New amendments to the Company Law of the People’s Republic of China have been passed at the sixth meeting of the Standing Committee of the National People’s Congress on the 28th of December, 2013. Twelve amendments have been made to the Company Law to relax the requirements on registered capital and simplify the registration procedures. These changes will become effective on the 1st of March, 2014. The amendments are intended to stimulate private sector entrepreneurship and to shape a better economic landscape for market reform. It remains to be seen how these changes will impact foreign investment enterprises.
Introduction of a “subscribed capital system”
The current law utilizes a paid-up capital system for limited liability companies and joint stock limited companies. The law generally requires shareholders to make initial capital contributions that are, in total, not less than 20% of the company’s registered capital. Shareholders are also required to pay the remaining contributions within a prescribed time-frame. For limited liability companies, the remainder must be paid within two years from the establishment of the company. For investment companies, the remaining amount must be paid within five years. For single shareholder limited liability companies, the full registered capital contribution is required to be paid in a single lump sum.
The amended law replaces the paid-up capital system in most cases with a subscribed capital system, where the company’s registered capital is the total amount of capital contributions subscribed by its shareholders pursuant to the provisions of the company’s articles of association. The subscribed capital system shall be applicable to limited liability companies and joint stock limited companies established through promotion(发起方式设立). The paid-up capital system shall remain applicable to joint stock limited company established by means of stock flotation (募集方式设立), and for such companies the actual total paid-up share capital registered shall be recorded with the relevant company registration authority. The current paid-up registered capital system shall also remain applicable to the extent specifically provided for in relevant laws, regulations and the decisions of the PRC State Council.
The prescribed timeframe for shareholders to make their capital contribution in full has also been removed. This change should reduce the costs of setting up a business as shareholders are no longer required to meet the cash outlay requirements as stated in the current law. There will be more flexibility in timing contributions.
Pursuant to the amended law, the actual paid-up capital of a company will not be set out on the company’s business license or appear as a company registered item. As the actual paid-up capital, which to some extent reflects the financial capability of the company, will be no longer be disclosed to the public (subject to any other regulatory change), due diligence reviews will be even more important in major commercial transaction. The new system may pose greater transactional risk to counterparties than the prior system, which actively monitored capital contributions. As company shareholders are responsible for contributions of registered capital to the company as reflected in its articles of association, relevant due diligence upon the financial standing and credit of the said company and its shareholder(s) may be even more important prior to concluding any substantial commercial contract or joint-venture contract. It will be more difficult to assess the actual capitalization of companies and the nominal registered capital figure will offer less assurance to counterparties.
Removal of the minimum amount of registered capital
The current law specifies the statutory minimum amount of registered capital required for limited liability companies, single shareholder limited liability companies and joint stock limited companies. The statutory requirements for these companies are RMB 30,000, RMB 100,000 and RMB 50,000,000 respectively.
The amended law abolishes these requirements. There will no longer be a statutory minimum amount of registered capital unless prescribed by other laws or administrative regulations. This allows companies to be set up more easily with a capital reflecting their specific requirements. Theoretically, it would be legally feasible for a limited liability company to have a registered capital of RMB 1. Greater flexibility to reduce capital to suit their individual business needs, as long as it accords with the company’s articles of association, has also been introduced.
Elimination of capital contribution cash requirement
Under the current law, a minimum percentage of a company’s registered capital must be contributed in cash. For limited liability companies, the amount of capital contribution paid in cash by all shareholders must be at least 30% of the company’s registered capital. Once that minimum threshold is met, capital contributions may be made using non-monetary assets such as contributions in kind, intellectual property rights and land use rights.
The amended law eliminates the threshold requirement of a cash contribution and allows shareholders greater freedom to make capital contribution payments with non-monetary assets. Shareholders are free to select the balance of cash and non-cash capital contributions that fits the company’s business needs.
Verification of capital contribution is no longer required
Under the existing law, all capital contributions made by shareholders must be verified by a lawfully established capital verification institution, which in practice meant a qualified local accounting firm. The accounting firm would issue a capital verification report, which together with other supporting documents, would need to be submitted to the company registration authority which monitors the completion of the capital contribution obligations.
Under the amended law, the verification of capital contributions is no longer required. Furthermore, the contributed capital of each shareholder does not have to be disclosed to the company registration authority. The mechanism for monitoring the status of capital contributions has been removed. Companies will benefit from these changes as the simplified procedures can substantially reduce time and cost in setting up a company.
Application of amendments to Foreign Investment Enterprises
The extend to which the aforesaid amendments to the PRC Company Law will apple to the establishment and operation of Foreign Investment Enterprises (“FIEs“), such as Sino-Foreign Equity Joint Ventures and Wholly Foreign owned Enterprises, is not yet clear. As with the existing Company Law, the amended Company Law is applicable to FIEs to the extent that an issue is not addressed under more FIE specific regulations. Many of the amended matters are covered by FIE specific regulations, but with time it can be expected these amendments will become relevant to FIE establishment and operations. We expect that further regulations will be issued concerning the application of the subscribed capital system to FIEs.