2013.12.31 FENG, Rui、SUN, Yi (Cliff)
Only two months after Premier Li Keqiang instructed on the facilitation of reform of the company registered capital registration system at a State Council meeting on October 25, 2013, the amendment to the PRC Company Law reflecting such reform was adopted at the 6th meeting of the Standing Committee of the 12th National People’s Congress of China (the “NPC”) and was published by the 8th Presidential Decree on December 28, 2013 (the “2013 Amendment”). The 2013 Amendment is to come into effect on March 1, 2014.
I. Highlights of the 2013 Amendment
The 2013 Amendment strictly follows the principles set by the State Council meeting in October for the reform of the registered capital registration system, with the following highlights.
1. “Paid In Capital” to “Subscribed Capital”
The paid in capital of a company is no longer required to be registered on the company’s registry, but is still required to be recorded on the shareholders’ books of the company;
No more minimum first installment of capital injection is required (which used to be 20% of the total registered capital);
No more requirement on the time limit of completion of full capital contribution (which used to be within 2 years for a general company and 5 years for a holding company after the company’s establishment);
No more requirement of capital verification; and
Registration of establishment of a company is no longer subject to payment of the first installment of its capital injection or the capital verification thereof.
However, for circumstances where any law, administrative regulation or the State Council mandates a “paid-in” regime for the registered capital of a company, the registered capital shall be actually paid in accordance with such law, regulation or decision of the State Council.
Further, for a joint stock limited company established by public share offer, its registered capital should still be the actually paid in share capital, which remains untouched by the 2013 Amendment.
2. Removal of General Minimum Registered Capital Requirements
The following general minimum registered capital requirements are removed by the 2013 Amendment:
RMB30,000 for a non-sole proprietorship limited liability company;
RMB100,000 for a sole proprietorship limited liability company; and
RMB5 million for a joint stock limited company.
It is no longer required that no less than 30% of the registered capital of a limited liability company must be cash.
However, for circumstances where any law, administrative regulation or the State Council stipulates minimum registered capital, the registered capital shall comply with such minimum-amount requirement under law, regulation or decision of the State Council.
3. Impact of the 2013 Amendment on FDI Practice in China
The 2013 Amendment, although with limited changes to the provisions of the Company Law, is material by nature in connection with the registered capital, and would have certain impact on the relevant legal system currently in place, in the sense that, to conform to and effectuate the 2013 Amendment in practice, a series of currently effective administrative laws and regulations (e.g. the Administrative Rules on Company Registration and the Administrative Provisions on Registration of Registered Capital of Companies) would have to be amended as well.
In addition, after the effectiveness of the 2013 Amendment, the NPC laws, administrative regulations and decisions of the State Council will be the only authorities to impose requirements of minimum registered capital and to introduce paid-in capital system to exceptional sectors or situations. In other words, the relevant requirements currently stipulated in department rules and local legislations will be contradictory to the 2013 Amendment and thus become automatically void since March 1, 2014, unless such requirements fall into the scope of decisions of the State Council to be stipulating such requirements. For instance, the Interim Provisions on the Establishment of Foreign-invested Printing Enterprises, which are department rules issued in 2002, set forth the minimum registered capital of an FIE engaging in the printing of package and decoration of publications as RMB10 million and the minimum registered capital of an FIE engaging in the printing of other publication materials as RMB5 million. It is yet to be made clear whether many requirements like the ones named above would continue to be in effect after the 2013 Amendment comes into force.
Further, it could be rather complicated and even confusing when the Company Law and the FIE laws (including the Chinese-Foreign Equity Joint Venture Law, the Chinese-Foreign Cooperative Joint Venture Law and the Wholly Foreign Owned Enterprise Law) are not consistent or even conflict with each other in practice. The 2005 amendment to the Company Law used to cause great confusions in practice after it became effective on January 1, 2006, which was later solved by the Implementing Opinions on Certain Issues regarding Application of Laws on Administration of Examination, Approval and Registration of Foreign Invested Companies jointly issued by the State Administration for Industry and Commerce, the Ministry of Commerce, the General Administration of Customs and the State Administration for Foreign Exchange in April 2006 (the “Opinions”) and further circulars issued by the State Administration for Industry and Commerce regarding the implementation of the Opinions.
The 2013 Amendment, as said above, designates the power of determining capital injection schedule and the percentage of each installment of capital injection of a company to the company’s articles of association, without stipulating any mandatory requirement to that regard. Such general release of restrictions would definitely have direct impact on the applicability of the relevant requirements set forth in the Opinions and thus, would probably need clarification by the competent government authorities like what they did in 2006.
On the other hand, given the current FIE regulating regime comprising of the commerce authority’s power to review the substance of an FIE’s articles of association and the foreign exchange authority’s power to scrutinize the cross-border flow of funds regulated under the capital accounts, it remains uncertain as to whether the local commerce authorities would, by taking the opportunity of article review, examine the “feasibility” of an agreement reached between the shareholders with respect to the amount of subscribed capital and the capital contribution schedule, even if recently the State Council has, with limited exceptions, just removed the power from the Development and Reform Commissions to approve the generally encouraged and permitted foreign-invested projects. Even if having been agreed by the Chinese partner, there may also be practical obstacles for a foreign investor to inject capital at a time or by a percentage different from that of the Chinese investor. Further, it may be difficult to change what has been followed in practice for so many years, e.g. profit distribution in proportion to the actually paid in capital. All these questions, issues and even problems may in the FDI practice need answers and solutions after the 2013 Amendment.
For the time being, amendment or reenactment of the FIE laws is already in the legislative agenda of the 12th NPC, for which the Ministry of Commerce has initiated the brainstorms of think tanks and from various other aspects of the society for drafting of the relevant bills. We are honored to be a part of the process. It is undoubtedly challenging for the government authorities to align the Opinions and the newly amended Company Law as much as possible taking into consideration of the prospective change of laws so as to avoid or minimize the instability and unpredictability of laws and regulations in regulating foreign investments. For foreign and Chinese investors, apparently skillful and professional guidance and advising by experts are crucial to better shape and perform their investment plans in view of all the foregoing complexity.
