CHINA Trends and Developments Contributed by: Catherine Chen and Shaun Gao, Zhong Lun Law Firm
The Impact of the New Company Law China’s 2024 Company Law introduced sub - stantial amendments that significantly impact PE and VC transactions in China. The following analysis outlines the key implications for industry practitioners. Capital contribution system Five-year mandatory capital payment The new legislation mandates that all sharehold - ers of limited liability companies (LLCs) fulfil their subscribed capital contributions within five years of incorporation, eliminating the previously unrestricted timeframe. This provision applies retroactively to existing companies, necessitat - ing that PE/VC investors reassess their portfo - lio companies’ capital structures and negoti - ate appropriate adjustments (such as capital reductions or accelerated payment schedules). Consequently, start-ups with inflated registered capital or extended payment terms may face considerable liquidity constraints, potentially affecting valuations and exit timelines. Enhanced liability for defaulting shareholders Shareholders who fail to meet their capital con - tribution obligations now face explicit liability for compensatory damages to the company. Founders and early-stage investors may bear joint and several liability for unpaid capital dur - ing the company formation phase. Equity transfers and liability allocation Stricter rules for defective equity transfers The transfer of unpaid or underpaid equity inter - ests now imposes supplementary liability on transferors if transferees subsequently default. While transferees bear primary responsibility for unpaid capital, transferors may incur liability if transferees fail to fulfil their obligations. Trans - fers of non-monetary assets with inflated valu - ations trigger joint liability for both transferors
and transferees, in the absence of a good faith defence by the transferee. Accordingly, PE/VC investors are advised to conduct thorough due diligence on historical capital contributions and to incorporate comprehensive indemnity provi - sions into transaction documentation. Simplified transfer procedures External equity transfers no longer require prior shareholder approval. Existing shareholders retain a 30-day right of first refusal (ROFR), but the procedural framework has been streamlined considerably. Corporate governance and shareholder rights Flexibility in governance structures Companies may now adopt simplified gov - ernance models, including the elimination of supervisory boards in favour of audit commit - tees. PE/VC investors should revise shareholder agreements to reflect this enhanced governance autonomy. Enhanced minority protections The legislation introduces new mechanisms ena - bling minority shareholders to challenge poten - tially abusive majority decisions, such as inequi - table capital increases or dividend policies. PE/ VC investors should leverage these provisions to safeguard their interests against founder domi - nance. Procedural hurdles in redemption execution Capital reduction requirements For company-initiated redemptions, repurchas - es or buybacks of PE/VC investors’ equity inter - ests, mandatory capital reduction procedures now require unanimous shareholder approval, potentially complicating timely execution.
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