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Highlights of the revised draft of the Company Law of China

Tuesday 5 April 2022

Sarah Luo
Chance Bridge, Shanghai
sha.luo@chancebridge.com

On 24 December 2021, the revised draft of the Company Law of China was released on the National People's Congress (NPC) website to solicit public opinion after it was deliberated at the 32nd session of the 13th NPC Standing Committee.

The revised draft has 15 chapters and 260 articles, among which around 70 new articles have been added or revised in substance on the basis of 13 chapters and 218 articles of the current Company Law. The revisions reflect the development of business environment improvement and property rights protection in China, and include several remarkable changes to current legislation, such as improving the company establishment and withdrawal system, strengthening the responsibilities of controlling shareholders and management personnel, and emphasising the social responsibility of companies.

Improving the company establishment and withdrawal system

In the revised draft, a new chapter on company registration has been established to clarify the matters and procedures for company establishment registration, change registration and cancellation of registration. The company registration authority is also required to optimise the registration process and improve the efficiency and facilitation of registration. Furthermore, the legal effect of electronic business licenses, announcements through a unified enterprise information publicity system and resolutions made by electronic communication have been clarified (eg, Articles 26, 34 and 76 of the revised draft).

The scope of property that can be used for capital contribution has been expanded, clarifying that equity and creditor's rights can be used for capital contribution (Articles 43 and 100 of the revised draft). Simultaneously, restrictions on the establishment of one-person limited liability companies have been relaxed. Regarding a company's liquidation system, the obligations and responsibilities of liquidation obligors and members of the liquidation team have been strengthened, and provisions for the simplified procedure of deregistration have been added.

Strengthening the responsibilities of controlling shareholders and management personnel

To strengthen the responsibilities of controlling shareholders and management personnel, more content has been added to the revised draft on the duties of loyalty and diligence for directors, supervisors and senior management personnel (Article 180 of the revised draft). The revised draft additionally imposes more obligations on the shareholders and management panel when they are involved in any affiliated transactions with the company. The new regulations require either group to report the company or the board voluntarily and to avoid voting whilst shareholders or the board are resolving related transactions (Article 183 of the revised draft).

If the controlling shareholders and management personnel engage in any behaviour that damages the interests of the company or other shareholders, causing losses to the company or shareholders, because of intentional or gross negligence, such as withdrawing capital contributions from the company or providing assistance for that, they shall be liable in accordance with the law.

Emphasising corporate social responsibility

To improve the development of corporate social responsibility, a new article has been stipulated in the revised draft: In compliance with obligations provided by laws and regulations, companies shall fully consider interest-related parties during business operations, such as employees and consumers, and undertake social responsibility. In addition, the state encourages companies to participate in social welfare activities and publish social responsibility reports.

The soliciting of public opinion on the revised draft closed on 22 January 2022, as planned, and 4,943 opinions were submitted via the website. The revised draft reflects an achievement in the understanding of 'company' in terms of both its critical role in the market economy of China and legislation on corporate laws. Such efforts will contribute to the continued improvement of the business environment in China.