Highlights of draft amendment to Company Law

The latest draft amendment to the Company Law was deliberated on and opened up for public comment on 24 December 2021, adding and substantively revising about 70 articles of the current Company Law comprising 13 chapters and 218 articles.

Expanding the scope of the right to know of limited company shareholders. Articles 33 and 97 of the Company Law provide for the same by enumerating the materials that shareholders can review and take copies of. However, since the very beginning, the adjudication criteria courts have used on whether original accounting vouchers, which are entered into the accounts for inspection, should be available for shareholders to review have been inconsistent.

In Fuba Investments v Hairong Boxin International Financial Leasing (2019), a retrial of a shareholders’ right to know dispute, the Supreme People’s Court held that article 33 of the Company Law expressly specifies that reviewing and taking copies of the company’s articles of association, minutes of shareholders’ meetings, resolutions of board meetings, resolutions of supervisory board meetings and financial and accounting reports are rights of shareholders, but the reviewing by shareholders of the company’s account books is predicated on their having a proper purpose in doing so, and that the same does not harm the company’s lawful interests. Fuba Investments was a shareholder of Hairong Boxin and, as such, it had the right to learn the company’s operating status and the right to review relevant documentation.

Additionally, article 13 of the Accounting Law specifies that: “Accounting vouchers, account books, financial and accounting reports and other accounting documentation must comply with the provisions of the uniform national accounting system.” Article 14 specifies: “Accounting vouchers include original vouchers and bookkeeping vouchers.”

It can be seen that account books do not include original vouchers or bookkeeping vouchers. The Company Law states that shareholders may review solely financial and accounting reports and account books, leaving out original vouchers, accordingly, the above-mentioned judgment concerning Fuba Investments based on the foregoing provision was untenable.

According to article 51 of the draft, shareholders of limited liability companies have the right to review and take copies of the “register of shareholders”, and to review but not to take copies of the “accounting vouchers”. If this article of the draft is adopted, there is hope for unification of the adjudication criteria on the review of original vouchers in shareholder right-to-know disputes.

Optimising the procedure for registering changes in legal representatives. The draft provides a new chapter on company registration, specifying the matters relating to and the procedures for company establishment registration, registration of changes and deregistration and further optimising the registrar and procedure, thereby enhancing registration efficiency and the level of convenience.

In particular, article 28 of the draft expressly provides that, “where there is a change in the legal representative of a company, the application for registration of the change shall be signed by the new legal representative”.

In Song v Beijing Yugao Investment Fund Management et al (2020), an appeal in a dispute over a request for change in registration of a company, the Third Intermediate People’s Court of Beijing municipality held that: “Pursuant to the Company Law and the articles of association of Jinchifei, a change in the legal representative of the company requires the passing of a resolution by its shareholders’ meeting and board of directors, and the carrying out of the requisite procedure for registering the change with the administration for industry and commerce. Accordingly, changing the legal representative is a self-governance matter of Jinchifei, so the court cannot compel Jinchifei to pass a resolution to change the legal representative nor can it directly change Jinchifei’s legal representative on its behalf.” Accordingly, the court rejected Song’s appeal request.

This case obliquely shows that a company’s internal decision-making procedure is the precondition for a legal action concerning a change in legal representative. In a traditional company control dispute, the party seeking to wrest control cannot secure the company’s official seal, business licence or the co-operation of the former legal representative in signing the application for registration of the change after passing a shareholders’ meeting resolution to change the candidates for legal representative, directors, etc. of the target company.

It will therefore often have to institute legal action to register the changes in the company or for return of the company’s licences and permits after completing the internal decision-making procedures. Legal action tends to take a long time to resolve, throwing up the risk of losing control of the target company. The new provision in article 28 of the draft will be beneficial in resolving such deadlocks.

Provision for accelerating the deadline for payment of capital contributions by shareholders whose capital contributions have not yet fallen due. Under the current legal framework, it is not possible to require shareholders whose capital contributions have not yet fallen due to complete their capital contribution obligations early to protect the interests of creditors.

Notwithstanding the fact that current laws and judicial interpretations require such shareholders to bear supplementary liability, for their being deemed as subject to enforcement in an enforcement procedure, unless the company enters bankruptcy or satisfies the conditions for bankruptcy but has not yet gone bankrupt, the creditors can only assert their rights against such shareholders.

In Li v Yang and Zhongqing Huili Asset Management (Beijing) (2020), an opposition to enforcement case, the Supreme People’s Court held that since the debtor’s shareholders’ “deadline for their subscribed capital contributions is 1 January 2044, it did not constitute a failure by them to pay their capital contributions in full and on time”. Accordingly it did not apply article 17 of the Regulations of the Supreme People’s Court on Several Issues Concerning the Changing and Addition of Parties in Civil Enforcements to add them as being subject to enforcement.

In contrast, article 48 of the draft directly grants creditors the right to request that shareholders whose capital contribution deadlines have not yet expired pay such capital contributions early. If this amendment is adopted, it will offer great convenience and protection to creditors, lighten the burden of proof on creditors and further increase protection of creditors’ interests.

Li Weiming is a partner at Tiantai Law Firm