On 24 December 2021, the Standing Committee of the 13th PRC National People’s Congress released the draft of a major update to the current PRC Company Law. If enacted in its current form, the draft would lead to some substantial changes compared to the current PRC Company Law. E.g., the draft provides for a mandatory requirement of having employee representatives in the Board of Directors of limited liability companies with more than 300 employees, for increased supervising obligations and potential liabilities of company organs as well as for clarifications on the possibility of making capital contributions with stock rights or creditor’s rights and for the formal introduction of simplified de-registration and capital reduction procedures. Below is an overview on some key aspects of the draft, in which we focus on the provisions relevant for PRC limited liability companies.

On 24 December 2021, the Standing Committee of the 13th PRC National People’s Congress had released the draft of a major update to the current Company Law of the People’s Republic of China. The latter had entered into effect on 25 December 1999 and was last amended with effect of 26 October 2018 (the “Current PRC Company Law”). The draft update, i.e. the Company Law of the People’s Republic of China (Draft Amendment) (the “Draft”), had been published by PRC National People’s Congress for public comments which could be made until 22 January 2022.

The Draft consists of 15 chapters with in total 260 articles. Compared to the Current PRC Company Law, which has 13 chapters with in total 218 articles, the Draft includes two additional chapters, i.e. Chapter II on Company Registration and Chapter VI on Special Provisions on State-invested Companies, and in total 42 additional articles.

According to an explanatory note of the National People’s Congress which was published together with the Draft on 24 December 2021, the main purposes of the Draft are as follows:

  • Optimizing the organizational structure of companies;
  • Improving the mechanism on capital contributions to companies;
  • Improving the existing procedures on the establishment of companies and optimizing the overall business environment.

Below is a brief summary on some key aspects of the Draft. We mainly focus on the provisions relevant for PRC limited liability companies (“LLC(s)”) and not on PRC companies limited by shares.

1. Promoting electronic functions and simplifying administrative formalities

a) Introduction of electronic business license

Article 26 of the Draft now officially provides that in addition to the physical business license, also an electronic business license may be issued by the competent company registration authorities, i.e. the competent Market Supervision Administrations (“MSA(s)”). The electronic business license shall have the same legal effect as the physical business license.

In practice, electronic business licenses are already currently issued at some locations. E.g., according to the current practices in Shanghai, companies registered in Shanghai shall already currently apply for and obtain e-business licenses, because e-business licenses are required for the operations of a company, such as for making the company’s annual report.

b) Express mentioning of the National Enterprise Credit Information Publicity System

The Draft expressly stipulates that both the MSAs and the company itself shall publish relevant information on the unified enterprise credit information publicity system, i.e. the National Enterprise Credit Information Publicity System.

(1) According to Article 34 of the Draft, the information to be published by the competent MSAs contains:

(i) company registration matters, such as company name, business scope, registered capital, etc.;

(ii) Articles of Association; and

(iii) other information.

According to the stipulations of the Current PRC Company Law and the current practice of MSAs, the Articles of Association of a company are not publicly available and can only be accessed upon special inquiry. Article 6, paragraph 4, of the Current PRC Company Law states in this regard that members of the public may apply to the company registration authority, i.e. the competent MSA, to inquire about the registration details of any company, and the MSA is required to provide the public with such inquiry services. In the past, in order to check and obtain physical company documents filed at the MSA (including Articles of Association), an application for obtaining the physical company documents filed at the MSA was required to be made at the competent MSA. For this, usually a Power of Attorney issued by the relevant company was required. However, such practice in Shanghai has recently been changed, and, currently, the MSAs in Shanghai do not accept applications for obtaining the physical company documents filed at Shanghai MSAs anymore. Under the current practice in Shanghai, however, the electronic archives of companies registered in Shanghai are, to some extent, publicly available on the official website of the Shanghai MSA (上海市市场监督管理局 (sh.gov.cn)). However, according to the official website of the Shanghai MSA, there are certain restrictions as follows: (i) the general public can only access limited and basic information of a company, such as company name, registered address, business scope, etc. (but not the Articles of Association); (ii) the relevant company itself can check its entire own company files (including its Articles of Association) via its e-business license (but not specific information of other companies); and (iii) (local PRC) law firms and official PRC authorities can access full company files (including Articles of Association) by using their Legal Person Key issued by Shanghai Electronic Certification Authority Center.

According to the wording of the Draft, it is not entirely clear whether in the future the Articles of Association of a company can indeed be obtained by the general public, without any special interests. It is further not entirely clear whether the full text of the Articles of Association or only certain major provisions shall be publicly accessible. It appears detrimental to the interests of many companies, if the full text of their Articles of Association would be generally available to the public. What will be the case here is currently still unclear. It is expected that future updates to the Draft and/or the final version of the new PRC Company Law will provide for clarifications.

