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China – Latest Amendment To The Company Law And Its Impact On FDI Practice.

27 May, 2014

 

 

Amendments to the PRC Company Law in regards to the company registered capital registration system were published on 28 December 2013 and will come into force on 1 March 2014. Feng Rui, Partner at Jun He in China, outlines the highlights of the amendments and discusses their impact on practices related to foreign direct investment in China.

 

At a State Council meeting on 25 October 2013, Premier Li Keqiang instructed on the reform of the company registered capital registration system. Just two months later, amendments to the Company Law reflecting such reforms (the 2013 Amendment) were adopted at the 6th meeting of the Standing Committee of the 12th National People’s Congress of China (the NPC), and published by the 8th Presidential Decree. 


The 2013 Amendment strictly follows the principles set at the State Council meeting. Highlights are as follows.

 

‘Paid-In Capital’ To ‘Subscribed Capital’


The key changes are:

 

  • the paid-in capital of a company is no longer required to be registered on the company’s registry, but is still required to be recorded on the shareholders’ books of the company
  • there is no longer a minimum requirement for the first instalment of a capital injection (previously 20% of the total registered capital)
  • there is no longer a time limit imposed on the completion of full capital contribution (previously within two years for a general company and five years for a holding company after the company’s establishment)
  • capital verification is no longer required and
  • registration for the establishment of a company is no longer subject to the payment of the first instalment of its capital injection or capital verification
 

However, where any law, administrative regulation or the State Council mandates a paid-in regime for the registered capital of a company, the registered capital shall be actually paid in accordance with such.


Further, for a joint stock limited company established by public share offer, its registered capital should still be the actually paid-in share capital, which remains untouched by the 2013 Amendment.


Removal Of General Minimum Registered Capital Requirements

 

The following general minimum registered capital requirements have been removed by the 2013 Amendment:

 

  • RMB 30k for a non-sole proprietorship limited liability company
  • RMB 100k for a sole proprietorship limited liability company and
  • RMB 5m for a joint stock limited company
 

There is no longer a requirement for at least 30% of the registered capital of a limited liability company to be in cash.


However, where any law, administrative regulation or the State Council stipulates a minimum for registered capital, the registered capital shall comply with such a requirement.


Impact Of The 2013 Amendment On FDI Practice In China

 

Although it introduces limited changes to the provisions of the Company Law, the 2013 Amendment is material by nature in connection with registered capital and will certainly impact the relevant legal system currently in place in the sense that, to conform to and effectuate the 2013 Amendment, a series of administrative laws and regulations currently in effect (eg the Administrative Rules on Company Registration and the Administrative Provisions on Registration of Registered Capital of Companies) will have to be amended as well.


In addition, after the 2013 Amendments came into force, NPC law, administrative regulations and decisions of the State Council became the only authorities with the power to impose requirements of a minimum registered capital and to introduce a paid-in capital system to exceptional sectors or situations. In other words, the relevant requirements currently stipulated in department rules and local legislation will be contradictory to the 2013 Amendment and thus become automatically void on 1 March 2014 unless such requirements fall in the scope of the decisions of the State Council. In other words, the relevant requirements currently stipulated in department rules and local legislation became contradictory to the 2013 Amendment and thus became automatically void on 1 March 2014 unless such requirements fall in the scope of the decisions of the State Council. For instance, the Interim Provisions on the Establishment of Foreign-invested Printing Enterprises, which are department rules issued in 2002, set forth the minimum registered capital of a foreign-invested enterprise (FIE) engaged in the printing of packaging and decoration of publications as RMB 10m and the minimum registered capital of an FIE engaged in the printing of other publication materials as RMB 5m. It is not yet clear whether other requirements like these will continue to be in effect after the 2013 Amendment comes into force.

 

It could be complicated and even confusing when the Company Law and FIE laws (including the Chinese-Foreign Equity Joint Venture Law, the Chinese-Foreign Cooperative Joint Venture Law and the Wholly Foreign Owned Enterprise Law) become inconsistent or even conflict with each other in practice. The 2005 amendment to the Company Law caused great confusion in practice after it came into force on 1 January 2006. This was resolved by the Implementation Opinions on Some Issues concerning Law Application for the Administration of Examination, Approval and Registration of Foreign-funded Companies (the opinions), jointly issued in April 2006 by the State Administration for Industry and Commerce, the Ministry of Commerce, the General Administration of Customs and the State Administration for Foreign Exchange, in addition to further circulars issued by the State Administration for Industry and Commerce regarding the implementation of the Opinions.

 

Furthermore, the 2013 Amendment designated the power of determining the capital injection schedule and the percentage of each instalment to the company’s articles of association without stipulating any mandatory requirement to that regard. Such general release of restrictions will definitely have direct impact on the applicability of the relevant requirements set forth in the Opinions and thus would probably need clarification by the competent government authorities like in 2006.

 

On the other hand, given the current FIE regulatory regime comprising the commerce authority’s power to review the substance of an FIE’s articles of association and the foreign exchange authority’s power to scrutinise the cross-border flow of funds regulated under the capital accounts, it remains uncertain whether the local commerce authorities would exercise their power of article review to examine the feasibility of an agreement reached between the shareholders with respect to the amount of subscribed capital and the capital contribution schedule, even though the State Council, with limited exceptions, recently removed from the Development and Reform Commissions the power to approve the generally encouraged and permitted foreign-invested projects. Even if the agreement of the Chinese partner has been obtained, there may be practical obstacles for a foreign investor wishing to inject capital at a time or by a percentage that differs from the Chinese investor. It may also be difficult to change practices that have been in place for many years, eg profit distribution in proportion to the actually paid-in capital. These questions, issues and even problems that may arise in foreign direct investment need answers and solutions following the 2013 Amendment.


For the time being, the amendment or re-enactment of the FIE laws has been entered into the legislative agenda of the 12th NPC. The Ministry of Commerce has initiated brainstorming in think tanks and various other sectors of society in the drafting of the relevant bills, and we are honoured to be part of the process. It is undoubtedly challenging for government authorities to align the Opinions and the newly amended Company Law, taking into consideration the prospective changes yet as much as possible avoiding or minimising instability and unpredictability in the regulation of foreign investments. For foreign and Chinese investors, skilful and professional guidance by experts will be crucial to better shape their investment plans in view of the anticipated complexities.

 

This article was supplied by Lexis Practical Guidance.

 

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