Freeing private capital

Mainland China did not have a modern company law until 1993. The current PRC Company Law (中华人民共和国公司法) (Company Law) was first promulgated on October 27 2005 and became effective on January 1 2006. As one of the most important laws in the economic sector, the Company Law sets out foundation rules for China's corporate system. After eight years of economic development, the Standing Committee of the Twelfth National People's Congress (NPC) passed amendments to the Company Law (Company Law Amendments) on December 28 2013. This will trigger a series of further changes that will move the country towards a market-driven economic system.

There are two basic types of companies under the Company Law – limited liability companies (LLCs) and companies limited by shares (CLSs), which are generally subject to different legal regimes. An LLC does not have the concept of share capital; instead, an LLC shareholder holds equity interests in the LLC which are constituted by, and proportional to, the shareholder's contribution to the total registered capital of the LLC. A CLS's capital is divided into a certain number of shares.

The Chinese legal framework governing foreign-invested enterprises (FIEs) was set up prior to the current corporate system. There are three types of FIEs – wholly foreign-owned enterprises (WFOEs), Sino-foreign equity joint ventures (EJVs) and Sino-foreign cooperative joint ventures (CJVs). These are all regulated by separate sets of laws and implementation regulations (FIE Laws). As all WFOEs and EJVs and most CJVs are incorporated as companies, the Company Law has become the main legislation applicable to all incorporated FIEs, especially on matters such as corporate governance, which are not well addressed in the relevant FIE Laws.

The main amendments

Currently, the minimum registered capital amounts of an LLC, a one-person LLC and a CLS are Rmb30,000 (US$4,900), Rmb100,000 (US$16,500) and Rmb5,000,000 (US$822,900), respectively. The new amendments abolish the minimum registered capital requirements for all types of companies (i.e. LLCs, one-person LLCs and CLSs). Exempted circumstances include any special requirement under the laws (i.e. the legislation promulgated by NPC or its Standing Committee), administrative regulations (i.e. the regulations promulgated by the State Council) or decisions of the State Council.

The capital registration system has essentially been changed from a paid-in to a subscribed capital registration system. As a result:

• The paid-in capital will no longer be one of the registration items provided for on a company's business licence. Instead, the business licence will only show the capital subscribed by the shareholders.
  
• Accordingly, current requirements regarding the timeframes within which the registered capital must be paid will cease to apply after the Company Law Amendments come into effect. Under the current Company Law, the shareholders of an LLC and the promoters of a CLS must pay at least 20% of the registered capital in the first instalment of capital contribution and pay the rest within two or five years after the establishment of the company. However, in accordance with the Company Law Amendments, the method and timing for payment of the registered capital will in principle be governed by the company's articles of association, and it is therefore up to the shareholders to negotiate and agree among themselves.
  
• Moreover, a capital verification report showing shareholders' actual capital contribution to a company will no longer be required by the company registration authorities (i.e., the State Administration for Industry and Commerce (SAIC) or its local counterparts), as registering the actual capital payment status is not required.

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Relaxing control

Although the Company Law Amendments cover a relatively narrow scope, the changes have much significance.

For decades, the legal regime governing China's economic activities has been highly regulated compared with most western jurisdictions. Even after giving up the planned economy system, the Chinese government still intervenes in non-governmental economic activities rather extensively by imposing statutory administrative approvals and market entry restrictions/thresholds, which has restricted innovation and entrepreneurship in the economic system and discouraged non-governmental capital from participating in economic activities.

The Chinese government is aware of this problem and has been gradually relaxing its control. In the year since it has taken office, the new leadership of China has pledged to speed up the process. The newly established China (Shanghai) Pilot Free Trade Zone (SFTZ), which is regarded as a testing ground for future economic reforms, is a result of these efforts. The key terms of the Company Law Amendments had already been included in the Several Opinions on Supporting the Establishment of the China (Shanghai) Pilot Free Trade Zone (国家工商行政管理总局关于支持中国（上海）自由贸易试验区建设的若干意见), issued by SAIC on September 26 2013 and introduced to the SFTZ in its official establishment in late September 2013, three months before the Company Law Amendments were promulgated.

In addition to driving long-term strategy, the recent slow-down of China's economic growth has made exploring new ways to grow an important task. Lowering investment thresholds is a sensible effort to encourage investment by non-governmental capital. From a regulatory perspective, the relaxation of minimum registered capital requirements and the simplification of the capital registration system are effective ways of reducing such thresholds.

Future changes

The Company Law Amendments reflect only part of the proposed business registration reform which was determined at the executive meeting of the State Council on October 25 2013. Other aspects of the proposed reform include: changing the government-led annual inspection system to an annual reporting system, under which the annual reports filed by the enterprises will be open to the public; relaxing residence (business venue) requirements for enterprise registration purposes; and establishing an enterprise credibility system by making enterprise registration records, annual reports and qualification documents of all enterprises publicly available on electronic platforms.

These reform initiatives were addressed in the Plan for Reforming the Registered Capital Registration System (注册资本登记制度改革方案) issued by the State Council on February 7 2014, and have been in the process of gradual implementation. The SAIC has recently announced that the company annual inspection system will cease to apply from March 1 2014. The promulgation of the Company Law Amendments is only the first step of the upcoming reforms of nationwide business registration systems.

