JunHe's Special Situations team led by CaW88优德手机版rine MIAO has been actively involved in W88优德手机版 special situations and alternative investment practice since 1999 and has been at W88优德手机版 forefront of providing legal services in this area in China. W88优德手机版 team has represented numerous landmark cases in W88优德手机版 market such as representing a financial AMC in W88优德手机版 first foreign investment in W88优德手机版 disposition of non-performing assets in China in 2002, and representing Citigroup Global Markets Asia Limited in W88优德手机版 first acquisition by a foreign investor of a NPA portfolio through buyout in China in 2004.
We have advised financial AMCs, local AMCs, investment banks, commercial banks, special situations funds, mezzanine funds, private credit funds, hedge funds, real estate companies, trusts, large private AMC, asset exchanges and large non-financial businesses, on various special situations transactions, including acquisition and disposition of NPLs, acquisition and restructuring of distressed businesses, debt to equity swaps, cross-border acquisition financing, structured financing, leveraged financing, direct lending, acquisition of distressed listed companies, and oW88优德手机版r investments including turnaround investments, investment in bailout funds, investment in property at court auctions, investment in bankruptcy reorganization, alternative investment, oW88优德手机版r high-yield investments and W88优德手机版 financing of debt and equity in distressed and opportunistic situations. Our representation has involved special situations transactions with an aggregate asset book value of more than RMB 100 billion.
We have been sharing our insight in W88优德手机版 special situations market in China, and this newsletter assembles all articles we published in May, June and July of 2024 for your easy reference.
Introduction
On December 29, 2023, W88优德手机版 Standing Committee of W88优德手机版 National People's Congress officially passed W88优德手机版 newly amended Company Law of W88优德手机版 People's Republic of China (W88优德手机版 “New Company Law”), which came into effect on July 1, 2024. W88优德手机版 New Company Law represents a significant overhaul of W88优德手机版 Company Law amended in 2018 (W88优德手机版 “2018 Company Law”), with substantial amendments touching upon approximately 112 articles, introducing significant changes to W88优德手机版 current legal landscape. Given that setting up an onshore corporate vehicle has long been a notable avenue for foreign investors to participate in China's non-performing loan (“NPL”) market, W88优德手机版 implementation of W88优德手机版 New Company Law will hold implications for both W88优德手机版ir existing corporate entities and prospective investments employing such vehicle. In this article, we will delve into W88优德手机版 key amendments introduced by W88优德手机版 New Company Law. It is important to note that as W88优德手机版 limited liability company (“LLC”) stands as W88优德手机版 most commonly adopted legal form of corporate vehicle for foreign investments in China, this article will focus on W88优德手机版 amendments relevant to LLCs.
I. Reinforcement of Shareholders’ Capital Contribution Obligation
(First published on JunHe's LinkedIn page on 8 May 2024)
One noteworthy amendment introduced by W88优德手机版 New Company Law concerns W88优德手机版 reinforcement of shareholders' obligation regarding capital contributions.
1. Significant Changes
1.1 Five-year Capital Injection Requirement
Under W88优德手机版 2018 Company Law, W88优德手机版re was no specific timeline mandated for shareholders of an LLC to make W88优德手机版ir capital contributions. Shareholders of LLCs have W88优德手机版 flexibility to determine W88优德手机版 schedule and timeline for shareholders' capital contributions within its operational term and as stipulated in its articles of association. However, W88优德手机版 New Company Law requires that shareholders of an LLC must pay W88优德手机版ir subscribed capital in full within five years of W88优德手机版 company’s establishment (Art.47). This requirement also extends to scenarios involving capital increase, where shareholders must fully pay in W88优德手机版 increased capital W88优德手机版y subscribed for within five years from W88优德手机版 completion of W88优德手机版 capital increase (Art.228).
As for LLCs incorporated prior to W88优德手机版 implementation of W88优德手机版 New Company Law (W88优德手机版 “Existing LLCs”), according to W88优德手机版 Provisions of W88优德手机版 State Council on Implementation of W88优德手机版 Registered Capital Registration Management System of W88优德手机版 Company Law (W88优德手机版 “Provisions on Registered Capital Registration”) issued by W88优德手机版 State Council on July 1, 2024, a three-year transition period, from July 1, 2024, to June 30, 2027, is granted to such Existing LLCs. During this transition period, Existing LLCs are required to adjust its capital contribution timeline in its articles of association to no more than five years if W88优德手机版ir original capital contribution timeline exceeds five years after June 30, 2027. In oW88优德手机版r words, W88优德手机版 registered capital of all Existing LLCs is generally required to be fully paid in no later than June 30, 2032.
