China 2024 Company Law: Key Changes Impacting Foreign-Invested Enterprises

Overview: Why the 2024 Company Law Matters for Foreign Companies

On July 1, 2024, the revised Company Law of the People’s Republic of China took effect, representing the most significant overhaul of China’s corporate legal framework in nearly two decades. The revision — the law’s sixth since its original enactment in 1993 — introduces substantial changes affecting capital requirements, corporate governance, director liability, shareholder rights, and company dissolution procedures.

For foreign-invested enterprises operating in China, the 2024 Company Law is directly relevant. Under the Foreign Investment Law, foreign-invested enterprises are governed by the Company Law unless special foreign investment regulations provide otherwise. This means that every WFOE, Sino-foreign joint venture, and foreign-invested partnership in Guangzhou, Shenzhen, Foshan, Dongguan, and Jiangmen must understand and comply with the new rules.

The following analysis focuses on the provisions most likely to affect foreign companies already operating in China or planning to establish a presence here.

Registered Capital: The Five-Year Contribution Deadline

Perhaps the most consequential change for foreign investors is the new requirement that shareholders of a limited liability company must fully pay their subscribed registered capital within five years of the company’s establishment. Under the previous regime, shareholders could set their own capital contribution timelines — in some cases extending decades into the future with no practical deadline.

The five-year rule applies to newly established companies immediately. For existing companies, a transition period applies, and companies with registered capital that is “manifestly disproportionate” to their business operations may be required to adjust. Companies with excessively long contribution timelines or registered capital amounts that bear no relationship to operational reality should start planning for adjustment now.

For foreign investors considering a WFOE in China, this means the registered capital amount declared at incorporation is no longer a purely nominal figure. It represents a genuine commitment to inject capital within a defined period. Setting an unrealistically high registered capital to project financial strength — a practice some foreign companies have followed — now carries real costs and enforceable deadlines.

Joint-stock companies are subject to an even stricter regime, with full subscription and payment of shares required at the time of establishment or upon any subsequent capital increase.

Corporate Governance Changes

The 2024 Company Law introduces significant flexibility to corporate governance structures, including several changes directly relevant to foreign-invested enterprises:

Board of Directors composition: Limited liability companies may now have a board with as few as three directors. Small companies may operate without a board entirely, vesting all executive powers in a single executive director. This is particularly useful for small WFOEs with a single foreign shareholder and minimal local staff.

Supervisory board optionality: Companies can now choose between a traditional supervisory board, a single supervisor, or — for small companies — no supervisory body at all, provided the shareholders unanimously agree. Alternatively, a company may establish an audit committee within the board of directors to assume supervisory functions. For WFOEs where the board and shareholders are the same individuals, eliminating redundant governance layers reduces administrative burden.

Legal representative flexibility: Under the 2024 law, the legal representative may be either a director or a general manager (previously, only the chairman or executive director could serve). This gives foreign companies more flexibility in structuring their China management team.

Employee representation: Companies with more than 300 employees must include employee representatives on the board of directors if they maintain a board, unless they have a supervisory board with employee representatives. This is a new threshold that foreign companies with growing workforces in China need to monitor.

Director and Supervisor Liability

The 2024 Company Law significantly expands the personal liability of directors, supervisors, and senior management. Key areas of heightened risk include:

Capital maintenance: Directors are now explicitly liable for losses caused by their failure to pursue capital calls from shareholders who have not paid their subscribed capital on time. If a shareholder defaults and the directors do not take timely action, the directors may be held personally liable for resulting company losses.

Improper capital reduction: Directors involved in an unlawful capital reduction — for example, distributing assets to shareholders without following proper creditor notification procedures — face personal liability for compensating the company’s losses.

Distributions in violation of law: Directors and supervisors who approve profit distributions that violate the Company Law (for instance, distributing profits before covering accumulated losses and making statutory reserve allocations) are personally liable for returning the improperly distributed amounts.

Duty of loyalty and diligence: The law codifies directors’ and officers’ fiduciary duties in greater detail, including a specific prohibition on misappropriating company business opportunities and competing with the company without shareholder consent.

