新《公司法》系列文章 | 浅议《公司法》修订对拟IPO企业股改的影响
2024年02月27日 14:39 来源:研究室

On 29 December 2023, the Company Law of the People’s Republic of China (2023 Amendment) (hereinafter referred to as the “New Company Law”) was revised and adopted by the Standing Committee of the 14th National People’s Congress during its seventh session. It will come into effect on 1 July 2024. This amendment constitutes the most extensive revision in recent years. Compared to the current Company Law of the People’s Republic of China (2018 Amendment) (hereinafter referred to as the “Current Company Law”), the New Company Law repeals 16 articles and adds or amends 228 articles, including substantial modifications to 112 articles. The revisions systematically enhance and refine aspects such as corporate capital systems, corporate governance, protection of shareholders’ rights, responsibilities of controlling shareholders, actual controllers, directors, supervisors, and senior management, as well as company establishment and exit mechanisms. These changes hold profound significance.

Drawing on the amendments to the Company Law and practical legal experience, the author briefly analyses several key impacts of the changes in the New Company Law on equity restructuring for companies intending to undertake an IPO. The aim is to assist these companies in navigating the requirements of the New Company Law and mitigating compliance risks during equity restructuring.

PART 1: Requirements for Founders and Restrictions on Share Transfers

(1) Lowering the Minimum Number of Founders for Joint-Stock Companies to One

Under the Current Company Law, establishing a joint-stock company requires a minimum of two founders. Article 92 of the New Company Law reduces this minimum to one, further simplifying the shareholder requirements during equity restructuring.

In practice, companies preparing for an IPO with only one shareholder will no longer need to introduce additional shareholders solely to meet equity restructuring requirements. This amendment also facilitates the domestic listing of wholly-owned subsidiaries intended for spin-off by listed companies.

(2) Clarifying that Founders Must Fully Paid Capital Before Company Establishment

To enhance the corporate capital system, the New Company Law mandates that, in addition to adjusting the paid-up capital period for shareholders of limited liability companies in accordance with relevant provisions, founders of joint-stock companies must fully pay for their subscribed shares prior to company establishment (see Article 98 of the New Company Law).

Currently, most companies preparing for an IPO require shareholders to make full capital contributions during equity restructuring based on advice from intermediary institutions. This amendment has limited practical impact on equity restructuring for these companies. However, the author notes that in some cases, such as with Nanhui Technology (301046), companies have augmented paid-up capital using undistributed profits to address insufficient capital contributions before restructuring. It remains to be clarified through further detailed regulations whether such practices comply with the New Company Law.

(3) Removing Share Transfer Restrictions for Founders Within One Year of Company Establishment

Under Article 141 of the Current Company Law, founders are prohibited from transferring their shares within one year of the company’s establishment. The New Company Law abolishes this restriction and, under Article 157, stipulates that share transfer restrictions for shareholders of joint-stock companies are governed by the company’s articles of association.

Previously, to circumvent share transfer restrictions, companies preparing for an IPO often completed equity structure adjustments before restructuring. In some instances, to satisfy investor exit requirements, companies reverted from joint-stock to limited liability companies after restructuring, causing inconvenience and attracting regulatory scrutiny, thereby affecting the listing process.

The amendments provide a longer timeframe for equity structure adjustments before and after restructuring, greatly facilitating financing activities, share (unit) circulation, and restructuring arrangements for companies preparing for an IPO. Additionally, the new regulations explicitly allow the company’s articles of association to stipulate share transfer restrictions, respecting the autonomy between the company and relevant parties.

PART 2: Procedures for Establishing Joint-Stock Companies

The New Company Law changes the name of the founders' meeting from "Founding Assembly" to "Establishment Assembly" when setting up a joint-stock company.

Regarding meeting notification periods, the Current Company Law requires a fifteen-day notice or announcement period. The New Company Law differentiates between capital-raising establishment and founders’ establishment. For capital-raising establishment, the fifteen-day notification or announcement period remains, and a majority of voting shareholders must attend. For founders’ establishment, the New Company Law removes the aforementioned restrictions and allows the establishment and voting procedures to be governed by the company’s articles of association or the founders’ agreement.

In practice, most companies preparing for an IPO adopt the founders’ establishment method. The author believes that compared to capital-raising establishment, the founders’ method offers greater autonomy and has a lesser impact on related parties. The adjustment in the New Company Law respects the autonomy of founders and companies, allowing more flexibility in conducting establishment assemblies and voting procedures, thereby improving the efficiency of equity restructuring and significantly reducing the risk of procedural defects during restructuring (under the Current Company Law, some companies failed to comply with the fifteen-day notice period, potentially resulting in establishment defects).

