2.1.4.2 Major improvements in Company Law 2006

The much awaited revised Company Law of the People's Republic of China was adopted on 27 October 2005, and came into effect on 1 January 2006. Some major changes are summarized here:

First of all, the threshold for setting up a company was lowered. The investment of private capital in business is thus encouraged. One can set up a limited liability company with only 30,000 RMB (round 3,000 euros), and the registered capital for a company limited by shares has been reduced from 10,000,000 to 5,000,000 RMB. Moreover, registered capital no Jonger needs to be paid in full at once as before.1 With the new requirement, shareholders are only required to pay 20 per cent of the registered capital and the remaining part can be paid up within two years of incorporation.2 The relaxation of incorporation requirements is also reflected in enlarged categories of forms of contributions from shareholders. The new company law rejects the idea of listing the forms of non-cash contributions, but adds in an all encompass concept. All assets that "may be evaluated in currency and may be transferred according to law" can be treated as non—cash contributions.3 Furthermore, the proportion of non-cash contribution to registered capital was increased as well from 20 per cent to 70 per cent. Finally, the revised company law removes the 50 per cent investment cap on investment in other companies, leaving the limit of outward investment to the discretion of the shareholders, which facilitates mergers and acquisitions.4 This is also welcomed by FlEs.5

Secondly, there are more default rules in the new company law, especially for a close company. Concerning issues such as powers of corporate bodies, distributions to shareholders and the determination of voting rights, we now more often see expressions like "unless otherwise prescribed by the articles of association" or "unless otherwise stipulated by all the shareholders".

Thirdly, corporate governance was improved. A section of provisions for the organizational structure of listed companies was inserted.6 In addition, the new company law contains rules on conflicts of interests.7 And Article 20 allows the corporate veil to be lifted when the shareholders abuse the independent status of a company.

Fourthly, protection of minority shareholders is strengthened. The new company law pays more attention to the balance of interests among different parties involved and deliberately increases the protection for minority shareholders. To begin with, shareholders have better access to information. Prior to the amendment, shareholders in a close company only had access to the annual accounts of the company. Now shareholders may require inspection of a company's accounts, unless it is unduly suspected and such inspection could damage the interests of the company.8 A cumulative voting system can also be applied when a shareholders' general meeting is called to elect directors or supervisors.9 In addition, for the first time, appraisal rights and derivative action have been laid down in Chinese company law.10 This is particularly significant to foreign investors in FlEs in restricted industrial areas because they are only allowed to be minority shareholders.11 Finally, shareholders holding 3 per cent of the voting rights may make proposals to the board of directors,12 and shareholders holding 10 per cent of all shareholders' voting rights are granted the right to dissolve the company if certain conditions are met.13 All these new key provisions are aimed at protecting minority shareholders' legitimate rights and strengthening their position. A detailed picture of minority shareholder protection in China as well as the impact on FlEs can be found in Chapter 5. Generally speaking, although there is still room for improvement, the new company law has taken steps in the right direction in optimizing the investment environment and in keeping up with international trends.