For foreign companies whose China directors are often senior executives of the parent company based overseas, these liability provisions warrant serious attention. Directors’ and officers’ liability insurance, previously rare for China subsidiaries, is becoming a prudent risk management measure.

Shareholder Rights and Protections

The revised law strengthens shareholder rights in several ways that benefit minority shareholders, including foreign investors in joint venture structures:

Expanded information rights: Shareholders now have the right to inspect accounting vouchers (not just financial statements and accounting books), and may engage accounting firms, law firms, or other professionals to assist in the inspection. This significantly enhances the ability of foreign minority shareholders to monitor the financial affairs of a joint venture.

Oppressed shareholder remedies: Shareholders who suffer oppression by controlling shareholders or directors now have clearer statutory grounds for seeking judicial remedies, including a buyout of their shares at fair value.

Derivative actions: The framework for shareholder derivative lawsuits — where a shareholder sues directors or officers on behalf of the company — has been clarified and extended to cover actions against controlling shareholders and actual controllers.

Capital Reduction and Exit Mechanisms

The 2024 Company Law introduces a simplified deregistration procedure for companies that have not commenced business operations and have no outstanding debts. This is a practical improvement for foreign investors who registered a WFOE but never activated it, allowing a cleaner exit without full liquidation proceedings.

For standard capital reductions, the process remains structured: board resolution, shareholder resolution, notification to known creditors within 10 days, and public announcement within 30 days. However, the law now specifies that the reduction must be proportional among shareholders unless all shareholders agree otherwise or the articles of association provide for non-proportional reduction. This protects minority shareholders from dilution through selective capital reduction.

Financial and Accounting Provisions

The law maintains the requirement to allocate 10 percent of after-tax profits to the statutory surplus reserve until the reserve reaches 50 percent of registered capital. However, it introduces more detailed provisions on the use of capital reserves to cover losses, specifying the order in which different categories of reserves may be applied. Companies should review their accounting policies to ensure compliance with the new sequencing rules.

The law also reinforces the obligation of companies to comply with applicable accounting standards and imposes personal liability on directly responsible directors and senior management for financial reporting violations.

Transition Period and Compliance Deadlines

Existing companies are not required to immediately comply with every provision. The State Council and the State Administration for Market Regulation (SAMR) have issued implementation rules that provide transition periods for certain requirements, most notably the registered capital contribution deadline. Companies registered before July 1, 2024, generally have until June 30, 2027, to amend their articles of association to comply with the five-year contribution rule, with capital fully paid within five years from the amendment date — effectively extending the final deadline in many cases.

Other provisions, such as the expanded director liability and governance optionality, take immediate effect and do not benefit from transition relief. Companies should review their governance documents, employment contracts for directors and officers, and insurance coverage as soon as possible.

Action Steps for Foreign-Invested Enterprises

We recommend that every foreign-invested enterprise in China take the following steps in light of the 2024 Company Law:

• Review registered capital: Assess whether the subscribed registered capital amount and contribution timeline are realistic and compliant. If the registered capital is excessive relative to business needs, consider a capital reduction.
• Update articles of association: Amend the articles to reflect governance structure choices — board composition, supervisory body election, legal representative designation — and to align capital contribution terms with the new five-year rule.
• Audit director liability exposure: Review the roles and responsibilities of directors and officers, ensure employment agreements address liability and indemnification, and evaluate the need for D&O insurance.
• Strengthen financial controls: Ensure profit distribution procedures, capital reserve usage, and financial reporting comply with the revised requirements.
• Seek professional advice: The implementation of the 2024 Company Law involves interaction between national law, SAMR regulations, and local practice in cities like Guangzhou and Shenzhen. Professional guidance from a firm familiar with both the law and local AMR practice is essential.

Dan Young Business Consultancy provides comprehensive corporate legal and compliance support for foreign-invested enterprises across Guangzhou, Shenzhen, Foshan, Dongguan, and Jiangmen. Our team can review your WFOE’s articles of association, advise on capital structure adjustments, and assist with governance compliance under the new Company Law.