Abstract

Chinese law has been strongly influenced by traditional cultural principles, fundamental priorities and common customs, values and virtues of the Chinese community. Legal and cultura dimensions in China were widely combined: Chinese traditional culture, with its dominant political-philosophical dimension, was considered to be as inherently normative, influencing the law-making process, the functioning of social institutions, the legal practices and the enforcement of the law. State and civil society in China were permeated by cultural values embedded by the Confucius’ philosophy and supported by the political institutions and the relevant principles, which were deeply influential in shaping Chinese law, including Chinese corporate law.

Before the issuance of the Company Law in 1993, China did not experience a comprehensive legislation with respect to companies. The enterprises’ provisions and regulations, in force at that time, only governed certain aspects of the companies, in accordance with the planned economy adopted in China after the founding of the People’s Republic of China in 1949.

The Company Law was considered the foundation of the modem socialist enterprises and the market economic system and it represented a significant progress towards China's compliance with international legal practices. The Chinese reform process, within the framework of the companies’ legal regulations, has been afterwards also implemented by means of the Foreign Investment Law issued in 2019.

The Foreign Investment Law and the related regulations represented a relevant step to increase foreign investments in China and, together with the Company Law, improved the evolution of the Chinese company legislation and the reform of the Chinese legal system. The future modernization of the legal framework of the comprehensive company law in China shall be strictly linked to a wider implementation of the legal procedures, of the legal practices, of the legal professions and of the overall legal system, in connection with a concrete development of the principle of the rule of law.

Key words

China, Tradition, Culture, Confucius, Law, Company Law, Commercial Law, Limited Liability

Company, Joint-Stock Company, Foreign Investments, Reform, Foreign-Invested Enterprises.

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Contents

1. Chinese Law: Introductive Remarks

1.1 Relation Between Culture and Law in China

1.2 Influence of Confucius’ principles in Chinese Law

1.3 Development Process of Chinese Law

2. Evolution of Chinese Company Law

2.1 Chinese Company Law Before 1993

2.2 The 1993 Law of the People’s Republic of China on Company Law

2.3 Amendment to the 1993 Company Law

3. Types of Companies in China

3.1 General Remarks

3.2 Legal Person Status: Distinctive Aspects

3.3 Limited Liability Company

3.3.1 Establishment and Registration

3.3.2 Organizational Structure

3.3.3 Dissolution and Liquidation

3.4 Joint Stock Company

3.4.1 Establishment and Registration

3.4.2 Organizational Structure

3.4.3 Dissolution and liquidation

4. Foreign Investment Enterprises

4.1 Brief Introduction to the Chinese Foreign Investments Rules

4.2 The Foreign Investment Law

4.2.1 Definitions and general Principles

4.2.2 Investment Promotion and Investment Protection

4.2.3 Investment Management and Legal Liability

4.3 Implementing Rules

5. Conclusive Remarks

1. Chinese Law: Introductive Remarks

1.1 Relation Between Culture and Law in China

Chinese legal system involves a significant relation between existing cultural roots inherent in the society and its institutional structures and activities.

Law in China reflects cultural values of the relevant community of people and it is largely affected by the complex of prevailing common practices in the society

Chinese traditional culture, with its dominant political-philosophical dimension, appears to be resistant to the very notion of law, so that, historically, China seems not to have experienced a development of an autonomous concept of “law” and legal tradition as happened elsewhere .

In the Chinese way of perceiving the law, it cannot be separated from traditional culture, which influences the structure and the functioning of the relevant law and its enforcement.

Law provisions should be compatible with fundamental cultural priorities of the Chinese community in order to be more effective.

Law seems to be a complex mixture of ethics, etiquette, religion and philosophy, while the concept of “source of law”, which is fundamental within the legal framework of any legal system, seems not to be very much considered .

People are encouraged to comply with cultural values and, accordingly, with the law and the legal system, since cultural values are integrated in the provisions of the law, in the legal institutions, in the interpretation of legal texts and in the legal practices.

The notion of law seems therefore to have the instrumental role to guarantee order and social stability.

Legal and cultural dimensions are widely combined. Culture is considered to be as inherently normative, influencing the law-making process, the functioning of social institutions, the legal practices and the enforcement of the law.

Prevailing cultural values, on one side, may constrain actions and policies of decision-makers and may limit legal reform, while, on the other side, may affect the participants’ attitude toward the law and may determine the effectiveness of law provisions in the society.

1.2 Influence of Confucius’ principles in Chinese Law

State and civil society in China are permeated by cultural values embedded in the Confucius’ philosophy and Confucius’ principles are deeply influential in shaping Chinese law, including Chinese corporate law .

According to traditional Confucius’ philosophy, morality is separated from law.

In the Confucius’ texts, the concept of the normative order in the society is expressed by the term “li”, which means “rites” , intending rules of proper conduct, secular as well as religious, aimed at assuring natural harmony in the relations among people.

Li may be considered as pre-legal moral normativity which expresses members’ endeavour to act according with the natural harmony of things.

Generally speaking, li refers to «a natural ordering of society integrated with a code of morality based on human nature which operates not by external compulsion but through individual conscience, in view of an idea of social harmony implying the individual’s obligation to act accordingly» .

Li seems, therefore, to be relevant from a normative point of view, since it may be intended as a principle of “self-regulation” of society and individuals, according to the natural state of things in the frame of a fixed cosmic order.

The importance of li is expressed in term of moral standards and rules which are fundamental for the ideal social normative order.

Therefore, li, as the core of Chinese traditional culture, implies the seeking of what is right and good, the existence of individual and social obligations, the respect of hierarchical order of rank and rules, such as social disapproval in case of breach of the rules .

