On December 29, 2023, the Seventh Session of the Standing Committee of the Fourteenth National People’s Congress reviewed and adopted the revised Company Law of the People’s Republic of China (hereinafter referred to as the “New Company Law”), which took effect on July 1, 2024. The New Company Law contains extensive revisions, attracting widespread attention from many small and medium-sized enterprise clients. This article attempts to briefly analyze the revisions of the New Company Law from three dimensions: protection of minority shareholders’ rights, protection of creditors’ interests, and corporate governance.

I. The New Company Law from the Perspective of Protecting Minority Shareholders’ Rights

(1) Expansion of Shareholders’ Right to Information

Simply put, the revised New Company Law expands shareholders’ right to information. Shareholders not only have the right to inspect accounting books but also original accounting vouchers, and shareholders of a parent company can extend their right to information to wholly-owned subsidiaries.

According to Article 33 of the Company Law before the revision, shareholders could request to inspect the company’s accounting books, but whether shareholders could inspect accounting vouchers was not specified. From the perspective of the purpose of exercising the right to information, accounting vouchers, as the basis for accounting book entries, are more authentic and better reflect the company’s true financial and operational status. The importance of accounting vouchers is self-evident.

However, in judicial practice, because the pre-revision Company Law and relevant judicial interpretations did not explicitly list accounting vouchers, there were significant differences in judgments across courts at various levels and regions. Some courts rejected shareholders’ claims to inspect accounting vouchers on the grounds of “lack of legal basis.” This situation made it difficult for shareholders, especially minority shareholders, to exercise their decision-making power in major business decisions or to understand the full picture of the company’s operations through inspecting original accounting vouchers when they discovered operational anomalies.

For shareholders who invest not directly but through investment entities in subsidiaries, the pre-revision Company Law also did not provide for parent company shareholders to exercise the right to information in subsidiaries, causing obstacles for parent company shareholders seeking to exercise their right to information in subsidiaries.

The New Company Law fills these legal gaps, clarifying that shareholders may request to inspect the company’s accounting books and accounting vouchers, and when exercising this right, may engage professional accounting firms, law firms, and other intermediary institutions to conduct the inspection, which better enables shareholders to grasp the company’s true and specific financial and operational conditions.

Furthermore, the New Company Law clarifies that parent company shareholders have the right to inspect and copy relevant materials of wholly-owned subsidiaries, including their accounting books and accounting vouchers. Of course, whether parent company shareholders can further extend this right to wholly-owned subsidiaries’ wholly-owned sub-subsidiaries remains to be clarified by new judicial interpretations.

(2) Minority Shareholders’ Exit Right When Controlling Shareholders Abuse Their Rights

In addition to the expanded scope of shareholders’ right to information, the New Company Law also amends the original Article 20 to grant minority shareholders an exit right when controlling shareholders abuse their rights, further protecting minority shareholders’ rights.

According to the pre-revision Company Law, Article 20, Paragraph 2, when a shareholder abuses shareholder rights and causes losses to the company or other shareholders, the consequence was only compensation liability. In practice, shareholders who abuse their rights are usually controlling shareholders. Common situations of abuse of shareholder rights include diverting company profits, refusing to distribute profits, usurping company business opportunities, using controlling shareholder status to provide guarantees or repay debts for themselves or related parties, etc. Faced with such abuses, other minority shareholders could only demand compensation through lengthy litigation, and the burden of proving the amount of damages was a major obstacle to protecting their rights. During this process, the company, as the directly injured party, would often continue to decline due to the controlling shareholder’s abuse of rights, further damaging minority shareholders’ interests.

According to Article 89 of the New Company Law, when a controlling shareholder abuses shareholder rights, seriously damaging the company or other shareholders’ interests, other shareholders have the right to request the company to repurchase their shares at a reasonable price. This provision provides a statutory exit mechanism for minority shareholders. When the controlling shareholder abuses its rights, minority shareholders can exercise this statutory exit right and request the company to repurchase their shares at a reasonable price. It is worth noting that according to the Several Provisions on the Time Effect of the Application of the Company Law of the People’s Republic of China (Fa Shi [2024] No. 7) effective July 1, 2024, the above provision on minority shareholders’ right to request share repurchase applies retroactively to civil legal acts before the New Company Law took effect.

(3) Relaxation of Shareholder Proposal Requirements for Joint-Stock Companies

According to the New Company Law, the shareholding ratio requirement for shareholders to submit proposals has been reduced from 3% to 1%. Shareholders individually or collectively holding 1% of the company’s shares may submit interim proposals in writing to the board of directors ten days before the shareholders’ meeting, but the board of directors has the right to review interim proposals.

II. The New Company Law from the Perspective of Protecting Creditors’ Interests

(1) Five-Year Paid-in Capital System

According to the New Company Law, the company’s registered capital still adopts a subscription system, but the subscription period is limited to a maximum of 5 years. Before this provision was introduced, many shareholders set exaggerated registered capital amounts to “showcase” the company’s strength while indefinitely extending the payment period. After this provision, such practices can be effectively curbed, better protecting creditors’ interests.

Before the revision, the prevalence of such practices led creditors to form incorrect reliance on the company’s actual situation, which was detrimental to transaction security and the protection of creditors’ legitimate rights. Moreover, when the company was unable to repay debts, except in specific circumstances, creditors had to first pursue the company for repayment, and only after finding no executable property could they pursue shareholders whose subscription period had not yet expired within the scope of their subscribed capital, greatly increasing creditors’ burden.

