How does the Company Law Impact the Governance of Foreign-Invested Enterprises?
For over a decade at Jiaxi, my colleagues and I have navigated the evolving regulatory landscape for foreign investors in China. A recurring theme in our advisory work is the intricate interplay between specialized foreign investment regulations and the foundational Company Law of the People's Republic of China. With the recent passage of the new Company Law, set to take effect on July 1, 2024, this interplay has entered a critical new phase. This article aims to dissect a core question for investment professionals: How does the Company Law, as the general corporate statute, fundamentally shape and constrain the governance of Foreign-Invested Enterprises (FIEs)? While the historic "three foreign investment laws" have been integrated into the Company Law framework, creating a unified corporate system, the governance practices of FIEs must now be examined through this refined legal lens. The implications are profound, moving beyond mere registration formalities to touch the very heart of corporate control, director liabilities, shareholder rights, and capital management. Understanding this is no longer an academic exercise but a practical imperative for ensuring compliance, mitigating risk, and safeguarding investments in a market that continues to mature its legal infrastructure.
董事责任与义务强化
The newly revised Company Law imposes significantly heightened duties and potential liabilities on directors, including those in FIEs. This is arguably the most impactful change for governance. The law now explicitly codifies the duty of loyalty and the duty of care, detailing specific scenarios such as conflicts of interest, related-party transactions, and capital maintenance. For foreign-appointed directors who may be operating from overseas, understanding the fiduciary duty in the Chinese legal context becomes paramount. I recall a case where the director of a European-invested manufacturing WFOE, based in Germany, approved a significant equipment purchase from a sister company without following the stringent procedural requirements for related-party transactions outlined in the Company Law. When the company later faced financial difficulties, minority shareholders successfully challenged the transaction, and the director was held personally liable for damages, as he failed to prove the fairness of the deal and that it was in the best interest of the Chinese entity. The law now even introduces scenarios where directors can be jointly and severally liable for company debts if they are found grossly negligent in capital contribution oversight or causing company losses. This transforms the director's role from a symbolic title to a position with tangible, serious legal risk, demanding greater on-the-ground involvement and documented diligence.
Furthermore, the law empowers shareholders to take direct action against derelict directors. This means that even a minority shareholder in an FIE can initiate a lawsuit against a director for violating duties that cause loss to the company. This provision shatters the traditional notion that governance in a JV or WFOE is solely a matter between the controlling shareholder and management. It introduces a powerful check and balance. In practice, we advise our FIE clients to immediately review and update their director appointment agreements, board authorization resolutions, and internal control manuals. Board meeting minutes must now be meticulously documented, showing thorough discussion, questioning of management proposals, and independent judgment. For foreign parents, it's no longer tenable to simply send directives; they must ensure their appointed directors have the time, resources, and legal understanding to fulfill these enhanced statutory duties. The era of the "remote-control director" is effectively over.
股东出资期限与责任
The new Company Law introduces a radical shift regarding the subscribed capital system, directly impacting a fundamental aspect of FIE setup and financial planning. While the previous system allowed for a flexible, long-term capital contribution schedule, the new law mandates that all capital must be paid in within five years from company establishment. This requirement must be clearly stipulated in the company's articles of association. For many FIEs, especially those in capital-intensive sectors or those with phased investment plans, this is a major operational and strategic pivot. We have already seen a scramble among our clients to amend their AOA and adjust their capital injection plans with headquarters. This change aims to curb the practice of "shell companies" with massively subscribed but unpaid capital, promoting corporate credibility. However, it also demands more upfront financial commitment from foreign investors.
The law also tightens the liability for capital contribution. If a shareholder fails to pay in capital on time, they are not only in breach of the AOA but also assume automatic liability to the company for losses incurred due to the delay. More critically, the law clarifies that the company's creditors can directly claim against a shareholder who has not fulfilled their capital contribution promise, within the amount of the unpaid capital. This "piercing" of the corporate veil in the context of capital contribution is a powerful tool for creditors. In a recent restructuring case for a struggling Sino-US JV, the Chinese creditor successfully pursued the US investor for the portion of registered capital that was still subscribed but unpaid, arguing it was essential to satisfy outstanding debts. This case underscores that the capital contribution schedule is no longer an internal matter but a public pledge with direct creditor rights implications. It forces foreign investors to be far more realistic and prudent in setting their registered capital levels from the outset.
小股东权益保护增强
Governance in FIEs, particularly joint ventures, has often been a delicate balance—or sometimes a tense struggle—between majority and minority shareholders. The new Company Law significantly strengthens the arsenal available to minority shareholders, thereby altering the dynamics of FIE control. Provisions such as the shareholder's right to inspect accounting books and documents (with a lower threshold for initiating such requests), the right to propose the dismissal of incompetent directors, and the right to sue for damages on behalf of the company (derivative action) are now more accessible. In one memorable instance, a Japanese minority partner in an automotive parts JV, holding only 30% equity, utilized the enhanced information rights to uncover a pattern of unfair related-party transactions orchestrated by the majority Chinese partner. Armed with detailed evidence, they were able to negotiate a much stronger oversight role and a revision of the profit distribution mechanism, all under the threat of a derivative lawsuit which the new law made a credible option.
