On Dec. 12, 2013, the sixth meeting of the Standing Committee of the 12th Session of the National People’s Congress amended 12 provisions of the Company Law of the People's Republic of China (the “Company Law”). These changes to the Company Law (the “New Amendments”) will take effect on March 1, 2014.
Amendments on paid-in capital and registered capital
The New Amendments substantially change certain basic requirements for forming and capitalizing a company, including: (i) the minimum amount of registered capital; (ii) the form and schedule for contributing registered capital; and (iii) the registration process.
1. Cancellation of minimum registered capital
The New Amendments repeal the statutory requirements for a minimum amount of registered capital, which previously were RMB 30,000 for a limited liability company, RMB 100,000 for a single-shareholder limited liability company, and RMB 5 million for a joint stock limited company.
Before the New Amendments, the Company Law required that companies “have a paid-in capital that is no less than the minimum amount of registered capital required by law.” Under the New Amendments, companies must “have a capital contribution in compliance with the provisions of the Articles of Association.” The Company Law gives promoters of a company substantial discretion in deciding the contents of the company’s Articles of Association. That discretion will now also apply to determining the “right amount” of equity to be contributed to a new company. This exercise of discretion will involve consideration of several factors that are familiar to U.S. companies and their legal counsel, including the risk of “piercing the corporate veil” and the ability to obtain third-party financing.
Similarly, when companies wish to reduce their registered capital, there will no longer be any lower limitation on the registered capital after reduction.
2. Deregulation of form and schedule of capital contribution
Under the New Amendments, the form and payment schedule of paid-in capital subscribed by the shareholders can be determined by the shareholders as set forth in the articles of association. Almost all statutory restrictions on the payment of registered capital have been eliminated. Before the New Amendments, such restrictions included:
- (a) For a limited liability company, contribution in cash was required to be not less than 30 percent of the registered capital;
- (b) For a limited liability company, the initial payment of contribution was required to be not less than 20 percent of the registered capital and not less than the statutory minimum amount of registered capital;
- (c) For a single-shareholder limited liability company, the capital contribution was required to be paid in a lump sum;
- (d) For a joint stock limited company, the initial payment of contribution by the promoters was required to be no less than 20 percent of the total registered capital; and
- (e) The shareholders, or promoters, were required to pay in the remaining amount of registered capital within two years after the company’s incorporation, except for investment companies, for which the relevant period was five years.
As a general exception, laws, administrative regulations, and decisions of the State Council may provide otherwise with respect to the minimum registered capital and the actual payment of registered capital, which is consistent with the regulation before the New Amendments. Currently, for foreign-invested companies, there are certain requirements on the form and payment schedule of paid-in capital set forth in the Foreign-funded Enterprise Law, the Chinese-Foreign Equity Joint Ventures Law, and the Chinese-Foreign Contractual Joint Ventures Law. These requirements will remain effective under the New Amendments, although there are signs that these three laws might also be amended in the near future, as we will discuss below.
3. Simplifying registration
Consistent with the above changes, the New Amendments also simplify the registration process for companies. “Paid-in capital” will no longer be recorded on the business licenses of companies. Capital verification reports, which verify the amount of paid-in capital, will not be required to be submitted for incorporation. The companies will not be required to register the amount of paid-in capital actually contributed by each shareholder with the governmental agency in charge of company registration, i.e., the State Administration for Industry and Commerce (“SAIC”).
SAIC is currently working on the amendments to the Regulations on the Administration of Company Registration, an administrative regulation, in order to accommodate the implementation of the New Amendments.
The statutory minimum requirement for registered capital has been a legal hurdle in China that was unfamiliar to companies and lawyers from Common Law jurisdictions. The Chinese laws used to set various thresholds on the amount of registered capital, and also specified the payment schedule of capital contribution for foreign invested entities. Before the New Amendments, registered capital requirements were, in many cases, arbitrary, and varied among different regions and industries. The local governments often required high registered capital to secure large capital investments in order to improve the local governments’ performance in attracting foreign investment and lifting local GDP statistics. Under such mindsets, projects with lower capital investment were often not welcome. With the repeal of statutory requirement of registered capital and deregulation of capital contribution, the legal basis for such practice is shaken. Hopefully this will bring a substantial and positive impact on starting foreign investment projects.
The Framework Plan of the China (Shanghai) Pilot Free Trade Zone (“FTZ”) states that, within the FTZ, the process for establishing companies will be consistent with international standards. In particular, “[t]he focus of administrative management procedures [for establishing companies] will shift from prior approval to mid-event control and subsequent supervision.” The company laws of the U.S. and most industrialized economies do not impose requirements on minimum capitalization requirements but require that companies, once established, must comply with the law. The “right amount” of equity depends on the nature of the company’s business plans, risk management, the level of insurance coverage, and the need to persuade third parties to various forms of credit to the company, such as trade credit and bank loans. The New Amendments to the Company Law are a substantial step in implementing the vision in the FTZ Framework Plan on a national scale. It is a promising sign that the much-discussed economic reforms of President Xi and Prime Minister Li’s administration will be promptly implemented.
The New Amendments are a solid beginning of an effort to reduce governmental regulation so that businesses can have more flexibility in their operations. It is also reported that the Ministry of Commerce is reaching out to the business community for suggestions on amending the Foreign-funded Enterprise Law, the Chinese-Foreign Equity Joint Ventures Law, and the Chinese-Foreign Contractual Joint Ventures Law. We will provide updates on the amendments to such related laws.
Appendix: Comparison chart of the Company Law before and after the New Amendment