CHINA Trends and Developments Contributed by: Joanna Jiang, Richard Qiang, Greg Guo and Dimitri Phillips, DaHui Lawyers
ment timeline to be in compliance” (if these companies are not already in compliance). • Shareholder accountability: shareholders who fail to meet their capital contribution dead- lines may be required to compensate the company for any resulting losses and may risk forfeiting their equity rights related to the unpaid capital if they do not rectify the situ- ation within a specified grace period under a notice issued by the company’s director(s). • Enhanced corporate governance: the Amend- ed Company Law introduces several critical corporate governance changes, including: (a) companies with 300 or more employees are now required to include at least one employee-elected director or supervisor; (b) companies have the option to set up an “audit committee” comprised of an unspecified number of directors to be responsible for supervising the company’s financial and accounting matters. Compa- nies that choose this option are no longer required to have a supervisor or a board of supervisors; (c) small-scale companies are now exempt from the requirement to appoint a super- visor; (d) directors are now entitled to seek com- pensation in cases of unreasonable dis- missal before the end of their employment terms; and (e) the list of statutory functions of the gen- eral manager (“GM”) has been removed, and the powers and functions of the GM can be more freely specified under the company’s articles of association or delegated by the company’s board of directors. • Director/officer incentivisation: in addition, the Amended Company Law sets out several measures aimed at incentivising directors and officers to perform their duties and functions
in a more diligent and meticulous manner including: (a) obligating company directors to verify whether the registered capital has been paid in full by the shareholders on time and in accordance with the company’s articles of association. Furthermore, com- pany directors are also required to issue written notices to urge the shareholders who fail to make their capital contribution on time and in full to do so; (b) requiring the board of directors or shareholders to review and approve any potentially conflicted or related-party transactions to maintain transparency and fairness; (c) specifying that directors are the com- pany’s liquidation obligors and have to set up a liquidation committee within 15 days of the occurrence of a liquidation event; and (d) providing that the board of directors must ensure the distribution of profits is com- pleted within six months of the date of the shareholders’ profit distribution resolution. The above changes will impact M&A in two spe- cific ways. Firstly investors looking to acquire companies should now take more scrupulous measures to ascertain whether the target com- pany has fulfilled its capital contribution obliga- tions. If any initial registered capital subscription remains unpaid, investors should address these problems, either by requiring the original share- holders to pay their contributions in full or by adjusting the final purchase price to account for any unpaid capital. Secondly, investors who have already acquired or become shareholders of a company must be mindful of the five-year timeframe to meet their potential capital contribution obligations. Failure
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