Following our previous blog about the key changes under the 2024 revised China Company Law, Hongda will introduce the removal of company supervisors as well as the mandatory deregistration in this latest post.
After coming into effect on July 1, 2024, the revised Company Law has attracted attention in terms of the changes in company management. In our previous blog published in February, Hongda highlighted one of the most critical changes you need to be aware of during the company establishment process: revisions to the capital contribution system. We provided a detailed introduction to the changes in the capital contribution system. Additional, we also outlined how you should update your administrative information related to registered capital under different general circumstances that you may face. For more information, please click this link to learn more.
In this blog, we will explain two more changes regarding company establishment and operation, particularly for startups and small to medium-sized foreign founded enterprises: the removal of company supervisors and the mandatory deregistration of inactive companies. Let's take a look at how these changes might impact you as a foreign investor looking to establish a company in China!
1. The Removal of Company Supervisor(s)
The recent amendments to the new Company Law have significantly adjusted the supervision mechanism that was previously centered around the board of supervisors. If you established a company before these amendments, you would remember that, in addition to appointing a legal representative and shareholders, you were also required to find a company supervisor to successfully set up the company. However, following these amendments, under certain conditions, the supervisor or the supervisory board will no longer be a mandatory component of the company.
China's supervisory system primarily inherits from the civil law countries represented by Germany and Japan. Its purpose is to restrain and supervise the power of the board of directors and the management, thereby protecting the rights and interests of the company and its shareholders, especially minority shareholders. Since the implementation of the Company Law in 1993, China has adopted a dual governance model consisting of a board of directors/executive director for daily decision-making and management, and a supervisory board/supervisor as a supervisory body.
Following this adjustment, supervisors are no longer required to be a mandatory organizational body of the company. The revised Company Law grants companies the discretion to choose, giving them multiple options to implement supervision either primarily through supervisors, an audit committee, or both. Under specific conditions, a company may opt not to establish a supervisor/supervisory board, with the audit committee of the board of directors taking over the functions of the supervisory board. The supervisory functions can now be performed by an audit committee composed of directors.
The abolition of the supervisor position provides major benefits to foreign enterprises in China, particularly small and medium-sized ones. Firstly, it simplifies the company structure and lowers management costs by eliminating the supervisory board or appointing supervisors, resulting in more streamlined and cost-effective operations. Additionally, decision-making efficiency improves as the supervisor's monitoring position is removed, leading to a more straightforward management system. This adjustment will also increase shareholder power by delegating supervisory tasks more directly to the shareholders' meeting, encouraging increased stakeholder participation to ensure that the company's actions are in the best interests of the shareholders. Finally, it promotes organizations' flexibility and autonomy, allowing them to create more adaptive internal monitoring mechanisms based on their specific needs and scale. This flexibility is particularly beneficial to foreign firms because it allows them to better align with international management models in the Chinese market while addressing different governance requirements across global markets.
At the same time, however, the removal of company supervisor(s) might bring potentials risks, to which you should pay enough attention. Although management costs have been reduced, if alternative supervisory mechanisms are not properly designed, the internal oversight of the company may weaken, especially concerning financial and management transparency. This could increase the operational risks for small and medium-sized enterprises.
2. Mandatory Deregistration of ‘Zombie’ Companies
There is currently no common and unified definition of a ‘zombie enterprise’ under Chinese law. However, based on Hongda's practical experience, zombie enterprises are commonly defined as organizations that have become inactive due to bad management or a lack of control and have not completed deregistration procedures.
The new Company Law states that if a company has had its business license revoked, been ordered to close, or been dissolved, and has not applied for deregistration with the company registration authority within three years, the registration authority will proceed with mandatory deregistration after a legal public announcement. Furthermore, if a firm fails to file annual reports for two consecutive years, ceases business operations, or has an expired business license failed to be renewed, the registration authority may intervene and order mandatory deregistration.
Following a company's mandatory deregistration, its legal representative, directors, and senior management will be placed on a "discredit list" and may be barred from engaging in some economic operations. During the liquidation process, if any illegal activities or attempts to evade responsibilities are discovered, those responsible may face legal consequences. Furthermore, the legal representative, directors, supervisors, and senior management of a company that has been mandatorily deregistered are prohibited from registering a new company for a certain period.
As a result, if your firm satisfies the criteria for obligatory deregistration and you have not taken early action, it may have a substantial negative impact on your commercial activities in China. If your firm may be affected by these vulnerabilities, you should take the following actions immediately:
- Timely Deregistration: If your company's business license is revoked, ordered to close, or dissolved, apply for deregistration with the company registration authority right away. Delaying deregistration for more than three years may result in action from the registration authority.
- Legal and Financial Consequences: If a company is deregistered, its owners may face a number of issues with liquidation, taxes, debts, and legal liabilities. As a result, remaining informed of and swiftly managing deregistration issues can assist minimize significant legal and financial risks.
- Regularly Check Company Status: Even if a company is dormant or not in operation, the owners should check the status of the business license and corporate credit information on a regular basis to ensure that they can respond quickly to any changes in the firm's operating status.
Let Hongda be Your Trusted EOR Partner!
After reading this blog, we believe that you have gained a better understanding of the two changes under the 2024 revised Company Law. Reach out to Hongda to book a consultation with us for a free consultation to discuss your specific needs, where we'll provide expert guidance and services.
