Amendments to Articles of Association Under China’s New Company Law
- China Legal Focus
- Mar 7
- 3 min read
China’s updated Company Law, effective July 1, 2024, introduces critical changes to corporate governance, requiring companies to revise their articles of association to ensure compliance. Below is a detailed analysis of the key amendments, their implications, and actionable steps for businesses.
1. Clarifying the Appointment and Removal of the Legal Representative
Under Article 46 of the revised law, companies must explicitly define the procedures for appointing and replacing their legal representative. Previously, this role was typically assigned to the board chairman or a sole director. However, Article 10 now broadens eligibility, allowing the legal representative to be any director actively managing company operations or the manager.
For companies with a board of directors, this shift introduces flexibility but also complexity. For instance, family-owned businesses that previously relied on professional managers as legal representatives may need to reconsider their approach to mitigate risks of mismanagement. Such companies could designate a trusted director instead, ensuring alignment with internal governance priorities.
When revising the articles of association, it is essential to specify whether the legal representative is tied to a specific role (e.g., “the director overseeing daily operations”) or determined through shareholder or board resolutions. Clear removal procedures should also be outlined, such as requiring a majority board vote or a supermajority shareholder approval. For example, a clause might state: “The legal representative shall be designated by a two-thirds vote of the board and may be removed by shareholders holding 60% of voting rights.”
2. Implementing the Five-Year Capital Contribution Deadline
A significant change under Article 47 mandates that shareholders of limited liability companies fully pay their subscribed capital within five years of incorporation. Existing companies (incorporated before July 1, 2024) are granted a three-year transition period (ending June 30, 2027) to adjust payment schedules exceeding this limit.
Companies must audit existing shareholder agreements to identify deadlines extending beyond June 30, 2032. For example, if a shareholder’s payment is scheduled for December 2035, the deadline must be brought forward to June 2032. Shareholders unwilling or unable to meet these obligations should consider reducing registered capital, a process requiring filings with the State Administration for Market Regulation (SAMR) and creditor notifications.
To mitigate risks, companies may impose penalties for delayed contributions, such as suspending voting rights or charging interest. Additionally, capital reduction processes should include public notices to creditors and safeguards to address potential disputes.
3. Accepting Equity and Debt as Capital Contributions
Article 48 formally recognizes equity and debt as valid forms of capital contribution, provided they are appraisable, transferable, and legally compliant. Equity contributions must adhere to strict criteria under Judicial Interpretation III, including proof of ownership, absence of encumbrances, and third-party valuations.
Debt contributions, particularly third-party claims, carry higher risks due to potential fraud. Companies should verify such debts rigorously—for instance, by sending confirmation letters to debtors and requiring notarized agreements. To protect against defaults, articles of association may restrict profit distributions to shareholders until debts are realized and include clawback clauses. A sample provision might state: “If a contributed debt is invalidated or uncollectible, the shareholder must compensate the company in cash within 30 days.”
4. Redefining Manager Authority
The revised law (Article 74) eliminates statutory manager powers, leaving authority to be defined either through board delegation or the articles of association. Companies must decide whether to prioritize operational efficiency or checks and balances.
For startups seeking agility, delegating authority to the board allows flexibility. Mature companies, however, may prefer specifying managerial powers in the articles, such as approving contracts up to a certain value without board oversight. Existing articles referencing outdated statutory powers (e.g., hiring mid-level staff) should be revised to align with the new framework.
Conclusion
The revised Company Law underscores the need for proactive governance adjustments. Companies should prioritize updating their articles of association to address legal representative procedures, capital contribution timelines, and non-monetary contributions. Engaging legal counsel to navigate SAMR filings and stakeholder communications is critical. Failure to comply risks penalties, operational disruptions, or invalidation of corporate actions.
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