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2024-12-09 Views: 95
On December 4, 2024, a symposium titled “A Sweeping Corporate Law Reform in China: Legal and Business Implications” was successfully held in Room 201 at Peking University School of Transnational Law (“STL”). This symposium was initiated and chaired by Professor Nitzan Shilon, director of the STL Center on Law and Economics, and was conducted entirely in English. The speakers included Song Chao, Founder and President of Polaris Youth; Dr. Wang Dan, former Chief Economist of Hang Seng Bank (China); Professor Wang Jun, Deputy Director of Institute of Company Law and Investment Protection at China University of Political Science and Law; and Ms. Liu Xiaoping, Partner at King & Wood Mallesons. The symposium aimed to provide a cross-disciplinary and cross-sector platform for discussion, exploring the implications of new reforms in corporate capital systems, and the allocation of power between the board of directors and shareholders within corporate governance structures from both legal and economic perspectives.
At 6 PM, the symposium commenced on schedule. Professor Nitzan Shilon first warmly welcomed all guests and participants, briefly introducing the background and objectives of the symposium. He pointed out that since last year’s implementation of the most comprehensive reform of company law in decades, changes in corporate capital requirements, the introduction of employee representatives on boards, and adjustments in corporate governance structures, especially the reallocation of power between the board and shareholders, have become focal points of public attention. These changes not only profoundly affect the governance structure of Chinese enterprises but also have a profound impact on global investors.
Following this, Liu Xiaoping, an STL inaugural class graduate and a corporate partner at King & Wood Mellesons, discussed the impact of reforms in China’s corporate capital system, emphasizing the importance of reasonable capital registration, the necessity of information disclosure, and how to balance long-term business planning with compliance with regulations. She began by sharing an actual case that had sparked heated online discussions, involving a company with registered capital exceeding RMB 10 billion which quickly applied for deregistration after the capital registration reform. There were suspicions that during the registration process, shareholders mistakenly entered a phone number where the registered capital should have been filled in. This example demonstrated that before the reform, due to low entry barriers, some companies did not take capital registration seriously, even entering numbers arbitrarily. Lawyer Liu indicated that prudent companies would determine their registered capital based on reasonable business plans, and rational market participants would not trust companies with inflated registered capital. When discussing the purpose of regulation, she believed that regulation was not just about requiring companies to commit to paying capital upon establishment but more importantly ensuring the stability and reliability of the company. She further explained the effectiveness of the new reforms in protecting creditors. In response to the question of whether initial capital payment requirements truly matter without subsequent capital replenishment obligations (for instance, if a company loses all its funds shortly after establishment and has no obligation to replenish them, such regulations may be practically ineffective), she thought that shareholders bear limited liability, and the reform of setting a deadline for capital contribution was not intended to solve all problems during operations.
Additionally, Lawyer Liu explained the different impacts of capital system reforms on new and existing enterprises. For newly established enterprises, they clearly knew the legal requirement to complete actual capital contributions within five years and could adjust their initial registered capital accordingly at the time of registration. However, for existing enterprises, especially those requiring substantial capital investment like manufacturing, the change of completing capital contributions within eight years posed challenges. She gave an example of a manufacturing client who originally planned to gradually invest remaining funds over a longer period but was forced to readjust plans due to the new Company Law.
Professor Wang Jun discussed the capital system and corporate governance structure reform of the New Company Law. He mentioned that the revision of the Company Law focuses on modifying the capital contribution rules, adding provisions such as a five-year contribution period and accelerated schedule of contribution of limited liability companies, which reflects the legislature’s intention to correct various problems arising from the relaxed contribution rules of the past decade.
However, Wang Jun believes that it is difficult for the legislature to achieve its goal of relying on the contribution rules to enhance the company’s debt paying ability, and the tightening of the contribution rules cannot solve the problems caused by weak distribution rules. Regarding corporate governance, he mentioned that this amendment has changed China’s shareholder centric corporate governance system in the direction of empowering boards of directors, which will help them to better adapt to market changes and adjust their business strategies. The reforms in the supervisory board and audit committee provide different options for companies to choose a governance structure that suits them. These are all optimization adjustments made by the legislature based on the experience of Chinese companies in the past.
