Chinese Law Updates: Further Refinements to the Protection of Minority Shareholders in the Third Review Draft of China's Company Law Amendment

Summary: The third review draft of the China's Company Law Amendment was submitted for consideration at the fifth session of the Standing Committee of the Fourteenth National People's Congress on August 28, 2023. The third review draft focuses on further implementing the requirements for equal protection of property rights and strengthening regulations on controlling shareholders and actual controllers. To further implement the requirements for equal protection of property rights, the third review draft refines the provisions related to the protection of minority shareholder rights. It stipulates that if controlling shareholders abuse their shareholder rights, causing serious harm to the company or other shareholders, the other shareholders have the right to request the company to purchase their shares at a reasonable price. The third review draft also refines the provisions for shareholders of joint-stock companies to inspect and copy relevant company materials, and adds provisions that companies cannot increase the shareholding ratio of shareholders making temporary proposals.

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The current Chinese Company Law was enacted in 1993, with individual provisions amended in 1999, 2004, 2013, and 2018, and underwent a comprehensive revision in 2005. To implement the major policy decisions of the Central Committee of the Chinese Communist Party on deepening the reform of state-owned enterprises, optimizing the business environment, strengthening property rights protection, and promoting the healthy development of the capital market, amendments to the Company Law were included in the legislative plan of the Standing Committee of the Thirteenth National People's Congress. In December 2021, the draft amendment to the Company Law was submitted for its first review at the thirty-second session of the Standing Committee of the Thirteenth National People's Congress. In December 2022, the draft amendment to the Company Law was submitted for its second review at the thirty-eighth session of the Standing Committee of the Thirteenth National People's Congress.

To further strengthen the regulation of controlling shareholders and actual controllers, the third review draft adds provisions: If controlling shareholders or actual controllers do not serve as company directors but actually carry out company affairs, they are subject to the provisions that directors owe the company fiduciary and due diligence duties.

To further refine the subscribed registration system and ensure capital adequacy and transaction safety, the third review draft adds provisions for the subscription period of limited liability company shareholders, specifying that the total subscription amount from all shareholders should be paid in full within five years from the date of the company's establishment.

The third review draft also adds provisions: Directly responsible supervisors and other directly liable persons who fraudulently report registered capital, submit false materials, or use other deceptive means to conceal important facts for company registration are subject to a fine ranging from 10,000 to 50,000 yuan; for violations of accounting laws, asset evaluation laws, etc., penalties are imposed according to the provisions of the accounting law, asset evaluation law, certified public accountant law, and other relevant laws and administrative regulations.

Many of our lawyers at Concord & Sage Law Firm are licensed to practice law in both China and the United States. If you have questions on Chinese legal topics, please feel free to email us at contact@concordsage.com. You may also contact the main author of this article, Attorney Qin Li (licensed in China and California), at liqin@concordsage.com.