Draft Regulation Offers 3-year Transition Period for Complying with New Capital Contribution Rules

On December 29, 2023, the Standing Committee of the 14th National People’s Congress, China’s top legislature, approved a comprehensive revision to the Company Law (“Company Law 2024”). The Company Law 2024 will come into force on July 1, 2024. It has adopted a rule of 5-year maximum capital contribution term, meaning that all shareholders shall complete their respective contributions to the registered capital of a company within 5 years after the date of incorporation, unless applicable laws or regulations require otherwise. The Company Law 2024 further provides that (1) all the companies incorporated before July 1, 2024 shall gradually adjust their capital contribution schedule in order to meet the rule of new 5-year capital contribution term, unless applicable laws or regulations waive otherwise; and (2) company registry may discretionarily require companies to adjust their capital contribution term or registered capital amount if obviously abnormal (Article 266).

Recently, a draft implementation regulation on administering registered capital registration (“Draft Regulation”) was released for soliciting public opinion. It aims to guide the adjustment by providing a 3-year transition period and clarify detailed registration requirements in terms of the new capital contribution rule.

1. Companies should make adjustment within 3-year transition period to comply with new capital contribution rule

1.1 Limited Liability Company

In general, for a limited liability company incorporated before July 1, 2024, the effective date of the Company Law 2024, if the capital contribution term of its registered capital exceeds the 5-year maximum term, the company shall adjust it to comply with the rule of the 5-year maximum term within a period from July 1, 2024 to June 30, 2027.

In particular however, if the remaining capital contribution term from July 1, 2027 is less than 5 years, the company does not need to adjust it while if the remaining capital contribution term from July 1, 2027 is more than 5 years, the company should change it to a term up to 5 years within the 3-year transition period.

Company registry may require the company to complete its adjustment (to a capital contribution term of no more than 5 years) within 90 days if it fails to do so within the 3-year transition period.

1.2 Company Limited by Shares

For a company limited by shares incorporated before July 1, 2024, its capital for subscribed shares shall be paid in full within the 3-year transition period.

2. Exceptions to rule of 5-year maximum capital contribution term

If a company incorporated before July 1, 2024, whether it is a privately owned company, a foreign investment company or a state-owned company, has businesses  in connection with significantly strategic national tasks, national welfare and people’s livelihood, national security or significant public interests, it may keep its original capital contribution term upon consent from governments of provincial level or above.

3. Company registry may discretionarily adjust obviously abnormal capital contribution term or registered capital amount

If a company is incorporated before July 1, 2024, and has a capital contribution term exceeding 30 years or registered capital amount exceeding RMB 1 billion, company registry may assess the authenticity of the registered capital taking into account shareholders’ ability to pay for subscribed capital, main businesses, scale of assets and other factors. If it determines that the capital contribution term or the registered capital amount is obviously abnormal, it may order, upon consent from provincial company registry, the company to complete adjustments within 6 months.

Furthermore, company registry may determine not to register if a limited liability company has unreasonably high registered capital, which is contrary to common sense or industry features, or its shareholders apparently lack ability to pay capital, or there are other factors that are in violation of principle of authenticity.

4. Companies may enjoy simplified procedures to decrease registered capital during the 3-year transition period

If a company incorporated before July 1, 2024 intends to decrease its registered capital but without reducing paid-in capital during the 3-year transition period, it may firstly make a public announcement through the National Enterprise Credit Information Publicity System (国家企业信用信息公示系统 (gsxt.gov.cn)) for a period of 20 days, and then apply for change registration of registered capital, if there is no objection from creditors within the above publicity period and all the following conditions have been satisfied:

(1) there are no unsettled debts, or debts are obviously lower than the paid-in registered capital;

(2) all shareholders have committed to undertaking joint and several liabilities, to the extent of original subscribed capital amount, for all the debts incurred before the capital decrease; and

(3) all the directors have committed not to damaging the company’s ability to settle debts or operate business on an on-going basis.

5. Companies are required to publicly disclose details of their registered capital

The Draft Regulation details the public disclosure requirements in relation to companies’ registered capital. Specifically:

• a company shall update its articles of association to include adjusted capital contribution term and make it public through the National Enterprise Credit Information Publicity System;

  
  

• a company shall disclose to the public, through the National Enterprise Credit Information Publicity System, subscribed capital, paid-in capital, method of capital contribution, date of contribution, number of shares promotors have subscribed, any change to the equities or shares;

  
  

• a company shall upload, through the National Enterprise Credit Information Publicity System, register of shareholders, financial statements and other materials that can prove the paid-in capital;

  
  

• company registry may add and make public, through the National Enterprise Credit Information Publicity System, special marks to those companies which fail to adjust their registered capital or capital contribution term due to revocation of business licenses or compulsory closure or being blacklisted;

  
  

• company registry may add and make public, through the National Enterprise Credit Information Publicity System, special marks to those companies which fail to adjust their capital contribution term or registered capital amount in accordance with the Draft Regulation.