On 26 October 2018, the Standing Committee of the National People's Congress approved a decision to revise the Company Law of the People’s Republic of China (Revision), with the aim of supplementing and improving the existing share repurchase regime. We have set out a brief introduction to this Revision below.
It has only been five years since the last revision to the Company Law of the People’s Republic of China (Company Law). Compared with the revisions made in 2013 and other previous revisions of the Company Law, it is worth noting that:
This Revision improves the current share repurchase regime of companies limited by shares mainly by broadening the share repurchase scenarios, simplifying the decision-making procedures for share repurchase and extending the exercise period for buy-back:
1. Broadening the share repurchase scenarios
Before the Revision, the Company Law prohibits share repurchases in principle, with the exception of only four scenarios, which are capital reduction; merger with other companies; awarding the shares to employees, and at the request of dissident shareholders. Following the Revision, the relevant provisions have been changed:
2. Simplifying the decision-making procedures for share repurchase
Under the original Company Law, shareholders’ approval is required in the case of share repurchases, which means a company may have to convene a shareholders’ meeting and involve a complicated notification and announcement if it intends to buy back its own shares. After the Revision, in the case of Employee Incentive Scheme or Newly Added Scenarios, companies can simply buy back their shares by passing a board resolution, provided that the Articles of Association of the Company or the shareholders’ meeting has authorised the board to make such a resolution, and two-thirds of the directors are present at the board meeting.
Given the introduction of the simplified decision-making procedure for share repurchase under the above scenarios, in order to avoid the company being manipulated by certain management personnel which might prejudice the interest of shareholders, especially minority shareholders, the revised Company Law requires the listed company to buy back its share through the public centralised trading system, namely companies have to repurchase their shares through the public stock trading centre, and they are not allowed to buy back their shares privately by entering into agreement with certain shareholders.
3. Extending the exercise period of buy-back shares
After the revision, we could see:
It is said that the extension of the buy-back share exercise period by allowing companies to buy-back shares for a maximum period of 3 years has, for the first time introduced the so called “Treasury shares” system, although the Revision does not specify the meaning and nature of Treasury shares. It is expected that companies, especially those that wish to implement Employee Incentive Scheme, will benefit from the extension, as the new system has provided them with more flexibility when arranging the overall incentive plan.
We expect that after the Revision, more companies, especially listed companies will actively use share buy-back as a tool to adjust the share structure and implement their employee incentive schemes.
Meanwhile, we would also like to remind readers that:
 Given that Article 142 is under Chapter 5 of the Company Law, which is in relation to issuance and transfer of shares of companies limited by shares, the new share repurchase regime shall be only applicable to companies limited by shares, which includes both listed companies and private companies.
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