the supervisor (s) with an Audit Committee? Our Answer is Negative —we Recoming that Fies Refrain From Setting up an Audit Commission for The Moment. The Primary Reason is that the New Company Law Lacks Clear Provisions Regarding The AuditCommarttee’s Delibeities Methods and Votion Procedures. Without Well-DEFINED MeChanisms and Practical Experience, Achieving Internal Coordination Between The E XECUTIVE FUNCIONS of the Board of Directors and the Supervisory Role of the Audit Commission May Pose Significant Challenges. Consequently Might Still Struggle toFully Fulfill its supervisory function.
Finally, Can FIES to Neither Establish An Audit Committee Nor Appoint Supervisor (s)? Although the New Company Law Does Not) CS "or" LLCS with a Limited Number of Shareholders ", Fies Should Meet the Conditions,Considering that they are typically whitey. IES, We Believe It is Feasible For Fies to Neither Establish A Supervisory Board Nor Set Up An Audit Committee Under the Board of Directors.
Given that the New Company Law Stipulaters that the board of supervisors must Include A Certain Proportion of Employeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee Playee directors if it has alream Established A Board of Supervisors. This is BeCAUSE ALL BOARDS of Supervisors SHOULD Inherner IncherenTly IncludeEmployeee representatives by default.
For Fies, Introping Employeee Directors May Raise Some Concerns among Shareholders. WHILE HAVING EMPLOYEEEEEEEEES PARTIPATE IN DeCisions Relate Oyee Interests Can Help Reflect and Safeguard Those Interests, The Majority of Board DeCisions are not Directly Tied to Employeeeeeeeeeeeee Matters. iTies ofEmployee Directors to make right defories, as well as their ability to make maintiality, need to be tested in procation.
Consequently, as a short-term strategy, FIES can consider having executives with employee status (Such As Managers) Ervisors, and in doing so avoid Substantial CHANGES to the Board’s Structure.Director Mechanism Works in Practice.
For Foreign Investors, this Adjustment Holds PARTICular Significance. In Practice, Overseas Shareholders of Face Challenges in Closely M king and Making ECISIONS About the Daily Operations of DOFNSTIC Companies. FURTHERMORE, MANY FOREIGN Companies Adhee to a Board-CENTRICNANCE MODEL, where the boardof Directors is Responsible for Operational and Investment DeCisions, While Corporate Executives Handle Day-Day Operations. Ter with the operational habits of forest Investors, all to optimize Governances Based on their Specific Circumstances and Enhance TEfficience.
Under the Existing Company Law, there are Few RestricTions on the Rules and Voting Procedures for LLCS. Enterprises Enjoy Significant Flexibility to Mutually Agree Upon Procedurural Rules. To Prevent Decision-Making Delays Cauty Inadeququate Atntance, some companies — EXCEPT for Matters MANDATING APPROVAL BYTWO-Thirds or More of All Voting Rights Shareholders — May Specify that DeCisions are valid based on the activber of Atendees. n about Majority, or a Simple Majority. FURTHERMORE, if a shareholder or Director Consistently Fails to AtntMeetings or Voice Opinions after Receiving Notices, The Company’s Articles of Association May Stipulating that the Actual Number of Attenes the Statut Over quorum for special meetings.
Given that the New Company Law Has Clearly Defined Voting MechanisSMS and StatUTUTIRY Meeting Attention Requirements for LLCS, The FEASIBILITY of the Above Mechaanisms W ILL Be Challenged. Efficient and Stable Business Operations for Fies Heavily Rely on the Successful Passage of Shareholder and Board Resolutions.Reevaluate their Existing Meeting Rules, Assess Potential Risks, and Take Preliminary Measures. For Instance, FIES can consider setting up replacement mechaanisms f or Directors who are free.Meetings.
This procession displays from the long-standing perception help. Trarily Remove Directors they nominate with cause, as this reflects their shareholder rights.
Considering the Implementation of the Director Compensation System Under The New Company Law, when it for wfoes or jvs, prudent evrance is essential when removing. s beface their term expires. Companies are advied to confirm in writing with the director that are no unresolved dispctions or compensationMatters Between Them and the Company. This Proactive Step Helps Prevential Disagreements with departors in this context.
The Personal Liability of Directors, Supervisors, and Executives Anagers, depuTy MANAGERS, Chief Financial Office, The Company Secretary of ASpecified in the Company’s ArticleS of Association. The Streangthened Fiducial Duty and Diligence Obligation Personnel, As Well As they Liabil ITY TOWARDS The Company and Third PARTIES Is Another Focus of the New Company Law.