In traditional Chinese culture, instead, the term “fa” is translated as law, written law in particular, in association with punishment.

From a general point of view, fa refers to a set of rules aimed at assuring good order of the social relationships and correct administration of the state.

According to traditional Confucian view, a well-ordered society requires the conformity of its members’ conduct to a proper self-regulating order, with the aim of achieving “harmony” as the highest of social normative order.

Confucian moral education was considered to be a strong incentive for citizens to cultivate civility and virtues .

The modernization process of the Chinese legal tradition is initially marked by the fall of the Qing Empire in 1911, together with the establishment of the First Republic of China in 1912.

The need to modernize the country required to adapt and to reinterpret the Chinese traditional settings to the Western-style legal models.

After the birth of People’s Republic of China in 1948 , under the communist regime, China experienced a tension between national identity and Western legal models. The new regime appeared to aim at a sort of socialist modernization, with cultural principles and mental attitudes inherited from the past of Confucius’ culture.

1.3 Development Process of Chinese Law

Traditional Chinese law and culture has been a significant influence in shaping new China's legal system .

Following the Great Proletarian Cultural Revolution (1966 - 1976), China's leadership sought to re-establish a legal system.

Since that time the Chinese Communist Party leadership tried to implement governance according to the law, while reserved to itself the right not to set the terms of the law, but also to set the terms for the «new "socialist spiritual civilisation" and its ethical content».

There was a “sort of vacuum” in the legal system after the Cultural Revolution.

The communiqué of the Third Plenary Session of the Eleventh Central Committee of the Chinese Communist Party held in December 1978 set the goals of the re-establishment of the legal system in China.

Indeed, 1978 was a significant year for China because in that year China began to carry out the economic reform and the “open door” policy.

China therefore enjoyed high economic growth rates despite weak legal institution and the difficult implementation of the rule of law.

The modernization process of the law and legal institutions of the People’s Republic of China which started in 1979, following the ten- years period of the Great Proletarian Cultural Revolution, transformed Chinese law and legal institutions in many aspects.

After the last quarter of twentieth century, legislation continued to be instrumental to the government system, confined to the residual notion of a sort of “rule of law” and aimed at assuring control and stability of Chinese society.

From the early decades of the last century China experienced attempts to overcome traditional customs and rules. However, legislative new rules seemed to be still governed by the research of a harmonious society supported by political institutions and relevant values.

The traditional Confucian attitude towards law has been maintained and in Chinese culture is still present a code of informal rules ensuring social order, aimed at ensuring harmony in the social relationships.

The negotiations for China's entry to the World Trade Organisation (“WTO”) brought to the surface the necessity to modernize Chinese Law and its legal system.

In the late 1980s, together with the advance of China’s economic, social and legal reforms at that time, China needed to rewrite some of the constitutional provisions in order to assure validity to the reform programmes implemented at that time.

A first round of amendments to the 1982 Constitution of the People’s Republic of China (the fourth China’s Constitution) came in 1988.

Constitution occupies an ultimate position in Chinese legal system, so that any constitutional changes should allow assessment of the consistency at central and local levels ensuring further legislative changes.

The fundamental law status of the Constitution is deemed to be firstly embodied in its rules on the most fundamental concerns of the country, including important principles and systems of national politics, economy, culture, society, diplomatic activities and so on.

The constitutional economic system clauses have a fundamental role to govern the nature and direction of China’s development.

From 1988 to 2011, the 1982 Constitution was amended four times (in 1988, 1993, 1999 and 2004 respectively).

All four constitutional amendments have involved the economic system, and half (a total 14 clauses) of 31 clauses of the Constitution Amendment belong to a modification of this part.

The constitutional amendments made in 1988 brought a fundamental change to the 1982 Constitution.

Article 11 was amended to recognize the private sector emerging in 1980s as a result of economic reform and also created the condition for a significant rise of private sector in the following year.

A new paragraph was added to the Constitution, which stated that China permitted the private sector of the economy to exist and develop within the limits prescribed by law, and the private economy was a complement to the socialist public economy.

The deepening of the economic reform since early 1990s to establish a market economy brought to amend Article 11 again. Two more amendments, passed in 1999 and 2004 respectively, modified the status of private sector, which changed from “a complement to the socialist public economy” to “major components of the socialist market economy” providing that China “encourages” and “supports” their development.

Law and regulation in China have been modernize primarily to allow the development of the market economy, which has been considered «the most dynamic driving force which cannot be ignored».

In this context, the idea of the rule of law has been gradually accepted by the Chinese system.

The 1999 Amendment to the Chinese Constitution expressly endorsed the concept of the rule of law providing that «the People’s Republic of China implements law to govern the state and construct the socialist country with rule of law».

This provision has been considered as a milestone in China’s overall legal reform.

Since that date, the term “rule of law” has frequently been used in China’s political, economic and social life.

After China entered into the World Trade Organisation in 2001, it was obliged to meet the requirements of such organization rules and regulations, particularly those governing trade and other economic activities.

As a World Trade Organisation member, China had to bring its relevant laws and regulations into line with those of the World Trade Organisation and China promised therefore to revise and adopt laws and regulations to deal with the new situation.

Therefore, after its accession to the World Trade Organisation, China expended considerable effort to review its existing legislation , including the opportunity to increase the transparency and the legal publications in China.

The 16th Congress Communist Party of China, held in 2002, set a new goal for the development of the Chinese legal system, in order to have a relatively solid and comprehensive legal system and the 10th National People’s Congress, in session between 2003 and 2008, continued the process of modernization of Chinese legislation.

