Interpretation of the Second Review Draft of the New Company Law Amendment Draft

28 Mar, 2023,murphy

On December 30, 2022, the National People's Congress website published the full text of the "Company Law of the People's Republic of China (Revised Draft Second Review Draft)" (hereinafter referred to as "Company Law (Revised Draft Second Review Draft)"). Since the implementation of the Company Law in 1993, it has undergone five revisions in 1999, 2004, 2005, 2013 and 2018. In this revision, more than 70 articles have been newly added and revised, and the Company Law has been comprehensively and systematically revised.

Compared with the current "Company Law", the "Company Law (Second Draft Amendment)" involves six important amendments, including:

1. Further strengthen the shareholders' investment responsibility, including: adding the loss of rights rule of delayed investment equity; Adjusting the conditions for accelerating the maturity of shareholders' subscription; Specify the contribution obligations of each party after the transfer of the equity before the payment period.

2. Optimize the company's organizational structure, specifically, including: clarifying the division of powers and authorizations between the shareholders' meeting and the board of directors; adding provisions for employee representatives among board members; clarifying the conditions for not having a board of supervisors and supervisors.

3. Further strengthen the protection of shareholders' right to know, clarifying that shareholders have the right to consult the register of shareholders and accounting documents; shareholders entrusting an intermediary agency to consult and copy materials no longer require the presence of shareholders.

4. It is clarified that if the company's executives cause damage to others intentionally or through gross negligence during the performance of their duties, both the company and the executives shall be liable; the company may purchase insurance for the directors.

5.  Strengthen the governance of listed companies, specifically including: expressly prohibiting illegal holding of shares of listed companies on behalf of others, and clarifying that subsidiaries of listed companies are not allowed to acquire shares of the listed company.

6. In order to effectively solve the problem of difficult cancellation of "zombie companies", the content of mandatory cancellation has been added. The aforementioned six important revisions are as follows:

Further strengthen the shareholder's capital contribution responsibility and effectively strengthen the protection of the company's creditors.

1. Newly added the loss of rights rules for overdue capital contribution equity: shareholders who have not fulfilled their capital contribution obligations after the expiration of the capital contribution grace period will lose the equity of the overdue capital contribution from the date when the notice of loss of rights is issued. If the forfeited equity has not been transferred or cancelled, the other shareholders shall pay the corresponding capital contribution according to the capital contribution ratio.

Article 51 is added to the Company Law (Second Draft Amendment): After the establishment of a limited liability company, the board of directors shall check the capital contribution of the shareholders, and if it is found that the shareholder has not paid the capital contribution in full on time, it shall send a written reminder to the shareholder to pay the capital contribution.

The company may specify a grace period for capital contribution payment in accordance with the provisions of the preceding paragraph; the grace period shall not be less than 60 days from the date when the company issues the capital contribution call letter. If the grace period expires and the shareholder still fails to fulfill the obligation of capital contribution, the company may issue a notice of loss of rights to the shareholder. The notice shall be issued in writing. From the date of issuance of the notice, the shareholder shall lose the equity of its unpaid capital contribution.

The equity lost in accordance with the provisions of the preceding paragraph shall be transferred according to law, or the registered capital shall be reduced accordingly and the equity shall be cancelled, If it is not transferred or canceled within six months, the other shareholders of the company shall pay the corresponding capital contribution in full according to their capital contribution ratio.

Shareholders who fail to pay their capital contributions in full on time and cause losses to the company shall be liable for compensation.

2. Adjusted the conditions for the accelerated maturity of capital contribution in the Minutes of the Civil and Commercial Trial Work Conference of the National Courts, clearly stipulated that if the company could not pay off the maturing debts, the company or creditors could ask the shareholders to accelerate the maturity of the payment.

Article 53 is added to the Company Law (Second Draft Amendment): If the company is unable to pay off the due debts, the company or the creditors of the due creditor's rights have the right to request the shareholders who have subscribed for the capital contribution but have not yet expired to pay the capital contribution in advance.

3.Under the subscription system, the capital contribution obligations of the parties who transfer the equity that has not yet expired are clarified, and it is stipulated that if a shareholder transfers equity that has not expired, the transferor shall bear supplementary responsibility for the capital contribution that the transferee has not paid on time.

