CHINA Trends and Developments Contributed by: Steven Yu, Jeffrey Zhu, Jia Guo and Stella Jiang, Global Law Office
Requirements on Capital Contribution Under China’s New Company Law Time limit for capital contribution The revised Company Law of the People’s Republic of China which came into effect on 1 July 2024 (“New Company Law”) requires shareholders of a limited liability company (LLC) established thereafter to make capital contributions in full within five years from the establishment date of the company, and also requires an LLC established before 1 July 2024 (“Existing LLC”) to adjust its capital contribution schedule in the arti - cles of association (AoA) to meet the new timeline requirement. For capital subscribed in an LLC before 1 July 2024, supplementary rules of the New Company Law generally require that, if the capital contribution deadline for an LLC is later than 30 June 2032, such deadline shall be adjusted to a date no later than 30 June 2032 and the adjustment shall be made before 30 June 2027. Based on our practice experience, for an Existing LLC whose capital contribution deadline in its AoA is due before 1 July 2024, local market supervision authorities (MSAs) would generally allow the exten - sion of capital contribution timelines, while the new deadline shall also be within five years from the reg - istration date of such amendment for capital contri - bution deadline in the AoA. For other Existing LLCs whose capital contribution deadlines are not due yet, although supplementary rules allow a deadline as late as 30 June 2032, some MSAs (eg, in Shanghai, Hang - zhou) still require such LLCs to adjust the deadline to be within five years from the registration date of such amendment in the AoA. It is suggested for investors to require their portfolio companies to confirm require - ments with local MSAs and revise the contribution deadlines according to the new rules respectively. Potential liabilities for capital contribution in equity transfer Paragraph 1 of Article 88 of the New Company Law provides that if a shareholder of an LLC transfers its equity with unpaid capital contribution not due yet, the transferee shall assume the capital contribution obli - gation, but the transferor shall bear supplemental lia - bility if the transferee defaults. The Supreme People’s Court of the People’s Republic of China (SPC) initially provided that Paragraph 1 of Article 88 shall apply to
equity transfer before the New Company Law came into effect, which caused lots of disputes in practice. The SPC published an official reply later and clarified that Paragraph 1 of Article 88 shall not be applied to equity transfer disputes before the effective date of the New Company Law and such disputes shall be resolved according to the unrevised Company Law’s principles before 1 July 2024. For investors planning to transfer equity interest with unpaid capital contribution in an LLC, as the transferor cannot control the act of the transferee, the trans - feror may elect to complete the capital contribution in advance and the amount for the capital contribution may be added to the transaction price. Directors’ capital-call duties and potential liabilities The New Company Law expands directors’ capital- call obligations. It stipulates that the board of directors shall check the shareholders’ capital contributions and issue written payment demands to defaulting shareholders. Directors may be held liable for com - pany losses if they fail to fulfil such obligations. Directors of companies shall pay special attention to such obligations under the New Company Law. Mean - while, the investors may require portfolio companies to provide directors’ and officers’ liability insurance for directors appointed by investors, which was not quite normal in the PRC market before. The Execution Period of the Redemption Rights for Investors There are divergent views on the nature of redemption rights in the Chinese judicial practice. The “right of for - mation” theory subjects redemption rights to an exer - cise period, after which the rights are extinguished, while the “right of claim” theory imposes no such time restraint and holds that the redemption rights are only bound by statutory limitation of action. On 29 August 2024, an article in the Q&A form addressing the nature and exercise period of redemp - tion rights was published in the People’s Court Daily, which was originally circulated on the SPC’s internal website. The published Q&A held the opinion that the redemption rights are rights of formation subject to a
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