The Chinese limited liability: an overview

Abstract

The Chinese commercial law is nowadays increasingly important worldwide, especially for those who intend to start a business in China. Chinese culture, as fascinating as it is enigmatic, is the basis of every commercial and non-commercial relationship. This short article will show the main characteristics of the Chinese Limited Liability Company (LLC), comparable to our S.R.L., providing knowledge bases for those who are not familiar with the discipline of this type of company. The reference basis is the Chinese Corporate Law of 2005, or CCL, which introduces important changes compared to the previous legislation [1].

Limited liability company (LLC)

The LLC is the first of the two corporate types described by the new Company Law. It is the company in which the shareholders are only liable for the capital contributions subscribed, including any guarantees given for its constitution.

Article 3 defines the LLC “As for a limited liability company, the shareholders shall be responsible for the company to the extent of the capital contributions they have paid“. From a structural point of view, the LLC can be considered as a middle ground between the JSLC [2] and the unlimited liability company (or ULC, unlimited liability company). It enjoys the limited liability system of the shareholders just like the Joint stock limited company, and at the same time it has a particularly simple internal structure, typical of ULC. Basically, the LLC it is a synthesis of the best advantages of both. Except Article 3, within the Company Law there is no other reference to shareholdings or their transferability. However, it is clear that the share capital is divided into a number of shares equal to the number of holdings.

Incorporation

The procedure to establish an LLC is quite simple; in fact, it requires a few basic steps: subscription, capital injection and registration. To proceed with the incorporation of the company, the following requirements must be observed [3]:

(1) the name and domicile of the company;

(2) the scope of business of the company;

(3) the registered capital of the company;

(4) the names or titles of the shareholders;

(5) the forms of capital contributions, the amounts and dates of capital contributions made by shareholders;

(6) the bodies of the company, and the measures for their establishment, their functions and

powers, as well as the rules of procedure;

(7) the legal representative of the company; and

(8) other items which the shareholders assembly deems necessary to be specified.

The number of shareholders must correspond to that required by law. Article 24 states: “A company with limited liability shall be jointly invested in and incorporated by not more than 50 shareholders”, ie an LLC cannot by law be incorporated by more than 50 shareholders who provide funding.

The share capital injected by shareholders must correspond to the minimum provided capital. The reference standard is Article 26 CCL: “The registered capital of a company with limited liability shall be the amount of capital contributions subscribed for by all of its shareholders, as is registered with the company registration authority. The amount of the initial capital contributions made by all of the shareholders of the company shall be not less than 20 percent of the company’s registered capital, or not less than the statutory minimum amount of the registered capital either, and the remainder shall be paid for in full by the shareholders within two years from the date the company is established; and in the case of an investment company, it may pay for the remainder in full within five years. The minimum amount of the registered capital of a company with limited liability shall be RMB 30,000 yuan. Where a greater amount is provided for by laws or administrative regulations, such provision shall prevail”.

The share capital of an LLC must correspond to the amount of the contributions of the shareholders, and entered in the registrar of the company. The initial provision of capital can’t be less than 20% of the share capital and the difference must be paid within two years from the day the company is made up; in the case of a financial company, it must be paid within five years. The minimum amount of the share capital must be 30,000 RMB, unless the law or the articles of association have provided otherwise. Regarding the forms of contributions, it is possible to confer any asset that could be evaluated. In case they are made in cash, they can’t be less than 30% of the share capital and must be paid into a specific bank account, according to the provisions of the articles of association.

Otherwise, if other kinds of assets are conferred, they also need to be evaluated to avoid them from being overestimated or underestimated; the evaluation is entrusted to a supervisory board, established by the law, that provides a certification following the estimate of the capital contributions made by the shareholders. A representative, jointly appointed by the shareholders, or another agent authorized by them, will then proceed with the request for incorporation and registration of the company in the Company Register. At this point, the company acquires legal personality. The business license is revoked in the event that the company does not start its business within six months of its establishment, or interrupts, without cause, the business for a period of more than six months. If the value of the contributions is lower than that declared, the shareholders will have to integrate the difference. If, after the establishment of the company, it emerges that the assets transferred have a lower value than that declared, the difference must be covered by the shareholders, and the founding members of the company are jointly responsible.

The company’s articles of association needs the mutual agreement between the members. Article 25 of the CCL indicates the minimum content of the articles of association: the name and domicile of the registered office of the company, the corporate purpose, the names of the shareholders, the forms, the amount and terms of capital  contribution with which the shareholders shall make the contributions, the corporate governance of the company, the functions of board members and the rules to which the company is subject, the legal representative of the company, any other matter that the shareholders consider useful to indicate in the articles of association.

The name of the company and its internal structure must comply with the provisions of the law.

Governance

Article 37 of the CCL includes three board members: the board of directors, the board of supervisors and the shareholders’ meeting.

The board of directors

Based on Article 45, a limited liability company can set up a board of directors, consisting of a minimum of 3 to a maximum of 13 members, except when otherwise provided for in Article 51. In fact, it is also possible for small companies, or companies with a limited number of shareholders, to establish an executive director with the same powers as the board of directors. Directors remain in office for a time established in the articles of association, which however can’t exceed three years; after this deadline, however, directors can be re-elected. If, beyond the three-year term, the new directors have not yet been elected or their number is lower than that established by law or in the articles of association, the current directors shall remain in office until the new ones are installed.

