The Company Law of the People’s Republic of China was adopted at the Fifth Session of the Standing Committee of the Eighth National People’s Congress on December 29, 1993, and underwent amendments in 1999, 2004, 2013, and 2018, and one revision in 2005. The second revision was reviewed and adopted at the Seventh Session of the Standing Committee of the Fourteenth National People’s Congress on December 29, 2023, and will take effect on July 1, 2024. This revision is the most extensive in scope compared to previous amendments and revisions, making profound adjustments to the capital contribution period of shareholders, corporate governance structure, and the duties of directors, supervisors, and senior executives.

The profound adjustments in the Company Law will also bring various impacts on arrangements related to private fund investments. From the perspective of private fund investment, combined with industry experience in the private fund sector, this article analyzes the main impacts as follows.

I. Impact of the Five-Year Registered Capital Subscription Period

Article 47 of the new Company Law stipulates that all shareholders’ subscribed capital contributions shall be paid in full by the shareholders within five years from the date of the company’s establishment as specified in the company’s articles of association. The impact of this provision on private fund managers and private funds is analyzed as follows:

01

Impact on Private Fund Managers

The Registration and Filing Measures for Private Investment Funds stipulate that the paid-in monetary capital of private fund managers shall not be less than RMB 10 million. If a private fund manager has shareholder subscription amounts beyond the RMB 10 million paid-in capital, it must also comply with the new Company Law requirements. After the paid-in registered capital of fund managers is raised to no less than RMB 10 million, this aligns with the minimum registered capital requirement for government-guided fund managers. Currently, private fund management institutions managing insurance funds still have a registered capital or subscribed capital requirement of no less than RMB 100 million according to relevant rules. Managers whose shareholders have not yet made full capital contributions should pay attention to the following issues:

Directed capital reduction or transfer of unpaid capital contributions to third parties may cause changes to the controlling shareholder or actual controller of the fund manager.

Since the Private Fund Regulations took effect on September 1 last year, the requirements for the total shareholding ratio of the actual controller of the fund manager have further tightened, with a minimum principle of no less than 40%, especially when the actual controller is a natural person, where window guidance generally requires no less than 50%. When shareholders of the fund manager with unpaid capital contributions undergo directed capital reduction or transfer their unpaid capital contributions to third parties, they should consider in advance whether there will be changes to the controlling shareholder or actual controller, and whether this will affect the fund manager’s continued compliance with the Asset Management Association of China’s requirements for private fund managers. Planning for possible equity changes should be done in advance.

Shareholders who apply for AMAC registration by establishing a new fund manager should verify whether other founding shareholders have insufficient capital contributions.

The original Company Law stipulated that after the establishment of a limited liability company, if the actual value of non-monetary property used as a capital contribution is found to be significantly lower than the value set in the company’s articles of association, the shareholder who made such contribution shall make up the difference, and other shareholders at the time of establishment shall bear joint liability. Article 50 of the new Company Law adds an additional circumstance: at the time of establishment of a limited liability company, if a shareholder fails to actually pay the capital contribution as stipulated in the company’s articles of association, other shareholders at the time of establishment shall bear joint liability with that shareholder within the scope of the shortfall.

When applying for registration with the Asset Management Association of China, most private fund managers adopt the method of establishing a new company. Therefore, shareholders of the newly established company should verify whether other founding shareholders have insufficient capital contributions to avoid bearing joint liability.

After the fund manager company is established, it should actively assist the company and its board of directors in asserting rights against shareholders who have not made full capital contributions, to avoid bearing responsibility for the unpaid portion.

Articles 51 and 52 of the new Company Law stipulate that the board of directors shall verify the capital contribution status of shareholders. If a shareholder is found to have failed to pay the full amount of capital contribution on time as stipulated in the company’s articles of association, the company shall issue a written call notice to such shareholder. The written call notice may specify a grace period for payment, which shall not be less than sixty days from the date the company issues the notice. If the grace period expires and the shareholder still fails to fulfill the capital contribution obligation, the company may, upon resolution of the board of directors, issue a forfeiture notice to the shareholder. Such notice shall be in writing. From the date the notice is issued, the shareholder loses the equity rights for which the capital contribution was not made. The forfeited equity shall be transferred according to law, or the registered capital shall be reduced accordingly and the equity canceled. If not transferred or canceled within six months, other shareholders shall make up the corresponding capital contribution in proportion to their capital contribution ratio.

