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SuggestionsonAmendment of Company Law*


Chen Xiaohong& Liu Junhai

In 2004,the National People's Congress decided to carry on comprehensive revisal of the Company Law according to opinionsfrom deputies to the National People's Congress and relevant parties. We believethe amendment of the Company Law should follow the basic principles of enhancing efficiency and reducing transaction cost. The amendmentneeds systematic and coordinated efforts, and, at the same time,should give prominence to keystones and pertinence. The amendment should also conform to the nationalconditions, and meanwhile fully draw uponthe international experiences.

Based on the project team’s special study on the 2004 key topic of the Research of China’s Company Law undertaken by the Enterprise Research Institute of the development Research Center of the State Council, this article proposes the following eight opinions on amendment of the Company Law.

I. Form of Corporation

Permit a limited liability company and a limited joint-stock company to adopt the form ofone-person company (namely the company with only one shareholder).

In principle, China’s current Company Law prohibits the form of one­-person company, but it allows of some exceptions, e.g. the establishment of wholly state-owned company.

The main reason for thepast prohibition on the establishment of one-person company lies in the belief of traditional Company Law on the organizational nature of the company. One-person company is practically easily abused by dishonest investors. In factthe establishment of one-person company is limited by Company Lawsin many countries.

We suggest that the set-up of one-person company be allowed. First, when an investor intends to set up a corporate in order to reduce the investment risk or to develop new businesses, the permission on the set-up of one-person company is possible to reduce the company’s cost. Second, related laws should make adjustment according to the social needs. At present,in our country there exist a great number of actual one-person companies. The parties concerned easily use such techniques as number of shareholders and so on to react to the present legal prohibition. Hence, to deny the reality willresult in a chaotic legal relationship. Third, major countries in the rest of the world have revised the law by allowing the set-up of one-person company.

At present, there have been few objections on the set-up of limited liability companies, butstill a few on the set-up of one-person joint-stock company. We believe the establishment of one-person joint-stock company with only one shareholder should be permitted. One-person joint-stock company is not a listed company, and its most important difference from one-person limited liability company is thestock negotiability. So, there does not exist the problem of greater risk for setting up one-person joint-stock company. This way is beneficial for the wholly state-ownedcompany to changethe system into the joint-stock company and to go public withoutacquiring special approval, and for major stockholders in the listed company to delist the company through purchasing such stocks as circulation stock and so on when necessary. This is one key method for the company to carry outstructural adjustment. For better readjustment on business and assets, or for better utilization of the capital market, a great number of overseas companies quite often list their relatively independent subsidiaries when the stock price goes up, and delist them by purchasing circulation stock when the price goes down.

In order to prevent such problems as manipulation by major stockholder possibly caused by set-up of one-person company, we require corresponding adjustment on the Company Law as well as the company registration and information disclosure system. The Company Law should introduce the principle of "uncovering the company veil".

II. The Set-up of Company and Capital System

1.Ease restrictions on shareholder’sways of contribution

The present Company Law has enumerated fivepermitted ways of contribution (currency, material object, industrial property, non-patented technology and land use right).Such stipulation could not satisfy the actual need. Ways of contribution valuable to settingup the company surpass the above-listed five investment methods. Otherproperty rights permitted by law and administrative rules should also be included. In foreign countries, ways of contribution are allowed to be varied. In effect, such diverse ways of contribution such as share investment have already emerged in our country.

We believe at least the shares and the"independent, negotiable, price-able, and other forms on which thelaws and regulations do not have prohibitions" can all be used as ways of contributions. About how to price the non-cash investment, the present laws andregulations do not have and are impossible to make the comprehensive stipulations. Our suggestion is to leave the shareholder with certain free decision-makingrights, and request the stipulation of pricing in the articles of association. We may also draw upon Japan’s legislationexperience, namely, to clearly limit ways of contribution. Japan holdsthat the credit andthe value of labor service have great uncertainties, and cannot be used as contributions.

2. Loosen company’s trans-investment limits in the current Company Law

The 12tharticle in the current Company Law had stipulated the limitation on the company’s trans-investment value, namely the accumulation investment values should not surpass 50% of this company’s net assets.

As it belongs to the company’s property control and independent management behavior, trans-investment must submit to the company’s demand for management strategy and profit pursuit. In terms of the property ability, it is merely a question of form transformation of the company’s asset, which affects both ability and degree of the cash realization of assets, and which does not directly influence the verity and maintenance of the capital. Its influence on debt discharge belongs to the creditor’s judgment on the credit of the company and the strategic arrangement for reducing risks. For example, the creditor may request to examinethe credit of the parent company and its important subsidiary companies, and at the same time, may request to make loans on the condition of mortgaging the shares of its subsidiary companies. As far as the shareholders are concerned, if they dislike the company to make trans-investment, thegeneral shareholdersmay beforehand limit or prohibit the company to carry out oversized trans-investment in thecompany’s articles of association, or may clearly define that the company should allow shareholders to carry on independent audit ofits subsidiarycompanies. The company’s trans-investment activity does not necessarily increase a shareholder’s investment risks, because the shareholder still enjoysthe limited liability treatment. If the company’s trans-investmentproject proved to be successful, the shareholder may also gain corresponding investment repayment.

In fact, our country's reform on joint stock system has already broken throughthis limitation. During the reform in the state-owned enterprises, most of the enterprises strip high quality property from the original ones to the newly set-up joint-stock companies, already breaking through the proportion of 50%.

Our suggestion is to loosen this limitation, and at the same time to consummate such systems as information disclosure, mutually stock-holding limitation (for instance, to limit the shareholding proportionof subsidiary company in the parent company and its related resolution power) and so on, to reduces negative influences possibly caused by trans-investment.

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* This article is abridged according to the 2004 key project "Research onChina’s Company Law" conducted by the Development Research Center of the State Council.