In 2005, China’s President instructed to put "building a harmonious society” at the top of their agendas in order to create a society capable to consider people above all. This vision increased the adoption of social elements in Chinese company law, also promoting a higher level of social responsibility in the framework of the corporate law.

About two decades have passed and China has experienced unprecedented change in many areas.

The addition of new economic and commercial laws is a reflection of the continuing evolution of the legal system of the country.

2. Evolution of Chinese Company Law

2.1 Chinese Company Law Before 1993

China, historically, was governed by command economy, while its institutions did not recognize private property rights.

Before the issuance of the Law of the People’s Republic of China on Company Law (the “Company Law”), in 1993, China did have only specific laws and regulations with respect to companies, which governed only certain kinds of companies or certain aspects of a company.

Those laws were formulated to be implemented in a planned economy rather than in a market economy.

Company’s capital of the state-owned companies and collectively owned companies were usually subscribed by a certain government department, and approved documents were issued by the competent government department. The business goal, registered capital, manager and staff were also verified by the competent authorities.

In the initial period of company regulation after 1949, the People's Republic of China adopted a planned economy.

Companies were subject to the state planning system and company managers were appointed by the relevant government departments.

The companies were the objects of state planning and were subordinate to governmental departments, so that legal representative and company managers did not have the power to decide the company's business and development schedule.

From 1957, under the planned socialist economy, the private economic initiative was substantially not admitted .

Between 1957 and 1978 , after the achievement of socialist reform, there were basically two kind of business entities: state-owned enterprises and collectively owned enterprises.

Prior to 1978, China did not feel the need to have national legislation to govern the operation of private companies, since its planned socialist economy was comprised almost exclusively of state-owned enterprises managed as governmental agencies, while, in late 1970s, these enterprises started to have financial difficulties.

Therefore, in 1978, China instituted a series of programs aimed at transforming China's socialist economy into a market economy and also at encouraging foreign equity investment into China. Initially, foreign investors were permitted to set up closely held, and closely monitored, "limited liability companies" by means of joint ventures with domestic entities and, afterwards, companies were allowed to be wholly owned by foreign investors.

The 3rd Session of the 11th Congress of the Chinese Communist Party in 1978 advanced the legal reform and the open-door policy and it marked China's transformation from a planned economy to a market economy.

After specific law reforms, in China individuals were first allowed to become individual industrial or commercial household, so that an entrepreneur could engage in certain types of business activities with the assistance of his or her household and, afterwards, individuals were allowed to engage a few employees and to carry out a larger number of allowed business activities.

In 1980, the State Council approved the Provisional Regulation on the Promotion of Crosswise Economic Co-Operation which promoted all forms of cooperative bodies based on an enterprise's willingness and without restrictions on operation or ownership. This regulation was the basis of recently developed jointly run companies.

Even after such reforms, companies remained unregulated, without guidance as to the establishment, registration, operation, merger, and dissolution of companies.

In 1980’s, the domestic economy in China was overheating, also due to the incomplete company laws and regulations and the weak implementation of the laws. As a result, the government took five rounds of nationwide clearing and rectification of trust business in 1982, 1985, 1988, 1993 and 1998, respectively.

The State had difficulties controlling all companies and, due to the chaos in the economic order, in 1985 the State Council issued the Notification on Further Clearance and Rectification of Companies and the Provisional Regulation Regarding Company Registration Management (Provisional Regulation).

The Provisional Regulation restricted the establishment of companies by individuals and emphasized the government's control over companies.

In 1988, with the progress of the market economy, the State Council promulgated the Provisional Regulation for Private Enterprises.

By means of the Regulations, private enterprises (being for-profit economic organizations having private ownership and employing eight or more workers) were formally recognised. Furthermore, villagers, urban unemployed, retired people and individual households were authorized to establish private enterprises in the form of a sole proprietorship, a partnership or a limited liability company.

Therefore, the regulation confirmed the legality of private enterprises and advanced the commonly acceptable concept of limited liability company (LLC) and three forms of private enterprises were allowed: the sole proprietorship, the partnership, and the limited liability company.

Article 5 provided that «LLC means the enterprise that the investor's liability to the company is limited to its investment while the company shall take the responsibility with its whole assets».

The Regulation was important in order to develop a socialist market economy and to try to be more compliant with international practices.

The economic reform of 1990s brought to a remarkable development of company law in China and provided China with the reformation of state-owned enterprises, the expansion of foreign investment and the implementation of private enterprises in the national economy.

In 1992, detailed descriptions for the setting-up procedures for a limited liability company (LLC) and for a joint stock company (JSC) were introduced by the Standards for Limited Liability Companies Opinion and its companion, the Standards for Companies Limited by Shares Opinion.

By means of the amendment passed in 1993, Chinese Constitution adopted the “socialist market economy”, to orientate the economic development.

As the representatives of the National People's Congress and other interested parties encouraged the formulation of the Company Law, the State Council formally proposed the limited liability company draft law to the Standing Committee of the National People's Congress.

In accordance with the chairman of the Standing Committee of the National People's Congress decision, the Law Work Committee of the Standing Committee placed draft limited liability company and Joint-stock company regulations in the Company law by revising the Standard Opinions.

In December 1992, the Law Work Committee handed a draft of the Company Law to the Thirtieth Session of the Seventh National People's Congress for examination.

In June 1993, after many revisions, the Company Law draft was handed to the Second Session of the Eighth National People's Congress to review the text.

The Company Law was approved by the Fifth Session of the Standing Committee of the Eighth National People's Congress.

The 1993 Company Law represents an important arrival point of the Chinese legislation produced in this stage of Chinese legal evolution.