Song Chao, representing young entrepreneurs, shared his feelings and insights on the new reforms in company law based on his personal experience founding Polaris Youth. He emphasized the critical role of a relaxed entrepreneurial environment in stimulating innovation vitality while pointing out that reasonable registered capital and support from mature investors are crucial for business growth in actual commercial operations. Song reviewed his career, mentioning that he began preparing for entrepreneurship in his final year at STL and successfully transformed a non-governmental organization into a commercial entity after graduation. Since 2016, he has been dedicated to supporting the development of young professionals, helping them participate in various educational programs and exchange activities to explore and realize their potential. As an entrepreneur, Song recounted how he started the company under conditions of insufficient funds. He pointed out that eight years ago when founding the company, policies for start-ups were less stringent, not requiring immediate payment of registered capital or provision of specific office locations, providing convenience for entrepreneurs. Song stressed the importance of low entry barriers in encouraging entrepreneurship and mentioned that he registered the company nearly a year before formal operations began.
Regarding the role of market forces and investors, Song stated that mature investors often ensure entrepreneurs bear certain risks through contractual terms rather than relying solely on legal requirements. Although the law stipulates that entrepreneurs must commit to paying capital within five years, in practice, investors often provide far more financial support than registered capital and expect these funds to be used reasonably. Moreover, to meet large clients’ requirements, businesses sometimes need to increase registered capital to demonstrate financial strength and responsibility. Concerning the practical impact of registered capital, Song mentioned its role in the real business world. He exemplified this by stating that to cooperate with certain major clients, his company raised its registered capital from RMB 1 million to RMB 10 million. This indicates that in actual business transactions, appropriate registered capital can enhance partners’ trust and be considered part of the company’s strength.
Dr. Wang Dan, former chief economist of Hang Seng Bank China, delved deeply into the transformation of China’s macroeconomic policy, shifting from pursuing rapid growth to focusing on risk control, which has had a profound impact on various industries, especially the real estate market. She noted that since 2021, the Chinese government has adopted a more cautious policy direction, emphasizing control and risk prevention instead of the growth-promoting strategy of the past 40 years. Particularly in supply-side reforms, the government increased environmental regulation, labor protection, and reduced production incentives for enterprises. After 2022, China’s economy entered a controlled growth phase, ending the era of high growth. In the real estate market, Dr. Wang Dan believed the government feared that a housing bubble burst might trigger a financial crisis, thus implementing the “three red lines” policy suddenly in 2022, demanding developers and financial institutions reduce their exposure in the real estate market, resulting in a loss of approximately RMB 4 trillion in investment in the real estate industry over two years.
From an industrial perspective, the current focus of China’s economic transition is no longer on growth but on changing the engine of economic growth. Social and financial resources are being redistributed to emerging industries such as electric vehicles, batteries, solar energy, and biotechnology, while traditional industries are gradually losing resources. This shift is long-term and will continue for many years. Finally, Dr. Wang discussed the balance between market regulation and market forces. She believed that although the government strengthened capital regulation, it also attempted to promote the development of market forces through rule-setting, not simply squeezing them out, aiming to create a fair competitive environment. Through these measures, the new reforms in China’s company law reflect a prudent attitude towards capital regulation, considering international experiences and fully taking into account China’s national conditions and development stage, aiming to provide a solid legal foundation for the healthy development of companies and market stability and prosperity.
In the subsequent interactive session, participants actively asked questions, engaging in lively discussions on relevant topics with the guests. The guests patiently answered, not only sharing their professional insights but also providing many constructive suggestions and advice on how to address the challenges brought by the reforms in practice.
The symposium concluded successfully in a pleasant tea break and exchanges, with participants unanimously agreeing that the symposium deepened their understanding of core issues in the new company law reforms, including the strengthening of corporate capital supervision, the introduction of employee representatives, and changes in the allocation of power between the board of directors and shareholders within corporate governance.
It also clearly revealed the profound impact of these changes on legal and business practices. Meanwhile, this exchange provided numerous constructive insights and ideas for optimizing corporate governance structures and effectively safeguarding investors’ rights. In the future, the Center on Law and Economics will offer more such cross-sector platforms for exchange, collectively drawing a beautiful blueprint for the prosperous development of China’s legal system and business practices.
Author: Chen Ruyue
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