Chinese Corporate Law

Sources of Chinese Corporate Law

The principal source of Chinese corporate law is the Company Law of the People’s Republic of China, originally enacted in 1993 and substantially revised in 2005, 2013, and most recently in 2023. The 2023 amendments, which took effect on 1 July 2024, represent the most significant revision in decades, introducing comprehensive changes to capital contribution rules, director duties, and corporate governance. The Company Law is supplemented by the Securities Law of the PRC (2019 revision) governing public offerings and trading, and by judicial interpretations issued by the Supreme People’s Court, particularly the Provisions on Several Issues Concerning the Application of the Company Law, which provide authoritative guidance on ambiguous statutory provisions. The Administration for Market Regulation (AMR) oversees company registration and administration.

General Framework

Article 3 of the Company Law defines a company as an enterprise legal person established in accordance with the Law, with independent legal personality and independent property. Companies bear liability for their debts with all of their assets. The Law distinguishes between the limited liability company (有限责任公司, youxianzeren gongsi) and the company limited by shares (股份有限公司, gufen youxian gongsi). The principle of separate legal personality is fundamental, and Article 20 of the Company Law provides for veil piercing, permitting a court to disregard corporate personality where a shareholder abuses the independent status of the company or the limited liability of shareholders to evade debts and cause substantial harm to the interests of creditors. Shareholders who abuse their rights bear joint and several liability.

Formation of a Company

A company is formed by registration with the Administration for Market Regulation. The articles of association (章程, zhangcheng) serve as the constitutional document and must contain the company’s name, registered address, business scope, registered capital, the name and residence of shareholders, and the governance structure. The 2013 reform replaced the paid-in capital system (实缴制, shijiao zhi) with the subscribed capital system (认缴制, renjiao zhi) for most companies, abolishing minimum capital requirements except for companies in regulated industries such as banking, insurance, and securities. Under the subscribed capital system, shareholders determine the amount and timing of their capital contributions as specified in the articles of association. The 2023 amendments introduced a maximum subscription period of five years for limited liability companies, requiring shareholders to fully pay their subscribed capital within five years of incorporation, addressing concerns about excessively long subscription periods and insufficient capitalisation.

Corporate Governance Structure

The shareholders’ meeting (股东会, gudonghui) is the highest authority of the company, exercising powers including the election and removal of directors, the approval of the annual financial budget and final accounts, the resolution on profit distribution, and amendments to the articles of association. The board of directors (董事会, dongshihui) is the executive and decision-making organ, and must have at least three members. Smaller limited liability companies may have a single executive director instead of a board. The board of supervisors (监事会, jianshihui) is a mandatory organ for all companies with at least three members, including employee representatives. The board of supervisors oversees the financial affairs of the company and monitors the conduct of directors and senior management. The legal representative (法定代表人, fading daibiaoren) is a single natural person, typically the chairman of the board or the manager, authorised to represent the company in legal proceedings and transactions without the need for specific authorisation.

Derivative Action

The 2005 reform introduced the statutory derivative action, permitting a shareholder to bring proceedings on behalf of the company where the company fails to pursue a claim against directors, supervisors, or third parties who have harmed the company’s interests. A shareholder must first demand in writing that the board of supervisors (for claims against directors) or the board of directors (for claims against supervisors) initiate proceedings. If the relevant organ refuses or fails to act within thirty days, or if irreparable harm would result from delay, the shareholder may bring a derivative action. Shareholders bringing derivative actions must have held shares for at least 180 consecutive days and must hold at least 1% of the shares in a company limited by shares.

Duties of Directors and Senior Management

Directors and senior management owe fiduciary duties of loyalty (忠实义务, zhongshi yiwu) and care (勤勉义务, qinmian yiwu) to the company. The duty of loyalty prohibits self-dealing, misappropriation of corporate opportunities, and the unauthorised disclosure of corporate secrets. Directors must not use their position to accept bribes or other improper benefits. The duty of care requires directors to exercise the diligence and prudence reasonably expected of a business manager. Breach of these duties gives rise to liability for damages caused to the company. The 2023 amendments strengthened the duties of directors and supervisors, introducing express provisions on the liability of directors for inadequate capital supervision, including joint and several liability where directors fail to ensure timely capital contributions.

Shareholder Rights

Shareholders are entitled to receive dividends declared by the shareholders’ meeting. The right to information includes the right to inspect the company’s financial statements, minutes of shareholders’ meetings, and other corporate records. Shareholders of limited liability companies have a pre-emptive right to subscribe to new capital contributions. The appraisal remedy, analogous to the dissenters’ rights in other jurisdictions, entitles shareholders who vote against certain fundamental transactions, including mergers and asset transfers, to require the company to repurchase their shares at a fair price.

The 2023 Amendments

The 2023 amendments to the Company Law, the most extensive since 2005, introduced several significant changes. The maximum five-year subscription period for capital contributions addresses the problem of inflated registered capital with distant payment dates. Directors now have an express duty to verify and collect capital contributions, with personal liability for failure to act. The amendments clarified the rules on the reduction of capital, providing a streamlined process for reducing subscribed capital. The liability of the controlling shareholder and actual controller (实际控制人, shiji kongzhiren) was clarified, imposing duties of loyalty and care on shadow directors who exercise effective control over the company even without formal appointment. The amendments also simplified the company registration process and enhanced the disclosure obligations of companies.