The first paragraph of Article 88a is added to the Company Law (Second Draft Amendment):If a shareholder transfers the equity that has subscribed for the capital contribution but has not yet expired, the transferee shall assume the obligation to pay the capital contribution; If the transferee fails to pay the capital contribution in full on time, the transferor shall bear supplementary liability for the capital contribution that the transferee fails to pay on time.

Optimize the company setting, clarify the division of duties and powers, and improve the flexibility of governance.

1. Further clarify the division of powers between the shareholders' meeting and the board of directors, and clarify that "issuing corporate bonds" is a statutory matter that can be authorized for resolution.

Article 59 of the "Company Law (Second Draft Amendment)" clearly stipulates that the shareholders' meeting may authorize the board of directors to issue bonds, and also simplifies the powers of the shareholders' meeting. The two contents of "determining the company's operating policy and investment plan" and "deliberating and approving the company's annual financial budget plan and final account plan" have been deleted.

Article 59 of the Company Law (Second Draft Amendment) reads as follows:

Article 59: The shareholders meeting shall exercise the following functions and powers:

(1) Election and replacement of directors and supervisors, and decisions on the remuneration of directors and supervisors;

(2) To review and approve the report of the board of directors;

(3) To review and approve the report of the board of supervisors;

(4) To review and approve the company's profit distribution plan and loss recovery plan;

(5) Make resolutions on the increase or decrease of the company's registered capital;

(6) Making resolutions on the issuance of corporate bonds;

(7) To make resolutions on the company's merger, division, dissolution, liquidation or change of company form; (8) To amend the company's articles of association;

(9) Other functions and powers stipulated in the company's articles of association.

The shareholders' meeting may authorize the board of directors to make resolutions on the issuance of corporate bonds.

If the shareholders unanimously agree in writing on the matters listed in the first paragraph of this article, a decision may be made directly without holding a shareholders meeting, and all shareholders shall sign or affix their seals on the decision document.

2. It is no longer based on whether it is "state-owned" or not, and it is specified that for a limited liability company with more than 300 employees, the board of directors should have employee representatives.

Article 68 of the "Company Law (Second Draft Amendment)": The number of board members shall be more than three. For a limited liability company with more than 300 employees, in addition to having a board of supervisors and employee representatives according to law, the board of directors shall include company employee representatives; Other members of the board of directors of a limited liability company may have company employee representatives. The employee representatives on the board of directors are democratically elected by the employees of the company through the employee representative meeting, employee assembly or other forms.

The board of directors shall have a chairman and may have a vice chairman. The method for selecting the chairman and vice-chairman shall be stipulated in the articles of association of the company.

3. The audit committee "succeeds" the board of supervisors, and it is clearly stipulated that the company that the audit committee exercises the functions and powers of the board of supervisors does not need to set up a board of supervisors or supervisors.

Article 69 is added to the "Company Law (Second Draft Amendment)": A limited liability company may set up an audit committee in the board of directors in accordance with the company's articles of association to exercise the functions and powers of the board of supervisors stipulated in this law, without having a board of supervisors or supervisors.

4. With the unanimous consent of all shareholders, a small limited liability company may not have a supervisor.

Article 83 of the Company Law (Second Review of Draft Amendment) : A limited liability company with a small scale may have one or two supervisors instead of a board of supervisors to exercise the functions and powers of the board of supervisors as provided for in this Law; With the unanimous consent of all shareholders, there may also be no supervisor.

Strengthen the protection of shareholders' right to know, and clarify that shareholders have the right to consult the register of shareholders and accounting documents. Shareholders entrust accounting firms, law firms and other intermediary agencies to view and copy materials, and shareholders are no longer required to be present.

Article 56 of the "Company Law (Second Draft Amendment)": Shareholders have the right to consult and copy the company's articles of association, register of shareholders, minutes of shareholders' meetings, resolutions of board meetings, resolutions of board of supervisors meetings, and financial and accounting reports.

Shareholders may request to consult the company's accounting books and accounting vouchers. Shareholders who request to consult the company's accounting books and accounting vouchers shall submit a written request to the company and explain the purpose. If the company has reasonable grounds to believe that the shareholder's inspection of accounting books and accounting vouchers has improper purposes and may damage the company's legitimate interests, it may refuse to provide inspection, and shall reply to the shareholder in writing and explain the reasons within 15 days from the date of the shareholder's written request. If the company refuses to provide inspection, the shareholders may bring a lawsuit to the people's court.