PART 3: Governance Structure of Joint-Stock Companies

(1) Simplifying Board and Supervisory Board Requirements, Allowing for a Single-Tier Governance Structure

The New Company Law removes the upper limit on the number of board members and unifies the minimum number of board members for joint-stock and limited liability companies to three. Consistent with regulations for limited liability companies, the New Company Law allows smaller joint-stock companies or those with fewer shareholders to operate without a board, appointing a single director to exercise board powers. Such companies may also opt to forgo a supervisory board, appointing a single supervisor to exercise supervisory board powers.

Furthermore, the New Company Law permits companies (including limited liability and joint-stock companies) to adopt a single-tier governance structure. In this structure, a board may establish an audit committee composed of directors to perform supervisory board functions, eliminating the need for a supervisory board or supervisors.

These amendments grant companies greater autonomy in their governance structures. In practice, companies preparing for an IPO can choose an appropriate governance structure based on their specific circumstances, investor shareholder requirements (if any), and IPO application timelines. Particularly for smaller joint-stock companies or those with fewer shareholders and ample time before the IPO reporting period, the arrangement of directors (boards) and supervisors (supervisory boards) can be more flexible.

(2) Introducing Requirements for Employee Representative Directors

The Current Company Law’s mandatory requirement for employee representative directors primarily applies to state-owned enterprises overseen by state asset regulators (including limited liability companies and wholly state-owned companies established by two or more state-owned enterprises or other state-owned investment entities). The New Company Law broadens the scope of mandatory employee representative directors, requiring companies with over three hundred employees (including limited liability and joint-stock companies) to include employee representatives on their boards of directors, provided they have a supervisory board and employee representatives. Employee representatives on the board are to be democratically elected by employees through representatives' assemblies, general meetings, or other democratic methods.

Consequently, in future practices, companies preparing for an IPO should consider their workforce size and, if they have over three hundred employees, incorporate employee representatives into their boards or supervisory boards as required. When electing employee representatives, companies must comply with local regulations such as the “Regulations on Democratic Management of Enterprises” and other relevant policies. However, details regarding the criteria for employee numbers (e.g., whether only employees with signed contracts are counted, inclusion of retired or rehired staff), selection procedures, and qualification standards (including differences between employee representative directors and supervisors) await further detailed regulations or case references.

(3) Adjusting the Powers of the Shareholders' Meeting, Board of Directors, Supervisory Board, and Managers

The New Company Law abolishes the term “Shareholders' General Meeting” for joint-stock companies, collectively referring to both joint-stock and limited liability companies as “Shareholders' Meetings,” and adjusts the powers of the company’s “three meetings and one layer” (Shareholders' Meeting, Board of Directors, Supervisory Board, and Managers).

Specifically, the New Company Law removes the powers of the Shareholders' Meeting to “decide the company’s business policies and investment plans” and to “review and approve the company’s annual financial budget and final accounts.” It adds that “the Shareholders' Meeting may authorize the Board of Directors to resolve on the issuance of company bonds.”

Regarding the Board of Directors’ powers, the New Company Law eliminates the phrase “the Board of Directors is accountable to the Shareholders' Meeting.” It also deletes the Board’s authority to “formulate the company’s annual financial budget and final accounts,” aligns the modifications with those of the Shareholders' Meeting, adds that the Shareholders' Meeting may delegate additional powers to the Board of Directors, and clarifies that restrictions in the company’s articles of association on the Board’s powers must not contravene the rights of bona fide third parties.

For the Supervisory Board’s powers, the New Company Law makes minor adjustments, such as changing the term “remove” to “dismiss” concerning directors and senior management. It also adds that the Supervisory Board “may require directors and senior management to submit reports on their performance” and, according to the company’s articles of association, “may decide on the hiring or dismissal of accounting firms handling the company’s audit business” (previously, such decisions were made by the Shareholders' Meeting or Board of Directors).

Regarding Managers’ powers, the New Company Law removes statutory powers and clarifies that Managers “exercise their powers in accordance with the company’s articles of association or the authorization of the Board of Directors,” thereby granting the company greater autonomy.

In practice, companies preparing for an IPO should redesign the primary systems and related documents involved in equity restructuring in accordance with these amendments, including the articles of association, rules of procedure for the three meetings, and key governance systems. After establishing a joint-stock company, they should promptly review and decide on matters related to daily operations in line with the adjusted powers of the “three meetings and one layer” to ensure procedural compliance.

PART 4: Allowing Companies to Use Capital Reserves and Registered Capital to Offset Losses

Under Article 168 of the Current Company Law, capital reserves cannot be used to offset company losses. The New Company Law removes this statutory restriction and, in Article 214(2), specifies that “to offset losses using reserves, discretionary reserves and statutory reserves must be used first; if these are insufficient, capital reserves may be used in accordance with regulations.” Furthermore, Article 225 clarifies that “after offsetting losses as per Article 214(2), if losses persist, the company may reduce its registered capital to offset the remaining losses. In doing so, the company must not distribute to shareholders or waive shareholders’ obligations to contribute capital.”

