What foreign firms need to know about capital contribution
Following approval by the Standing Committee of the National People’s Congress on 29th December 2023, China’s revised Company Lawtook effect on 1st July 2024.[1] It represents the most comprehensive and substantial amendment to the Company Law since its enactment in 1993, over 30 years ago. In this article, Carlo Diego D’Andrea and Aris Xie of D’Andrea & Partners Legal Counsel explain how new capital contribution rules in the revised Company Law will impact foreign companies.
Adjustments to the maximum period for subscribed capital contributions by shareholders
The first major change to the law is the requirement that the registered capital of a company must be paid within a specified term, with the consequences of failing to fulfil this obligation by the specified date having also been strengthened. For limited liability companies, Article 47 explicitly establishes a five-year time limit for capital injection, stating, “Within five years from the date of incorporation, all shareholders shall fully contribute their subscribed capital in accordance with the provisions of the company’s articles of association”.
For companies established and registered before the implementation of the revised Company Law on 1st July 2024, if their capital contributions exceed the five-year time limit, they are required under the law to “gradually adjust” their capital contributions within five years of the establishment of the company. Additional implementing regulations from China’s authorities have been released to provide further guidance on how gradual adjustment will be applied.
Accordingly, the State Council promulgated the Provisions of the State Council on Implementing the Registered Capital Registration Management System under the Company Law (Management Provisions).[2] In conjunction with the Management Provisions, adjustment systems are provided for companies in different situations.
For limited liability companies registered on or before 30th June 2024, and the remaining period for subscribed capital contributions exceeds five years from 1st July 2027, the Management Provisions provide a three-year transition period, requiring the remaining period for subscribed capital contributions to be adjusted by 30th June 2027 to within five years. Any adjustment must be recorded in the company’s articles of association.
Strengthening shareholders’ capital contribution obligations
Along with the time limit for the contribution of registered capital, the revised Company Law generally strengthens the regulation and liability requirements for shareholders’ improper or insufficient contributions.
The law explicitly states that shareholders who fail to contribute their capital in full and on time shall be held liable for compensating the losses incurred by a company. Directors have an obligation to verify contributions and issue collection notices on behalf of a company. If a director fails to fulfil this obligation in a timely manner, resulting in losses for a company, they shall bear the liability for compensation. Shareholders who receive notifications from the directors but still fail to fulfil their contribution obligations within the prescribed period may, by resolution of the board of directors, face a notice of loss of rights. This implies that the shareholder loses the rights to their unpaid contributed shares.
In addition, if a company is unable to pay its debts as they become due, the company or its creditors, whose debts are due, are entitled to demand that shareholders who have subscribed to but not yet fully paid their capital contributions (because the payment term has not expired) make those payments in advance of the term.
Improvement of equity transfer rules
The revised Company Law has enhanced the right of consent for other shareholders regarding the transfer of equity and, for the first time, clearly stipulates the sharing of responsibilities between the transferor and transferee in the event of an equity transfer. Specifically, Article 84 of the Company Law removes the requirement for shareholders of a limited company to obtain the consent of other shareholders for the transfer of equity, replacing it with a requirement to provide notification. If the other shareholders fail to respond to the notification, it will be deemed as waiving their right of first refusal.
Conclusion
This comprehensive revision of the Company Law adjusts the existing corporate governance structure from multiple perspectives, which will significantly impact the operations of foreign-invested enterprises in China and influence their future investment decisions. Specifically, it will affect the optimisation of the current corporate governance structure, the adjustment of registered capital and the subsequent operation of companies. It is essential to pay attention to subsequent regulations and rules issued by regulatory authorities and consider the actual situation of a company’s operations in China to assess the aspects that need to be adjusted. Navigating the updated capital contribution rules and foreign investment landscape, as well as adhering to best practices, remains crucial for successful operations in China. By staying informed and seeking professional advice, foreign-invested companies can leverage these changes to their advantage and thrive in the dynamic Chinese market.
Carlo Diego D’Andrea is managing partner at D’Andrea & Partners Legal Counsel. Aris Xie is a counsel at the firm.
D’Andrea & Partners Legal Counsel is a leading international law firm, with European headquarters situated in Milan, Italy, and its Asia-Pacific headquarters based in Shanghai, China. The firm has a strong presence across major cities in China. The firm is one of the very few international law firms in China duly authorised by the Ministry of Justice to operate as a Representative Office of a foreign law firm in China.
[1] Company Law of the People’s Republic of China, National People’s Congress, 29th December 2023, viewed 18th October 2024, <http://www.npc.gov.cn/npc/c2/c30834/202312/t20231229_433999.html>
[2] Provisions of the State Council on Implementing the Registered Capital Registration Management System under the Company Law, State Council, effective on 1st July 2024, viewed 18th October 2024, <https://www.gov.cn/zhengce/zhengceku/202407/content_6960377.htm >
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