Converting a Joint Venture in China into a Limited Liability Company under the New PRC Company Law before December 31, 2024 — Key Requirements and Impacts under the New PRC Company Law

Requirements under the New Company Law

Impacts on JV Conversion

I. Shareholding Ratio

Under the New Company Law, it is impermissible for a shareholder to hold 0% shares in a limited company. However, it was common practice for foreign shareholders to contribute cash and hold 100% shares in JVs, while Chinese shareholders provide in-kind contributions, entitled to a proportion of interests but holding 0% of shares.

Such JVs must reconcile the disparity between parties’ equity ratios on face and actual interest ratios, and complete registration with the competent AMR.

II. Capital Contribution Timeline

Under the New Company Law, shareholders have a maximum of five years from the company’s establishment to complete full capital contributions. Companies registered before 1 July 2024 shall “gradually adjust” the capital contribution timelines if they exceed this five-year period.

Shareholders failing to contribute on time shall forfeit their equity in unpaid contributions, which could be transferred, or even cancelled to reduce the registered capital.

Shareholders of JVs should reassess the need and capacity to further make outstanding capital contributions and may consider decreasing registered capital if necessary.

III. Corporate Governance

1. Authority Allocation and Mandatory Quorum

Unlike the JV Law, the New Company Law designates the shareholders’ meeting, instead of the board of directors as the highest authority, granting it statutory rights to determine crucial matters such as amending articles of association and altering registered capital. To decide on these matters, shareholders must represent at least two-thirds of voting rights and attend a duly convened meeting according to the mandatory quorum requirements stipulated in the New Company Law.

JVs must adjust the authority scope and voting ratios of shareholders’ meetings and the board of directors accordingly. It is also crucial to ensure compliance with the mandatory quorum requirements.

2. Supervisor and Supervisory Board

JVs are not required to set up a supervisor or a board of supervisors under the JV Law. However, the New Company Law mandates companies to establish a supervisory board unless exceptions apply. The exceptions, for example, include having an audit committee exercising the authority of the supervisory board.

JVs need to assess if they are required to establish a supervisor or supervisory board, or if any of the stipulated exceptions apply under the New Company Law.

3. Employee Representatives

According to the New Company Law, companies with over 300 employees must include an employee representative on the board of directors, elected democratically by the company’s employees. Such companies may be exempted if they already have an employee representative on the board of supervisors.

JVs surpassing the threshold of 300 employees shall carefully strategize on how to best embed employee representatives in the company organs, especially if they lack a board of supervisors with employee representation.

It is worth noting that while some JVs with a small number of shareholders may opt for a single director instead of a board, it remains unclear whether they can claim an exemption from the requirement to include employee representatives on the board if they exceed the employee threshold simultaneously.