China introduces its new company law

China's new PRC Company Law takes effect from 1 January 2006. The new law brings about many changes to the previous Company Law and is aimed at delivering commercial and governance improvements. Whilst some of the changes do not directly impact on foreign companies investing in China, it is important that all foreign investors planning to invest in China have an understanding of how the new legislation operates.

Incorporation threshold

Under the old Company Law, there were different levels of minimum registered capital depending on the type of business being carried out. The revised Company Law removes the connection between industry sector and minimum registered capital. It also reduces the minimum registered capital requirements for a limited liability company to RMB30,000 and reduces the minimum registered capital for a company limited by shares from RMB10 million to RMB500,000.

Contributions to registered capital

The revised Company Law now permits the contribution of any non-cash assets which can be monetarily valued and legally transferred. The old Company Law expressly provided that five kinds of assets could be contributed to the registered capital of a company (ie cash, tangible assets, industrial property rights, non-patented technology and land use rights). The new Company Law also states that at least 30% of a company's registered capital must be in the form of cash contributions.

Payment of registered capital

Foreign investment enterprises such as equity joint ventures, cooperative joint ventures and wholly foreign owned enterprises, are already permitted to contribute their registered capital in instalments. However, under the old Company Law other companies were not. The new Company Law allows contribution of registered capital to be made by way of instalments as long as the first instalment is not less than 20% of the registered capital and the balance of the registered capital is contributed within two years after incorporation of the company.

Legal representative

Under the old Company Law, only the chairman of the board of directors could be the legal representative of a company. The new provisions allow for a managing director or a manager to be the legal representative also.

Inter-company investment

Companies are now permitted freely to invest in other companies as long as a company does not undertake joint liability for an invested entity's debts. The rule prohibiting a limited liability company from making investments in other enterprises which exceed, in aggregate, 50% of the new asset value of such company has been abolished.

Minority shareholders

The new Company Law introduces a number of measures aimed at increasing the protection of minority shareholders. Shareholders now have a statutory right to receive information, require a repurchase of their shares and petition for dissolution of the company.

Corporate governance

The new Company Law allows the corporate veil to be lifted in certain circumstances, which may result in the controlling shareholder being held personally liable for the debts of the company.

Relationship with other foreign investment enterprise legislation

Foreign investors must be aware that the changes to the previous Company Law only apply where current legislation on foreign investment is silent. Where the laws governing foreign investment differ from the provisions of the new Company Law, the former prevail. Otherwise the new Company Law is applicable to all companies, including foreign investment enterprises and joint stock limited companies.