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News & Insights
Authored by: Edwarde Webre and Jackie Chen
Subsequent to the release of the second draft amendment (the “Second Draft Amendment”) to the Company Law of the People’s Republic of China (“Company Law”) in December 2022, a third draft amendment (the “Third Draft Amendment”) was released on September 1, 2023 for public comment. The proposed amendments introduce significant changes to the Company Law aimed at enhancing corporate governance practices and protecting the rights of shareholders.
Compared to the Second Draft Amendment, the key highlights of the Third Draft Amendment are as follows:
1. Regarding shareholders capital contribution liabilities, the Third Draft Amendment provides that the registered capital of limited liability companies must be fully paid within five years from the date of a company’s establishment, unless an earlier date is set in the company’s articles of association. In addition, directors who fail to fulfil their obligations to verify the contributions made by shareholders and pursue the payment of any outstanding contributions that have not been paid in full on time shall be held liable to the company for compensation.
2. Regarding the protection of shareholders’ rights, the Third Draft Amendment has placed strong emphasis on:
3. Controlling shareholders and actual controllers who do not serve as directors but who effectively control the company’s operations shall be subject to a director’s fiduciary duties and diligence obligations towards the company.
4. The Third Draft Amendment strengthens the democratic management of the Company. It proposes the establishment and enhancement of a democratic management system, with the employee congress as the fundamental form. Furthermore, the inclusion of employee representatives in the board of directors is suggested in the Third Draft Amendment for all companies while inclusion shall be mandatory for companies with over 300 employees that do not have a board of supervisors, as set out in the Second Draft Amendment.
5. Regarding corporate bonds, the Third Draft Amendment confirms the permissibility of the public and private issuance of corporate bonds, clarifies the authority responsible for registering enterprise bonds, replaces bond certificates with a bond holder registry, expands the types of companies that can issue convertible bonds from public companies to all companies limited by shares, and introduces provisions on the rules and effectiveness of bondholder meetings and includes regulations pertaining to bond trustees.
6. The Third Draft Amendment also introduces provisions to reinforce legal liabilities and penalties for non-compliance. It imposes fines ranging from 10,000 to 50,000 yuan on individuals directly responsible for fraudulent practices, such as providing false information during company registration. Moreover, violations of accounting laws and asset evaluation regulations will be penalized in accordance with relevant laws and regulations.
The Third Draft Amendment reflects the Chinese government’s ongoing commitment to improving corporate governance practices and protecting shareholders’ rights. We will continue to monitor developments with respect to the amendment of the Company Law. Should you have any questions or concerns regarding corporate governance matters, please do not hesitate to reach out to us.
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