Freeing private capital

Mainland China did not have a modern company law until 1993. The current PRC Company Law (中华人民共和国公司法) (Company Law) was first promulgated on October 27 2005 and became effective on January 1 2006. As one of the most important laws in the economic sector, the Company Law sets out foundation rules for China's corporate system. After eight years of economic development, the Standing Committee of the Twelfth National People's Congress (NPC) passed amendments to the Company Law (Company Law Amendments) on December 28 2013. This will trigger a series of further changes that will move the country towards a market-driven economic system.

There are two basic types of companies under the Company Law – limited liability companies (LLCs) and companies limited by shares (CLSs), which are generally subject to different legal regimes. An LLC does not have the concept of share capital; instead, an LLC shareholder holds equity interests in the LLC which are constituted by, and proportional to, the shareholder's contribution to the total registered capital of the LLC. A CLS's capital is divided into a certain number of shares.

The Chinese legal framework governing foreign-invested enterprises (FIEs) was set up prior to the current corporate system. There are three types of FIEs – wholly foreign-owned enterprises (WFOEs), Sino-foreign equity joint ventures (EJVs) and Sino-foreign cooperative joint ventures (CJVs). These are all regulated by separate sets of laws and implementation regulations (FIE Laws). As all WFOEs and EJVs and most CJVs are incorporated as companies, the Company Law has become the main legislation applicable to all incorporated FIEs, especially on matters such as corporate governance, which are not well addressed in the relevant FIE Laws.

The main amendments

Currently, the minimum registered capital amounts of an LLC, a one-person LLC and a CLS are Rmb30,000 (US$4,900), Rmb100,000 (US$16,500) and Rmb5,000,000 (US$822,900), respectively. The new amendments abolish the minimum registered capital requirements for all types of companies (i.e. LLCs, one-person LLCs and CLSs). Exempted circumstances include any special requirement under the laws (i.e. the legislation promulgated by NPC or its Standing Committee), administrative regulations (i.e. the regulations promulgated by the State Council) or decisions of the State Council.

The capital registration system has essentially been changed from a paid-in to a subscribed capital registration system. As a result:

• The paid-in capital will no longer be one of the registration items provided for on a company's business licence. Instead, the business licence will only show the capital subscribed by the shareholders.
  
• Accordingly, current requirements regarding the timeframes within which the registered capital must be paid will cease to apply after the Company Law Amendments come into effect. Under the current Company Law, the shareholders of an LLC and the promoters of a CLS must pay at least 20% of the registered capital in the first instalment of capital contribution and pay the rest within two or five years after the establishment of the company. However, in accordance with the Company Law Amendments, the method and timing for payment of the registered capital will in principle be governed by the company's articles of association, and it is therefore up to the shareholders to negotiate and agree among themselves.
  
• Moreover, a capital verification report showing shareholders' actual capital contribution to a company will no longer be required by the company registration authorities (i.e., the State Administration for Industry and Commerce (SAIC) or its local counterparts), as registering the actual capital payment status is not required.