In context

Recent company law changes in China improve business climate

April 10, 2014
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In context

The Chinese government recently amended a number of Chinese corporate laws and regulations. These amendments include abolishing the statutory requirement for minimum registered capital for most industries, altering the annual inspection regime and establishing a publicly accessible system for the disclosure of corporate information more efficiently. The relaxation of requirements on capital injection is welcomed by small or medium-sized enterprises in China but is arguably not cheerful news for FIEs for multiple reasons. The new annual reporting requirement and the disclosure system, however, may make the operation of companies in China more efficient and transparent. Like other enterprises, FIEs in China will soon need to follow the new annual reporting requirements by completing an annual report and submitting it to the disclosure system on time.

The Chinese government recently amended a number of Chinese corporate laws and regulations by abolishing the statutory requirement for minimum registered capital for most industries, altering the annual inspection regime and establishing a publicly accessible system for disclosure of corporate information more efficiently. All these changes came into effect on 1 March 2014.

 

Reform of the registered capital regime
Under the prior Chinese Company Law, two most frequently used corporate vehicles were subject to stringent requirements on capitalisation. A limited liability company was required to have minimum registered capital of RMB 30,000, at least 30% of which had to be in cash, and the company had to register the capital amount and the details of contribution with the competent administration of industry and commerce (AIC, the corporate/trade registry). Similarly, a company limited by shares had to have registered capital of RMB 5 million or more.

 

Companies were also required to complete this capitalisation in a statutorily determined period of time. For instance, for a Sino-foreign equity joint venture enterprise, 15% of its capital had to be paid within three months of incorporation, with the remaining part paid up within two years.

 

As of March 2014, these requirements have been abolished. As applicable to both pure domestic enterprises and foreign-invested enterprises (FIEs) in most business sectors, companies can have a registered capital based purely on their operational needs and the shareholders agreement, with the timeline and proportion of capitalisation specified in their articles of association.

 

However, this reform does not apply to all industries. These changes do not apply to companies limited by shares to be incorporated by public offering, foreign-invested holding companies, various corporate vehicles for banking and certain other financial businesses.

 

Alteration of annual inspection requirement
Each company in China was required to complete a series of filing/registration formalities each year. Only after the AIC received a comprehensive set of documents as endorsed by each authority relating to the company’s operation would the AIC then affix its chop on the company’s business licence to evidence the company passing the inspection and its good standing.

 

This requirement is now abolished as of March 2014. Each company is now required to prepare an annual report listing its general information (shareholding details, directorship appointment/changes, etc.), and file this report with the competent AIC during the first half of each year. This annual report will be accessible to the public through the State AIC’s newly issued “Enterprise Credit Information Disclosure System” (see below).

 

Public search system on corporate information
It was previously difficult to obtain a company’s registered information from the AIC in an efficient way or on a no-name basis. For the details of a company’s shareholding structure, directorship, capital payment and annual inspection status, a qualified Chinese lawyer needed to do an on-site search at the relevant AIC. Local AICs sometimes refused to provide this type of corporate information.

 

From late February 2014, a web-based search engine, “Enterprise Credit Information Disclosure System” was put online for the public. People can now obtain various types of information about a company registered in China for free by identifying a company’s name or AIC registration number. A company’s shareholding details, such as directorship and historical changes, capitalisation records and its history of being subject to administrative penalties will all be available on the system.

 

The relaxation of requirements on capital injection is welcomed by small or medium-sized enterprises in China but arguably not cheerful news for FIEs for multiple reasons. The reasons include operational issues and the complex foreign exchange control in China, which means that FIEs will still need a required amount of capital to be injected into China to cover day-to-day expenses. The new annual reporting requirement and the disclosure system, however, may to a certain extent make the operations of companies in China more efficient and transparent.  Like other enterprises, FIEs in China will soon need to follow the new annual reporting requirements by completing an annual report and submitting it to the disclosure system on time.

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