China’s new Company Law which was passed by the Standing Committee of the National People’s Congress (NPCSC) of China on 29 December 2023 will take effect on 1 July 2024. The new “Company Law” features a total of 15 chapters and 266 articles. In this Pacific Prime article, we will cover the some of the biggest changes taking effect on 1 July.
Do you have businesses in China? Do you know how the new law will affect your business? In this article, we will cover some of the major changes that will be coming when the new law takes effect and how you can leverage Directors & Officers Liability Insurance to protect you and your corporation from the increased risks.
Key Changes the 2024 Company Law Brings
The revisions that the new Company Law brings changes how businesses in China operate. The key changes in the new law include changes to capital contributions, legal representatives, the powers of board of directors, and liabilities of controlling shareholders.
Legal Representative
It is mandatory for every Chinese company to have a legal representative to represent the company in its civil activities. Before the new law, the position of legal representative can only be held by the chairman of the board of directors, or the general manager of the company.
When the new law takes effect on 1 July, the position will be open to the general manager or any director who carries out the company’s affairs on behalf of the company. The new law also introduces exit mechanisms for when the legal representative resigns from the company.
Article 10 of the new Company Law defines that when the legal representative resigns from the company, they also effectively resign from their position as the legal representative. The company is required to appoint a new legal representative within 30 days from the date of resignation.
Controlling Shareholder & Actual Controller
The debate between controlling shareholders and actual controllers of a company has been a common issuer in the governance of Chinese companies.
In the case of shareholders abusing the legal identities of the companies they hold share over to commit acts of debt evasion that will cause harm to the company, the companies involved shall bear joint liability.
Capital Contribution
Among the revisions made in the 2024 Company Law, capital contributions made by shareholders have gone through certain changes
One of the biggest changes is that after 1 July, under article 47, shareholders of limited liability companies (LLC) (established after 1 July) must settle the entirety of their capital contributions within five years from the date of establishment of the company.
The article will not only affect new companies but also existing LLCs. If the schedule of capital contributions of an existing LLC exceeds the five-year limit, The specific implementation methods shall be prescribed by the State Council.
Under article 52 of the new Company Law, if a shareholder fails to settle their capital on time, a written notice of disenfranchisement may be given to said shareholder by resolution of the board of directors of the company. Effective on the day of notice, the shareholder forfeits his/her shareholding in the unpaid contribution.
For the latest and most accurate information we advise you to stay tuned to the official website of the State Council of the People’s Republic of China.
How to Protect Your Company from Increased Risks
The new Company Law will expand the responsibilities directors and managers have to the company. With these increased responsibilities, shareholders, directors, managers, as well as LLCs will have increased risks and potential liabilities.
Example of changes to take effect on 1 July:
- Article 52: Shareholder capital contribution time limit
- Article 53: Debt evasion regulations
- Article 163: Financial support to others buying company shares
- Article 211: Improper profit distributions
- Article 266: Illegal reduction of registered capital
- And more
To help your company better mitigate the increased risks and prevent potential losses, a Directors & Officers Insurance (D&O insurance) is a great solution. These insurance plans designed to offer liability coverage for company managers to protect them from claims that may arise from the decisions and actions they have to make as part of their duties.
D&O insurance shines in its protection against legal defense costs and settlements incurred by a company’s board members, managers, as well as employees against claims made by shareholders or other third parties for alleged wrongdoings, effectively protecting an individual’s personal assets.
Conclusion
The new 2024 Company Law that will take effect on 1 July in China will the way corporations operate in the country. The new amendments seek to expand liability and hold companies, directors, and shareholders accountable for their business.
The implementation of the new law urges Chinese companies to take risk mitigation precautions such as taking out Directors & Officers Liability Insurance. These policies usually provide coverage not only for current and future directors and officers of a company and its subsidiaries but also past ones too.
Contact us today to learn more about insurance and discover your options!
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