Shareholders may entrust accounting firms, law firms and other intermediary agencies to inspect the materials specified in the preceding paragraph.

Shareholders and their entrusted accounting firms, law firms and other intermediary agencies shall abide by the provisions of laws and administrative regulations on the protection of state secrets, commercial secrets, personal privacy, personal information, etc. when consulting and copying relevant materials.

Clarify the compensation rules for company directors and executives who damage the rights and interests of others due to performance of duties, and clarify that the company can insure directors

1. It is clarified that if directors and senior managers perform their duties and cause damage to others due to intentional or gross negligence, in addition to the company's liability for compensation, the directors and senior managers should also be liable for compensation.

Article 190 is newly added to the "Company Law (Second Draft Amendment)": If directors and senior managers perform their duties and cause damage to others, the company shall be liable for compensation; directors and senior managers have intentional or gross negligence should also bear the liability for compensation.

2. The company can purchase liability insurance for directors.

Article 192 is newly added to the Company Law (Second Review Draft of the Revised Draft): The company may purchase liability insurance for directors’ liability for compensation due to the performance of company duties during the director’s term of office.

After the company purchases liability insurance for directors or renews the insurance, the board of directors shall report to the shareholders' meeting the insured amount, scope of coverage and premium rate of the liability insurance, among others.

Strengthen the governance of listed companies and clarify prohibited items.

1. It is clearly stipulated that the shares of listed companies shall not be held in violation of the provisions of laws and administrative regulations.

Article 140 is added to the "Company Law (Second Draft Amendment)": Listed companies shall disclose information on shareholders and actual controllers in accordance with the law, and the relevant information shall be true, accurate and complete.

It is forbidden to violate the provisions of laws and administrative regulations to hold stocks of listed companies on behalf of others.

2. It is clearly stipulated that the listed company's holding subsidiary shall not acquire the shares of the listed company.

Article 141 is added to the Company Law (Second Draft Amendment): A listed company's holding subsidiary shall not acquire shares in the listed company. Where a listed company's holding subsidiary holds shares in the listed company due to company mergers, exercise of pledge rights, etc., it shall not exercise the voting rights corresponding to the shares it holds, and shall dispose of the relevant listed company shares in a timely manner.

Solve the problem of difficult cancellation of "zombie companies", and increase the content of mandatory cancellation.

Article 237 is added to the Company Law (Second Review of the Draft Amendment) : Where a company is revoked of its business license, ordered to close down or cancelled, and the liquidation has not been completed after three years, the company registration authority may make a public announcement through the unified enterprise information publicity system, with a period of no less than 60 days. After the expiration of the announcement period, if there is no objection, the company registration authority may cancel the company registration. Where the company registration is canceled in accordance with the provisions of the preceding paragraph, the responsibilities of the original company shareholders and liquidation obligors will not be affected.

Generally speaking, there are some differences between the current "Company Law" and the new "Securities Law" on the responsibility system of business managers. According to Article 149 of the current Company Law, directors, supervisors and senior managers shall be liable for compensation to the company due to violations of laws and regulations in the performance of their duties, but there is no stipulation on what kind of liability shall be given to third parties other than the company and shareholders.

The current provisions of the "Company Law" make the phenomenon of some company directors, supervisors and executives with high salaries and inaction or disorderly actions happen from time to time, which not only seriously damages the rights and interests of the company's creditors, consumers and other external stakeholders, but also damages the company's reputation and image. Although according to the provisions of the "Company Law", the company should be liable for compensation for the losses caused by this, but because these executives are the actual decision makers or managers of the company, the company's stipulations on the recovery of faulty directors and other executives are also in vain In fact, the behavior of directors and other executives is actually paid by the company in the end, so that the company also becomes a victim, and the ultimate loss is the company's shareholders and even the majority of investors, while directors and other management personnel evade the liability for compensation.

Therefore, the amendment to the "Company Law" adds that directors and senior managers who perform their duties and cause damage to others due to intentional or gross negligence shall bear joint and several liability with the company, which increases the legal liability of directors, supervisors and senior managers.

Of course, the Amendment to the Company Law has also improved the specific content of the duties of loyalty and diligence of directors, supervisors, and senior managers, thus providing specific guidance on whether directors, supervisors, and senior executives should take responsibility and how much responsibility they should take.

 
 
 

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