Business registration reform measures have already been introduced on a trial basis in several cities (for example, Shenzhen, Zhuhai, Dongguan and Shunde District of Foshan) in Guangdong Province since 2012. Specifically, a new version of the business licence, which universally applies to all types of business entities, has been adopted by the local counterparts of SAIC in Guangdong Province as part of the reform. Business scope, registered capital and paid-in capital of a company are not set out on these new business licences as they are no longer registration items in those cities. The business registration reform also includes simplifying registration procedures by changing the substantive review of the application documents by the AIC to a pro-forma review.

After the Company Law Amendments became effective on March 1 2014, the reform measures regarding registered capital were expanded from being adopted only in those pilot cities in Guangdong Province and in the SFTZ to throughout the whole country. Other reform measures (such as relaxing the residence and business scope requirements) may also be introduced nationwide in the future if their tests in those pilot cities turn out to be successful.

In addition to the Company Law Amendments, further reform of the company capital regime within the ambit of the Company Law is also in the pipeline. The Company Law provides that the same type of shares of a CLS under the same issuance shall be subject to the same terms and conditions and at the same price per share, which implies the possibility of issuing different classes of shares in a CLS. However, this has been impractical due to the lack of detailed implementation regulations.

On November 30 2013, the State Council issued the Guiding Opinions on the Launch of the Pilot Project for Preference Shares (国务院关于开展优先股试点的指导意见), which stated that listed companies determined by the China Securities Regulatory Commission (CSRC) may issue preferred shares publicly and that listed companies (including companies that are registered in China but listed overseas) and non-listed public companies may issue non-public preferred shares. On December 13 2013, the CSRC, the regulator of securities in China, published the draft Measures for the Administration of the Pilot Project on Preference Shares (Draft for Comments) (优先股试点管理办法（征求意见稿）) to solicit public opinion. It is expected that issuing different classes of shares by a qualified CLS will become practicable after the draft measures are officially issued.

Resolving inconsistencies

As the FIE Laws were initially promulgated during the 1970s and 1980s and amended in the early 2000s, there are certain inconsistencies between the FIE Laws and the new Company Law (which was promulgated in 2005). This has led to much criticism and confusion in practice. Although the Ministry of Commerce (MOFCOM), together with a few other regulatory authorities, issued the Implementing Opinions on Several Issues Concerning the Application of the Law in the Administration of the Examination, Approval and Registration of Foreign-invested Companies (关于外商投资的公司审批登记管理法律适用若干问题的执行意见) in 2006 to consolidate certain inconsistencies in order to better regulate the practice, the FIE Laws and the Company Law are still not fully compatible.

Further to the Company Law Amendments, amending the FIE Laws have been put on the agenda of the NPC. In early December 2013, MOFCOM, the authority in charge of foreign investment matters, published a notice on its website seeking public opinions on amendments to the FIE Laws. The market expects that the new FIE Laws will resolve existing inconsistencies with the Company Law and will, together with the latter's new amendments, set out a more flexible legal regime for foreign investment.

Various other administrative regulations and provisions will be amended by the State Council or the relevant ministries in the next few months in correspondence with the Company Law Amendments.

The PRC Administration of Company Registration Regulations (公司登记管理条例) promulgated by the State Council in 1994 (and amended in 2005) and the Provisions for the Administration of Registration of the Registered Capital of Companies (公司注册资本登记管理规定) promulgated by SAIC in 2005, are ancillary regulations to the Company Law. As they are based on the paid-in capital registration system, the State Council and SAIC are in the process of amending these two regulations. The amendments are expected to be issued around the time the Company Law Amendments take effect.

There are also regulatory requirements on the minimum registered capital for certain types of companies or companies in specific industries regulated by the State Council's various ministries. These now contradict the Company Law Amendments. For example, the minimum registered capital of a foreign-invested CLS is Rmb30 million under the Certain Questions on the Establishment of Foreign-funded Companies Limited by Shares Tentative Provisions (关于设立外商投资股份有限公司若干问题的暂行规定), which was issued by the Ministry of Foreign Trade and Economic Cooperation (the predecessor of MOFCOM) in January 1995. Similarly, in the Administration of Foreign-invested International Freight Forwarding Agencies Measures (外商投资国际货物运输代理企业管理办法) which was issued by MOFCOM in December 2005, the minimum registered capital of a foreign-invested international freight forwarding enterprise is US$1 million. Amending these regulations to eliminate inconsistency with the Company Law Amendments has been put on the agenda of the competent regulators.

The Company Law Amendments are one of the reform initiatives taken by the new leadership of China to stimulate non-governmental capital's investment and economic activities. More reforms are expected. The ultimate aim of all these reforms is to further broaden and develop China's corporate system as well as the overall economic system, on a free market basis with less intervention from the government. This will not be achieved overnight and there may be regulatory readjustment in the process, but the reforms are certainly heading in the right direction towards helping China establish a more mature market economy in a steady and healthy manner.


Sun Hong and Tony Zhong, Norton Rose Fulbright, Shanghai


More from CLP:
PRC Company Law (2013 Revision)
Plan for Reforming the Registered Capital Registration System