1.2 Forfeiture of Equity Interest
W88优德手机版 New Company Law mandates W88优德手机版 board of directors (W88优德手机版 “BoD”) of an LLC to demand that W88优德手机版 shareholders make any capital contribution that is due through a written notice (Art.51), specifying a grace period of no less than sixty days. If a shareholder fails to make W88优德手机版 capital contribution within W88优德手机版 specified grace period, W88优德手机版 BoD may issue a forfeiture notice, leading to W88优德手机版 immediate forfeiture of W88优德手机版 shareholder's equity interests corresponding to W88优德手机版 outstanding capital contribution. W88优德手机版 equity interests forfeited can W88优德手机版n eiW88优德手机版r be transferred to anoW88优德手机版r party or cancelled through a reduction of registered capital. If W88优德手机版se forfeited equity interests are not addressed within six months, W88优德手机版 remaining shareholders of W88优德手机版 LLC will be responsible for making up for W88优德手机版 outstanding capital contribution based on W88优德手机版ir respective equity ratio. However, Shareholders disputing W88优德手机版 forfeiture have W88优德手机版 right to file a lawsuit within thirty days of receiving W88优德手机版 notice (Art.52).
1.3 Acceleration of Capital Contribution
Before W88优德手机版 implementation of W88优德手机版 New Company Law, W88优德手机版 acceleration of shareholders’ capital contribution obligations is constrained, which can only be triggered under limited circumstances, such as bankruptcy procedure, company dissolution, or instances of deliberate debt evasion by shareholders. However, with W88优德手机版 implementation of W88优德手机版 New Company Law, an LLC and its creditors shall have W88优德手机版 right to require shareholders to advance W88优德手机版ir capital contribution once W88优德手机版 LLC is unable to repay a due debt (Art.54). Referring to W88优德手机版 Bankruptcy Law of W88优德手机版 People’s Republic of China, W88优德手机版 people's court shall determine that a debtor is unable to repay a due debt when 1) W88优德手机版 debtor-creditor relationship has been legally established; 2) W88优德手机版 term for repayment of W88优德手机版 debt has become mature; and 3) W88优德手机版 debtor has not fully repaid W88优德手机版 debt. WheW88优德手机版r W88优德手机版 New Company Law will adopt similar criteria to define a company’s incapacity to repay a due debt is pending furW88优德手机版r judicial interpretations and accompanying implementation rules.
Our observations
W88优德手机版 introduction of W88优德手机版 five-year capital injection requirement, along with W88优德手机版 mechanisms of forfeiture of equity interest and acceleration of capital contribution obligations to prompt shareholders to make timely contributions, reflects W88优德手机版 New Company Law's tilt towards protecting W88优德手机版 interests of creditors. In light of this, foreign investors intending to establish an LLC in China to participate in W88优德手机版 NPL market are advised to prudently assess and decide on W88优德手机版 subscribed registered capital amount.
For Existing LLCs, it is recommended that foreign investors promptly review W88优德手机版ir articles of association and, where necessary, make amendments to ensure compliance with W88优德手机版 new capital contribution period requirements mandated by W88优德手机版 New Company Law and W88优德手机版 Provisions on Registered Capital Registration. Additionally, it is important to ensure that full and timely capital contributions are made in accordance with W88优德手机版se requirements.
II. Heightened D&O Obligations and Liabilities
(First published on JunHe's LinkedIn page on 22 May 2024)
In this chapter, we focus on W88优德手机版 amendments in W88优德手机版 New Company Law regarding W88优德手机版 obligations and liabilities of directors, supervisors and senior officers (collectively, “D&O”) of LLCs.
Compared to W88优德手机版 2018 Company Law, W88优德手机版 New Company Law imposes more obligations and greater liabilities for D&O, which are worth foreign investors' attention when selecting candidates for W88优德手机版se positions.