2.2 The 1993 Law of the People’s Republic of China on Company Law

The People’s Republic of China did not have any formal national company law until the National People’s Congress promulgated the Law of the People’s Republic of China on Company Law in 1993 (the “Company Law”).

The Company Law came into force on 1994 and, since then, it has been amended many times.

The 1993 Company Law was important because, for the first time, in mainland China the organization and activity of business entities were regulated.

The Company Law was therefore the foundation of modem socialist enterprises and the market economic system.

The 1993 Company Law was divided into eleven chapters with 230 articles. The first chapter dealt with general principles, while the second chapter with the establishment of limited liability companies and their organizational structures. The third chapter dealt with the establishment of joint-stock companies and their organizational structure. The fourth chapter concerned the issuance and transfer of shares of joint-stock companies. The fifth chapter related to company debenture, while the sixth chapter dealt with company finance and accounting. The seventh chapter covered mergers and divisions, while the eighth chapter governed company's bankruptcy, dissolution and liquidation. The ninth chapter concerned branches and subsidiaries of foreign companies. The tenth chapter described legal liability, and the eleventh chapter was the appendix.

The main purpose of the 1993 Company Law was stated in Article 1: «The Company Law of the People's Republic of China (hereinafter referred to as the "Law") has been enacted in order to standardize the organization and activities of companies, protect the lawful rights and interests of companies, shareholders and creditors, safeguard the social and economic order and promote the development of the socialist market economy».

The modern concept of company has played a very important role in standardizing Chinese enterprises, especially the State-owned enterprises.

For decades, the concept of the company in China was not clear. It does not differ from the concept of general enterprise. The Provisional Regulation Regarding Company Registration Management of 1985 provided that the "company" in that regulation meant «the economic entity engaging in production, trade or service industry which is established pursuant to the formalities provided by this regulation and has its own assets and conducts business on its own decisions and undertakes its own losses and taking the economic liabilities in accordance with the laws» . Therefore, the definition of “company” in the Regulation of 1985 did not substantially differ from the definition of “general enterprise”.

The 1993 Company Law provides that limited liability companies and joint-stock companies are legal enterprise entities.

The 1993 Company Law only governs limited liability companies and joint-stock companies within Chinese territory, while in China, before the enforcement of the Company Law, there were a great deal of companies.

Article 229 of the Company Law dealt with non-limited liability companies and non-joint-stock companies established before the enforcement of the Company Law. Pursuant to such provision, the companies established pursuant to laws, regulations, local laws, and the Standard Opinions on limited liability companies and joint-stock companies before the enforcement of this law, as well as those not in compliance with this law, had to meet the legal requirements within a stipulated time.

The Company Law has been amended multiple times since then and the most current version of the Company Law took effect in 2018.

2.3 Amendment to the 1993 Company Law

On October 27, 2005, an amendment to the Company Law was adopted and it became effective on January 1, 2006.

The 2006 amendment modified the 1993 Company Law by providing for the establishment requirements of a company. The amendment completed the institutions of the establishment and the capital of companies.

Such amendment modified the protective mechanism for shareholders, especially minority shareholders and improved the protection mechanism for shareholders.

By means of the 2006 amendment it has been improved the withdrawal mechanism for the shareholders of limited liability companies and the regulations of the litigation on behalf of shareholders.

The 2006 amendment revised also the liability mechanism of a company. Since such amendment tried to offer a less-strict requirement of establishing a company, the corresponding liability mechanism was very important.

The current version of Company Law was announced in 2013 and entered into force on March 1, March 2014.

On December 28, 2013, the Standing Committee of the National People’s Congress of the People’s Republic of China released its “Decision on Amending the Marine Environmental Protection Law of the People’s Republic of China and Other Six Laws”, deciding to amend the Company Law.

The amendment to the Company Law, which took effect in 2014, provides with significant innovations in the company registration system, especially in registered capital aspects.

The 2013 amendment contains issues of interest to foreign investors, such as the abolition of the minimum registered capital, of the deadlines for its payment and of the cash contribution requirements.

Officially, the purpose of this reform was to make the corporate legislation more efficient, with the aim of simplifying and liberalizing investments in China.

On April 22, 2019 the Supreme People’s Court published Provisions on Several Issues Relating to the Application of the Company Law of the People's Republic of China (V).

The Provisions are related to disputes of shareholders’ rights and they seem to be in line with the government’s efforts to strengthen China’s business environment.

The Provisions are composed by 6 articles and were issued in order to ensure a correct interpretation and application of the Company Law, as promulgated in 2006 and amended in 2018.

The issued Provisions introduced some alternative ways to resolve disputes between limited liability companies’ shareholders, under certain circumstances as set out by the Court. The Provisions also regulate in a more detailed manner certain distributions of profits’ resolutions and related Court’s revocation of such resolutions.

The above Provisions have been effective starting from April 29, 2019.

3. Types of Companies in China

3.1 General Remarks

During the 1950s there were five forms of companies in China. During the drafting of the Company Law, it has been suggested to add the provision of unlimited companies and joint liability companies to the two popular company forms, i.e. limited liability companies and joint stock companies.

Legally, the Company Law only deals with two types of company.

However, it would not be correct to say that other types of company (created later on by other rules and regulations) would have nothing to do with Chinese company regulation.

Apparently, the Company Law has not been amended to adopt other company forms.

So far, there is no sign that the Company Law would be used to govern the joint stock cooperative companies because they are currently governed by various national and local regulations.

A limited liability company is usually recognized as a “private” or “closed” company, while a joint stock company is recognized as a “public company".

Moreover, an important distinction is between “public company” and “listed company”.

In a listed company the shares are traded over the stock exchanges, while in a public company the shares are issued to the public but are not necessarily traded over the stock exchanges. Therefore, every listed company is a public company but not vice versa.

