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The revised version of the PRC Company Law (the Revised Law) was adopted by the Standing Committee of the Tenth National People's Congress on 27 October 2005 and came into effect on 1 January 2006. This piece of legislation has made substantial amendments to the existing Company Law promulgated in 1993 (the Old Law). In total, the Old Law had 11 chapters and 230 articles whereas the Revised Law has 13 chapters and 219 articles. 46 articles and 137 articles in the Old Law have been deleted and amended respectively. In this article, we highlight various key developments made by the Revised
Law. Corporate autonomy and articles of
association
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The Revised Law gives considerable attention to corporate autonomy. Through its articles of association, a company may prescribe specific requirements in the following
areas: |
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appointment of the company's legal
representative |
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capital contributions |
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investments and guarantees |
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convening procedures of shareholder meetings or general shareholder
meetings |
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voting rights and voting
procedures |
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appointment of the managing director and deputy managing
director |
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transfer of shares |
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distribution of profits |
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cumulative voting mechanism
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Under the Old Law, the chairman of the board of directors automatically became the company's legal representative. Under the Revised Law, the managing director, executive director and manager are also eligible to hold this office. The appointment mechanism for the chairman and vice-chairman must be stipulated in the company's articles of
association.
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The ratio, timing and forms of capital contributions must also be stipulated in the articles of association. However, the Revised Law merely provides for relevant thresholds. The minimum registered capital requirements for a limited liability company
(LLC) and a company limited by shares have been lowered respectively from at least RMB100,000 to RMB30,000 and from RMB10 million to RMB5 million (nevertheless, these thresholds are still subject to specific laws and regulations for different industries). The Revised Law also allows capital contributions to be made by installments, rather than demanding full payment of registered capital at the inception. The first installment should not be less than 20% of the total registered capital and the remainder should be paid within two years of the incorporation of the company. In the case of an investment company, the balance of the registered capital must be paid within five years. Another incentive to investors is that the Revised Law broadens the forms of acceptable capital contributions by including non-cash assets (such as equity interest and intellectual property rights), provided that such non-cash assets can be monetarily appraised and are transferable. Again, the Revised Law only requires that cash contributions should not be less than 30% of the company's registered
capital.
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The Revised Law allows a single person LLC to be established by one natural person or one legal person as its single shareholder. The minimum registered capital of a single person LLC is RMB100,000. Full payment of capital contribution as set out by the articles of association is required. A natural person is only allowed to establish a single person
LLC. A single person LLC is not allowed to invest in, or establish, another
company.
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With regard to investment by a company in other companies, the Revised Law leaves the limit of investment to the discretion of the shareholders. However, the company cannot assume joint liability for the debts of invested enterprises. In addition, a company can grant any guarantee or security to secure the debts of its shareholder or de facto controller (i.e. upstream guarantees or security), provided that they are approved by the resolutions of the board of directors and shareholder meetings or general shareholder meetings in accordance with the articles of association. The guaranteed shareholder or the shareholder controlled by the de facto controller should not take part in the vote, and the resolutions for such guarantees or security must be passed by votes cast by more than one half of the shareholders entitled to vote and attending the
meeting.
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Furthermore, according to the articles of association of the company, shareholders may exercise their voting rights at shareholder meetings in a manner which is not in proportion to their capital contribution ratio. In addition, shareholders may receive dividends and be given the priority to subscribe for new equity in a proportion which differs from their capital contribution
ratio.
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Protection of
shareholders
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The Revised Law introduces several new measures aimed at strengthening the protection for minority shareholders by recognising the rights of shareholders:
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to inspect and copy the articles of association, accounts and minutes of board and shareholder meetings,
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to petition the court to revoke certain shareholder or board resolutions which are made in breach of legal procedures,
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to adopt a cumulative voting mechanism for electing directors and supervisors,
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to request the company to repurchase their shares,
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to petition for the liquidation of the company, and
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to bring action against the directors, supervisors or senior manager if relevant laws, regulations or the articles of association of the company are
violated.
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Under the Revised Law, if the proceedings of a shareholder meeting or a general shareholder meeting and directors meeting violate the law or the articles of association, or the resolutions are in breach of the articles of association, shareholders may apply to the courts to revoke relevant resolutions within 60 days of the resolutions being
made.
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To enable minority shareholders to elect directors or supervisors, the Revised Law allows companies limited by shares to adopt a cumulative voting mechanism according to the articles of association or the resolutions of the general shareholder meeting. Under this cumulative voting mechanism, each share shall have voting rights equal to the number of directors or supervisors to be elected and the voting rights can be collectively
used.
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The Revised Law also states that shareholders may ask the company to repurchase their equity interest at a reasonable price:
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when they oppose a merger, demerger or transfer of major assets by the company, |
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where the company fails to distribute dividends for five consecutive years even if the company has been earning profits during such period, or |
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where they oppose amendments of the company's terms to extend the company's operating
period.
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Furthermore, if the situation arose that the business operation of a company became seriously difficult and would damage the interests of the shareholders if it continued to operate, shareholders holding 10% or more of the company's shares may petition the court to liquidate the company if no other solution can be
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Improved corporate
governance
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The Revised Law has made a number of improvements relating to corporate governance. It imposes stringent duties on the directors, supervisors and senior management, and delegates more authority to the board of supervisors. Directors, supervisors and/or senior management are liable for any damages to the company caused by their violation of any laws, regulations or articles of association. If a violation is suspected, shareholders are entitled to request that the directors, supervisors and/or senior management attend a shareholder meeting or general shareholder meeting and provide information to the supervisors or board of supervisors. Where the directors and/or senior management are found to have been in breach of duty, shareholders can request the supervisors or board of supervisors to file a lawsuit against the relevant directors and/or senior management. Where the supervisors are found to have been in breach of duty, shareholders can request the board of directors or executive directors to file a lawsuit against the relevant supervisors. If the supervisors or board of supervisors, or the board of directors or executive directors object or fail to file a lawsuit to the court within 30 days after the written requisition from the shareholders, the shareholders, for the interests of the company and in their own name, may directly bring action against the directors, supervisors and/or senior management who are in
default.
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The Revised Law for the first time introduces the idea of 'lifting the corporate veil'. In order to protect creditors' interests, the Revised Law stipulates that shareholders of a company should be jointly and severally liable for the liabilities of the company if they abuse the company's independent corporate legal status to evade liabilities and cause material loss to creditors of the
company. |
Conclusion
The changes made by the Revised Law to the Old Law generally indicate a move towards international trends in corporate law. It has taken more than ten years to revise and produce this Revised Law because it has been designed to allow a balance of corporate autonomy versus an appropriate level of government control. The Revised Law enshrines the principle of equality among shareholders. Yet, the current position is that, where the laws governing foreign investment enterprises (FIEs) differ from the provisions of the Revised Law, the former prevail. Therefore, the changes made by the Revised Law only apply where legislation on FIEs is silent. Nonetheless, it remains to be seen whether those laws governing FIEs will be similarly amended in the near
future.
anita.so@gthk.com.hk
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