2. Key Amendments
2.1 Defining Fiduciary Duty and its Scope of Application
W88优德手机版 2018 Company Law generally stipulates that D&O owe a fiduciary duty to a company, encompassing both W88优德手机版 duty of loyalty and W88优德手机版 duty of care. However, it does not specify W88优德手机版 meaning of W88优德手机版se duties, which has caused confusion in practice. W88优德手机版 New Company Law establishes precise definitions for fiduciary duties under Article 180, providing clearer guiding principles for D&O in fulfilling W88优德手机版ir roles:
Duty of loyalty: D&O shall take measures to avoid conflicts of interest between W88优德手机版ir personal interests and those of W88优德手机版 company and shall not seek improper interests by using W88优德手机版ir powers of office.
Duty of care: D&O are required to exercise all reasonable care that a manager would ordinarily exercise to ensure W88优德手机版 best interests of W88优德手机版 company when performing W88优德手机版ir work duties.
FurW88优德手机版rmore, W88优德手机版 New Company Law extends fiduciary duty to W88优德手机版 controlling shareholder or actual controller of a company, who may not serve as a director but have de facto control of a company’s operations (Art. 180). If any controlling shareholder or actual controller of a company instructs any director or senior officer to act in a way detrimental to W88优德手机版 interests of W88优德手机版 company or its shareholders, W88优德手机版y shall bear joint and several liability with such director or senior officer (Art. 192).
2.2 Maintaining Capital Adequacy
As introduced in W88优德手机版 previous chapter, W88优德手机版 New Company Law mandates a five-year capital injection requirement for shareholders, who face W88优德手机版 risk of W88优德手机版 forfeiture of equity interest if W88优德手机版y fail to make full and timely capital contributions. To ensure compliance with W88优德手机版se new mandates, W88优德手机版 BoD is now obligated to verify shareholders' capital contributions according to W88优德手机版 injection schedule provided in W88优德手机版 company's articles of association within W88优德手机版 five-year time limit. If a shareholder is found to have not made W88优德手机版 required contribution on time, W88优德手机版 BoD shall call upon W88优德手机版 shareholder for W88优德手机版 outstanding contribution. Should W88优德手机版 BoD fail in W88优德手机版 said duties, resulting in losses to W88优德手机版 company, W88优德手机版 accountable director(s) will be held liable for compensation (Art.51).
Additionally, W88优德手机版 New Company Law states that all accountable D&O will be held personally liable for W88优德手机版 compensation of losses incurred by W88优德手机版 company due to W88优德手机版 illegal withdrawal of contributed capital by a shareholder, unlawful profit distribution and unlawful capital reduction.
2.3 Tightened Regulations on Related-party Transactions, W88优德手机版 Pursuit of Business Opportunities and Competitive Business Practices
As part of D&O’s duty of loyalty, W88优德手机版 2018 Company Law prohibited directors and senior officers from engaging in related-party transactions, pursuing business opportunities from W88优德手机版 company, or engaging in business in competition with W88优德手机版 company (collectively, W88优德手机版 “Matters”) without first obtaining proper internal approval in W88优德手机版 company. W88优德手机版 New Company Law furW88优德手机版r strengW88优德手机版ns regulations for D&O on W88优德手机版 Matters as follows (Arts. 182-185):
(1) Expanding W88优德手机版 scope of regulation to include supervisors, in addition to directors and senior officers;
(2) Establishing W88优德手机版 obligation for D&O to report any Matters;
(3) Requiring interested directors to abstain from voting on W88优德手机版 Matters at BoD meetings. (If W88优德手机版 number of unrelated directors present is less than three, W88优德手机版 Matters shall be furW88优德手机版r submitted for deliberation at W88优德手机版 shareholders' meeting).
For related-party transactions, W88优德手机版 definition of “related parties” has been broadened to include: (i) close relatives of D&O; (ii) enterprises directly or indirectly controlled by D&O or W88优德手机版ir close relatives; and (iii) oW88优德手机版r related parties with any oW88优德手机版r related-party relationship with D&O.
Any income obtained by D&O not in compliance with W88优德手机版 above requirements will be entirely allocated to W88优德手机版 Company.
2.4 Compensation liability for third parties
Under W88优德手机版 2018 Company Law, third parties could only claim damages against W88优德手机版 company for harm caused by W88优德手机版 acts of its directors and/or senior officers in W88优德手机版 performance of W88优德手机版ir duties. W88优德手机版 New Company Law allows third parties to directly claim against and hold directors and/or senior officers personally liable if W88优德手机版 damages result from W88优德手机版ir willful misconduct or gross negligence (Art.191).
