Will the “Year of the Dragon” in China be a year of economic reforms? The company law published on December 29, 2023 (applicable to GmbH and joint stock companies) is preceded by a legislative process lasting several years; It is now scheduled to come into effect on July 1, 2024, and will also bring major changes for foreign-invested companies in China.
Below is an overview of the most important changes:
Capitalization of companies and deadlines for capital contributions
Shareholders should check the potential effects at an early stage: One of the most important changes concerns the company's share capital. In the future, it must be paid no later than five years after the company is founded. However, the transitional rules announced in the law so that existing companies can gradually adjust any longer payment terms are currently missing. If the company does not meet the claims due from third-party creditors, the company itself or a creditor may also demand an advance capital contribution. Shareholders can contribute their capital in the form of company shares or creditor rights. Creditor rights mean claims of a shareholder against the company. Previously, it was only possible to convert shareholder loan credits into equity. The change should allow the entry of other amounts receivable, for example from deliveries or services, as capital. The board must review capital contributions. If a delay is found, he must notify the defaulting member in writing within a minimum period of 60 days. If the capital contribution is not made in a timely manner, the company may order the withdrawal of shares by decision of the board of directors, thus losing the defaulting partner all rights associated with the unpaid contribution. The withdrawn shares may be transferred or there will be a corresponding capital reduction. If this is not completed within six months, the remaining partners will be responsible for the delinquent contribution. The new regulations also affect the use of company reserves to offset losses, expand production/business or increase capital.
Internal structures of society
The amended law brings more flexibility: a new “audit committee” within the board of directors may in the future take over the tasks of the supervisory board or supervisory person(s), which will then no longer apply. Particularly interesting for SMEs is the option to completely waive the need to create a supervisory board with the consent of all shareholders. In the future, in addition to being an administrator, any member of the board of directors may be indicated in the articles of association as a legal representative of the company; Current CEO restriction no longer applies
Additional co-determination by employees
Particularly important for companies with more than 300 employees: If there is a board of directors made up of three or more people, it must in future contain at least one person representing the employees. This person is elected by the workforce in a democratic process and may also be a member of the board's new “audit committee.” Nothing has changed in the existing rules for co-management of the supervisory board. The opinions of employees must be heard when decisions are made about restructuring, dissolution, bankruptcy or other “important aspects related to the business”.
Mergers, spin-offs, transfer of shares, increase and reduction of capital, as well as liquidation are regulated. In the case of a merger with a 90% or more owned subsidiary, in future only a board decision will be required rather than a shareholder deliberation. When transferring shares, it is stipulated that shareholder rights may be exercised by the new shareholder as soon as the transfer is registered internally in the “list of shareholders”. Differentiated regulations distribute responsibility between the seller and the buyer for transferred shares for which capital contributions have not yet been made. When transferring the property to third parties, any preemptive rights of co-shareholders must be taken into account. If the co-partner does not respond within 30 days, the right of preference will be considered waived. However, this regulation is dispositive – the company's articles of association may contain different regulations on share transfers. If the shares are transferred judicially within the scope of coercive execution, co-shareholders also have a right of preference, but they must exercise it within 20 days.
Responsibility of corporate bodies and shareholders
Advisors, legal representatives, supervisory boards, administrators and shareholders must familiarize themselves with the new liability rules. FOR EXAMPLE: Boards of directors, supervisory boards and managers have an explicit duty of loyalty and care similar to German law and can be held liable for breaches of the duty. In principle, the company is responsible for the actions of the legal representative that cause damage in the performance of their duties, but can also take legal action against them if necessary. Directors may be held liable for damage caused to the company if they fail to comply with the obligation to verify capital contributions. All bodies can be held liable if they harm the company's interests when doing business with related companies or people. The revised law also contains differentiated regulations on liability before founding and in case of illegal distribution of profits. A director, in turn, can demand compensation from the company in the future if he is removed from his position early “without just cause”.
Formal aspects of committee bodies and decisions
Requirements are increasing: more refined regulations concern, for example, the dismissal of legal representatives, management boards and supervisory boards. In individual cases, a management board or supervisory board may be legally obliged to temporarily continue its activities despite the termination of its appointment. Committee decisions can always be taken electronically, unless the statutes provide otherwise. In the future, board deliberations will require the participation of the majority of administrators. Finally, the law also regulates the possibility of judicial challenge to erroneous decisions of the general meeting or the board of directors and subsequent reversal of registrations already made under company law.
If you have any questions, the Foreign Trade Center Shanghai team will be happy to help you at any time at [email protected].
The above information was created in cooperation with Rödl & Partner, Shanghai/Beijing/Guangzhou/Taicang:
Rödl & Partner China
20/F Guohua Life Financial Building
1501 Century Avenue
Shanghai 200122 / China
T +86 21 6163 5328, F +86 21 6163 5310
Mr. Sebastian Wiendieck, partner
Mr. Ralph Koppitz, partner
From: January 12, 2024