Academic journal article Washington International Law Journal

Introduction to the New Company Law of the People's Republic of China

Academic journal article Washington International Law Journal

Introduction to the New Company Law of the People's Republic of China

Article excerpt

I. INTRODUCTION

On October 27, 2005, the People's Republic of China adopted a new Company Law. This law became effective on January 1, 2006.' The New Company Law replaces the Old Company Law, which had been adopted in 1993.2 The New Company Law is a complete revision of the old law. Almost nothing of the old law survived the revision. Drafters estimate approximately ninety percent of the provisions of the new law are unique.

The New Company Law governs two types of corporations: limited liability companies (youxian gongsi) and joint stock companies. The changes to limited liability companies are especially important to foreign investors in China because the statutes governing foreign direct investment in China require foreign investors to operate through a Chinese limited liability company.3 For existing foreign invested limited liability companies, the rules on operation of such companies have substantially changed. Potential new investors must realize the old rules no longer apply and consider the new regime. Because foreign investors are currently prohibited from investing directly in China through joint stock companies, the discussion below will be limited to the New Company Law's changes regarding limited liability companies.

II. IMPORTANT CHANGES INTRODUCED BY THE NEW COMPANY LAW

A. Management and Articles of Association

Under the Old Company Law, the articles of association for a limited liability corporation was not a living document. Article 22 of the Old Company Law provided a list of items to be included in the articles. As a matter of practice, companies were required to include those provisions and no others. As a result, articles of association were virtually the same for every company regardless of its size or nature. There was no freedom to revise or adapt the articles to meet the specific needs of a particular company. Under the Old Company Law, the roles of shareholders, directors, and officers were taken as mandatory provisions to be followed by all companies. As a result, the articles of association became little more than a 'Till in the blanks" form document adopted by every company without regard to the actual management needs of that company.

The New Company Law abandons the rigidity of the old law and encourages shareholders of limited liability companies to take a flexible approach to company management. The articles of association now are intended to be adaptable to meet the specific needs of each company. The New Company Law provides for management of the company by the shareholders, directors, officers and supervisors and provides default provisions concerning the duties and scope of authority for each.4 However, with respect to many important provisions related to management of the company, the New Company Law specifically provides that the shareholders are free in the articles of association to adopt specific provisions to meet the needs of the company.5 There are virtually no provisions related to management that cannot be altered or expanded in a manner determined by the shareholders in the articles of association.

The New Company Law also encourages shareholders to include provisions in the articles of association related to the financial management of the company. For example, the Old Company Law required profits earned by the company to be distributed among shareholders strictly in accordance with the shareholders' ownership interest in the company.6 Under the New Company Law, shareholders are entitled in the articles of association to provide for distribution of profits in any manner agreed to by the shareholders, even if that distribution differs from the ownership percentage of the respective shareholders.7 This provides significant flexibility in financing of limited liability companies that was entirely absent under the Old Company Law.

Under the former company law system, officers and directors often used their companies to secure financing of other businesses with which the officers and directors were involved. …

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