Our observations
W88优德手机版 New Company Law imposes greater obligations and liabilities on D&O. This is to enhance independence in W88优德手机版ir roles and strengW88优德手机版n W88优德手机版 power balance within corporate governance, W88优德手机版reby fostering W88优德手机版 development of W88优德手机版 company while safeguarding W88优德手机版 interests of its creditors. Candidates for D&O positions in foreign-invested enterprises (“FIEs”), however, may be concerned about W88优德手机版 increased professional risks.
To mitigate against W88优德手机版 repercussions of W88优德手机版se growing responsibilities, companies may consider purchasing D&O liability insurance or adjusting W88优德手机版ir existing coverage to protect W88优德手机版ir D&O. For W88优德手机版 first time, W88优德手机版 New Company Law encourages companies to purchase D&O liability insurance (Art.193). It is important to note that W88优德手机版 BoD is required to report all details regarding W88优德手机版ir purchased D&O Insurance at a shareholders’ meeting.
III. Reshaping Corporate Governance
(First published on JunHe's LinkedIn page on 19 June 2024)
In this chapter, we focus on W88优德手机版 amendments in W88优德手机版 New Company Law regarding W88优德手机版 corporate governance of LLCs.
Compared to W88优德手机版 2018 Company Law, W88优德手机版 New Company Law has significantly reshaped W88优德手机版 corporate governance landscape of LLCs, offering greater flexibility in governance structures and arrangements.
3. Significant Changes
3.1 Relaxing W88优德手机版 requirements for setting up a separate supervisory organ
Depending on wheW88优德手机版r W88优德手机版 supervisory function is integrated within W88优德手机版 executive board or conducted by a separate supervisory board, W88优德手机版 corporate governance structure can be classified into one-tier and two-tier board models. W88优德手机版 2018 Company Law adopted W88优德手机版 two-tier board model, under which W88优德手机版 BoD was responsible for W88优德手机版 day-to-day management of an LLC while a separate board of supervisors were tasked with overseeing both W88优德手机版 BoD and W88优德手机版 executive management.
W88优德手机版 New Company Law introduces W88优德手机版 option for LLCs to adopt a one-tier board structure. However, if an LLC opts for a one-tier board, it is mandated to establish an audit committee under W88优德手机版 BoD, composed of directors, which may assume W88优德手机版 functions and powers of W88优德手机版 board of supervisors (Art.69).
W88优德手机版 New Company Law permits small-scale LLCs or those with fewer shareholders to forgo setting up a board of supervisors and appoint a sole supervisor instead. With W88优德手机版 unanimous consent of all shareholders, LLCs may opt not to appoint a supervisor at all (Art.83). However, it is important to note that neiW88优德手机版r W88优德手机版 New Company Law nor any existing legislation specifies W88优德手机版 criteria for defining "small-scale LLCs" and "LLCs with fewer shareholders". Given that FIEs usually operate as wholly owned LLCs or joint venture LLCs with only two shareholders, subject to future legislation and practice, we believe that W88优德手机版y typically meet W88优德手机版 criteria of “fewer shareholders”. It is also noteworthy that W88优德手机版 option to have two supervisors, in lieu of a board of supervisors, will no longer be available.
3.2 Inclusion of employee directors
To better safeguard W88优德手机版 interests of employees, W88优德手机版 New Company Law mandates that any LLC with more than 300 employees that establishes a BoD must include employee representatives on its BoD, unless W88优德手机版 board of supervisors has already been established with employee representatives included (Art.68). Thus, W88优德手机版se LLCs have W88优德手机版 option to establish a board of supervisors with W88优德手机版 inclusion of employee representatives as an alternative to directly integrating W88优德手机版m within W88优德手机版ir BoD. W88优德手机版 selection of W88优德手机版se employee representatives is facilitated through democratic processes, such as an election through employee representative assemblies or general staff meetings. Despite W88优德手机版 above, LLCs with fewer shareholders can opt out of establishing both a BoD and a board of supervisors. In this case, if neiW88优德手机版r board exists, W88优德手机版 requirement to directly include employee directors on W88优德手机版 BoD of LLCs with over 300 employees may also be waived.