02

Impact on Private Funds

Private funds can be established in corporate form, partnership form, or contractual form. Corporate-type private funds must strictly comply with the new Company Law. Contractual funds have no organizational form and are not subject to the new Company Law. Partnership-type funds, especially limited partnership funds, are the most common form of fund establishment. Does the partnership-type fund need to comply with the 5-year paid-in capital requirement of the new Company Law?

A partnership enterprise is different from a company. The capital contributions of partners in a partnership enterprise are not registered as registered capital in industrial and commercial registration. However, partnership enterprises also have issues of subscribed and paid-in capital. In practice, where the Partnership Enterprise Law has provisions, it applies; where it has no provisions or unclear provisions, reference is usually made to the Company Law. For example, in the judgment of Shandong Liaocheng Intermediate People’s Court (2022) Lu 15 Min Zhong 1884: “Furthermore, with reference to Articles 181, 182, and 183 of the Company Law of the People’s Republic of China, petitioning the court for dissolution of a company based on shareholder request falls within the jurisdiction of the People’s Court. Current law does not grant arbitration institutions the power to adjudicate the dissolution of partnership enterprises. The defendant’s business premises are located in the Liaocheng High-tech Zone, Shandong Province. Therefore, arbitration does not apply to this case, and the court has jurisdiction pursuant to Article 27 of the Civil Procedure Law of the People’s Republic of China.”

At the legal provisions level, the Civil Code stipulates that unincorporated organizations shall apply relevant provisions on legal persons by reference in addition to the provisions of this chapter. Article 108 of the Civil Code: Unincorporated organizations shall, in addition to applying the provisions of this chapter, refer to the relevant provisions of Section 1, Chapter 3 of this Part. Section 1, Chapter 3 of Part I of the Civil Code contains the general provisions on legal persons, with companies being typical for-profit legal persons.

Therefore, it is recommended that before relevant judicial interpretations or normative documents are issued, private funds should strictly apply the relevant provisions on 5-year paid-in capital to avoid partners bearing responsibility for unpaid capital contributions. When a private fund LP fails to pay capital contributions on time, the fund manager should promptly call the LP and, if necessary, register the reduction of the corresponding capital contribution amount with the industrial and commercial registration authority.

II. Impact of Changes in Directors’ Responsibilities on Private Funds Appointing Directors to Investee Companies and Recommendations

After a private fund invests in a company, to understand the company’s daily operations and control major matters, it often appoints a director to the investee company. This director usually does not directly participate in daily management but may have veto power over certain major matters at the board of directors level.

01

Main Responsibilities of Directors under the New Company Law

1. Controlling shareholders, actual controllers, directors, supervisors, and senior executives who use affiliated relationships to harm the company’s interests and cause losses to the company shall bear compensation liability (Article 22)

2. Directors responsible who fail to timely verify and call for shareholder capital contributions, causing losses to the company, shall bear compensation liability (Article 51)

3. If a shareholder withdraws capital contributions and causes losses to the company, the responsible directors, supervisors, and senior executives shall bear joint and several liability with that shareholder (Article 53)

4. Directors, supervisors, and senior executives who violate laws, administrative regulations, or the company’s articles of association in performing their duties and cause losses to the company shall bear compensation liability (Article 188)

5. If they cause damage to others while performing duties, directors and senior executives who act with intent or gross negligence shall also bear compensation liability (Article 191)

6. If the company distributes profits to shareholders in violation of regulations and causes losses to the company, shareholders and responsible directors, supervisors, and senior executives shall bear compensation liability (Article 211)

7. If the company reduces capital in violation of regulations and causes losses to the company, shareholders and responsible directors, supervisors, and senior executives shall bear compensation liability (Article 211)

8. Directors as liquidation obligors who fail to fulfill liquidation obligations in a timely manner, causing losses to the company or creditors, shall bear compensation liability (Article 232) [Directors are the liquidation obligors of the company and shall form a liquidation group within fifteen days from the date the dissolution cause arises. The liquidation group shall be composed of directors, unless otherwise stipulated in the company’s articles of association or otherwise resolved by the shareholders’ meeting. If the liquidation obligor fails to fulfill the liquidation obligation in a timely manner and causes losses to the company or creditors, it shall bear compensation liability.]