(2) According to Article 35 of the Draft, the respective company itself shall publish the following information:

(i) subscribed contribution and paid-in amount of the registered capital of a LLC, the contribution method (e.g., in kind and/or in cash) of the registered capital of a LLC as well as the number of shares subscribed by the promoter of a company limited by shares; 

(ii) share transfer and other changes regarding the equity interests in a LLC;

(iii) granting, changes and withdrawal of administrative approvals;

(iv) other information required by laws and administrative regulations.

c) Official Introduction of simplified de-registration procedures

In addition to the normal liquidation and de-registration procedures which are rather complex and time consuming, the Draft newly introduces stipulations on simplified de-registration procedures which are applicable to both LLCs and companies limited by shares. According to Article 235 of the Draft, in order to be able to go through simplified de-registration procedures, the following prerequisites shall be met:

(i) the company shall not have any debts, or all debts shall have been settled;

(ii) all shareholders shall make an undertaking that the company does not have any debts, or that all debts have been settled; and

(iii) the company shall make an announcement on the National Enterprise Credit Information Publicity System for a period of no less than 20 days. If there is no objection raised by, as we understand, relevant PRC authorities, creditors or other interested parties during the publication period, the company can apply for de-registration at the company registration authority. 

Article 235 of the Draft further stipulates that after the company has been de-registered through simplified deregistration procedures, if it is found out that any debts incurred by the company have not been duly settled, the shareholders shall bear joint and several liability for such debts.  

These kind of simplified de-registration procedures are actually not new. They have first been introduced by the Circular of the State Administration for Industry and Commerce on the Pilot Reform of the Simplified De-registration of Enterprise effective as of 6 January 2015 as one of the measures of facilitating the exit of market players, and then have subsequently been improved and further promoted from only pilot areas to the whole PRC.  

Compared to normal liquidation procedures, in simplified liquidation procedures as currently existing, the set-up and recordal of a Liquidation Team as well as formulation of a liquidation plan and liquidation report are not required, and simplified liquidation procedures are considerably faster. Further, an announcement on the National Enterprise Credit Information Publicity System is sufficient, and no individual notification of creditors is required.  

E.g., in Shanghai, in order to be qualified for a simplified liquidation procedure, a company must currently meet certain criteria, such as (i) not having carried out any business activities after obtaining its business license and having no accounts receivable or accounts payable or having settled all accounts receivable or accounts payable before applying for the de-registration, and (ii) not being listed in the List of Enterprise Operating Abnormally or the List of Seriously Violating Enterprises, or having any frozen or pledged equity interests, or any mortgaged movable property, etc., or not being under legislative investigation or administrative compulsory measures, or being investigated, or being under judicial assistance procedures, or being given administrative punishment. 

We assume that the simplified liquidation procedures as now stipulated in the Draft will basically be the same as the simplified liquidation procedures currently available. However, with the formal introduction of simplified de-registration procedures into the Draft, if the Draft is accordingly implemented into actual law, simplified de-registration procedures will officially be implemented into formal law on a national level and be officially applicable in the whole PRC.

d) Introduction of simplified capital reduction procedures

The Draft also newly introduces simplified capital reduction procedures. According to Article 221 of the Draft, under certain circumstances, a company can carry out a simplified capital reduction. Compared to a normal capital reduction, instead of an individual notification of creditors, a public announcement is then sufficient. However, details on this are not entirely clear in the Draft, and the actual impact of this is currently difficult to foresee. 

2. Changes to shareholder’s rights and responsibilities

a) Capital contribution with stock rights and creditor’s rights

Article 43 of the Draft newly stipulates that shareholders of a LLC may contribute capital with stock rights and creditor’s rights, while the value of any non-financial assets used as capital contribution shall be assessed and verified and shall not be overestimated or underestimated. According to Article 13 of the Implementing Rules for the Administrative Regulations of the People’s Republic of China on the Registration of Market Entities effective as of 1 March 2022, capital contributions with stock rights and creditor’s rights are, generally, already legally possible. However, if Article 43 of the Draft should be implemented into the final version of the new PRC Company Law, feasibility of these contribution methods would for the first time be officially clarified in a formal law on the national level.