This shift necessitates a change in mindset for majority investors. The traditional approach of "we own the board, so we run the show" is becoming legally riskier. Governance documents, especially the Articles of Association and the Shareholder Agreement, must now be crafted with greater care to establish fair, transparent, and legally compliant procedures that protect minority rights as mandated by law, while also safeguarding the company's operational efficiency. For foreign investors entering a JV as a minority partner, these legal enhancements provide a stronger foundation for protecting their investment. They must, however, be proactive in understanding and exercising these rights, which often requires local legal and advisory support to navigate effectively. The law has, in essence, leveled the playing field to a considerable degree.
公司治理结构灵活性
A notable feature of the new Company Law is the introduction of greater flexibility in corporate governance structures, which FIEs can leverage. For smaller WFOEs, the law now explicitly allows for the appointment of a single director instead of maintaining a board, simplifying decision-making. Conversely, for larger or more complex FIEs, the option to establish board committees (e.g., audit, remuneration, nomination) is formally recognized, aligning their governance more closely with international best practices. This allows FIEs to tailor their oversight bodies to their specific scale and needs, rather than adhering to a one-size-fits-all model. I advised a UK-based tech startup setting up its first WFOE in Shanghai; they were relieved to learn they could start with a single director (their APAC head) rather than forming a three-person board, which for them was an unnecessary administrative burden at the initial stage.
However, this flexibility comes with the need for clear internal rules. Choosing a single director system concentrates power, so the AOA must clearly define the limits of that director's authority and the matters requiring shareholder approval. For FIEs opting for board committees, the law requires clear mandates and rules of procedure to be established. This is where many companies fall short—they set up the structure but not the robust processes to make it effective. The key takeaway is that the law provides the toolbox, but it is up to the FIE and its investors to design a governance structure that is both compliant and operationally sensible. It's not about having the most complex structure, but the most appropriate and well-documented one.
清算义务人责任明确
A often-overlooked but critical aspect of governance is the end-of-life process. The new Company Law clarifies and emphasizes the responsibilities of "obligors" during company liquidation, primarily the directors. If a company is to be dissolved, the directors are now legally obligated to form a liquidation committee and initiate liquidation proceedings in a timely manner. Failure to do so, resulting in loss or damage to company assets, can lead to personal liability for the directors. For FIEs, especially those where the foreign parent decides to exit the market, this formalizes a previously murky area. We've handled cases where a foreign investor simply stopped funding a loss-making JV, walked away, and left the Chinese legal representative (often a director) holding the bag. That legal representative faced travel restrictions, credit blacklisting, and personal liability for unpaid taxes and employee wages because a proper liquidation was not initiated.
This provision forces a more responsible exit strategy. It mandates that foreign investors plan for dissolution as carefully as they plan for entry. Governance, therefore, extends to the entire lifecycle of the FIE. The board must have protocols for identifying when the company is effectively insolvent or should be wound up, and must trigger the statutory liquidation process without delay. This protects creditors, employees, and the directors themselves. In my experience, a clean and compliant exit, though requiring time and cost, is infinitely preferable to the legal and reputational quagmire of an abandoned entity. The new law makes this not just good practice, but a legal imperative with sharp teeth.
总结与前瞻
In summary, the impact of the Company Law on FIE governance is systemic and profound. It elevates director liability to unprecedented levels, rigidifies capital contribution schedules, empowers minority shareholders, offers structural flexibility, and enforces responsible dissolution. The overarching trend is a move towards greater accountability, transparency, and formalization of corporate processes. For investment professionals, this means that governance can no longer be an afterthought or a mere replication of the parent company's model. It must be a deliberately designed, China-compliant system that is actively managed.
Looking ahead, I anticipate several developments. First, we will see a surge in disputes related to director liability and capital contribution as the new law is tested in courts. Second, the demand for qualified, locally knowledgeable independent directors for FIEs will likely grow as a risk-mitigation strategy. Third, the integration of FIE governance with the broader Company Law framework will continue to erase the "special status" perception, treating FIEs fundamentally as Chinese legal persons subject to the same core rules. The successful foreign investor will be the one who embraces this new rigor, viewing robust, compliant governance not as a regulatory burden, but as the essential scaffolding for sustainable and protected investment in China. The game has changed, and the rules are now clearer—and stricter.
Jiaxi Tax & Financial Consulting's Perspective: At Jiaxi, with our deep frontline experience spanning over a decade in serving FIEs, we view the new Company Law not merely as a regulatory update, but as a fundamental reset of the governance playing field. Our key insight is that compliance must now be proactive and integrated into strategic decision-making from day one. The law's heightened personal liabilities for directors and shareholders mean that reactive or informal governance practices pose existential risks. We advise our clients to undertake a comprehensive "governance health check": meticulously aligning their Articles of Association with the new mandates, restructuring board protocols to ensure documented diligence, recalibrating capital plans within the five-year window, and establishing clear internal controls for related-party transactions and liquidation triggers. The most successful FIEs we work with are those treating their Chinese entity's governance with the same seriousness as their global compliance programs. The new Company Law, in essence, demands that foreign investment be managed with both entrepreneurial vision and rigorous statutory discipline. Our role is to bridge that gap, transforming legal obligations into a framework for secure and prosperous operations.