Revisions to China's Company Law: Impact on Canadian businesses
On December 29, 2023, China's National People's Congress Standing Committee endorsed revisions to the Company Law, effective on July 1, 2024. It is the sixth time that the law was amended since 1993, with these revisions being the most substantive.
How this applies to foreign investments in China
Foreign-invested Enterprises (FIEs), including joint ventures (JVs) and wholly foreign-owned enterprises (WFOEs), are required to conform their corporate practices to the new Company law by December 31, 2024. If a FIE has updated its articles of association in accordance with the previous Company Law as prescribed with the Foreign Investment Law (FIL), it will have to do it again to comply with the new Company Law. As over 99% of FIEs in China are limited liability companies (LLCs) rather than joint stock companies (JSCs), this article will focus on the key changes impacting foreign-invested LLCs in mainland China.
Capital contribution
The most notable change to the Company Law is that shareholders of an LLC must contribute all their subscribed capital to the company within five years of the LLC's incorporation. Companies established before July 1, 2024, will have a transitional period to adjust their capital contribution if their timeline exceeds five years.
Legal representative
Under the new Company Law, an LCC can designate any of its directors or general managers as a legal representative, so long as the person is involved in the company's daily operations. This change offers more flexibility to decide who can represent the company and sign legal binding contracts.
Shareholders' meeting
Under the new Company Law, a shareholders' meeting is no longer responsible for making decisions on the company's business policy and investment plan or approving the annual financial budget plan and accounting plan. Instead, such responsibilities are given to the board of directors.
Board of directors
The new Company Law removes the previous cap of thirteen on the number of directors and expands the power of the board of directors. An audit committee consisting of directors can be set up to replace the supervisory board or supervisor(s). With the aim of protecting employees' interests, an LLC with more than three hundred employees must appoint an employee representative on the board of directors, unless its board of supervisors already includes an employee representative. Such an employee representative must be democratically elected by the company's employees.
Supervisors
Companies with either a small number of shareholders or a small size of operations can choose not to have a board of supervisors. Instead, it can have one supervisor or no supervisor if all shareholders reach a consensus.
Actions to consider
The revisions are favourable to foreign companies overall. However, Canadian businesses need to be aware of the revised rules on capital contribution and corporate governance and take appropriate actions to ensure compliance accordingly.
Canadian investors in JVs may need to negotiate with other shareholders on the capital injection plan and the re-arrangement of rights and obligations regarding the shareholders' meeting, board of directors, supervisor(s), and management, and other areas affected by the new Company Law.
Canadian-invested WFOEs may also need to review their capitalization and key positions such as legal representatives, directors, supervisors, and senior management, and assess the necessity of adjustment.
Get help from the Trade Commissioner Service
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Canadian companies are welcome to contact the Trade Commissioner Service in China (infocentrechina@international.gc.ca) for advice. We can also recommend qualified service providers should companies need legal advice on compliance.
