News

On December 29, 2023, the 14th National People's Congress Standing Committee approved the seventh revision of the "Company Law of the People's Republic of China". The revised law will come into effect on July 1, 2024.

The amendment involves the deletion of 16 articles from the 2018 Company Law, with the addition and modification of 228 articles, including substantial changes to 112 articles, making it a major revision, often referred to as the "second revision." This article aims to provide practical interpretations of the modifications introduced by the new law, drawing comparisons with the 2018 Company Law.

I. Changes in Registration

According to Article 9 of the new law, the business scope, including changes, is specified in the company's articles. Considering Articles 32-36, the business scope is a statutory registration item, and any changes should be duly registered. Failure to register changes may limit the company's ability to resist claims from third parties acting in good faith, except for matters requiring legal or regulatory approval.

It's crucial to note that the new law emphasizes the element of "good faith," narrowing the scope of entities against which a claim can be made. If a third party is aware of the changes and conducts transactions based on the pre-change information, the company can raise relevant defenses. However, such disputes are expected to be rare, given the ease of accessing registration information.

II. Legal Representative

The concept of a legal representative is not present in foreign legal systems. The new law (Article 10) expands the pool of individuals who can serve as the legal representative beyond the chairman and general manager to include other board members, as specified in the company's articles. However, it is anticipated that situations where individuals other than the chairman or general manager act as the legal representative will be uncommon in Chinese practice.

Additionally, the new law introduces a mechanism for the resignation of the legal representative. However, the law does not clearly specify the legal consequences if a new representative is not promptly appointed within the statutory period (30 days), which may lead to disputes and delays.

III. Meeting Methods

The new law introduces the option to convene shareholder meetings, board meetings, or supervisor meetings using "electronic communication" methods (e.g., Tencent Meetings, WeChat groups), allowing for online voting. This change facilitates meetings for members located in different regions. It is advisable to maintain comprehensive meeting records, including synchronous recordings.

IV. Invalid Resolutions

The new law outlines circumstances under which shareholder or board resolutions are deemed invalid. However, clarity is needed regarding the second condition, "failure to vote on the resolution items." It is unclear whether this refers to the entire resolution not passing or specific items within a resolution. Following the Civil Code of the People's Republic of China (Article 156), if a part of a civil legal act is invalid but does not affect the validity of the rest, the remaining part remains effective.

Reference Case: Dispute over the effectiveness of a company resolution: (2021) Supreme People's Court Min Shen 3524. (Note: This case involves partial invalidity of a shareholder resolution while other parts remain effective.)

V. Establishment Agreement

To clarify the rights and obligations of promoters during the establishment of a limited liability company, it is strongly recommended to sign an establishment agreement. In the case of a joint-stock limited company, the law mandates the signing of a promoter agreement. In practice, the agreement should cover matters specified in the company's articles (Article 46).

VI. Subscription Period System

Article 47 of the new law has significant implications for the existing 42 million limited liability companies in China and those established in the future. To address issues such as excessively long subscription periods and excessive registered capital observed under the old law, the new law imposes strict regulations. Shareholders must fully contribute the subscribed registered capital amount within five years. It is essential for company articles to explicitly state the subscription period, with a maximum duration of five years.

Transitional provisions are provided for existing companies with subscription periods exceeding five years and exceptionally large registered capital. However, the subjective judgment criteria for what constitutes "clearly abnormal" in terms of contribution periods and amounts raise uncertainties in future practice.

The author argues that such a modification is unnecessary. Existing market transparency through credit information systems allows potential transaction parties to easily access relevant information. Intervening in market behavior, which is a personal choice based on registered capital, seems unnecessary.

VII. Acceleration to Maturity

Article 54 applies, and particular attention should be paid to the definition of "unable to repay matured debts," which should align with bankruptcy law. Following the interpretation in the "Notice of the Supreme People's Court on Several Issues Concerning the Application of the <People's Republic of China Enterprise Bankruptcy Law> (I)", a court should deem a debtor incapable of repaying matured debts when certain conditions are met.

The request for acceleration to maturity can be initiated by the company or creditors. It is expected that the understanding provided in the "Summary of the Ninth National Court Work Conference" (Judicial Document [2019] No. 254) regarding whether shareholders' contributions should be accelerated to maturity will no longer apply post the new law.

Reference: "Summary of the Ninth National Court Work Conference" on the acceleration of shareholders' contributions: Under the subscription system of registered capital, shareholders enjoy term benefits. Courts should not support creditors seeking supplementary compensation from shareholders who have not yet reached the contribution deadline but are held responsible for the company's inability to repay matured debts. Exceptions include cases where the company is subject to execution, has exhausted all execution measures without available assets, is eligible for bankruptcy but does not apply, or where the shareholders' meeting has resolved or extended the shareholder contribution period.

VIII. Inspection and Copying Rights

In comparison with the old law, the new law introduces the right to inspect and copy the shareholder register and the right to inspect (and copy) accounting vouchers. The right to inspect "accounting vouchers" is particularly practical and impactful, acting as a deterrent against fraudulent activities. However, the ability to copy or photograph accounting vouchers during inspection requires clarification and negotiation with judges (trial judges, enforcement judges) in practice.

It is crucial to consider the scope of inspection of accounting vouchers and accounting books. According to the "Accounting Law of the People's Republic of China (2017 Revision)," accounting vouchers include original vouchers and accounting certificates, while accounting books, as per the 15th article, must be based on audited accounting vouchers. Accounting books include general ledgers, detailed ledgers, journals, and other auxiliary books.

The term "accounting books" in accounting law may differ from the "accounting books" mentioned in the company law, and it is advisable to interpret them in the same way.

This article provides insights into the key modifications introduced by the new Company Law (2023 Revision), shedding light on practical implications and considerations. The second part of this series will continue the analysis, covering additional aspects of the revised law.