Key points of capital reduction from the perspective of new company law

The new Company Law was amended and passed on December 29, 2023, and will come into effect on July 1, 2024. The new law shortens the deadline for subscribed capital contributions, allowing companies to adjust their registered capital according to their operational conditions. This article starts by focusing on the key provisions of the new law and analyzes the essential points of the capital reduction process, providing practical recommendations.

1. Classification of Capital Reduction

The new Company Law clearly distinguishes between substantive capital reduction and formal capital reduction. Substantive capital reduction refers to the return of capital to shareholders by the company, whereas formal capital reduction involves reducing registered capital to offset losses without returning capital to shareholders. Regarding formal capital reduction, Article 225 of the new Company Law specifically provides that such reductions do not require notification of creditors and only necessitate public announcement within thirty days from the date of the resolution.

The new Company Law also stipulates proportionate reduction and targeted reduction. Proportionate reduction maintains the proportion of shareholding for each shareholder after the reduction, while targeted reduction results in a change in the proportion of shareholding among shareholders post-reduction. It is noteworthy that, pursuant to the provisions of the new Company Law, except for reductions due to shareholders’ forfeiture for failure to pay contributions on time or statutory buybacks, limited liability companies require unanimous agreement of all shareholders to implement targeted reductions.

2. Capital Reduction Procedure

 The capital reduction procedure prescribed by the new Company Law is as follows:

1. (1) Formulation of Plan: The board of directors devises a comprehensive capital reduction plan, including the amount of registered capital and the method of reduction.

1. (2) Shareholders’ Meeting Resolution: The shareholders’ meeting adopts a capital reduction resolution in accordance with the company’s articles of association and legal requirements.

1. (3) Preparation of Financial Documents: Preparation of balance sheets and asset inventories reflecting the company’s existing assets and liabilities.

1. (4) Notification of Creditors and Public Announcement: Notification of creditors and publication in newspapers or the National Enterprise Credit Information Disclosure System to meet statutory notification deadlines.

1. (5) Registration Procedures: Application to relevant registration authorities for company change registration, submission of necessary documents and materials.

3. Notes on Capital Reduction

1. (1) Method and Scope of Notification:

• Following the adoption of the capital reduction resolution, the company must provide written notification to all creditors and make a public announcement.
• Regardless of whether the debts are due or the amounts are specified, all creditors with debt relationships with the company must be notified.

1. (2) Legal Consequences of Illegal Capital Reduction:

• Article 226 of the new Company Law stipulates for the first time that shareholders engaging in illegal capital reduction must return the funds received and bear liability for compensation.
• The aforementioned provision also states that if other shareholders and company directors or supervisors are responsible for illegal capital reduction, they must also bear joint liability.

4. Recommendations

The new Company Law provides more detailed procedures and stricter liabilities for capital reduction. Therefore, many companies choose to complete capital reduction procedures before the new law takes effect to avoid potential uncertainties. However, it is important to note that before registering a capital reduction, companies should communicate fully with the local relevant authorities and follow the statutory procedures for capital reduction transactions.

D’Andrea & Partners Legal Counsel will continue to provide information on investment information in China. If you have any questions related to any business and legal information in general, feel free to contact us at: info@dandreapartners.com. 

D’ Andrea & Partners Legal Counsel is a leading international law firm, with our European headquarters situated in Milan, Italy, and our Asia-Pacific headquarters based in Shanghai, China. Our firm has a strong presence across major cities in China. Our firm has a strong presence across major cities in China, India, Italy, UAE, and Vietnam, as well as a Russian-speaking Desk. We are one of the very few international law firms in China duly authorized by the Ministry of Justice of the PRC to operate as a Representative Office of a foreign law firm in China.

Disclaimer

The above content is provided for informational purposes only. The provision of this article does not create a professional mandate between DP Group and the reader and does not constitute legal or financial advice. Professional advice must be tailored to the specific circumstances of each case, and the contents of this article are not a substitute for legal or financial advice.