3.2 Legal Person Status: Distinctive Aspects

According to Article 36 of General Principles of the Civil Law of the People's Republic of China (the “Chinese Civil Law”), a legal person shall be an organization with capacity for civil rights and capacity for civil conduct. A legal person independently enjoys civil rights and assumes civil obligations in accordance with the law.

Therefore, on the basis of the intent of the organization, the main difference is between profit organization and non-profit organization.

Profit organizations are regulated as an enterprise legal person or a corporate juridical person starting business activities.

The enterprise legal persons are regulated as commercial organizations and, according to Article 41 of the Chinese Civil Law, they may include wholly state-owned enterprise, collectively-owned enterprise, privately-held enterprise, economic associations, Chinese-foreign equity joint venture, Chinese-foreign contractual joint venture and foreign-capital enterprise.

The privately-held enterprise is the typical commercial form commonly organized as limited liability company.

The limited liability Company and the joint stock company have legal capacity. According to Article 3 of the Company Law, «a company is an enterprise legal person, which has independent corporate property and enjoys corporate property rights. A company shall be liable for its debts to the extent of all of its property».

Connected with the legal personality, the privately-held enterprise presents also the peculiarity of the independent property, the restrictive shareholder withdrawals and the legal representative system .

With reference to non-corporate enterprises, according to Article 50 of the Chinese Civil Law, “legal person of government units” refers to the different levels and various state bodies that can be qualified with legal person status and obtain funds from the national or local government finance, commonly seen as government agencies at all levels, and the People’s Courts.

The “institution legal person” refers to a social welfare organization established by law and qualified with a legal person status, operating in the culture, education, sports, science and technology sectors.

A “mass organization” is instead considered a legal person referring to the social organizations established by the masses in a voluntary way, in accordance with legal procedures and undertakes the non-productive or non-profit activities (such as trade unions, federations and research groups).

A different type of organization is an “incorporate organization” qualified as a commercial form not having a legal person status.

The “incorporated organizations” may be divided in two types: on one side, the individually-owned business, regulated by Articles 26-29 of the Chinese Civil Law and, on the other side, the relative administrative regulations and individual partnership enterprises, regulated by Articles 30-35 of the Chinese Civil Law and in the Partnership Enterprise Law of the People's Republic of China (the “Partnership Law”).

These commercial forms are used to operate business under a small capital basis, as individual operation, qualified as commercial entity where the means of production is owned by individuals, based on the individuals’ personal activity and the proceeds of this activity is owned by individuals.

The limited partner enjoys a limited liability for partnership debts based on his subscribed capital contribution, but the difference with a limited liability shareholder system is that a limited partner does not carry out partnership affairs and cannot represent the limited partnership.

A limited liability company and the joint stock company have legal capacity.

According to Article 3 of the Company Law, «a company is an enterprise legal person, which has independent corporate property and enjoys corporate property rights. A company shall be liable for its debts to the extent of all of its property».

3.3 Limited Liability Company

3.3.1 Establishment and Registration

The limited liability company has legal capacity, which is linked with three main functions: independent property, independent authority and independent limited liability.

In line with the 2005 Company Law, a limited liability company refers to a company whose shareholders assume an amount equivalent to the amount of contributed capital to offset its total assets against the responsibility assumed for company debt.

In 2013 the Company Law has been revised in order to simplify the set-up requirements and reduce the cost of establishment.

According to Article 23 of the Company Law, to establish a limited liability company it is necessary to fulfill the following conditions: (i) the number of shareholders has to be conform to the statutory number; (ii) the capital contribution subscribed by all shareholders has to be consistent with that prescribed in the articles of association; (iii) the shareholders must have jointly formulated the company's articles of association; (iv) the company must have a name and an organizational structure established in conformity with the requirements for limited liability companies; and (v) the company must have a domicile.

Compared to the previous provision of Article 23 of the Company Law, the amendment deselected the limitation of the minimum registered capital system, which means that “one yuan to establishing a company” could be feasible .

With reference to the number of shareholders, according to Article 24 of the Company Law, a limited liability company shall be invested in and established by no more than 50 shareholders.

With refence to registered capital of the limited liability company, it shall be the capital contributions subscribed by all shareholders as registered with the company registration authority.

Where laws, administrative regulations and the decisions of the State Council stipulate the actual paid registered capital and another amount on the minimum registered capital of a limited liability company, such stipulations shall prevail.

According to the amendment to Article 23 of the Company Law, also the paid-in capital system of a limited liability company is modified in a subscription capital system.

Pursuant to Article 7, the company business license no longer records the paid-in capital. However, under Article 26 of the Company Law there are still some types of companies complying with the paid-up registered capital system and the minimum registered capital system. Secondly, as per Article 27 of the Company Law, the provision stating that “the monetary contribution shall occupy 30% of the registered capital” is deleted, so that a company could contribute entirely, for instance, in technology investment.

Current Article 27 of the Company Law, in particular, provides that shareholders may bring capital contribution in currency or in non-currency property that may be valued in currency and transferable according to the law such as physical objects, intellectual property and land use rights, except for property that may not be used as capital contribution according to the laws or administrative regulations. To this aim, non-currency property contribution, such as capital, shall be valued and verified, and shall not be over-valued or under-valued. Where laws or administrative regulations have provisions on valuation, such provisions shall prevail.

Capital contribution may be made by each shareholder, subscribing as specified in the articles of association of the company on time and in full. If a shareholder makes its capital contribution in currency, it shall deposit the full amount of capital contribution in currency in a bank account opened by the limited liability company . If capital contribution is made in non-currency property, the transfer procedures for the property rights therein shall be handled according to the law.

