The Five-Year Challenge: China’s Company Law Amendment and Corporate Capital
- Sep 5, 2023
- Posted by: sinovestconsulting
- Category: Legal & Regulation
China’s corporate regulations have been evolving continuously, with the latest transformation being the unveiling of the new amendment to the Company Law. One of the most talked-about provisions in this amendment requires shareholders of limited liability companies to fully contribute their subscribed capital within five years from the company’s establishment. This regulation has sparked extensive discussions and debates within the industry, with many questioning whether this change signifies a shift from subscribed capital to paid-up capital, its appropriateness, and whether it will lead to mass company deregistration.
Background of the New Company Law Amendment
The revision of the new Company Law was initiated in December 2021 and has garnered significant attention since then. On September 1, 2023, during the fifth session of the 14th National People’s Congress Standing Committee, the third draft of the amendment was publicly disclosed, marking the commencement of soliciting opinions from various stakeholders. The primary objective of this revision is to enhance the registered capital contribution registration system, which includes the provision mandating shareholders to fully contribute their subscribed capital within five years from the company’s establishment.
Why the Five-Year Deadline?
In the new Company Law amendment, a deadline of five years for shareholders to fully contribute their subscribed capital is established. Several factors contribute to the rationale behind this regulation. First, statistical data indicates that the lifespan of most Chinese enterprises does not exceed five years, making this timeframe seem appropriate. Second, past experiences have shown that some companies have abused the subscribed capital system by setting excessively high registered capital and overly extended contribution periods to attract creditors and bank loans. However, once the companies encountered operational difficulties, creditors and investors faced risks. Hence, the new regulation aims to prevent such scenarios and uphold transaction security.
Balancing Different Perspectives
While the primary goal of the new Company Law amendment is to safeguard transaction security, there is a need to strike a balance between maintaining transaction security and stimulating market vitality. Some experts argue that although a five-year contribution period seems appropriate, longer periods, such as 15 to 20 years, should be considered to ensure the interests of all parties. This would encourage investment and enhance the sustainable growth of companies without compromising their vitality and competitiveness.
On the other hand, some viewpoints suggest that this provision will not lead to mass company deregistration but could trigger a series of capital reduction actions. This would also help ensure that the setting of registered capital becomes more reasonable, preventing shareholders from setting excessively high registered capital and overly extended contribution periods.
Impact of the New Company Law Amendment
The enactment of the new Company Law amendment will have far-reaching implications for Chinese enterprises. It will help curb the misuse of the subscribed capital system and enhance corporate creditworthiness and health. Additionally, it will promote fair competition among honest companies and reduce instances of shareholder abuse of the subscribed capital system. While this regulation has sparked controversy, it can be seen as a significant adjustment in China’s corporate regulations, aimed at creating a healthier and more sustainable business environment.
In summary, the primary objective of the new Company Law amendment is to strike a balance between safeguarding transaction security and stimulating market vitality. This amendment will have a profound impact on Chinese enterprises, encouraging greater emphasis on integrity and compliance. In the future, as this provision is implemented, Chinese businesses will focus more on trustworthiness and adherence to regulations, creating a more favorable environment for sustainable economic growth.
