On 28 December 2013, the Standing Committee of the National People’s Congress amended the Company Law to relax or cancel certain capital-related requirements to establish and register companies in China. The amendments took effect on 1 March 2014. This begins nationwide implementation of corporate law reforms that the State Council executive meeting announced on 25 October 2013.
Corporate law reforms
The corporate law and regulatory reforms announced in October 2013 include:
- relaxed capital requirements under the Company Law;
- greater disclosure and transparency, with the following information to be publicly available electronically on local Administration for Industry and Commerce (AIC) systems (in most cases still to be set up): annual reports (filings), which will replace the current system of annual inspections; registered information, including electronic business licences and electronic registration management; and a blacklist of non-compliant companies;
- relaxed registration requirements for a company’s site of business operations (to be based on local regulations).
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Many of these are already in effect in Shenzhen and other Guangdong cities, as well as the China (Shanghai) Pilot Free Trade Zone.
Foreign and domestic investors
The reforms will give both domestic and foreign investors more autonomy and should make investment in the private sector easier, especially for small enterprises, by reducing bureaucracy and increasing transparency.
Investors will benefit because they will have more flexibility to determine the form, amount and timing of their capital contributions, and will be required to register only subscribed capital, not capital actually contributed.
In addition, a system of publicly available electronic information, including annual filings and a blacklist of non-compliant companies, will replace the current annual inspection system. This will reduce the burden on companies, increase transparency and make Chinese companies more accountable.
These reforms bring China’s requirements in this area closer to international norms, which will be positive for both investors and the business environment.
What the amendments mean
To establish and register companies after these amendments:
- “Paid-in capital” and shareholders’ “capital contribution amounts” are no longer registered with the AIC. Capital contribution amounts are still required in the articles of association and for limited liability companies (LLCs) in the shareholders’ register, and shareholders who fail to contribute as required are legally liable;
- Companies generally no longer require a minimum registered capital, although it may still be required by other laws or regulations in certain sectors;
- There is no required initial contribution of a proportion of capital and no deadline for making all contributions. Capital is contributed as provided by the articles of association;
- LLCs are no longer required to have a minimum proportion of registered capital in cash;
- LLCs and joint stock companies established by promotion no longer require capital verification. But joint stock companies established by share offer still require capital verification and need a capital verification certificate to register.
Foreign-invested enterprises
These reforms, including the latest changes to the Company Law, will take some time to implement. The Company Law amendments will likely be followed by amendments to various regulations implementing the Company Law, and to foreign investment laws and regulations for foreign invested enterprises (FIEs), that is equity joint ventures, co-operative joint ventures and wholly foreign-owned enterprises. For example, existing regulations and notices setting out requirements for capital contributions, debt-equity ratios, minimum amounts and timing for contributions and the like for FIEs may be repealed, superseded or amended in due course.
If this is not complete by 1 March 2014 (from when the Company law amendments are effective), the AIC, Ministry of Commerce and other regulators will presumably issue a joint notice specifying how these Company Law amendments are to be implemented for FIEs (as they did for the 2006 Company Law amendments with notices No. 81 and 102). The whole process could take several more months.
It is also possible that some local officials may continue, at least initially, to want companies seeking to register to meet some of the requirements that the amended law has legally abolished. So investors will need to keep in close touch with developments on the ground to determine the state of implementation among local authorities.
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