Company’s property is formed by the contributions from shareholders.

Shareholder shall receive dividends in proportion to its paid-up capital contribution. When the company increases its capital, the shareholder shall have the priority right to subscribe for capital contribution in proportion to its paid-up capital contribution, except where all shareholders agree not to receive dividends in proportion to the paid-up capital contribution or not to exercise priority right to subscribe for capital contribution in proportion to the paid-up capital contribution.

Once the contributions are made, the shareholders cannot withdraw their shares of their company assets randomly since this would lead to a partial liquidation of the company. However, shareholders can withdraw from the company by underselling their shares as transferable assets . According to Article 35 of the Company Law, in fact, after a company is established, its shareholders may not withdraw their capital contribution.

3.3.2 Organizational Structure

The management authority of a limited liability company is carried out by a majority of partners, while more fundamental decisions, like capital increase resolutions, require unanimity, which is not easy to achieve with numerous changing owners. The Company Law thus provides a committee organ having authority with respect to company affairs.

Company governance structure is formed by three organs: the board is a decision-making organ, the board of directors is an executive organ which is responsible for the board, to direct and manage the company’s affairs, and the senior managers, appointed or dismissed by the board and responsible for the company’s daily management and administrative affairs. It is also provided a separate supervisory board to oversee the directors, managers and other personnel.

The organs can be adapted by the articles of associations.

A limited liability company shall have a board of directors of three to thirteen members , unless otherwise stipulated according to Article 51 of the Company Law, which provides that a limited liability company shall have a board of supervisors, which shall have no fewer than three members.

A limited liability company with comparatively few shareholders and comparatively small in scale may have one to two supervisors instead of a board of supervisors.

A limited liability company may have a manager, who shall be employed or dismissed by the board of directors. The manager shall be accountable to the board of directors and shall exercise may functions and powers.

The board of shareholders of a limited liability company shall be composed of all the shareholders. The board of shareholders shall be the organ of authority of the company and shall exercise its functions and powers , pursuant to the Company Law.

A shareholder of a limited liability company shall be liable for the company to the extent of the capital contribution it subscribes.

A wholly state-owned company doesn’t have a shareholders’ meeting and members of the board of directors are appointed by the State-owned assets supervision and administrative institution.

3.3.3 Dissolution and Liquidation

The Company Law provides for a liquidation procedure for limited liability companies, which is different from the bankruptcy liquidation.

The liquidation is carried out for the reasons of dissolution described in the company’s articles of association, or in the event that the decision to dissolve the company is taken by the board of shareholders or the general meeting, or in case of merger or division of the company, or if its business license has been revoked, or in the event of a compulsory dissolution, such in the case it is ordered to close down or to be revoked according to the law or it is ordered to be dissolved by a People’s Court decision.

The liquidation group shall be committed to sell out the company’s credits and debts. Where a liquidation group has not been formed to carry out liquidation within the specified time limit, the creditors may apply to the People's Court for its designation of relevant personnel to form a liquidation group and carry out liquidation. The People's Court shall accept the application, and shall, in a timely manner, organize a liquidation group to carry out liquidation.

The liquidation group shall formulate a liquidation plan and submit the same to the board of shareholders, general meeting or the People’s Court for confirmation.

In accordance with the subscribed capital system, capital contributions not yet paid up shall be classified as liquidation property. According to Article 186 of Company Law, the property of the limited liability company remained after the property is respectively applied to payment of the liquidation expenses, the wages, social insurance premiums and statutory compensation of staff and workers and the outstanding taxes, and to full payment of the debts of the company shall be distributed in proportion to the capital contributions of its shareholders.

During liquidation, a company shall continue to exist, but it may not engage in new business activities unrelated to liquidation.

In case the liquidation group discovers that the company's property is insufficient to pay its debts in full, it shall apply to the People's Court for declaration of insolvency, according to the law, and, after the insolvency declaration of the People’s Court, the company's liquidation group shall turn over the liquidation matters to the People's Court.

Where a company is declared bankrupt according to the law, it shall be subject to insolvency liquidation according to the laws on enterprise insolvency.

3.4 Joint Stock Company

3.4.1 Establishment and Registration

A joint stock company refers to a company whose total capital is divided equally amongst shares of equivalent value to offset its total assets against the responsibility assumed for company debt.

The establishment of a joint stock company can be carried out in two different way: promotion and stock floatation.

According to Article 77 of the Company Law, the promotion mode refers to establishment of a company by means of subscription by the promoters for all the shares to be issued by the company, while the floatation mode refers to establishment of a company by means of subscription by the promoters for a portion of the shares to be issued by the company, and offer of the balance to the public or to specified targets. The founders apply different provisions to the different modes, such as the percentage of the stocks that the founders subscribed, which shall not be lower than 35%.

A joint stock company established by the capital floatation mode conducts financing directly to the public . It is therefore reserved a capital paid-in register under this circumstance and the promoters are not allowed to introduce more stockholders before the founders pay up for the stocks they subscribed.

When promoters offer shares to the public, the shares shall be distributed by a securities company established according to the law, with which a distribution agreement shall be concluded.

3.4.2 Organizational Structure

In the joint stock company is required to set up the following organs: the shareholders’ meeting, the board of directors, the senior managers and the board of supervisors.

The same provision concerning the power of shareholders’ assembly of a limited liability company is applied to the shareholders’ assembly of a joint stock company.

According to Article 108 of the Company Law, a joint stock company shall have a board of directors of five to nineteen members. The members of the board of directors may include representatives of the staff and workers of the company.

A company limited by shares shall have a manager, who shall be engaged or dismissed by the board of directors. The board of directors of a company may decide that a member of the board of directors shall serve concurrently as the manager.

