PEI Hongbo：Major Transformations in China's Company Law

Introduction

　　The newly revised Company Law of the People's Republic of China, officially enacted by the 14th National People's Congress Standing Committee on December 29, 2023, will take effect from July 1, 2024.

　　This comprehensive overhaul represents a significant milestone in China's corporate governance landscape, introducing numerous amendments aimed at enhancing corporate efficiency, protecting stakeholder rights, and fostering a more transparent and responsible business environment.

　　This article delves into the key changes in the new Company Law and their potential impacts on Chinese enterprises.

　　Key Changes in the New Company Law

　　1.Strengthened Corporate Governance Structures

　　The new Company Law reinforces corporate governance by refining the roles and functions of the board of directors and the board of supervisors. Notably, it mandates that companies with over 300 employees must have workers' representatives on their boards of directors, ensuring greater representation of employee interests in strategic decision-making. This change aligns with modern corporate governance principles and promotes a more inclusive and democratic approach to business management.

　　2.Flexible Capital System

　　The revised law introduces greater flexibility in the company's capital regime. Effective July 1, 2024, newly established limited liability companies must fully subscribe their registered capital within five years from incorporation, while joint-stock companies must pay up their entire share capital upon registration. For existing companies registered before July 1, 2024, a "3+5" transitional arrangement applies, allowing adjustments to be made by June 30, 2027, to comply with the new timeline. This flexibility encourages capital efficiency and reduces the financial burden on businesses during their initial stages.

　　3.Expanded Forms of Capital Contribution

　　The new law expands the scope of acceptable forms of capital contributions, allowing shareholders to contribute not only monetary assets but also non-monetary assets such as intellectual property, land use rights, equities, and debts, provided they can be appraised and legally transferred. This enhancement facilitates the diversification of capital sources and promotes investment in innovative and knowledge-intensive enterprises.

　　4.Enhanced Protection of Stakeholder Rights

　　The new Company Law significantly strengthens the protection of stakeholders' rights, particularly those of workers and shareholders. It explicitly requires companies to consider the interests of workers, consumers, and the broader community in their business operations, encouraging social responsibility and sustainable development. Additionally, it clarifies the duties of directors and senior managers, including their fiduciary and diligence obligations, and imposes stricter liability for misconduct, thereby enhancing accountability and transparency.

　　5.Promoting Transparency and Accountability

　　The law mandates the use of electronic communication for conducting meetings and voting among shareholders, directors, and supervisors, increasing efficiency and accessibility. It also requires the disclosure of key financial and operational information through the National Enterprise Credit Information Publicity System, enhancing transparency and facilitating public scrutiny.

　　Impacts on Chinese Enterprises

　　1.Improved Corporate Governance

　　The stricter governance structures and accountability measures will force Chinese enterprises to adopt more professional and ethical management practices. This will ultimately lead to better decision-making, increased investor confidence, and improved corporate performance.

　　2.Enhanced Competitiveness

　　The flexibility in capital contribution and the expanded scope of acceptable assets will enable enterprises to raise funds more efficiently and diversify their capital base. This will foster innovation, drive growth, and enhance the overall competitiveness of Chinese companies in the global marketplace.

　　3.Greater Social Responsibility

　　The emphasis on social responsibility and stakeholder protection will encourage Chinese enterprises to adopt more sustainable business practices. This includes environmental protection, fair labor practices, and ethical conduct, all of which contribute to a positive corporate image and enhanced brand value.

　　4.Increased Transparency and Trust

　　The mandatory disclosure requirements and the use of electronic communication will improve transparency and facilitate stakeholder engagement. This will build trust among investors, customers, and the broader community, fostering a more stable and predictable business environment.

　　Conclusion

　　The new Company Law of the People's Republic of China represents a significant step forward in China's corporate governance framework. By enhancing governance structures, promoting flexibility in capital contribution, strengthening stakeholder protection, and fostering transparency and accountability, it lays the foundation for a more efficient, ethical, and sustainable business landscape. Chinese enterprises must embrace these changes and adapt their practices accordingly to harness the full benefits of this historic reform.