Ease of incorporating opens doors
(China Daily)
Updated: 2005-03-02 01:32

Every day, Fu Xiaodong helps his clients complete investigations, mergers and acquisitions, and in the design of corporate structures for new commercial projects.

A billboard advertises services providing company registrations. The amendment to the law on businesses becoming corporations lowers the minimum-required registered capital for a limited company.

In the view of the veteran corporate lawyer based in Beijing, opening a new business is becoming easier and easier in legal terms.

Soon, it may take only 30,000 yuan (US$3,600) of registered capital to set up a limited company, compared to the current 100,000 yuan (US$12,000) minimum requirement - if a proposed amendment to current law on incorporating goes through.

The amendment, placed before the Standing Committee of National People's Congress (NPC) last Friday for a first read through, applies the minimum registered capital to limited companies in all industries, except for cases where other laws or regulations otherwise stipulate. The current Corporation Law differentiates between consulting, commercial and manufacturing categories.

"The amendment contains many aggressive changes that will foster the creation of new businesses," Fu said. "But I don't see it as a surprise because the changes just come in a way they should be, in the context of an ever-improving economic legal system."

He noted that corporate regulations have been changing in many ways in China.

Last year, for example, local industrial and commercial administrations stopped requiring companies to specify whether they are retailers, consultants, tobacconists or manufacturers on their business licences. Instead, most companies now simply must specify "anything not banned by laws or administrative regulations."

The reason is that a law on administrative licensing went into effect last July, which forbids administrations from checking or approving things unless there is a legislative requirement to do so.

"In the administrative aspects, the old psychology that suspects and challenges everything is fading out," said Fu.

"Similarly, some limiting rules in the Corporation Law, be they registered capital or something else, do not make sense anymore."

Another big change in the draft amendment is that citizens will be allowed to open single-person limited companies. The current law requires at least two founders for a limited company, whereas single-person businesses have unlimited liability and an exclusion from bankruptcy protection.

But Fu said it is still too early to tell whether the revision of the law will stimulate mass registrations of small companies, as the prospects of ventures will remain a top concern of business founders.

"But the amendment shows respect for the reality in the business world," he said. "This is an encouraging sign and the revised law will facilitate many business people's ambitions."

From many legal professionals' perspectives, the large-scale modification of the Corporation Law embodies a big change in legislators' mindsets.

"Most regulatory measures were stipulated at a time when the market system was budding, so they were focused on big State-owned companies and there was not much consideration for small and private businesses," said Wang Xinxin, a professor of economics law at prestigious Renmin University of China in Beijing.

The tough registered capital requirement indicates that the legislators were more concerned with "static" economic security rather than the dynamics of commerce, Wang said.

Moreover, there were many stiff industrial regulations by various administrations besides the statutes, which made it very difficult for individuals to start a venture, he added.

"In the past, the law wanted to make sure that a company has to go through strict examinations to get started, so that the creditors' risks are minimized and the economy won't run off track," Wang said.

"In a sense, the law was providing guarantees to creditors by depriving the poor of their rights to invest."

"But the prevalent idea today is it is up to businesses themselves to care about commercial risks, where as the law should focus on providing fair and effective market rules."

The draft amendment counts stock as a valid form of capital, in addition to the current law's options that include currency, materials, industrial property, non-patent technologies and land use rights. It also largely improves the share of intangible assets in registered capital as well as the ratio of external investment to net assets.

The amendment affects far more than just small limited companies or deregulation, since there are many more precise regulatory rules related to companies of different sizes and organizational forms.

The draft specifies meeting procedures of boards of directors and strengthens the roles of boards of supervisors and shareholders to restrain directors.

It makes clear that boards of supervisors should meet at least once a year in limited companies, and once every six months in shareholding companies. Shareholders representing more than 10 per cent of votes in a limited company can propose temporary shareholders' meetings, compared to the one-fourth of votes required presently.

Liu Junhai, a researcher with the Institute of Law of Chinese Academy of Social Sciences, said the revised law will have far-reaching implications on the operation of public firms and the securities market.

"In many places the shareholders' meetings have become something irrelevant and small investors have little leverage over executives," Liu said, attributing the problem to insufficient rules in the law.

Many stipulations in the amendment are vital to improve corporate governance systems and may add some morale to the sluggish stock market, he said.

The draft requires two-thirds votes of shareholders when a public firm disposes more than 30 per cent of its assets within a year. There are some detailed articles that restrict directors, supervisors and the management from conducting "connected transactions" that may allow them to profit at the expense of the firm's interests.

It allows shareholders to sue public company seniors for damaging their rights. Small shareholders can also file lawsuits on behalf of a public company if the company's interests are hurt, if the management refuses to take legal action.

"Strengthening shareholders' rights should be a main principle of the revision of the law," said Liu.

The amendment, for the first time, also makes clear the role of independent directors. It stipulates that they should account for at least one-third of a public firm's board to foster checks-and-balances in the decision-making process.

(China Daily 03/02/2005 page5)

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