A joint stock company shall have a board of supervisors of no fewer than three members. The board of supervisors shall include representatives of the shareholders and an appropriate ratio of the representatives of the company's staff and workers, where the ratio of the staff and workers’ representatives shall not be less than one third. The specific ratio shall be specified in the articles of association of the company.

A shareholder of a joint stock company shall be liable for the company to the extent of the subscribed shares.

According to Article 122 of the Company Law, a listed company shall have independent directors., which should be independent as regards personality, economic interest, generation procedure, exercising authority and professionalism.

3.4.3 Dissolution and liquidation

The liquidation process described with reference to the limited liability companies is also applicable to the joint stock companies.

The property of the company remained after the property is respectively applied to the due payments, according to Article 186 of Company Law , shall be distributed, in the case of a company limited by shares, in proportion to the shareholdings of its shareholders.

4. Foreign Investment Enterprises

4.1 Brief Introduction to the Chinese Foreign Investments Rules

In 1979 China opened itself to foreign investments adopting its first law on equity joint ventures. In the 1980’s laws on wholly foreign-owned enterprises and cooperative joint ventures were issued.

Since then, an assortments of investment vehicles were at disposal of foreign investors who wanted to expand overseas, depending on their business strategies, financial means, human resources, and legal framework of their countries.

In China there have been five major vehicles for foreign investors to do business in China: representative office, branch, Chinese-foreign equity joint venture, Chinese -foreign cooperative joint venture and wholly-owned enterprise.

The representative office and branch did not have the status of Chinese legal person and were preparatory in nature and involved a limited scope and amount of business activities.

The Chinese-foreign equity joint venture, Chinese-foreign cooperative joint venture and wholly-owned enterprise where collectively referred to as foreign investment enterprises and were legal persons representing the core instruments for direct investment in China.

From 1990’s China allowed foreign investors to establish foreign companies limited by shares.

On March 15, 2019, at the Second Session of the 13th National People's Congress, it adopted the Foreign Investment Law of the People’s Republic of China (the “Foreign Investment Law”), which came into effect on January 1, 2020.

The Foreign Investment Law replaced three separate foreign investment laws enacted in the early years of China’s economic reform: the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures , the Law of the People's Republic of China on Wholly Foreign-owned Enterprises and the Law of the People's Republic of China on Chinese-Foreign contractual joint ventures.

Together with the adoption of the Foreign Investment Law, several related regulations and notices, which were issued at the end of 2019, also took effect.

It amended the previous regime and aimed at expanding and promoting the foreign investments, in order to protect rights and interests of foreign investors, to standard the management of foreign investment, to impel the formation of a new pattern of all-round opening-up, to fix the regulation of foreign investments and to promote the growth of the socialist market economy.

The new Foreign Investment Law and the related regulations represented an important step for foreign investment in China.

4.2 The Foreign Investment Law

4.2.1 Definitions and general Principles

The Foreign Investment Law defines a “foreign investment” as an activity directly or indirectly conducted by a foreign natural person, enterprise or other organization (the "foreign investors"). Article 2 of the Foreign Investment Law includes the following circumstances: (i) a foreign investor establishes a foreign-funded enterprise within the territory of China, independently or jointly with any other investor, (ii) a foreign investor acquires shares, equities, property shares or any other similar rights and interests of an enterprise within the territory of China, (iii) a foreign investor makes investment to initiate a new project within the territory of China, independently or jointly with any other investor; and (iv) a foreign investor makes investment in any other way stipulated by laws, administrative regulations or provisions of the State Council.

A foreign-funded enterprise refers to an enterprise that is incorporated under the Chinese laws within the territory of China and is wholly or partly invested by a foreign investor.

In short, Article 2 of the Foreign Investment Law redefines the terms “foreign investment”, “foreign investors”, and “foreign-invested enterprises”, by distinguishing “foreign investment” into “direct investment” and “indirect investment”, both of which are subject to the adjustment of the Foreign Investment Law and the supporting laws.

Before the issuance of the Foreign Investment Law, only foreign direct investments were regulated by the three laws, which have been replaced by the Foreign Investment Law, on wholly foreign owned enterprises, Chinese-foreign contractual joint ventures and Chinese-foreign equity joint ventures.

Article 2 of the Foreign Investment Law also adds merger and acquisition transactions into the scope of foreign investment, while, before the law, foreign investment only included setting up.

In practise, Article 2 abolishes the distinction between wholly foreign owned enterprises, Chinese-foreign contractual joint ventures and Chinese-foreign equity joint ventures, which were used since then, and refers the enterprises of foreign investment uniformly as “foreign-invested enterprise”.

Article 3 of the Foreign Investment Law provides that China shall adhere to the basic state policy of opening-up and encourage foreign investors to make investments within the territory of China and, at the same time, the State shall implement policies on high-level investment liberalization and convenience, and shall establish and improve the mechanism to promote foreign investment and create a stable, transparent, foreseeable and level-playing market environment.

Articles 4 and 28 of the Foreign Investment Law clarify that China will adopt the management system of pre-establishment national treatment and negative list for foreign investment.

The pre-establishment national treatment refers to the treatment given to foreign investors and their investments during the investment access stage, which is not lower than that given to their domestic counterpart.

The negative list refers to special administrative measures for the access of foreign investment in specific fields as stipulated by the Chinese government. The government will give national treatment to foreign investments outside the negative list.

Foreign investors shall not invest in any field forbidden by the negative list for access of foreign investment and for any field restricted by the negative list, foreign investors shall conform to the investment conditions provided in the negative list.

