On 28 December 2013, the 6th meeting of the Standing Committee of the 12th Session of the National People's Congress adopted the Decision of the Standing Committee of the National People's Congress on Amending the Marine Environmental Protection Law of the People's Republic of China and Six Other Laws. One of the laws amended was the People's Republic of China Company Law ("Company Law"). 1 The amendments take effect on 1 March 2014.
Amendments to the Company Law
We have not attempted to cover all the amendments to the Company Law in this note. In this note we will focus on what we consider to be the most significant of the set of amendments to the Company Law which essentially overhaul the registered capital payment system, thereby lowering the cost of market entry (the "Amendments"). These are summarised below.
- Subscribed registered capital: There will be a fundamental change from the concept of 'paid-in registered capital' to 'subscribed registered capital' (Articles 7 and 32 of the Company Law); capital verification will no longer need to be undertaken after a shareholder has made a capital contribution in connection with the establishment of a limited liability company, as such capital contributions no longer need to be made at that time (deletion of Article 29, amendment of original Article 30).
- No minimum registered capital: Removing the requirement for companies to have a minimum level of capitalization (Articles 23(2), 26, original 77(2), and original Article 81 of the Company Law) and instead, capital contributions shall comply with provisions of the company's articles of association, i.e. the shareholders will determine the amount, method and deadline for payment of subscribed capital and will be responsible for ensuring and monitoring the actual and legal payment of capital contributions. These changes mean the abolition of the following minimum registered capital requirements:
- RMB30,000 for a limited liability company;
- RMB100,000 for a sole-shareholder limited liability company; and
- RMB5 million for a company limited by shares,
As a result, companies therefore need not maintain a 'statutory minimum' registered capital should they reduce it during the term of the company (original Article 178). However, if other laws, administrative regulations and decisions made by the State Council provide otherwise, then such provisions shall apply (Articles 26, original Article 59, original Article 81).
- No minimum cash contributions to registered capital: Removing the requirement for minimum cash contributions making up 30% of the registered capital (Article 27).
- No timing restrictions for payment of registered capital: Removing the requirement for registered capital to be paid within a certain timeframe (Article 26, original Article 81, original Article 84).
Stamp of the new leadership: Major reforms to company registration and supervision
The Amendments followed announcements made by Premier Li Keqiang in late October 2013 and the Minister of the Administration of Industry and Commerce, Mr Zhang Mao, in November 2013 to map out major reforms to the company registration and registered capital systems in China. The main objectives of the reforms are to reduce the bureaucratic procedures and cost of market entry to stimulate investment, supported by a strengthened corporate regulation environment with fairer and more transparent processes. With a slogan of "lenient entry [conditions], strict supervision" (宽进严管), Premier Li and Minister Zhang identified five major changes ("Five Major Changes"), some of which have been addressed in the Amendments:
- Removing the requirements for minimum registered capital and the timeline for capital contribution (unless other laws provide otherwise) – as addressed in the Amendments;
- Changing from a paid-up capital to subscribed capital system, so as to lower cost of establishing a company - as addressed in the Amendments;
- Establishing an annual reporting system to replace the annual inspection system, whereby company information will be made publicly available; furthermore, the authorities will implement a fair and systematic system of random checks of companies;
- Establishing an enterprise credit information system whereby company information will be made publicly available on electronic databases, and errant companies will be placed on a "black list" where "a mistake in one area would lead to restrictions in other areas"; and
- Relaxing the requirements in relation to premises used for registered offices of companies.
In his press conference on 7 November 2013, Minister Zhang credited the success of the pilot economic special zones in Shenzhen, Zhuhai, Dongguan and Shunde to the introduction of reforms similar to the Amendments. Minister Zhang reported that the number of new market entrants grew by 98.51% and 52.61% in Shenzhen and Zhuhai respectively, and 20% in Dongguan and Shunde. In addition, there was a six-fold increase in the number of registered enterprises in the China (Shanghai) Pilot Free Trade Zone ("SFTZ"). Minister Zhang said that the authorities aim to replicate such success in other parts of China.
Impact of the Amendments to foreign-invested enterprises ("FIEs")
With the removal of the requirements of minimum registered capital and for capital contribution to follow a prescribed deadline, it would appear, at first blush, that investors would be able to set up "one-yuan companies". However, the caveat as set out in the Amendments is the catch-all "if other laws, administrative regulations and decisions made by State Council provide otherwise, then such provisions shall apply'. So do FIE-related laws or administrative regulations provide otherwise? The People's Republic of China Wholly Foreign-Owned Enterprise Law Implementing Rules (effective 12 April 2001) require that:
- the application for the establishment of a wholly foreign-owned enterprises ("WFOE") must still include the total investment amount, registered capital, source of funds, type of capital contributions and the time limit for making them in relation to the proposed WFOE (Article 14(4));
- the registered capital of a WFOE shall be in proportion with its operational scale (Article 20); hence, 'sufficient' registered capital (as 'approved' by the authorities) must still be paid;
- a WFOE must not reduce its registered during its operating term (Article 21);
- increases of registered capital must be approved and registered (Article 22); and
- after each instalment of capital contributions is made, the WFOE must engage a Chinese certified public accountant to conduct verification thereof and issue a capital verification report which shall be record-filed with the Approval Authorities and the administrative authority in charge of industry and commerce.
