PRC Company Law – the latest changes affecting joint stock corporations

PRC Company Law is undergoing a major overhaul after five rounds of "beauty repairs" in 1999, 2004, 2005, 2013 and 2018. What does the latest consultation draft mean for joint stock corporations?

In December 2021, The National People’s Congress (NPC) Standing Committee issued a consultation draft (the “Draft Amendment”) on the Company Law which proposes significant amendments. Changes introduced by the Draft Amendment aim to:

• simplify corporate structure
• reduce the burden of investors
• ease market entry and ultimately stimulate investment.

In our previous article we looked at the major amendment and proposed developments affecting limited liability companies (LLCs). In this article we look at the changes impacting Joint Stock Corporations (JSCs) introduced by the Draft Amendment.

The authorised capital system

• JSCs are allowed to issue a portion of the total number of their shares at the time of founding with the rest of the shares to be issued by the board of directors under the authorisation of the articles of incorporation or shareholders’ meetings according to the actual needs of the company operations.

Our take on the changes: The authorised capital system isn't exactly an innovation, but rather an assimilation of experiences from other jurisdictions like the US and Germany.

Different classes of shares

• JSCs are allowed to issue different classes of shares and set different voting rights accordingly under the Draft Amendment. Specifically, the Draft Amendment lists three types of shares:
  • Preference shares and deferred shares.
  • Shares with special voting rights.
  • Shares with transfer restrictions.

Our take on the changes: These modifications align with the rules for listing companies as stipulated by the “Administrative Measures on Preference Shares Pilot Scheme” and listing rules stipulated by the Science and Technology Innovation Board, ChiNext Market, Beijing Stock Exchange, etc. This revision provides more protections and lower enforcement risks for investors with respect to their financial investments. If NPC adopts the Draft Amendment, the investors can exercise their special shareholder rights such as repurchasing rights, liquidation preference rights, and veto rights.

Non-denominated shares

• Under the Draft Amendment, all shares of a JSC shall be either denominated or non-denominated according to the provisions of the articles of incorporation.
• The JSCs may also convert all of the issued denominated shares to non-denominated shares or vice versa in accordance with its articles of incorporation.

Our take on the changes: This is in line with a trend we've seen more and more of other jurisdictions adopting non-denominated shares. Also affected by the revisions regarding the “authorised capital system” and the subscription capital rules, the requirement that all shares should be denominated seems redundant as the face value of the shares and the registered capital no longer substantially reflect the capital adequacy and solvency of the company.

One-person JSCs

• JSCs can now be founded by one promoter, replacing the previous stipulation that required at least two promoters.
• The shareholder of the one-person JSC should make the capital contribution in one lump sum whereas the shareholders of LLCs can make their capital contributions by installments.
• The promoter of the one-person JSC cannot be a non-legal person entity like a partnership enterprise.

Our take on the changes: We require further interpretations or implementing rules to help understand how this new form of JSC would be regulated. As far as the Draft Amendment is concerned, the one-person JSC is under more restrictive regulations compared to the rules governing LLCs.

Minor modifications in line with interpretations of the Company Law and anti-money laundering regulations, etc.

• Some articles concerning the governance of JSCs are revised in accordance with the listing rules promoted by exchanges such as the Shenzhen Stock Exchange and Shanghai Stock Exchange.
• For the purpose of anti-money laundering regulation, bearer shares are canceled and all shares issued by the JSC should be registered shares.