2024 Company Law Impact on Foreign-Funded Enterprises: Analysis and Recommendations
The Company Law of the People’s Republic of China (“Company Law“) underwent amendments and was officially adopted on December 29, 2023. This amended law, hereafter referred to as the “2024 Company Law“, is set to come into effect on July 1, 2024.
To address the topic, it is necessary to examine the evolution of laws and regulations governing foreign-funded enterprises. Previously, China promulgated (1) Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures, (2) Law of the People’s Republic of China on Wholly Foreign-owned Enterprises, and (3) Law of the People’s Republic of China on Sino-foreign Contractual Joint Ventures as the legal basis for of all foreign-funded enterprises in China.
The above-mentioned three laws were repealed by the Foreign Investment Law of the People’s Republic of China (“Foreign Investment Law“, promulgated on March 15, 2019, Implemented on January 1, 2020), which stipulated that the organizational form, structure and operating rules of foreign-funded enterprises are subject to the provisions of the Company Law, the Partnership Enterprise Law of the People’s Republic of China and other applicable laws.
Considering that a large number of foreign-funded enterprises are organized as limited liability companies, the implementation of the 2024 Company Law will have a substantial impact on the corporate governance of all foreign-funded enterprises in China.
It is clear that the Company Law will be the main legislation governing foreign-funded enterprises. In other words, the 2024 Company Law will apply almost non-discriminatorily to foreign-funded enterprises.
In this article, I will analyze the impact of the adoption and implementation of the 2024 Company Law on foreign-funded enterprises. I will provide insightful suggestions to navigate the changes and ensure compliance.
- Organizational Form Adjustment
- Understanding the 5-Year Time Limit for Contributing Subscribed Capital
- Power Adjustment: Enhancing and Refining Abilities
- Enhanced Safeguards for Shareholders’ Rights and Interests
- Enhanced Accountability for Directors, Supervisors, and Senior Managers
- Updated Regulation for Company Dissolution and Liquidation
Organizational Form Adjustment
The CN State Counsel promulgated the Implementation Regulations for the Foreign Investment Law of the People’s Republic of China on December 26, 2019 ( effective on 2020.01.01. “Implementation Foreign Investment Law“) , stipulated that
“With effect from 1 January 2025, where an existing foreign investment enterprise has not adjusted its organisation form or organizational structure etc and complete the change registration pursuant to the law, the market regulatory authorities shall not process the application(s) for any other registration matter(s) of the said foreign investment enterprise, and shall announce the relevant information.”
In plain English: “if an existing foreign investment enterprise does not adjust its organizational form or structure and complete the change registration before 1 January 2025, the market regulatory authorities will NOT process any of its future applications for other registration matters and will publish its status quo.”
Since the Foreign Investment Law and Implementation Foreign Investment Law were introduced, the majority of foreign-funded enterprises have already restructured their organizational form. However, we have observed that a significant number of businesses e.g., branch offices have not yet done so. Those offices, businesses need to catch the deadline – no later than 31 December 2024.
Understanding the 5-Year Time Limit for Contributing Subscribed Capital
Article 47.1 of 2024 Company Law stipulated that
” The registered capital of a limited liability company shall be the amount of capital contributions subscribed for by all the shareholders as registered with the company registration authority. The amount of capital contributions subscribed for by all the shareholders shall, according to the articles of association, be fully paid up by the shareholders within 5 years as of the date of establishment.“
Transitional period: The State Administration for Market Regulation (“SAMR“, the governing bureau for business registration, i.e.) drafted a regulation for comments, suggesting if companies that registered before 1 July 2024, should allow a three (3) years transition period for meeting the above-mentioned mandatory requirement. Combined with relevant articles thereof, the deadline for most companies to pay the subscribed capital in full is 1 July 2027. This transition period may extend to 1 July, 2032 for companies that either (a) outlined in their bylaws deadline for pay the subscribed capital is over 30 years; or (b) need to contribute capital over one billions CNY.
Note: The above-mentioned SAMR regulation is a “draft for comments”. It could still be amended and is subject to the final promulgated and announced version.
Failing to contribute subscribed capital within the prescribed time limit may result in incurring administrative penalties.
Power Adjustment: Enhancing and Refining Abilities
Shareholders
- deleted “
to decide on the company’s business policy and investment plan“, “to examine and approve the company’s annual financial budget plan and final account plan“, and added “the shareholders’ meeting may authorize the board of directors to make resolutions on the issue of corporate bonds”. - Resolutions made by the shareholders’ meeting on general matters shall be adopted by the shareholders representing more than half of the voting rights. (Resolutions to amend the Articles of Association, increase or decrease the registered capital, and resolutions to merge, split, dissolve or change the form of the company shall still be passed by shareholders with more than two-thirds of the voting rights.)
Board of Directors
- Deleted the expression
“the board of directors is responsible to the shareholders’ meeting”, and delete its authority to “formulate the company’s annual financial budget plan and final account plan”; Added “Other powers conferred by the shareholders’ meeting” and “The restrictions of the articles of association on the powers of the Board of directors shall not confront a bona fide third party”. Overall, the shareholders’ meeting can delegate more powers to the board, which will exercise them on a daily basis. - Deleted the restriction of maximum thirteen Board of Director members, and the numbers of Board of Directors would be more than three, with no upper limit.
- The shareholders’ meeting may decide to remove a director, but if the director is removed before the expiration of his term of office without justifiable reasons, the director may demand compensation from the company.
- The expression “
Executive Director” has been deleted and referred to only as “Director”
General Manger
The original listing of the functions and powers of the General Manager is deleted, and it is stipulated that the manager shall be responsible to the Board of Directors and exercise his functions and powers according to the provisions of the Articles of Association or the authorization of the Board of Directors.
Enhanced Safeguards for Shareholders’ Rights and Interests
……
Enhanced Accountability for Directors, Supervisors, and Senior Managers
……
Updated Regulation for Company Dissolution and Liquidation
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