Following the release of the first draft of the amendments to the Company Law of the People's Republic of China ("PRC") ("First Draft") and the second draft of the amendments in late 2021 and late 2022, respectively, the third draft of the amendments to the PRC Company Law ("Third Draft") was promulgated for public comments on 1 September 2023. Below is an analysis of three noteworthy changes contained in the Third Draft.
- Timeline relating to capital contribution
The most notable change relates to the timeline for shareholders to contribute to the registered capital of the company. Since 1 March 2014, the PRC Company Law has allowed shareholders to make the actual contribution of the capital they have subscribed in instalments or at specific milestones set out in the company’s Articles of Association, with no restrictions in terms of the timeline of the capital contribution unless specifically stipulated in the relevant laws. The Third Draft has amended this part by stipulating that the capital contributions shall be paid in full by the shareholders pursuant to the provisions of the Articles of Association of the company or within five years following the establishment date of the company, whichever is earlier. However, the Third Draft does not clarify whether the five-year requirement is also applicable to the contribution to the increased capital subscribed by the shareholders after the establishment of the company.
- Cap on capital reduction
The Third Draft sets limits on capital reduction. Compared with the current PRC Company Law, the Third Draft requires a company to reduce the capital contribution or shareholding of shareholders according to the proportion of capital contribution or shares held by the shareholders when it reduces its registered capital unless otherwise specified by law. This new requirement is mandatory and cannot be excluded by unanimous approval of shareholders.
- No consent for share transfer
Regarding share transfer, the First Draft has expressly provided that the consent of other shareholders of the company is not required for the transfer of shares to a third party. However, the other shareholders still have the priority right and the transferring shareholder(s) must notify in writing such other shareholders of the number of shares, price, and method and period of payment of the transfer, provided that such other shareholders shall respond within 30 days from receipt of the written notice. The Third Draft has followed the position of the First Draft in this regard, but further specifies that the time when the share transfer takes effect shall be when the transferee is recorded in the register of shareholders of the company.
If the Third Draft is passed in its current form, investors will need to take the above into consideration when they invest in, or dispose of the shares of, a PRC-incorporated company.
