Client Alert: Time is Up—Your Subsidiaries in China Must Adopt New Corporate Governance this Year or Face Severe Restrictions
By December 31, 2024, all foreign-owned companies in China must adopt new corporate governance terms in their constitutional documents to comply with the PRC Company Law (Company Law). Under the Foreign Investment Law (FIL), which took effect January 1, 2020, failure to file Company Law-compliant documentation before the end of 2024 will, until remedied, bar foreign-invested enterprises from processing other filings of any kind with the local company registration authority. In addition to the practical difficulties this causes, the FIL also provides that companies that fail to meet the deadline will be publicly shamed by the relevant authorities.
The FIL mandates an overhaul of regulatory compliance for foreign-invested enterprises (FIEs) in China. The FIL repeals the old Equity Joint Venture (EJV) and Wholly Foreign-owned Enterprise (WFOE) laws that used to govern FIEs. FIEs are now required to comply with the Company Law. As a result, FIEs’ corporate governance documents, including their articles of association and joint venture contracts, have become officially obsolete and are subject to mandatory update or replacement.
While the FIL granted FIEs a grace period of five years to update their constitutional documents, this grace period is nearly over. Further delay is risky business. Since January 1, 2024, local offices of the Administration of Market Regulation (AMR) around China have begun issuing “warm” reminders that detail the penalties for failure to meet the deadline. As a result, more and more companies are taking proactive steps to update their corporate documents to comply with the Company Law.
You should not view this change as merely swapping old forms for new forms at the AMR, because the Company Law affords new, previously unavailable options and opportunities to your China-based company that you should consider. Leading legal experts have identified 100+ mandatory or discretionary changes for WFOE articles and 150+ mandatory or discretionary changes for EJV articles. For example, a perpetual term of existence, eliminating the board of supervisors, disproportionate board representation, and allowing the general manager to act as legal representative are options now available to FIEs under the Company Law. When updating your corporate documents, you may choose to adopt a better approach to everything from newly delegable manager duties to limits on foreign debt.
To help manage the process and to allow Kirton McConkie to offer FIE update services on a flat fee, Kirton McConkie has contracted with a leading alternative legal services provider that specializes in China cross-border investment tools. These tools allow Kirton McConkie’s attorneys to deliver high-quality and customized FIE documentation in both English and Chinese.
To ensure your China subsidiary manages the mandatory update under the Company Law effectively and efficiently, you will need advice from an expert on corporate governance in China. Adam Channer, a shareholder at Kirton McConkie, practiced law in China for six years, first in Hong Kong with a U.S. global firm, and then in Beijing with a “Red Circle” firm. Adam has handled China-inbound investment inquiries of all kinds and has the expertise and the network to guide your U.S.-based legal department and your China-based subsidiaries through the conversion process—from initial consultation to formal filings.
If you have operations in China and were waiting for a sign, this is it—the time to act is now.