The recent implementation of the newly revised Company Law in China marks a significant turning point for foreign entrepreneurs looking to register and operate businesses within the country.

As per the statistics from the Ministry of Commerce, by 2022, there were 1.12 million foreign-invested enterprises in China. This burgeoning number reflects the dynamic market landscape that continually adapts to evolving legal frameworks.

This article aims to delve into the implications of such changes, specifically focusing on the transition from the “Three Capital Enterprises Law” to the “Foreign Investment Law,” and the latest amendments to the Company Law.

1. Greater Flexibility in Corporate Governance

The revised Company Law significantly alters the power dynamics within a company. It no longer mandates that the shareholders’ meeting decides the operating policy and financial budget, thus expanding the powers of the board of directors and managers.

This change is especially beneficial for foreign enterprises, as it increases corporate flexibility and allows for more efficient management, particularly beneficial for those with overseas shareholders who often face decision-making challenges.

2. Enhanced Protection of Shareholder Rights

A critical aspect of the new Company Law is the emphasis on the protection of shareholder rights. It strengthens the shareholders’ right to information and broadens the scope of accessible data. The law also includes provisions to ensure fairness in situations such as capital reduction, where the law mandates proportional reduction based on shareholders’ contributions or shareholding ratios.

Importantly, the law introduces measures to prevent the abuse of power by controlling shareholders, safeguarding the interests of minority shareholders.

3. Options in Supervisory Board Requirements

Under the revised Company Law, there’s increased flexibility regarding the establishment of supervisory boards. For smaller scale companies or those with fewer shareholders, setting up a supervisory board is no longer a mandatory requirement.

This change is particularly advantageous for foreign-funded enterprises, simplifying the previously mandatory and sometimes challenging requirement of establishing a supervisory board, which often involved logistical difficulties such as supervisors needing valid visas to enter China.

4. Subscribed Capital Contributions Timeline

The new law introduces specific timeframes for capital contributions in limited liability companies. Shareholders must fully pay their subscribed capital within five years after the company’s establishment.

This stipulation is aimed at ensuring adequate capital for the company and protecting creditors’ rights. It’s a significant change that existing companies need to comply with by a specified deadline, and it calls for adjustment in strategies regarding capital contribution for both existing and new companies.

5. Streamlining Company Establishment and Closures

The new Company Law simplifies processes related to the establishment, operation, and cancellation of companies. It includes provisions for one-time notification by registration authorities for incomplete or non-compliant application materials, recognition of electronic business licenses, and streamlined company registration processes.

Moreover, the law introduces a simplified cancellation procedure for debt-free companies, making the process more efficient and less cumbersome, especially for foreign entrepreneurs.

6. Conclusion and Recommendations

In conclusion, the new Company Law brings substantial changes to corporate governance, shareholder responsibilities, and the duties of directors, supervisors, and senior executives. These changes have a profound impact on all types of companies, especially foreign-invested enterprises.

Existing foreign-funded enterprises are advised to prepare and adapt to these changes, including fulfilling capital contribution obligations and considering corporate governance restructuring.

For new foreign-funded enterprises, careful planning and compliance with the new law are crucial to minimize compliance risks.