Article 47, powers of the board of directors:

(1) to convene the meeting of the shareholders assembly, and to report on its work to the

board;

(2) to implement the resolutions adopted by the shareholders assembly;

(3) to decide on the operational plans and investment plans of the company;

(4) to draw up the annual financial budget plan and final accounts plan of the company;

(5) to draw up plans for profit distribution and plans for making up losses of the company;

(6) to draw up plans for the increase or reduction of the registered capital and the issue of

corporate bonds of the company;

(7) to draw up plans for the merger, division, dissolution and transformation of the company;

(8) to decide on the establishment of the internal administrative bodies of the company;

(9) to decide on the appointment or dismissal of the manager of the company and the matters

concerning his remuneration, and upon recommendation of the manager, decide on the

appointment or dismissal of the deputy manager(s) and persons in charge of the financial

affairs of the company, and on the matters concerning their remuneration;

(10) to formulate the basic management system of the company; and

(11) to exercise other functions and powers stipulated by the company’s articles of association.

The new Company Law has established that the legal representation of the company does not necessarily have to be entrusted to the chairman of the board of directors, as provided for in the previous law, but that it can also be conferred on a CEO or manager of the company.

The board of supervisors

The discipline concerning the board of supervisors tales a large space within the CCL, from Article 52 to Article 56. According to Article 52, the board of supervisors shall be composed of at least three members. If a limited liability company has a small number of shareholders or is relatively small in size, the board of supervisors can be replaced by one or two supervisors. The board of supervisors is composed of the representatives of the shareholders and employees with respect to the proportion established by the company’s articles of association. The representatives of employees and workers must be democratically elected by the employees and workers of the company, through the meeting of the representative, or by the general meeting of the same, if no other forms of election are established. The board of supervisors shall have a chairman elected by at least half of the supervisors and has the task of convene and preside over all the meetings of the board of supervisors. If the chairman of the board of supervisors is unable to perform these functions or doesn’t perform them properly, there is the possibility to jointly elect a supervisor [4].

The functions of the board of supervisors before the 2005 reform involved:

• monitoring the financial conditions of the company;

• control over the members of the board of directors and their work;

• the proposal to convene the extraordinary shareholders’ meeting;

• all other powers signed in the company’s articles of association.

Following the reform, new functions were introduced (Article 54):

• power to propose for removal of the directors or senior managers who violate laws, administrative regulations or the company’s articles of association, or the resolutions adopted by the shareholder’s assembly;

The shareholders assembly

The last issue to be addressed as regards the salient features of the governance of a Chinese LLC is that of the shareholders’ meeting. The powers and functions assigned to the shareholders’ meeting, as shown in Article 38, concern:

1) to decide on the operational policy and investment plan of the company;

(2) to elect or replace directors and supervisors who are not representatives of the staff and

workers, and to decide on matters concerning the remuneration of the directors and

supervisors;

(3) to examine and approve reports of the board of directors;

(4) to examine and approve reports of the board of supervisors or the supervisors;

(5) to examine and approve the annual financial budget plan and final accounts plan of the

company;

(6) to examine and approve the company’s plans for profit distribution and for making up

losses;

(7) to adopt resolutions on the increase or reduction of the registered capital of the company;

(8) to adopt resolutions on the issue of corporate bonds;

(9) to adopt resolutions on the merger, division, dissolution, liquidation or transformation of

the company;

(10) to amend the articles of association of the company; and

(11) other functions and powers provided for in the company’s articles of association.

When the members of the assembly express unanimous agreement on a specific issue among those indicated, they can immediately take a decision without having to convene a shareholders’ meeting. The decision must be ratified to be effective. The type of decision, quorum and assembly procedures, in addition to the provisions of the law, are established in the articles of association [6]. Unless otherwise stated, decisions are taken jointly. Any decision regarding important matters (for example liquidation, M&A, dissolution) must be taken by unanimity. For other issues of some importance, such as the increase or reduction of capital, a two-thirds majority is required for the decision to be approved. However, the company’s articles of association may prescribe that a higher majority is required for certain matters in accordance with the provisions of the law.

Conclusion

With the Foreign Investment Law of January 2020, new steps were taken in China’s trade opening to the World. The discipline of Foreign-Invested-Enterprises (FIE’s) has finally been standardized [7], as well as the Companies Law of the People’s Republic of China has been reviewed. In this short article I wanted to focus the attention only on the Chinese LLC, but I will be back on the topic later. It is interesting to note how, already following the 2005 reform in the field of Company Law, Chinese companies have tried to conform as much as possible to an international standard model, introducing many characteristics that have made them very similar to the models we already know.

(a cura di Lorenzo Nobile)

References

[1] Minkang G: Understanding Chinese Company Law, Hong Kong University Press, Hong Kong, 2006

[2] Grace Xing Hu, Jun Pan, Jiang Wang: Chinese capital market: an empirical overview, National bureau of economic research, 2018

[3] Art. 25, Companies Law of the People’s Republic of China, 2006

[4] Art. 52, Companies Law of the People’s Republic of China, 2006

[5] in accordance with the provisions of Article 152

[6] Art. 44, Companies Law of the People’s Republic of China, 2006

[7] Fuxiu Jiang, Kenneth A Kim, Corporate Governance in China: A Survey, Review of Finance, 2020

Rivista scientifica digitale mensile (e-magazine) pubblicata in Legnano dal 2013 – Direttore: Claudio Melillo – Direttore Responsabile: Serena Giglio – Coordinatore: Pierpaolo Grignani – Responsabile di Redazione: Marco Schiariti
a cura del Centro Studi di Economia e Diritto – Ce.S.E.D. Via Padova, 5 – 20025 Legnano (MI) – C.F. 92044830153 – ISSN 2282-3964 Testata registrata presso il Tribunale di Milano al n. 92 del 26 marzo 2013
Contattaci: redazione@economiaediritto.it
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