New PRC Company Law – Consultation Draft Clarifies Capital Contribution Requirements

Other Author      Elfie Wang of Meng Bo Law Office, a PRC law firm based in Shanghai, with which Mayer Brown has a close working relationship.

Following the introduction of amendments to the PRC Company Law (New Company Law), there were a number of uncertainties surrounding various issues including contribution of the Registered Capital. As discussed in our earlier Legal Update, the New Company Law envisaged detailed implementation measures to be formulated by the State Council clarifying how existing companies will be required to adapt to the new capital contribution requirements.

On 6 February 2024, the State Administration for Market Regulation (SAMR) issued a consultation draft of the Provisions of the State Council on the Implementation of the Registration and Administration System of Registered Capital under the PRC Company Law (Draft Implementation Provisions), which is open for public consultation until 5 March 2024.

The Draft Implementation Provisions provide confirmation on a number of important issues including: the transition period during which adjustments to existing contribution of register capital obligations are to be required; details surrounding the introduction of a simplified procedure for capital reduction; the on-going (and in some cases very significant) liability of shareholders; as well as the power of the SAMR.

What Investors and Companies Need to Know About the Amendments?

Transition Period

The Implementation Provisions provide for a three-year transition period from 1 July 2024 to 30 June 2027 (Transition Period) during which shareholders of existing companies are expected to review and adjust their contribution schedule where such action is needed – adjustment being required if the remaining contribution period beyond 30 June 2027 exceeds five years.

Any adjustments should be completed within the Transition Period.

Simplified Procedure for Capital Reduction

As discussed in our earlier update, in recent years a significant number of companies have been established with a very large registered capital – making reduction under the New Company Law essential. In the past the process of reducing registered capital has been complex. The Draft Implementation Provisions however, further provide for a simplified procedure during the Transition Period, applicable where capital has not been paid-in.

The simplified procedure will apply where:

1. there is either no outstanding debt or where debt is significantly lower than the company's paid-in capital;
2. all shareholders undertake to be jointly and severally liable for the company’s debts before the capital reduction to the extent of their originally subscribed capital contribution; and
3. all directors undertake not to jeopardise the Company's ability to pay its debts and to continue as a going concern.

Eligible companies may apply for capital reduction after a 20-days announcement through the National Enterprise Credit Information Publicity System, provided that no creditor raises objection during such announcement period.

Information Publicity

The New Company Law expressly requires companies to publicise the paid-in capital of each shareholder through the National Enterprise Credit Information Publicity System.

The Draft Implementation Provisions now provide that such publication will need be made within 20 working days of contribution. Although there is no need to provide a capital verification report, companies are now required to upload relevant shareholders’ register and financial statements to evidence such capital contribution.

Power of the SAMR

Any failure to adjust registered capital within the Transition Period may result in the SAMR ordering correction within 90 days.

Article 266 of the New Company Law also grants the SAMR power to order adjustments if the contribution period or amount appears to be abnormal.

The Draft Implementation Provisions provide more details in this regard and restrict the SAMR’s power in respect of existing companies to these circumstances:

1. where the contribution period exceeds 30 years or the contribution amount is more than RMB1,000 million;
2. where the SAMR deems the contribution period or contribution amount to be abnormal based on its assessment of factors – such as the shareholders’ ability to make contributions, the company’s major business and asset size – the SAMR may consult with industrial professional institutions or relevant authorities and the company may be asked to provide clarification; and
3. upon consent of the SAMR at provincial level.

Further, the SAMR may refuse to register a new company if it determines that the proposed registered capital is unrealistic or inconsistent with relevant laws and regulations, including circumstances where the registered capital is obviously too high having regard to the proposed business, industry or investor ability to pay.

Possible Exemption

Existing companies involved in major national strategic projects important to the national economy, or that concern national security or the public interest, may be exempt upon consent of the relevant department of the State Council or the people's government at or above the provincial level. In such circumstances the company may follow its original capital contribution schedule.

Wider Review

Although the Draft Implementation Provisions are still at the public consultation stage, they have brought greater degree of clarity on some outstanding issues and should be taken into account when investors and companies plan for possible adjustments.

Clearly there are a number of issues that need to be considered by affected companies. 

For example, shareholders may face on-going liability in circumstances where a very high registered capital was originally proposed. 

While the simplified procedure for capital reduction may reduce the obligation to pay in new registered capital, in circumstances where companies cannot pay their debt there may be on-going liability up to the original subscribed capital contribution, which needs to be taken into account. 

This may be a complicating factor in a number of circumstances including where companies are subject of acquisition (a purchaser may seek an indemnity for example). Such background will also need to be subject to careful drafting in shareholder agreements and is also something that will need to be taken into account by individuals serving as directors. 

Investors planning business expansion may wish to consider the advantages of setting up a new company without the complications discussed above. 

Further updates will follow.