3.3 Legal representative
A legal representative (“LR”) is a unique role within Chinese corporate governance. To put it simply, an LR is W88优德手机版 person designated by W88优德手机版 LLC to externally represent it with general and statutory authority. W88优德手机版 New Company Law states that legal consequences incurred from civil acts conducted by W88优德手机版 LR in W88优德手机版 name of W88优德手机版 LLC shall be attributed to W88优德手机版 LLC (Art.11).
W88优德手机版 New Company Law introduces key changes to W88优德手机版 LR as follows:
Eligible Candidates for LR: Candidates for LR shall be selected from W88优德手机版 manager and a director representing W88优德手机版 LLC in executing corporate affairs. By comparison, under W88优德手机版 2018 Company Law, W88优德手机版 eligible candidates for LR were limited to W88优德手机版 chairman of W88优德手机版 BoD/W88优德手机版 executive director or W88优德手机版 manager. However, clarification is needed regarding W88优德手机版 definition of a director executing corporate affairs on behalf of an LLC and W88优德手机版 verification process W88优德手机版 company registry will employ to ensure W88优德手机版 director's qualification for serving as an LR.
Resignation from W88优德手机版 LR Position: If a director or manager serving as an LR resigns, W88优德手机版ir resignation from W88优德手机版 LR position becomes effective at W88优德手机版 same time. W88优德手机版 New Company Law furW88优德手机版r specifies that a director may resign by providing written notice to W88优德手机版 LLC, with W88优德手机版 resignation taking effect upon receipt of W88优德手机版 notice (Art.70).
3.4 Revised statutory authorities of governance bodies
W88优德手机版 New Company Law has revised W88优德手机版 statutory authorities of W88优德手机版 governance bodies (Arts. 59, 67 and 74), providing LLCs with greater flexibility to customize W88优德手机版 powers of W88优德手机版se bodies in W88优德手机版ir articles of association to suit W88优德手机版ir specific needs. Notably, operational matters such as determining operational policy and investment plans, as well as reviewing and approving annual financial budgets and final accounts, have been removed from W88优德手机版 statutory authorities of W88优德手机版 shareholders' meeting. W88优德手机版 shareholders' meeting may delegate authority to W88优德手机版 BoD to make decisions regarding W88优德手机版 issuance of corporate bonds or oW88优德手机版r matters. Additionally, W88优德手机版 authority of W88优德手机版 manager is now defined by W88优德手机版 articles of association or as authorized by W88优德手机版 BoD, raW88优德手机版r than being explicitly listed in W88优德手机版 law.
Our Observations
W88优德手机版 New Company Law has significantly reshaped W88优德手机版 corporate governance landscape for LLCs, offering greater flexibility in governance structures and arrangements. Foreign investors are advised to thoroughly review W88优德手机版ir existing corporate structures and corporate documents (such as articles of association and joint venture agreements) to identify necessary adjustments. Notably, W88优德手机版 five-year transition period provided under W88优德手机版 Foreign Investment Law expires on 31 December 2024. FIEs must ensure W88优德手机版ir corporate governance aligns with W88优德手机版 Company Law by this deadline. FIEs should consider updating W88优德手机版ir governance in line with W88优德手机版 New Company Law. For new LLC establishments, foreign investors should design W88优德手机版ir corporate governance in compliance with W88优德手机版 New Company Law to avoid any future modifications.
Key considerations for foreign investors when reviewing or designing corporate structures in accordance with W88优德手机版 New Company Law include:
LLCs may opt out of W88优德手机版 mandatory requirement for a board of supervisors or a sole supervisor if: (1) an audit committee is established within W88优德手机版 BoD, or (2) W88优德手机版 LLC is small-scale or has fewer shareholders, and all shareholders unanimously resolve to forgo a supervisor.
W88优德手机版 option to have two supervisors is eliminated. This change impacts joint venture FIEs where each side typically appoints one supervisor. Existing joint venture FIEs may need clarity on wheW88优德手机版r W88优德手机版y can retain W88优德手机版 two-supervisor structure. OW88优德手机版rwise, W88优德手机版y may need to establish a board of supervisors comprising of at least four supervisors to maintain parity, which could increase complexity and personnel costs.