9. If a resolution of the board of directors of a joint stock company violates laws, administrative regulations, or the company’s articles of association or shareholders’ meeting resolutions, causing serious losses to the company, the directors who participated in the resolution shall bear compensation liability. [Dissent recorded in the meeting minutes constitutes exemption] (Article 125)

10. If the company illegally provides gifts, loans, guarantees, or other financial assistance to others for acquiring shares of the company or its parent company, causing losses to the company, the responsible directors, supervisors, and senior executives shall bear compensation liability (Article 163)

02

Recommendations on Private Fund Appointed Directors

In summary, the new Company Law further strengthens directors’ responsibilities, particularly regarding verification and call obligations for insufficient capital contributions of investee companies and the liquidation obligations of directors as liquidation group members. For directors appointed by private investment institutions, this often contradicts the original intention of appointing directors to investee companies. Additionally, since private fund investments are long-term, the directors appointed by private funds may be replaced during the investment period due to resignation or other reasons. The question arises: do directors during the period when the responsible facts occurred bear liability, or do directors during the period when the damage results occurred?

Before relevant judicial interpretations and rules are clarified, given that this involves personal liability of senior executives of private investment institutions, it is recommended to adopt a strict approach. If a private investment institution considers not appointing directors due to personal liability issues but still wishes to achieve the original objectives of director appointment, it may negotiate with the investee company from the following aspects:

(1) Major matters requiring veto power at the board level may be elevated to the shareholders’ meeting level for voting;

(2) Alternatively, request the establishment of a board advisory committee as a pre-review body for board proposals. Matters approved by the board advisory committee may be submitted to the board for deliberation, with investor representatives serving on the board advisory committee;

(3) When only appointing a supervisor—the articles of association should specify that shareholders’ meeting and board meeting agendas, times, and locations must be notified to the supervisor in advance, and meetings cannot be held in the supervisor’s absence.

III. Joint Liability Issues in Equity Transfers Involving Defective Capital Contributions

According to Article 88 of the new Company Law, joint liability issues arise in equity transfers involving defective capital contributions.

1. Transfer of Equity with Unmatured Capital Contribution Term

① If a shareholder transfers equity that has been subscribed but whose capital contribution term has not yet matured, the transferee shall assume the obligation to make the capital contribution;

② If the transferee fails to pay the capital contribution in full and on time, the transferor shall bear supplementary liability for the transferee’s unpaid portion.

2. Transfer of Equity with Matured Capital Contribution Term

(1) Circumstances of defective contributions:

① Failure to make capital contribution by the date specified in the company’s articles of association;

② The actual value of non-monetary property used as a capital contribution is significantly lower than the subscribed amount.

(2) Liability:

① The transferor and transferee shall bear joint liability within the scope of the contribution shortfall;

② If the transferee neither knew nor should have known about the above circumstances, the transferor shall bear liability.

Impact on Private Fund Investments in Investee Companies

In addition to capital increases, private funds often acquire existing shares as a method of investing in investee companies.

1. Private funds acquiring equity with unmatured capital contribution terms. According to Article 88 of the Company Law, the obligation to pay capital contributions rests primarily with the transferee. The fund’s contribution obligation is clear and the risk is controllable.

2. Private funds transferring equity with unmatured capital contribution terms. If a private fund has partially unpaid equity in an investee company due to insufficient fundraising or phased capital contributions, to avoid the private fund as transferor still bearing potential supplementary contribution obligations, the fund should focus on verifying the transferee’s capital contribution capacity, and even require the transferee to provide a guarantee for the contribution capacity. Alternatively, if the investee company can undergo capital reduction, priority should be given to capital reduction, followed by the transferee’s capital increase.

3. Private funds acquiring equity where the capital contribution has not been made by the date specified in the company’s articles of association. According to Article 88 of the Company Law, the transferor and transferee bear joint liability for the shortfall. For private funds, the risk is controllable.

4. Private funds transferring equity where the capital contribution has not been made by the date specified in the company’s articles of association. In this case, unless the transferee can actually pay the relevant subscribed capital contribution at the time of equity transfer, it is recommended to prioritize the capital reduction process of the investee company, followed by the transferee’s capital increase.

5. Private funds acquiring equity contributed with non-monetary assets. When a private fund acquires equity in this form of contribution, to avoid situations where the actual value of non-monetary property is significantly lower than the subscribed amount, the fund should focus on verifying the original assessment of the non-monetary contribution portion, the transfer of ownership of the non-monetary contribution, etc. If the transferor has both non-monetary and monetary capital contributions, the private fund should prioritize acquiring the portion of equity attributable to monetary contributions.