First Implementation Rule of the New PRC Company Law Officially Adopted

On July 1, 2024, the PRC State Council adopted the Rules on Implementing the Registered Capital Management System of the PRC Company Law (the “Implementation Rule”). This is the first implementation rule to the new Company Law, both of which have been effective on July 1, 2024. The Implementation Rule aims to address the most concerning question: how should existing companies adjust the contribution period of registered capital to comply with the new Company Law. This newsletter focuses on limited liability companies and not companies limited by shares.

1. Background

As mentioned in our previous newsletter dated January 9, 2024, the previous Company Law adopted a system where the registered capital of a company was recognized upon subscription, without any legal requirements for the actual contribution timeline, while the new Company Law requests a full actual payment within five years since company establishment. This fundamental change brings a series of questions for existing companies, especially those with a huge amount of registered capital but few actual contributions.

2. Transition period of three years (Art. 2 and 6)

To facilitate the adjustment for existing companies, the Implementation Rule sets up a three-year transition period from July 1, 2024, the effective date of the new Company Law, to June 30, 2027. Companies established before June 30, 2024, and with a capital contribution period longer than five years since July 1, 2027 shall be subject to adjustment as follows:

• Companies do not need to adjust the capital contribution period if the remaining period is less than five years, counting from July 1, 2027. In other words, if the deadline for the capital contribution is within June 30, 2032, this would be acceptable.
• Otherwise, companies need to adjust the capital contribution period to no more than five years during the transition period (meaning until June 30, 2027) by modifying their articles of association.
• If the production and operation of the company involves national interests or significant public interests, and if the relevant competent department of the State Council or the provincial people's government puts forward an opinion, the Market Supervision and Administration Department of the State Council may agree to contribute the capital in accordance with the original period of contribution.

For companies that should adjust but do not, the competent authority will request corrective measures; if it fails to make corrections after certain period of time, the company registration authority will make a special record in the National Enterprise Credit Information Publication System.

3. Information publication (Art. 4)

Companies should inform the public about the subscribed registered capital and paid-in capital, etc., on the National Enterprise Credit Information Publication System within 20 working days when information is updated. This can be done by logging in to the platform with the company's password (Link: 国家企业信用信息公示系统 (gsxt.gov.cn)). Furthermore, the company shall ensure that the information disclosed is true, accurate, and complete.

Overall, the Implementation Rule serves as a bridge between the previous Company Law and the new one regarding the registered capital contribution system in China. It clarifies uncertainties and will effectively guide existing companies to gradually comply with the new system. For existing FIEs that have not fully completed the actual payment of registered capital, it is advisable to assess the outstanding capital and decide the next steps based on business needs, whether to reduce the capital or set up a new timeline to complete the contribution as set forth therein.

Furthermore, the new PRC Company Law provides increased flexibility in corporate governance. For instance, it is no longer required to appoint a supervisor or a board of supervisors for certain companies. It also allows for a more flexible allocation of powers to the board of shareholders, the board of directors, and the company manager.

Against this background, companies should consider conducting a Gap and Opportunity analysis. Part of this analysis will be a review of the Articles of Association (AoA) of your company as follows:

• Identify mandatory changes in the AoA triggered by the new PRC Company Law (e.g., adjustment of capital contribution timeline).
• Identify new flexibility in the AoA regarding corporate governance to provide a leaner corporate structure and better risk management (e.g., cancellation of the supervisor position)

Please do not hesitate to contact us if you are interested in conducting such analyses. WZR would be glad to support you.

Beijing, July 3, 2024