On December 29, 2023, China’s Company Law was amended and will take effect on July 1, 2024.
Under the amended law, shareholders are required to pay in registered capital no later than five years after establishment of the company. If shareholders fail to fulfill the contribution obligation, they might forfeit their right to the unpaid equity interest which must be transferred, cancelled or paid in by other shareholders.
China’s Foreign Investment Law requires that all foreign invested companies follow the Company Law in the same way that domestic companies do. Wholly foreign-owned enterprises (WFOE) are the main vehicle for foreign investors to establish a commercial presence in China, and many U.S. higher education institutions have established WFOEs to handle their operations in China.
U.S higher education institutions with WFOEs in China should therefore be aware of the December 29, 2023 amendments to the Company Law which will take effect on July 1, 2024. Since most WFOEs are established as limited liability companies (LLCs), this article summarizes key changes for LLCs.
Capital Contribution
Under the existing Company Law, there is no required minimum date for capital contributions. Currently, shareholders must establish the form, amount and date of their capital contributions within the Articles of Association (AOA) and are obligated to fulfill their declared capital contributions in the form and within the period declared in the AOA. Under this model, capital contributions do not need to be paid upfront, and companies can make contributions under a long-term schedule. The new Company Law, in contrast, now requires that shareholders pay in registered capital no later than five years after the establishment date of the LLC.
Registered capital can be contributed in monetary capital and non-monetary capital. There are three permissible forms of non-monetary capital contributions expressly stipulated by the existing Company Law: fixed assets contribution, intellectual property right contribution and real estate contribution. The new Company Law adds two forms: equity contribution and creditor’s rights contribution. This is not as new as it may seem, however, since the Detailed Rules for the Implementation of the Regulation of the People's Republic of China on the Administration of the Registration of Market Entities (March 1, 2022) already allowed investors to make contributions to a company using equity from Chinese companies and creditor’s rights, provided that such equity and creditor’s rights could be evaluated and transferred to the company. The new Company Law requires shareholders to deposit the full amount of any monetary capital contribution into a bank account opened for the LLC and to deliver any non-monetary capital contribution and register the ownership transfer (if needed) to the company.
If shareholders fail to fulfill the contribution obligation, in addition to having to pay such capital and indemnify the company against losses caused by such failure, they will, after a grace period of up to 60 days, forfeit their right to the unpaid equity interest which must be transferred, cancelled or paid in by other shareholders. In addition, if the company cannot repay due debt before the due date of contribution, the company or its creditors may ask the shareholders to accelerate the contribution.
Legal Representative
Every WFOE should have a legal representative registered at the State Administration for Market Regulation (SAMR). Under the current Company Law, the legal representative should hold the position of the sole director (or a chairman of the board if there is a board of directors) or the general manager of the company. However, the new Company Law provides that any director who carries out the company’s affairs on behalf of the company or general manger could be the legal representative.
Director
The new Company Law requires directors to verify capital contributions and assume responsibility for indemnifying the company against losses in case of failure to do so. If a shareholder fails to fulfill the contribution obligation, directors—who are required to regularly verify contributions—must issue a written demand for payment to the shareholder. In addition, the new Company Law abolishes limits on the number of directors. A company may not dismiss a director without reason; otherwise, the director may request compensation from the company.
Supervisor
Currently, the LLC may choose to have a supervisor or board of supervisors. Under the new Company Law, an LLC no longer needs to appoint any supervisors and may instead decide to establish an audit committee composed of directors who will exercise the duties that would otherwise be handled by a supervisor or board of supervisors.
Implications for U.S. Higher Education Institutions with WFOEs in China
As the new law requires shareholders to make contributions within five years of the entity’s establishment date, all existing WFOEs must adjust contribution deadlines to meet this requirement. For WFOEs established after the new law takes effect, investors should carefully determine the amount of registered capital and fulfill contribution obligations within the prescribed time limit. Fortunately, the new law also gives WFOEs more flexibility in terms of designating legal representatives and directors or deciding whether to appoint a supervisor.
U.S. higher education institutions with WFOEs in China should ensure that the WFOEs comply with the amended law’s requirements. In addition, they may want to consider making changes to the WFOEs’ structure in terms of directors, legal representatives, and supervisors.