China Introduces favourable Changes to its Company Law in Latest Update

28th February 2024
Advocacy, Chamber News

On 29^th December 2023, the NPC’s Standing Committee adopted an amendment to China’s Company Law, due to take effect on 1^st July 2024. This decision follows several years of draft amendments and deliberations stretching back to the end of 2021.

The proposed changes to China’s Company Law will affect many critical aspects of corporate establishment, operations, and governance. This goes beyond mere tweaks and represents a substantial revision to the legal framework governing companies in China. Chief among the changes will be the imposition of greater personal liability for directors, supervisors and management, alterations to capital contribution timelines, as well the requirement for mandatory employee involvement in the governance of large companies.

So, what does this mean for foreign business in China?

The proposed amendments to the Company Law will have a significant impact on businesses operating within the China market. Whilst in many ways the Law will encourage a streamlining of business operations and corporate governance, it also presents challenges for foreign investors at a time of heightened economic sensitivity.

Firstly, adapting to the new legal landscape will require considerable time and effort. Familiarising oneself with the intricacies of the revised regulations, particularly regarding shareholder capital contributions, corporate governance structures, and director liabilities, is crucial, and businesses will need to adjust their internal practices and potentially restructure their corporate governance accordingly. Compliance with the Company Law will entail proactive engagement with legal counsel and advisors specialising in Chinese business law.

This, by extension, highlights an important point. Whilst compliance with the Company Law is a necessity for companies that intend on sticking out the China market in the long-term, the extensive administrative workload, including document filing and legal consultations, may drive away companies with futures that are less secure. It will also increase operating costs.

That being said, one should not downplay the importance of these measures in highlighting China’s increasing alignment with global best practises. The previous Company Law was “old and stale,” as well as “clumsy and inadequate for regulating corporate governance and relationships among market participants.”[1] By contrast, the new regulations require capital abundance and thus creditworthiness for companies, further protect the rights of companies and creditors, optimise corporate governance, clarify and protect equity transactions, enhance the transparency of information disclosure, and streamline establishment and liquidation procedures.

We will have to see how implementation of the Law affects foreign businesses going forward. Our Sentiment Survey revealed 60% of businesses found the China market more difficult than last year, with many adopting a “wait-and-see” approach on investment. Whilst the amendments indicate increased government willingness to address the regulatory hurdles companies face, companies need further reassurance. The economy continues to suffer from deflationary pressures, underlying structural issues remain, and inward FDI reached its lowest level in 30 years last week.

To learn more about the British companies in China, check out our Sentiment Survey. This measures the outlook of over 300 British businesses with a China presence, and is only the beginning of an exciting advocacy agenda going into 2024.

Finally, for a deeper dive into the Company Law itself, do check out our member MSA’s latest insights on the Law’s specific provisions, as well as what the likely ramifications will be for legal and business professionals here in China. Click below image to access full article