Previously, there was debate over whether companies could use capital reserves to offset losses during equity restructuring, with some cases retaining unoffset losses post-restructuring. This amendment provides a legal basis for loss-making companies to use capital reserves to offset losses during equity restructuring and allows conditional use of registered capital to offset losses, thereby enhancing the mechanisms available for loss offsetting and providing a reliable institutional safeguard for loss-making companies undertaking equity restructuring. Notably, in future practices, companies preparing for an IPO intending to use capital reserves and registered capital to offset losses must strictly adhere to applicable prerequisites and sequences, follow necessary statutory procedures, and, particularly when using registered capital, comply with reduction procedures to avoid harming creditors’ interests.

PART 5: Refining Qualifications for Directors, Supervisors, and Senior Management, and Strengthening Regulations on Related-Party Transactions

(1) Refining Qualifications for Directors, Supervisors, and Senior Management

The New Company Law supplements and improves the existing negative qualification criteria for directors, supervisors, and senior management. Building on Article 146 of the Current Company Law, it adds that individuals declared to be on probation must not serve in these roles from the end of their probation period up to two years. For those who have served as legal representatives of companies or enterprises that were revoked licenses or ordered to close due to illegal activities and bear personal responsibility, the date of closure initiation marks the start of the prohibition period from serving as directors, supervisors, or senior management. Additionally, it clarifies that having “significant outstanding personal debts overdue for repayment” refers to individuals classified as dishonest persons by the People’s Court for failing to settle substantial debts by their due dates.

In future practices, companies preparing for an IPO should scrutinise candidates for directors, supervisors, and senior management in accordance with these new requirements. Intermediary institutions must also adjust and update their investigation forms and interview questionnaires for these roles accordingly.

(2) Strengthening Regulations on Related-Party Transactions Involving Directors, Supervisors, and Senior Management

The New Company Law further tightens regulations on related-party transactions involving directors, supervisors, and senior management by including their immediate family members, enterprises directly or indirectly controlled by such persons, and other related parties with ties to these roles within the scope of regulated related-party transactions. In current practice, these entities are typically primary focus areas during IPO due diligence and regulatory compliance processes. The amendments incorporate existing practical experience, having a limited impact on companies preparing for an IPO.

Notably, the New Company Law introduces a requirement that when these related parties enter into contracts or transactions with the company, they must report to the Board of Directors or Shareholders' Meeting and obtain approval through resolutions in accordance with the company’s articles of association, regardless of the transaction’s size or relative proportion. This is more stringent than the current practice, where companies deciding on the approval level based on the transaction’s amount or proportion. Consequently, after the New Company Law takes effect, companies preparing for an IPO should adjust their articles of association and related-party transaction management systems accordingly, establish reasonable approval and supervision mechanisms, and ensure that directors, supervisors, and senior management strictly comply with these regulatory requirements to minimise governance defects post-establishment.

PART 6: Other Relevant Amendments and Impacts

1. Amendment to Article 95 of the New Company Law

Article 95 of the New Company Law adjusts the matters that must be included in the articles of association of joint-stock companies in line with the recent amendments. As previously mentioned, the New Company Law delegates many matters to be stipulated in the company’s articles of association. Companies preparing for an IPO must ensure their articles of association are duly revised to be comprehensive and compliant. Similarly, related governance systems and legal documents involved in equity restructuring should be updated in accordance with the Company Law amendments.

2. Addition to Article 40 of the New Company Law

Article 40 introduces new statutory disclosure requirements for companies on the National Enterprise Credit Information Publicity System, including the number of shares subscribed by founders and information on share changes. Companies preparing for an IPO must ensure timely disclosure of relevant information upon completing equity restructuring.

Conclusion

The New Company Law enhances the company establishment system, simplifies certain equity restructuring requirements, and grants companies preparing for an IPO greater autonomy in establishing joint-stock companies and managing corporate governance. However, it also imposes higher standards in areas such as capital contributions, protection of stakeholders’ rights (including employees, shareholders, and creditors), and the responsibilities of controlling shareholders, actual controllers, directors, supervisors, and senior management. Companies preparing for an IPO should carefully consider the amendments to the New Company Law, design equitable restructuring plans accordingly, and implement appropriate system designs.

Related Links:

1. "Comparison Table and Key Points of the 2023 Company Law Amendment" compiled by Professor Liu Bin’s team from the Institute of Commercial Law Research, China University of Political Science and Law.

2. https://mp.weixin.qq.com/s/VeKX8tSZRGUAD2N6lNdnWQ