On December 20, 2023, China finalized amendments to its Company Law, bringing about significant shifts in corporate governance, capital requirements, and share transfers. These changes, set to take effect on July 1, 2024, will impact investors across the country. Let’s delve into some key points you need to be aware of:
1. Corporate Governance:
Expanded Legal Representative Pool: The new law widens the eligibility for the legal representative position, allowing any director or the general manager to take on the role. This provides companies with more flexibility in choosing their leader.
Streamlined Director Resignations: Directors can now resign by simply notifying the company in writing, with the resignation taking effect when received. However, if such resignation leaves the board with less than the minimum quorum, the director must continue their duties until a replacement is appointed.
Smaller Companies Exempt from Board: Small limited liability companies with few shareholders are no longer required to have a board of directors. They can choose to have one director who fulfills all board functions. This simplifies governance for smaller businesses.
2. Registered Capital:
Phased Capital Contribution: The new law mandates full payment of registered capital within five years of company establishment. Existing companies with longer contribution periods must adjust their schedules accordingly. This promotes financial stability and protects investors.
Disproportionate Capital Reduction Allowed: The law now permits disproportionate capital reduction, meaning some shareholders can reduce their investment without others proportionally doing the same. This provides an exit mechanism for specific investors, potentially increasing investment flexibility.
3. Equity Transfer in Limited Liability Companies:
Consent No Longer Required for Non-Shareholder Transfers: Shareholders no longer need to approve equity transfers to non-shareholders. However, they retain pre-emptive rights to purchase the transferred shares if they wish. This balances shareholder control with easier transferability.
Simplified Transfer Process: The transferring shareholder informs other shareholders of the sale details, and if they don’t exercise their pre-emptive rights within 30 days, the transfer is finalized. This streamlines the equity transfer process.
These are just some of the key changes introduced by the new PRC Company Law. Investors should carefully review the full text of the law and seek professional advice to understand how these changes might impact their existing investments and future business plans in China.