Fields not included in the negative list shall be managed under the principle that domestic investment and foreign investment shall be treated uniformly.

The negative list system has been piloted in the Shanghai Free Trade Zone since 2013 and was expanded countrywide in 2018, but the Foreign Investment Law represents the first time that the negative list system was fixed in the form of law.

4.2.2 Investment Promotion and Investment Protection

According to Article 9 of the Foreign Investment Law, national policies on supporting the development of enterprises shall equally apply to foreign-funded enterprises in accordance with the law.

The government shall establish and perfect the service system for foreign investment, and provide foreign investors and foreign-funded enterprises with consultation and services in respect of laws and regulations, policies and measures, investment project information and other aspects.

It shall establish multilateral and bilateral cooperation mechanisms for the promotion of investment with other countries, regions and international organizations, so as to enhance international exchanges and cooperation in terms of investment.

It is provided that the government shall not expropriate any investment made by foreign investors. Only under special circumstances, the government may expropriate or requisition an investment made by foreign investors for public interests in accordance with the law. Such expropriation or requisition shall be made pursuant to statutory procedures and fair and reasonable compensation will be given in a timely manner.

A foreign investor may, in accordance with the law, freely transfer inward and outward its contributions, profits, capital gains, income from asset disposal, royalties of intellectual property rights, lawfully obtained compensation or indemnity, such as income from liquidation, within the territory of China.

According to Article 22, intellectual property rights of foreign investors and foreign-funded enterprises shall be protected, such as the legitimate rights and interests of holders of intellectual property rights and relevant right holders.

4.2.3 Investment Management and Legal Liability

Article 34 and Article 37 of the Foreign Investment Law establish a foreign investment information reporting system in China for the management of the foreign investment companies.

According to Article 34, the foreign investors or the foreign funded enterprises shall submit the investment information to competent departments for commerce through the enterprise registration system and the enterprise credit information publicity system.

The contents and scope of foreign investment information to be reported shall be determined under the principle of necessity; investment information, available through interdepartmental information sharing, will not be required to be submitted again.

Authorities will not be allowed to request any investment information that can be obtained by interdepartmental information sharing.

Article 37 of Foreign Investment Law provides the penalties of noncompliance. In case any foreign investor or foreign-funded enterprise violates the provisions of the law and fails to report their investment information as required by the foreign investment information reporting system, competent department for commerce shall order it to make corrections within a prescribed time limit.

In case a foreign investor invests in a field forbidden by the negative list, relevant competent department shall order the said investor to stop its investment activity, dispose of the shares and assets thereof or take any other necessary measures within a prescribed time limit, and restore the government to what it was prior to the investment; if there is any illegal gain, such gain shall be confiscated .

Where an investment activity of a foreign investor breaches any special administrative measures for restrictive access provided in the negative list, relevant competent department shall order the investor to make corrections within a prescribed time limit, and take necessary measures to meet the requirements of the aforesaid measures; if the foreign investor fails to make corrections within the time limit, specific measures shall be taken.

In addition, where an investment activity of a foreign investor violates any provision in the negative list, the said investor shall bear corresponding legal liability.

4.3 Implementing Rules

The State Council adopted the Regulation on the Implementation of the Foreign Investment Law of the People’s Republic of China (the “Implementing Regulation”) on December 12, 2019, and it took effect on January 1, 2020.

The Implementing Regulation provides additional rules and clarification on general provisions and principles set out in the Foreign Investment Law.

In brief, the Implementing Regulation provides with national treatment for foreign invested enterprises in many areas, including government funding, land supply, tax reductions and exemptions, permitting, standards formulation, public procurement, and project approvals and implements the rights of for foreign invested enterprises to participate in rule-making, standards formulation and government procurement.

Furthermore, the Implementing Regulation provides, inter alia, that government authorities have to take measures and establish systems for transparency in rule-making and administration and to provide rules concerning expropriation of foreign investors’ investments and the protection of intellectual property.

In addition to the Implementing Regulations, many other supporting documents regarding foreign investment have also entered into effect on 1 January 2020, such as the Interpretations of the Supreme People's Court on Several Issues Concerning the Application of the Foreign Investment Law of the People's Republic of China issued on 26 December 2019, the Measures for the Reporting of Foreign Investment Information issued on 30 December 2019, the Notice regarding Foreign Investor Information Reporting Related Matters issued on 31 December 2019 and the Circular on Effective Work on Registration of Foreign-invested Enterprises for the Implementation of the Foreign Investment Law issued on 28 December 2019.

The Implementing Regulations and the other legal acts connected with the Foreign Investment Law brought many changes to the foreign investment regime in China and shall lead the growth of the Chinese legal framework.

5. Conclusive Remarks

Over the past decades a progressive transformation of law and legal institutions in China took place in the frame of China’s modernization process.

The recognition and protection of private property, the amendment to the Constitution, the evolution of the bankruptcy law , the Company Law, the Foreign Investment Law and the other commercial and economic legislation, contributed to the development of Chinese law and legal institutions.

Although China's traditional legal system continues to influence the development of the modem legal system, the continuing significance of China's traditional legal system appears to be indirect, with the remote persistence of traditional elements .

The current phase of development of Chinese company law needs to create a new form of ethics and moral rules, a sort of modernization of law, involving legal reforms, legal practices and expert lawyers, in order to ensure a modern concept of law (and legality) separated and autonomous from the politic issues and from the moral (and ethic) rules.

The future modernization of the legal framework of company law in China shall be strictly linked to a wider implementation of the legal procedure, the legal practices and the overall legal system, in connection with a concrete development of the rule of law.

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CHINESE COMPANY LAW: AN OVERVIEW

di Ilaria Ricci