By limiting the subscription period to 5 years, the New Company Law facilitates the timely payment of registered capital to the company, which not only helps maintain the company’s operations and provides certain assets to deal with debts but also helps creditors reasonably assess the company’s basic situation and solvency based on registered capital information, providing a basic guarantee for transactions.

(2) Contribution Obligations After Transfer of Unpaid Equity

The New Company Law also revises provisions regarding shareholders who transfer unpaid equity to evade contribution obligations when the company is in debt, better protecting creditors and transferees. A key feature is that the transferor also bears contribution liability.

Specifically, this can be divided into the following situations:

① For the transfer of equity that has been subscribed but whose contribution term has not yet matured, the transferee bears the contribution obligation. If the transferee fails to pay the full contribution on time, the transferor bears supplementary liability for the unpaid portion.

② For the transfer of equity whose contribution term has matured but remains unpaid, or where the value of non-monetary assets is lower than the subscribed amount, the transferor and transferee bear joint liability within the scope of the shortfall.

③ If the transferee neither knew nor should have known about the above situations, the transferor bears liability.

The above revisions can to some extent prevent shareholders from maliciously evading contribution obligations and company debts, which is conducive to maintaining market order.

(3) Accelerated Maturity of Capital Contributions

Under the current Bankruptcy Law and judicial interpretations of the Company Law, the conditions for accelerated maturity of shareholder contributions are relatively stringent, such as the company entering bankruptcy proceedings, the company as an execution target having no executable property, the company having grounds for bankruptcy but not applying, or the company extending the contribution period through other means while being unable to pay debts. For cases where the contribution term has not matured but the company genuinely has no property to pay debts, creditors need to go through lengthy litigation procedures to realize their claims from shareholders with unpaid registered capital.

According to Article 54 of the New Company Law, if the company cannot pay its due debts, the company or creditors with matured claims have the right to require shareholders who have subscribed but whose contribution term has not yet matured to make advance payment. The phrase “company cannot pay its due debts” literally means that as long as the company fails to perform or fully perform when facing due debts, the standard is met. The threshold is relatively low. Whether this standard will be applied in judicial practice remains to be clarified by future case law or judicial interpretations.

III. The New Company Law from the Perspective of Corporate Governance

(1) Simplification of Governance Structure

According to the New Company Law, a new organizational structure—the audit committee—is introduced. Audit committee members are composed of directors and exercise the functions of supervisors. The company may, in accordance with its articles of association, form an audit committee within the board of directors to exercise the functions of the board of supervisors, without setting up a board of supervisors or supervisors. For limited liability companies of smaller scale or with fewer shareholders, if they do not set up an audit committee, they may also dispense with supervisors upon unanimous consent of all shareholders.

(2) Legal Representative

Compared with the pre-revision Company Law, the selection scope for legal representatives has been slightly expanded. According to the New Company Law, the legal representative is no longer limited to the chairman, executive director, and manager, but also includes other directors who represent the company in executing company affairs. That is, except for external directors and independent directors who only perform supervisory duties, any director who represents the company in executing company affairs may serve as the legal representative. The company’s articles of association no longer need to list the name of the legal representative, only the method of appointment and change.

Additionally, the New Company Law clarifies that the legal representative has the right to resign from the position, and if a director or manager serving as legal representative resigns, it is deemed as simultaneously resigning from the legal representative position, filling the gap in the pre-revision Company Law regarding whether the legal representative should continue to serve after resigning as director or manager.

The New Company Law also stipulates that after the legal representative resigns, the company shall determine a new legal representative within thirty days, and the application for changing the legal representative shall be signed by the new legal representative. This measure also unifies the acceptance standards for change application materials, avoiding situations where the predecessor legal representative’s non-cooperation hinders industrial and commercial registration changes.

(3) Increased Responsibilities of Company Senior Executives

As mentioned above, the New Company Law stipulates that shareholders’ registered capital subscription period shall not exceed 5 years. Directors have the obligation to urge shareholders to pay registered capital on time. Directors who fail to fulfill this obligation in a timely manner, causing losses to the company, must bear compensation liability. Additionally, if shareholders withdraw capital contributions and cause losses to the company, the responsible directors, supervisors, and senior executives must also bear joint and several compensation liability with the shareholder who withdrew the capital. This increases the obligations of company senior executives and further constrains shareholders to pay registered capital according to the subscription period.

In addition to the obligation to call for shareholders’ paid-in registered capital, the New Company Law also improves the duties of loyalty and diligence of directors, supervisors, and senior executives, clarifying that if directors and senior executives cause damage to others while performing their duties, in addition to the company’s compensation liability, the directors and senior executives shall also bear compensation liability if they acted with intent or gross negligence.

IV. Conclusion

Beyond the revisions mentioned above, the New Company Law also includes the introduction of class shares and no-par value shares for joint-stock companies, simplification of the preemptive rights procedure for limited liability company shareholders, and clarification of the exercise period for the right to revoke defective shareholders’ meeting resolutions. The implementation of the New Company Law will affect every aspect of existing and newly established companies, and it is recommended that all companies understand the new regulations as early as possible and make timely responses and adjustments based on their actual circumstances.