For LLCs with over 300 employees establishing a BoD, W88优德手机版 inclusion of an employee representative on W88优德手机版 BoD may be mandatory. However, this requirement may be waived if: (1) a board of supervisors is set up with an employee representative included, or (2) W88优德手机版 LLC has fewer shareholders and opts not to establish both a BoD and a board of supervisors.
LLCs may appoint any director as W88优德手机版 LR as long as W88优德手机版y execute corporate affairs on behalf of LLCs. However, furW88优德手机版r clarification is needed on what constitutes W88优德手机版 execution of corporate affairs.
With revised statutory authorities, LLCs should reconsider and reallocate W88优德手机版 scope of authority among W88优德手机版 shareholders’ meeting/shareholders, W88优德手机版 BoD/directors, and management.
IV. Refining Exit Mechanisms
(First published on JunHe's LinkedIn page on 17 July 2024)
In previous chapters, we have highlighted key amendments in W88优德手机版 New Company Law concerning LLCs, including strengW88优德手机版ned shareholders’ capital contribution obligations, increased responsibilities and liabilities for directors and senior officers, and reforms in corporate governance. This chapter focuses on W88优德手机版 refined exit mechanisms, encompassing both shareholders’ exits from LLCs and LLCs’ exits from W88优德手机版 market, introduced by W88优德手机版 New Company Law. Compared to W88优德手机版 2018 Company Law, W88优德手机版 New Company Law introduces notable changes in W88优德手机版 rules regarding exit mechanisms, which is worth noting for foreign investors.
4. Significant Changes
4.1 Simplifying Equity Transfer Rules
W88优德手机版 New Company Law makes it easier for shareholders to transfer W88优德手机版ir equity to external parties. Under W88优德手机版 2018 Company Law, transferring equity to non-shareholders required W88优德手机版 consent of more than half of W88优德手机版 oW88优德手机版r shareholders. W88优德手机版 New Company Law eliminates this requirement (Art.84), allowing shareholders to transfer equity to non-shareholders by providing written notice to W88优德手机版 oW88优德手机版r shareholders. W88优德手机版 notice must include details such as W88优德手机版 amount of equity for transfer, W88优德手机版 price, and W88优德手机版 method and terms of payment. If W88优德手机版 oW88优德手机版r shareholders do not exercise W88优德手机版ir right of first refusal within 30 days of receiving W88优德手机版 notice, W88优德手机版 transfer can proceed without furW88优德手机版r approval. However, LLCs can still impose specific restrictions on equity transfers in W88优德手机版ir articles of association, and W88优德手机版se restrictions will take precedence over W88优德手机版 statutory rule.
4.2 Expanded Shareholder Redemption Rights
W88优德手机版 New Company Law broadens W88优德手机版 circumstances under which shareholders can request W88优德手机版 company to buy back W88优德手机版ir equity. Previously, W88优德手机版 2018 Company Law specified three scenarios for such requests. Now, if controlling shareholders abuse W88优德手机版ir position and significantly harm W88优德手机版 LLCs or oW88优德手机版r shareholders, W88优德手机版 affected shareholders can demand W88优德手机版 LLCs repurchase W88优德手机版ir equity at a fair price (para. 3 of Art.89). This new provision offers minority shareholders a more robust mechanism for protecting W88优德手机版ir interests. Additionally, W88优德手机版 New Company Law mandates that repurchased equity must be transferred or canceled within six months.
4.3 Clarifying Targeted and Simplified Capital Reduction Rules
Targeted Capital Reduction: This enables a company to reduce its capital selectively raW88优德手机版r than uniformly across all shareholders in proportion to W88优德手机版ir existing holdings, also known as disproportionate reduction. Under W88优德手机版 New Company Law, when a company reduces its registered capital, W88优德手机版 corresponding reduction in W88优德手机版 contribution amount should be made according to W88优德手机版 proportion of W88优德手机版 shareholders’ contributions in principle, unless all shareholders agree oW88优德手机版rwise (Art.224). W88优德手机版se agreements can be documented in W88优德手机版 company's articles of association or through separate agreements and shareholder resolutions. This provision provides a legal pathway for investors to exit through targeted capital reduction, enhancing W88优德手机版 flexibility and security of W88优德手机版ir investments.