b) Notice on Loss of Rights

Article 46 of the Draft newly introduces a loss of rights regime. If a LLC finds out that its shareholder failed to (fully) make its capital contribution, the LLC shall send a reminder to such shareholder with a grace period of no less than 60 days. If the shareholder still fails to duly make its capital contribution upon expiration of the grace period, the LLC has the right to send to the shareholder a written notice on the loss of rights. As of the date of such notice, the shareholder shall lose its rights as a shareholder for the unpaid portion of its equity interests. The LLC shall then, within 6 months, transfer the respective equity interests or reduce the registered capital accordingly and de-register the respective equity interests. This regime would be completely new and there are no equivalent provisions in the Current PRC Company Law or other current PRC laws and regulations.

c) Capital contribution by shareholder in advance

According to Article 48 of the Draft, if a LLC is unable to pay off its debts when they are due and clearly lacks solvency, the LLC or its creditors are entitled to request the shareholders of the company who have subscribed to the registered capital of the LLC but where the contribution date is not yet due to make a capital contribution in advance. 

According to the current practice and Article 6 of the Circular of the Supreme People’s Court on Issuing the Summaries of the National Conference for the Work of Courts in the Trial of Civil and Commercial Cases effective as of 8 November 2019, the creditors can only request the shareholders to pay off in advance the LLC’s debts under certain circumstances. Article 48 of the Draft, if implemented into actual law, would provide for more protection of the creditors of a LLC. 

d) Changes to some rules regarding the transfer of equity interests in LLCs

(1) Consent of other shareholders not required anymore for a share transfer

According to Article 71 of the Current PRC Company Law, the transfer of equity interests in LLCs to third parties is subject to (i) the consent of the majority of the other shareholders of the LLC; and (ii) the waiver of the pre-emptive rights of the other shareholders.

In the Draft, the requirement of the “consent of the majority of the other shareholders” has been deleted. According to Article 85 of the Draft, if any shareholder proposes transferring its stock rights to any third party, such shareholder shall give the other shareholders a written notice on the details of the proposed transfer, including the number of equity interests to be transferred, the payment method and term, etc., and the other shareholders shall have pre-emption rights under the same conditions. If any shareholder fails to respond within 30 days upon receipt of the written notice, such shareholder shall be deemed to have waived its pre-emption right. 

In our view, the practical impact of such change will be rather limited, since already under the current law, non-response to the notice within the 30-days’ period constitutes a deemed consent to the transfer. 

(2) Joint and several liability of transferor and transferee  

Article 89 of the Draft newly states that the transferor and the transferee of equity interests in a LLC shall bear joint and several liability for the still existing capital contribution obligations related to the transferred equity interests at the time of share transfer. In a respective Share Transfer Agreement, this issue should be clarified, e.g. it can be stated that the transferee will take over and shall be fully liable to make any future capital contributions not made yet at the time of the share transfer, and this can be reflected in the determination of the purchase price.

3. Changes to the corporate governance structure

The Draft also proposes a number changes to the corporate governance structure of both LLCs and companies limited by shares, compared to the current situation. The major changes on the corporate governance of LLCs according to the Draft are as below:

4. Strengthen the responsibility and potential liabilities of Directors, Supervisors and senior management

The Draft newly introduces that the Directors, Supervisors or the senior management shall be liable to compensate the losses of both a LLC and a company limited by shares to the extent of their wrong-doings under the following circumstances: 

• where the shareholder(s) at the time of establishment failed to duly make their capital contribution (Article 47 of the Draft);

• where the shareholder(s) illegally withdraw(s) registered capital (Article 52 of the Draft);

• where the company distributes the profits to the shareholders in violation of the PRC Company Law (Article 207 of the Draft);

• where the company reduces its registered capital in violation of the PRC Company Law (Article 222 of the Draft). 

Compared to the Current PRC Company Law, which provides for the principle of “duties of care” mainly as a general principle and for liabilities of the company organs for their own actual acts and wrong-doings, the Draft would extend potential liabilities of company organs to the wrongdoing of the shareholder(s) and the company itself. If this should be implemented into actual law, the general supervision and compliance requirements on company organs would be considerable increased.

5. Conclusion

The Draft in its current version is a mere draft for comments and it is unclear with which exact content it will be enacted as formal law in the future. However, the Draft in its current form would lead to some substantial changes compared to the Current PRC Company Law. Some of the changes would likely be against the interests of investors (such as the mandatory requirement of having employee representatives in the BoD of LLCs with more than 300 employees) and further increase general compliance requirements (such as the increased supervising obligations and potential liabilities of company organs of a LLC). Other changes may be regarded as an improvement, such as the clarification on the possibility of making capital contributions with stock rights or creditor’s rights as well as the formal introduction of simplified de-registration and capital reduction procedures. For its actual impact in practice, it remains to be seen whether there will be further versions of a draft for public comments and how the Draft will eventually be transformed to formal law.