People's Daily Online -- China makes drastic modifications on corporate law

People's Daily Online -- China makes drastic modifications on corporate law
China makes drastic modifications on corporate law

On Oct. 27,2005, the amendment of the Corporate Law of China was adopted in majority by the Standing Committee of the 10th National People's Congress at its 18th session.

The existing Corporate Law of China was enacted on Dec. 29, 1993 and experienced minor revisions in 1999 and 2004. It has played a crucial role in building modern corporate governance and improving the socialist market economic system for the 11 years.

However, the current situation calls for more adaptations of the law to address issues such as the too high incorporation requirements, and loopholes in corporate governance, the protection of legitimate interests and rights of shareholders (especially those of small and medium shareholders), and definition of obligations of chairmen, councilors and top executives of companies.


Business startups encouraged

The introduction of one-person company has aroused broad attention of the whole society in the new amendment. Huang Jianchu, an official for the economic law with the Standing Committee of the National People's Congress, explained that the amendment is designed to encourage investment and improve the efficiency of the economic operation to boost the social wealth accumulation. There are also adjustments on corporate system.

Concerns were raised in the reviewing process that the time for one-person company was not ripe, or it was difficult to monitor the assets of a one-person company.

The revised article of the law provides that a person is allowed to incorporate one limited company with a minimum registered capital of 100,000 yuan which is collected at a one-off payment.

The shareholder of a one-person company is supposed to shoulder the joint liability for the company's debts if he/she fails to prove that the company's assets is independent from his/her private assets.

The revised law also lower the minimum registered capital of the other limited companies to 30,000 yuan and cut the threshold of joint stock companies down to 5 million yuan from 10 million yuan.

The law makes more financing options possible and specifies the way of funding, as well as raises the ratio of intangible assets.


Better corporate governance

The revised law perfects the corporate governance and further improves the internal mechanism. The amendment defines a company as a corporate legal entity which has independent corporate assets, enjoys legitimate property rights and is liable for debts.

Shareholders' meeting is the power organ of a company and performs its duties in line with the law which gives it a specific role in the company. The law also states clearly the responsibility of the shareholders' meeting, the board of directors, management, and the supervisory councils, as well as how they function.

Either a board chairman, an executive board director or a manager can be appointed as legal representative of a company by shareholders or shareholders' meeting. Dividends distribution among shareholders can be included into corporate charters for limited companies. If the corporate charter is inconsistent with the law on these issues, the charter prevail.

Independent board directors are required for listed companies. Board directors, supervisory councilors and senior executives have a bigger role to play than before, which also means they are held responsible for any harm they cause to the company.

Protecting small and mid-sized shareholders and employees

Practically, accounting books are in hands of very few shareholders who are directly involved in business operation and it is difficult for other shareholders to get an accurate understanding of the company. To protect the legitimate interests and rights of small and mid-sized shareholders who do not run the business, the revised law entitles shareholders to check books. Shareholders can resort to the court in case the company refuses the checking application.

Shareholders who cause any losses to the company or other shareholders as a result of rights abuses have to pay for what they have done. In the mean time, shareholders can seek buying stakes if they do not receive dividends for five consecutive years.

Labor unions should be in place and function in compliance with the law. A labor union, on behalf of employees, signs collective contracts with a company on salaries, welfare, insurance and working safety issues. There are also regulations on employment contracts between the employer and the employed.

By People's Daily Online