Company Law amendments: highlights and shortcomings

The 2023 amendments to China’s Company Law make substantial additions and modifications to the original, spanning 112 articles. In many aspects, the revised law represents a significant legislative step-up; but in others, it is also unfortunately inadequate.

Taking into consideration projects and cases personally undertaken, the author – a corporate lawyer primarily practising litigation and arbitration related to M&A, cross-border investment and other corporate law areas – comments on the impact of key revisions.

Pulse on practical reality

The revised Company Law recognises and endorses certain practices that are generally upheld among the legal community, and widely applied.

1. Accounting vouchers have been made available to all shareholders. Wholly owned subsidiaries are also entitled to review the vouchers, which help safeguard the rights of minority interests. Shareholders may also retain an intermediary to review the vouchers, making them more accessible to overseas shareholders.
2. The revisions clarify that shareholders of limited liability companies do not need the consensus of a majority of other shareholders to transfer their equities. Exercise of pre-emptive rights is also optimised, making it easier for investments, financing and M&A.
3. Horizontal disregard of corporate personality, already an established practice, is ratified to strengthen protection of counterparties’ interests.
4. Minority shareholders’ rights to request buyback in case of oppression by controlling shareholders are enhanced, stepping up the overall protection of minority interests.
5. Simplified and mandatory deregistration systems are introduced to provide a quick exit for “zombie enterprises” – namely, revoked but yet to be deregistered companies – which serves to both lower such companies’ costs and optimise the business environment.

Room for improvement

While many highlights are to be commended, the revised Company Law falls short of fully resolving certain issues in judicial practice.

Many provisions require further clarification, including the following.

Claims against third parties should not be acceptable as non-monetary property for capital contribution. There are two types of claims that may be used for capital contribution:

1. Debt-to-equity conversion, in which contribution is made with claims against the subject company (a method adopted in China Great Wall Asset Management’s transfer of controlling equity in Shenhui Automobile, personally advised); and
2. Contribution made with claims against third parties. In the author’s opinion, claims are inherently flawed, as their realisation depends on the debtors’ performance of repayment obligations, which does not always occur according to plan. Even when repayment does happen, sometimes it is not in full, which leads to uncertainties.

Non-performing claims are often recovered at a discount, but it also means a discount to the company’s paid-up capital, going against the principle of capital certainty.

For these reasons, the author has reservations about using claims against third parties in capital contribution, and what it means to capital maintenance and protection of creditor interests.

Losing the board of supervisors may be detrimental to corporate governance. The revised Company Law allows companies to adopt a single-tier governance model, under which an audit committee of directors can take the place of the board of supervisors. This represents a significant deviation from the existing corporate structure.

Since the audit committee is not independent from the board of directors – being composed of its members – it cannot achieve the purpose of supervising the board of directors. With only such a committee and not a board of supervisors, internal supervision for the board of directors may be inadequate.

The responsibilities of a board of supervisors are not confined to the board of directors’ financial and accounting work. They also extend to corporate management and directors and senior management. An audit committee, on the other hand, cannot supervise the company’s management and operations, and may fall into the trap of ineffective self-monitoring. Therefore, an audit committee cannot completely take on the functions of a board of supervisors.

Governance structure does not align with the Civil Code. The revised law provides that all members of the board of directors executing company affairs on its behalf may act as legal representatives, but the Civil Code does not mention that board members may take on such a role.

In addition, the Civil Code provides that for-profit legal persons should have an executive organ. In the first draft of the Company Law amendments, there was an article that said “the board of directors is a company’s executive organ”, but the statement has since been removed without another executive organ being named.

With China adopting a combination of civil and commercial codes, the inconsistency may prove an issue.

There is lack of clarity in selection and appointment of employee-representative directors, and restrictions on their qualifications. The revised Company Law no longer determines the need for such a role dependent on whether the shareholders or investment entities are state-owned, but on the number of employees.

For companies with more than 300 employees, unless there is already such a person in the board of supervisors, a representative of employees should sit on the board of directors. However, relevant provisions leave a few questions unanswered.

For example, what happens when the assembly of employee representatives has a candidate for the representative director, but the shareholders’ meeting has another? With unclear restrictions on qualification, can a member from senior management assume the role?

Such a representative used to be a staple only in state-owned entities, but after the Company Law revision, all large and medium-sized enterprises must confront these lingering issues.

Serving as a bridge between the employee representative assembly and board of directors, employee-representative directors should by no means be assumed by senior management personnel.

The appointment requirements and qualifications for such a role await future legislative, administrative and even judicial authorities to shed some light.

There are still gaps in the legislation. One example of this is the issue of succession of shareholder status. Previously, upon the death of a natural person shareholder, the status was taken up by his/her lawful successor.

However, if a legal person’s shareholder status was extinguished, can its shareholder rights be succeeded? If yes, by whom? The current law offers no answers, but more than a few such cases have transpired.

Wu Dong is a senior partner at Hui Ye Law Firm. He can be contacted by phone at +86 21 5237 0950 and by email at wudong@huiyelaw.com
Wang Zhengqian is an attorney at Hui Ye Law Firm. She can be contacted by phone at +86 21 5237 0950 and by email at zhengqian.wang@huiyelaw.com