The People's Republic of China Sino-Foreign Equity Joint Venture Law Implementing Regulations (effective 22 July 2001) provide:
- that the total investment amount and the total registered capital must be set out in the joint venture agreement and articles of association, as well as the capital contribution of each joint venture party and the deadline for making the contributions; such amounts are essentially subject to approval by the authorities (Articles 11(3), 11(4))
- reduction of the registered capital during the joint venture operating must be approved by the examination and approval authority (Article 19);
- increases or reductions in the registered capital of the joint venture must be approved by the examination and approval authority (Article 21); and
- each capital contribution must be verified by a certified accountant and a capital verification report issued (Articles 28 and 29).
However Minister Zhang did state at the press conference that the reform measures will apply to foreign-invested enterprises. However to do this will require an overhaul of the rules that currently impose capital contribution deadlines, such as the two current permitted schemes set out in Implementing Opinions on Several Issues on the Application of Laws in the Approval, Registration and Administration of Foreign Invested Companies2 being:
- 15% within three months of the business license date and the balance within 2 years; or
- the entire capital must be paid in within 6 months of the business license date.
It remains to be seen whether the authorities in China will apply the new or the old rules pending the passing of amendments to the FIE-related legislation. Our recent telephone enquiries to one local Ministry of Commerce suggest they were not even aware of the changes to the Company Law! As a result the old rules were still being applied. There has not yet been any indication as to how long the 'overhaul' is likely to take.
The Five Changes envision a more transparent, and fair system to monitor and supervise an increasing number of companies. The authorities will issue further details of legislation to implement:
- the annual report system (where companies will provide pertinent details of its status: capital contributions, permits received, main operational projects, assets and liabilities) will replace the annual inspection system – we understand that the economic zones in Shunde and Dongguan have implemented an annual report system since 2012, while Shenzhen has implemented it since 1 March 2013, and the SFTZ is drafting further measures to provide details of information required; and
- the establishment of the enterprise credit information system which captures and makes public pertinent information of enterprises, and a "black list" system – a draft of the proposed enterprise credit information system has been circulated by the Legislative Affairs Office of the State Council for comments within certain groups (“Draft”)3. Under the Draft:
- central and local enterprise credit information public notification systems will be established. The State Administration of Industry and Commerce and its local counterparts, as well as the subject enterprises will be obliged to make certain enterprise credit information public via such systems. In addition, other relevant administrative authorities may publish certain enterprise credit information via such systems; and
- egregious breaches of the law by enterprises will be made public. Furthermore, under a “joint response mechanism”, various government departments may impose restraining measures on such enterprises in relation to the recognition of qualifications and credentials, granting of licenses and approvals, as well as enhanced supervision and administration. In addition, the legal representatives of such enterprises will be prohibited from serving as legal representatives of another enterprise for a period of three years, unless such legal representative can prove that he/she was not personally responsible for the underlying cause leading to the enterprise being placed on the "black list"; and
- the establishment of an overseas recovery guarantee system whereby foreign investors and their controlling persons who breach capital contribution obligations, commit fraud or engage in illegal behavior shall be listed in a key monitoring list ( 重点 监控名单) and such investors and their controlling persons will be subject to stricter examination procedures or face restrictions in their [future] investments in China. It has been a matter of speculation for many years as to whether China had a foreign investor "black list": if it did not have one in the past, it looks as if it will have one in the future once the Draft becomes law.
The Five Changes represent another significant move by the Xi-Li administration towards modernizing China's business environment and stimulating investment by relaxing restrictions on market entry, developing a new style of governmental supervision and control, and establishing a more, transparent, fair and modern company registration system, whereby companies are accountable to the public as well as the authorities. Depending on the level of government department support and cooperation, the enterprise credit information system has the potential to bring about profound changes to the level of transparency of information relation to companies operating in China; it will bring together all the information about a company in a single location instead of having to piece it together from websites and lists kept by various government departments. China will certainly become a more hostile environment to companies that do not play by the rules as a result of these reforms.
The challenge with implementing these far-reaching reforms will be persuading local governments to 'come to the table' and relinquish some of their powers vis-à- vis companies (e.g. some maintain their own 'name and shame' systems which they may be reluctant to give up and industry regulators may take the view that they should retain powers to disclose non-compliant behavior by enterprises within their industry sector), so as to allow a worthwhile and relatively complete public company information database as is commonly found in common law jurisdictions to be created and to convince them to adopt a mindset of "lenient entry [conditions], strict supervision" (宽进严管), which, it could be argued, is diametrically opposed to their current approach.