The Draft Revision of PRC Company Law: Prospects and Challenges

On 15 November 2023, Associate Professor Dr Zhou Chun of Zhejiang University Guanghua Law School presented a seminar on ‘The Draft Revision of PRC Company Law: Prospects and Challenges’. This seminar was moderated by Associate Professor Dr Lin Lin.

The seminar began with a legislative history overview of PRC Company Law, beginning with the introduction of the first Company Law in China in 1993 to major changes in the 2005 Company Law followed by two amendments in 2013 and 2018. The process to revise PRC Company Law has been in progress since 2019 and there is currently a third draft of the revised PRC Company Law. While China has experienced rapid economic development, Dr Zhou highlighted that changes to company law have been relatively stable by comparison.

She then explained the factors leading to the 2023 major revision, namely the enactment of the PRC Civil Code and Securities Law as well as the new requirements of state-owned enterprise (SOE) governance reform and the World Bank ‘Ease of Doing Business’ assessment. There were 4 underpinning principles: to regulate corporate organization and behaviour, safeguard the legal rights and interests of companies, shareholders and creditors, enhance China’s distinctive modern corporate system and promote entrepreneurial spirit.

Dr Zhou set out in brief the anticipated revisions before taking the audience through key amendments of the 2023 PRC Company Law. These amendments were in relation to corporate finance, corporate governance, shareholder rights, the responsibilities of directors and senior managers, and the liabilities of controlling shareholders and de facto controllers.

Regarding limited liability companies (LLCs), there was a proposed reversion to the 2005 Company Law in which the entire subscribed capital must be paid in full within 5 years of incorporation. The rationale for this revision was based on empirical data which indicated that the average life span of an LLC is 3 to 4 years. Further notable changes in respect of strengthened capital contribution responsibilities included the board of directors’ responsibility to call contributions, the forfeiture of shares in the event of failure to fulfil the contribution obligation within the grace period and the accelerated maturity of contribution.

As regards joint stock companies (JSCs), there was now more discretion in corporate finance in the form of changes to the authorized capital system, the introduction of non-par value and multiple classes of shares including preference shares. While these changes were promising, there were also challenges such as the lawmakers’ resistance to embrace a novel categorization and reluctance to leave room for private ordering.

On the topic of corporate governance, Dr Zhou stated that there was a swing between shareholder meeting primacy and board of director primacy as seen in various versions of the draft amendments. A central challenge was how to reconcile the shareholder primacy decision making model with stakeholderism, controlling shareholder regulation, and SOEs.

New shareholder rights of governance and control rights, proprietary rights, and remedial and ancillary rights were also introduced in the proposed law, with an enhancement of the right to participate in JSCs. Further, there were also new definitions added to strengthen the existing rules on directors’ duties and responsibilities although these additions were still ambiguous. There were also proposed changes to the fiduciary duty of controlling shareholders and de facto controllers.

The seminar ended with a lively question-and-answer session between Dr Zhou and the audience.

Associate Professor Zhou Chun from Guanghua Law School, Zhejiang University, presenting

Attendees listening attentively to the presentation

Associate Professor Lin Lin, moderating the Q&A