By Alan Zhou｜Sean J. Pratt｜Elina Lin
In a new age of Chinese reform, reformation of the company capital registration system is now flourishing at all levels of government in the People’s Republic of China. On October 25, 2013, plans and preparations for capital registration reforms were discussed at length in a State Council executive meeting chaired by Prime Minister Li Keqiang. These plans and preparations were building on a new set of reforms brought to light on March 15, 2013, when the 12th National People's Congress meeting reviewed and adopted the "Program of Institutional Reform and Functional Transformation of the State Council" (hereinafter, the “Program”). The reform of the industrial and commercial registration system was identified as a key component of the functional transformation of the State Council in article 6 of the Program, which states, “the registration system for the company’s registered capital shall be changed from the registration of paid-up registered capital to the registration of subscribed registered capital, and shall relax the other conditions for industrial and commercial registration” (emphasis added).
Three key principles underpin the main thrust of this reform: “convenient and efficient,” “standardized and unified,” and “easy access and strict control.” With these principles in mind, the plans and preparations has set in motion five key aspects of company capital registration reform: (1) relaxing the conditions of capital registration; (2) changing from an annual inspection system to an annual reporting system; (3) relaxing the conditions of the registration market players’ residences (places of business); (4) vigorously promoting the construction of business credibility system; and (5) advancing the change from registration system for paid-up registered capital to the registration system for subscribed registered capital.
In recent years, SAIC has shown its support for this form of capital registration reform by carrying out pilot reform programs in some areas, such as Shenzhen, Zhuhai, Dongguan, Shunde, Shanghai Pilot Free Trade Zone and so on. Either relying on the SAR legislative power, or through the normative documents of local governmental bodies, these areas strive now to promote this reform under the current Chinese legal framework.
The Shanghai Pilot Free Trade Zone is at the cutting edge of this multi-layered, governmental reform movement. On September 26, 2013, SAIC sent a notice to the Shanghai Administration for Industry and Commerce on printing and distributing the "Certain Opinions of the State Administration for Industry and Commerce on Supporting the Development of the China (Shanghai) Pilot Free Trade Zone" (hereinafter, the “Opinions”). The Opinions expressly state that both the registration system for the subscription of registered capital and the annual report disclosure system shall be adopted, on a pilot basis, in Shanghai Pilot Free Trade Zone. Shortly thereafter, the Shanghai Municipal People's Government and the Shanghai Administration for Industry and Commerce respectively promulgated the “Measures on the Administration of the China (Shanghai) Pilot Free Trade Zone” and the “Regulations of Management on the Registration of Enterprises in China (Shanghai) Pilot Free Trade Zone” (collectively, the “Measures and Regulations”), which both came into effect on October 1, 2013. The Measures and Regulations outline significant substantive changes to the company capital registration procedures for enterprises located in the Pilot Free Trade Zone.
To begin with, a number of statutory regulations which control the manner and amount of capitalization of a company have been repealed under in the Pilot Free Trade Zone. Unless otherwise prescribed by laws or regulations, the Measures and Regulations repeal certain minimum registered capital requirements (e.g., limited liability companies, one-person limited liability companies and joint stock companies are no longer bound by minimum requirements of RMB 30,000, RMB 100,000, and RMB 5 million respectively), they repeal certain restrictions on the initial amount and percentage of capital contribution at establishment as well as the percentage of the amount of cash capital contribution to the registered capital of a company by all shareholders (promoters), and the period during which the shareholders (promoters) of a company must fully pay up their capital contribution has also been abolished. As opposed to the traditional statutory capital contribution requirements, shareholders (promoters) of a company are now permitted to independently agree with each other on their respective amount, method and timeframe of capital contribution subscriptions, and to record the same in the company's articles of association without the additional industrial and commercial registration procedures otherwise required under the traditional PRC framework.
Steps have also been taken under the Measures and Regulations to reform the somewhat oppressive capital oversight regime in place under the traditional system. Shareholders (promoters) of a company located in the Pilot Free Trade Zone are independently responsible for the truthfulness and legality of the information on payment of capital contribution, but bear less personal liability for the debts of the company (e.g., the shareholders of a limited liability company shall be liable to the company to the extent of their respective amount of capital contribution subscribed, while the shareholders of a joint stock company shall be liable to the company to the extent of their respective number of shares subscribed). Likewise, the annual, statutory inspection system for enterprise capital has been donme away with and replaced with an annual reporting system which merely requires enterprises to submit an annual capital report via the market player credit information disclosure system (between March 1 and June 30 of each year), and to announce the annual reports to the public. The Measures and Regulations have conveniently exempted new enterprises established in the same year from this requirement, and place the responsibility for truthfulness in reporting on the enterprises themselves.
There is no question that the Program established at the state level has lofty aspirations for making the future business environment “convenient and efficient,” “standardized and unified,” by providing “easy access and strict control.” These reforms to the company capital registration system appear to support the notion that a new era of Chinese reform is shaping fertile ground for growing businesses.
Mr. Alan Zhou is a Shanghai-based partner with Global Law Office who specializes in corporate and M&A. (E-mail: email@example.com)
Mr. Sean J. PRATT is a Shanghai-based foreign counsel with Global Law Office who specializes in corporate, anti-trust and compliance (FCPA). (E-mail: firstname.lastname@example.org)