China’s Company Law (2006)
A Company can be formed in China either as a Limited Liability Company or a Company limited by Shares. In 2006 China revised the Company Law. There are some significant changes for Companies compared with the previous law. Article 2 defines Companies as:
"For the purpose of this Law, the term company refers to a company with limited liability or a company limited by shares incorporated within the territory of the People’s Republic of China in accordance with this law.”
Major parts of the 2006 law for these companies are:
Company Limited:
1. Establishment Requirements: The new law now permits a one shareholder limited liability company. This in essence means if you wish to avid the liability of a sole proprietorship you can now have a single shareholder company with the benefits of a regular limited liability company. However, you must put up more capital in the amount of 100,000 RMB vs. 30,000 RMB for a limited liability company with more shareholders. This registered capital can now be paid over a period of about 2 years (5 years for investments enterprises) and allows cash and specific non currency contributions.
2. Investments: Companies can now invest in other business entities without restrictions.
3. Representative: The legal representative no longer has to be the Chairman of the Board, but can also be an Executive Director or General Manager.
4. Shares: Shares no longer must be based solely on capital contributions. This could open the possibility for preferred shares. The law also expands the rights of minority shareholders and gives added punishment to shareholders who knowingly abuse their position as company shareholders.
Company Limited by Shares
5. Promoters: The new law requires from 2 to 200 promoters for the company limited by shares. In the past it was 5.
6. Capital: The minimum registered capital is 5 million RMB.
7. Shares: The law allows companies to repurchase up to 5% of their issued shares for employee stock options, as long as the companies follow the legal requirements. In the present law Directors and Senior Managers can transfer up to 25% of the total shares they hold each year with some stipulations.
8. Directors: Listed companies will need to have independent directors.
Understanding what is happening in China from a legal standpoint is important. You can clearly see that legally China is working to open up their economy more for foreign investment and to strive to build a strong and sound legal framework for companies to operate in. Most legal scholars tend to agree that China will continue to open up more avenues and means for business.