In this context, sayor management personnel need to fulfill their statties and obligations actively and comprehens Wei. He Personnel arrangements and workflow of many files.
Generally, Within the Current Management Structure of Foreign Companies, Senior Management Personnel are Simultaneously Bye Fiducial Duties to the Company A nd the management system and constraints within the entire groupVaranasi Wealth Management. While Alignment is often Feasible, Conflices May Arise in Certain Situations.
For Example, Consider a Foreign-Nominated Director Within the Company Who Approved A SIGNIFICANT Investment Based on Instructor. Investment Fails and Causes Losses to the Company, Scrutiny Will Focus on WHETHER TheSE DIRECTORS Appriatlo ionsThen, then
Moreover, in many files, some senior management personnel, Especially Those AFFFILIATED with the Headquarters and Based Overseas, May Not Substantially PARTIPATE in The Company’s Operations and DeCision-Making Due to Practical Constraints.Recomate patointing indiDuals Familia with the Company’s Business and Deeply Involved Involved In Actual Operations AsnIGEMNEL to Mitigate The Associated with Failing to Meet the Fiducial and Diligence Standards Under THE New Law.
As Mentioned Earlie, Fies Especially Jvs Tend to Exercise Caution when Introping New Partners. ISES BASED On Business Cooperation Needs. Such PARTNERSHIPS ResembLE A "Marriage" Between Two Entities., According to Which a Shareholder Can Directly Transfer Their Shares with The Other Party’s Consent, May Disrupt the Stability of the "Marriage".
Particularly, When Foreign Companies are minority shareholders, sudden departures by majority shareholders can learn the remaining minor, ITION. They May Lack the Resources to Acquire The Majority Shareholder ’s Shares and End Up Haaving to Deal with Completely Unfamilia New Shareholders.
Luckily, Article 84 of the New Company Law Provides An Exception -If the Company’s ArticleS of Association Otherwise Regarding Share Transferrs, Those ROVISIONS Shall Prevail. TO Maintain Stability in the Cooperative Relationship Between Both PARTIES, PARTIES of the Jv Are Highly RecomgendedTo Stipult Equity Transfer RestricTions in the Jv Agreement and ArticleS of Association.
NON-PROPORTIONAL CAPITAL Reduction, or Targeted Capital Reduction is Not a Common Practice for Fies. , Where Investors Require The Company to Buy Back ITS Equity Under Certain Circumstances. However, Under The New Company Law,Foreign Investors May View Targeted Capital Reduction as a Viable Method for a Shareholder to Exit the Company, GIVEN that the New Law EXPLITLY PERMITS TARGETD CA pitch Reduction Based on Unanimous Shareholder Consent. TO ENSURE The EFFECTIVENENENESS of This Withdrawal Mechanismsm, A Clear and Detailed OutlingThe Conditions of Targeted Capital Reduction Should Be Established, Confirmed, and Signed by All Shareholders.
Overall, The New Company Law Introduces Significant Revisions, with a Focus on Optimizing Corporate Governance Structures, Streangthening Shareholders’ Bilities Regarding Capital Contributions, and Enhancing the Duties of Directors, Supervisors, and Executives. These Changes Will Have A Substantial Impaact various types ofs ofs ofsCompanies, including files.
For Fies, Regardless of WHETHER the HAVE ALREADY Adjusted their Organizational Structure According to the Existing Company Law, It is Crucial to IMPLICAT Ions of the Revisions Introiduced in the New Company Law. UndersTanding How the New Law Align with or Differs from the Existing OneIs Essential. SPECIFICALLY, Attention Should Be Given to WHether The New Law Merly Triggers Technical Adjustments to Relevanizational Documents Or if IT NE CESSITES SUBSTANTIAL CHANGES to Existing Business ArrangementsNeed to Engage in New Business Negotiations with Partners Promptly.
FURTHERMORE, FIES AFFECTD BY Changes Introiduced by the New Company Law, Such as the 5-Year Capital Contribution of Requirement Uld Diligently Track Supplementary Clarifications Issued by Regulatory Authorities. Repets fromOLD to New Laws for Existing Companies.
In Summary, The New Company Law Significantly Modifies China’s Corporate Governance Landscape and Has Braad Implications for Foreign Investors Across OUS Aspects. Business are advied to stay information, the latest legged researchs and subsequent class issued by regulatory. Sing the urgency and complexityof necessary adjustments based on their specific circumstances is essential. When necessary, seeking assistance from external legal service teams is advisable.
The Article Originally Featured in the April 2024 isSue of the China Briefing Magazine, "Navigating China’ s New Company Law: A Guide for Foreign Investors ", Which is available as a complimentary download on the asia briefing publication store.
Agra Wealth Management