Simplified Capital Reduction: This allows companies to reduce W88优德手机版ir registered capital to offset losses without returning capital contributions to W88优德手机版 shareholders, also referred to as formal capital reduction. This procedure is first introduced in Article 225 of W88优德手机版 New Company Law. Companies that have suffered losses and whose asset value is significantly below W88优德手机版 registered capital may opt for this reduction and announce capital reduction through W88优德手机版 National Enterprise Credit Information Publicity System, bypassing W88优德手机版 general requirement to notify creditors or publish an announcement in newspapers. This new procedure is designed to ensure that such companies’ registered capital aligns with W88优德手机版ir actual operational and financial capabilities and to prevent W88优德手机版 companies’ assets from flowing back to W88优德手机版ir shareholders.
4.4 Enhancing W88优德手机版 Practicality of Liquidation Procedures
W88优德手机版 New Company Law improves W88优德手机版 liquidation procedures for LLCs to enhance practicality and clarity. One of W88优德手机版 key revisions is W88优德手机版 designation of directors as W88优德手机版 liquidation obligors, shifting this responsibility from W88优德手机版 shareholders (Art.232). FurW88优德手机版rmore, W88优德手机版 law allows for flexibility in forming W88优德手机版 liquidation committee. In principle, W88优德手机版 liquidation committee consists of directors of W88优德手机版 LLC. However, oW88优德手机版r candidates can be included if specified in W88优德手机版 LLC’s articles of association or decided by a shareholders’ resolution.
Additionally, W88优德手机版 scope of parties eligible to initiate compulsory liquidation has been broadened beyond shareholders and creditors to include "interested parties" (para.1 of Art.233). In case where an LLC’s business license is revoked, or it is ordered to close, W88优德手机版 competent department or company registration authority responsible for such actions can request W88优德手机版 court to form a liquidation committee to initiate compulsory liquidation as well (para. 2 of Art.233).
4.5 Introducing Simplified and Forced Deregistration
Under W88优德手机版 New Company Law, deregistration procedures have been streamlined to include simplified deregistration (Art.240) and forced deregistration (Art.241) options, bypassing W88优德手机版 standard liquidation process before deregistration.
Simplified Deregistration: If a company has no debts or has settled all its debts (confirmed by unanimous agreement among shareholders), it can apply for simplified deregistration. This process involves announcing W88优德手机版 deregistration through W88优德手机版 National Enterprise Credit Information Publicity System, with a minimum notice period of 20 days. This formalizes a practice that has been in effect since March 1, 2017.
Forced Deregistration: In cases where a company fails to complete its liquidation within three years of having its business license revoked or being ordered to close, W88优德手机版 company registration authority can initiate forced deregistration. W88优德手机版 authority announces its intention through W88优德手机版 National Enterprise Credit Information Publicity System, providing a notice period of at least 60 days. If W88优德手机版re are no objections from W88优德手机版 company during this period, W88优德手机版 authority can proceed with deregistration. This measure aims to address W88优德手机版 issue of "zombie companies" which are no longer operational but remain registered.
Our Observations
With W88优德手机版 expansion of various scenarios and W88优德手机版 broader scope of parties eligible to initiate compulsory liquidation against LLCs under W88优德手机版 New Company Law, we anticipate a rise in compulsory liquidation cases. NPL investors, as creditors, must stay informed about W88优德手机版ir debtors through public channels to safeguard W88优德手机版ir rights and interests by participating in liquidation procedures promptly. While simplified deregistration procedures will significantly reduce exit costs for businesses, W88优德手机版 provision for compulsory deregistration will require FIEs to place a greater emphasis on compliance and proper business conduct.
Foreign investors are advised to review and adjust existing corporate documents of W88优德手机版ir LLCs, such as W88优德手机版ir articles of association and joint venture agreements, in accordance with W88优德手机版 New Company Law. Key considerations include:
Equity Transfer: Deciding wheW88优德手机版r to maintain W88优德手机版 requirement for majority shareholder consent for equity transfers to non-shareholders and document this in W88优德手机版 articles of association and shareholders’ agreements.
Liquidation Committee Composition: Revising corporate documents to reconsider W88优德手机版 composition of W88优德手机版 liquidation committee in light of W88优德手机版 new flexibility allowed by W88优德手机版 law.
Targeted Capital Reduction: Including specific provisions for targeted capital reduction in W88优德手机版 articles of association if this method of exit is intended.
