China’s updated company law will take effect on March 1. Leo Zhou Liang, senior partner at Dacheng Law Offices, highlights the key changes for corporates.
There are four key revisions in China’s new Company Law, which comes into effect on March 1. The new rules are intended to simplify the company registration process and lower financial requirements for establishing a company.
Specifically, four key new provisions will take effect: First, the required minimum amount of registered capital for companies will be removed.
Second, the mandatory requirement of proportion of initial capital contribution and the proportion of capital contribution paid in cash will be eliminated.
Third, the new regulations will remove mandatory requirements for capital contribution, including the amount, the method and the time limit. Instead, these issues will be determined by shareholders and recorded in the company’s articles of association.
Fourth, a capital verification report will no longer be necessary at the time of registration.
Of course, the above-mentioned amendments are applicable to general companies only. Enterprises in special industries such as foreign-owned enterprises and those in the financial industry are still required to comply with stricter company registration rules.
More holding companies: The removal of required minimum amount of registered capital for companies will reduce the need for capital paid-in. Hence, more holding companies and special purpose vehicles can be set up to facilitate multilevel financing and the arranging of complex transaction structures.
More hi-tech companies: The removal of the mandatory requirement of the proportion of capital contribution paid in cash may enable investors to more flexibly allocate various types of assets for capital contribution, including technology, intellectual property and physical assets, to better suit the features of a particular industry and meet the real needs of the company.
Flexibility in the arrangement of capital contribution may offer opportunities for development of hi-tech companies and startups. Shareholders who are making capital contributions by means of non-monetary assets should pay attention to the proper assessment and verification of the valuation of those non-monetary assets. If the actual value thereof is found to be apparently lower than what is set forth in the company’s articles of association, the shareholder who has offered the non-monetary property will be liable for making up the difference, and other shareholders of the company at the time of establishment may also be held liable.
Need for more due diligence: Due to the removal of the need for actual paid capital and the absence of any requirement for annual inspection of companies, enterprises ought to pay closer attention to and take steps to ensure they are adequately protected as creditors in transactions. More prudent legal and financial due diligence on counterparties in transactions is recommended to prevent transaction risk. Proper use of guarantee measures are also worth considering.
Be careful when setting registered capital at establishment: Despite the removal of the requirement for the actual paid capital, the full payment of registered capital is still vital for the capital increase of joint stock limited companies, which are established by promotion. In accordance with the new law, this type of company is prohibited from offering new shares to others before its promoters have fully paid up all the shares they have subscribed to.
As a result, companies that are to be established by promotion are recommended to prudently set the amount of registered capital at the time of establishment. Unless the laws and regulations requirements state otherwise, joint stock limited companies established by promotion should not set an amount of registered capital significantly higher than the companies’ actual needs at the current stage to avoid potential barriers to methods of capital increase in the future, thus overburdening promoters.
Regulatory updates to watch out for: The amendments signify China’s will thoroughly reform the company registration and regulation system. Other related regulations, such as those on the Administration of Company Registration, are likely to be amended in the first quarter of 2014.
But the relaxation of registration requirements related to companies’ registered capital calls for reinforcement of the protection of creditors in transactions through legislative and administrative measures. The State Council executive meeting on October 25, 2013 suggested establishing an enterprise credit system easily accessible by the public. This indicates new regulations may be adopted which affect companies’ ongoing information disclosure obligations.