Chinese Company Law for Foreign Investors: Corporate Governance, Shareholder Rights, Capital Contributions, Directors, and Legal Representatives

Chinese Company Law for Foreign Investors: Corporate Governance, Shareholder Rights, Capital Contributions, Directors, and Legal Representatives

Introduction

Establishing or acquiring a company in China requires more than an understanding of foreign investment restrictions and market access rules. Foreign investors must also understand the legal structure of the Chinese company they intend to operate, the rights attached to their ownership interests, the obligations associated with registered capital, and the responsibilities of the individuals who manage and represent the enterprise.

The central legislation governing these matters is the Company Law of the People’s Republic of China, substantially revised on 29 December 2023 and effective from 1 July 2024. The revised legislation introduced significant changes to corporate governance, shareholder contributions, directors’ duties, the supervision of companies, and the accountability of controlling shareholders and actual controllers. It applies to both domestically invested and foreign-invested companies established in China, subject to the particular requirements of foreign investment legislation.

The principal framework for foreign investors is therefore formed by several interconnected legal instruments. The Company Law regulates the establishment, organisation, management, and dissolution of companies. The Foreign Investment Law, effective since 1 January 2020, governs foreign investment activities and the treatment of foreign-invested enterprises. The negative list for foreign investment access identifies sectors in which foreign investment is prohibited or restricted. Additional legislation and administrative regulations govern matters such as market registration, foreign exchange, taxation, employment, competition, data protection, and industry-specific licensing.

An important consequence of this framework is that a foreign-invested enterprise is not generally a separate corporate form governed by an entirely independent company statute. It is ordinarily a Chinese company established under Chinese law, with foreign ownership subject to the applicable investment rules. Its internal organisation and corporate governance are therefore principally governed by the same Company Law that applies to Chinese-invested companies.

This article examines the principal company-law issues relevant to foreign investors, focusing on limited liability companies, shareholder rights, capital contributions, corporate governance, directors’ duties, legal representatives, and the practical protection of ownership interests.

1. The Legal Framework Governing Companies with Foreign Investment

1.1 The Company Law and the Foreign Investment Law

The Foreign Investment Law of 2019 fundamentally reorganised the legal framework for foreign participation in the Chinese economy. It replaced the previous legislative system based on three separate statutes governing Chinese-foreign equity joint ventures, wholly foreign-owned enterprises, and Chinese-foreign cooperative joint ventures.

Under the current framework, foreign investors may establish enterprises independently or together with other investors, acquire equity interests in existing Chinese enterprises, invest in new projects, or participate through other legally recognised arrangements.

Article 31 of the Foreign Investment Law expressly provides that the organisational forms, organisational structures, and rules of conduct of foreign-invested enterprises are governed by the Company Law, the Partnership Enterprise Law, and other relevant legislation.

Consequently, a foreign investor establishing a limited liability company in China generally operates through the same corporate legal form available to domestic investors. The distinction lies primarily in the ownership of the enterprise and the additional regulatory requirements applicable to foreign investment.

The Company Law determines matters such as:

• The legal personality of the company and the extent of shareholder liability.
• The rights and obligations of shareholders.
• The amount and payment of registered capital.
• The composition and authority of shareholders’ meetings and boards of directors.
• The duties and liabilities of directors, supervisors, and senior managers.
• The transfer of equity interests.
• Profit distribution, capital reduction, merger, dissolution, and liquidation.

The Foreign Investment Law operates alongside these provisions. It determines whether foreign participation in a particular sector is permitted, whether restrictions apply, and which investment reporting, approval, or security-review requirements may be relevant.

These two statutes should not be treated as competing legal systems. They regulate different, although closely connected, dimensions of the same investment.

1.2 Foreign Investment Access and the Negative List

Foreign investors do not enjoy unrestricted access to every sector of the Chinese economy. The Foreign Investment Law establishes a system under which foreign investment is prohibited in certain fields, restricted in others, and generally subject to national treatment in sectors not included in the negative list.

Where a sector is restricted, foreign investors must comply with the applicable conditions. Depending on the relevant industry, these may include limitations on foreign ownership, requirements concerning the nationality or qualifications of investors, restrictions on the organisational structure of the enterprise, or other regulatory conditions.

Where foreign investment is prohibited, establishing a company does not overcome the prohibition. A company may be capable of registration under general company law while remaining unable lawfully to conduct the intended regulated activity.

The distinction between corporate registration and permission to conduct a particular business is therefore fundamental. Registration creates the legal entity; it does not automatically confer every licence or authorisation required for its operations.

Foreign investors should also consider whether their proposed investment may trigger national security review, merger control, or industry-specific approval requirements. These questions are separate from the ordinary procedures for incorporating a company.

1.3 The Main Corporate Forms

The Company Law recognises two principal forms of company:

1. Limited liability companies.
2. Joint-stock limited companies.

A limited liability company is commonly used for privately held businesses, foreign-invested subsidiaries, joint ventures, and small or medium-sized enterprises. Its ownership is divided into equity interests held by shareholders.

A joint-stock limited company divides its capital into shares. It may be appropriate for larger enterprises, businesses seeking a more developed shareholding structure, or companies intending to raise capital through share issuance.

The two forms differ in their capital structure, governance arrangements, and rules concerning ownership transfers. For many foreign investors establishing an operating business in China, however, the limited liability company remains the most familiar and practical corporate form.

A foreign investor may establish a wholly foreign-owned limited liability company where the relevant sector permits full foreign ownership. Alternatively, it may establish a joint venture with one or more Chinese or foreign investors.

The choice between these structures should reflect not only the proposed ownership percentages but also the intended allocation of decision-making authority, management responsibilities, financing obligations, and exit rights.

1.4 Separate Legal Personality and Limited Liability

Article 3 of the Company Law establishes that a company is an enterprise legal person with independent legal personality and property. It enjoys independent corporate property rights and is responsible for its debts with all of its own assets.

Article 4 provides that shareholders of a limited liability company are generally liable to the company only to the extent of their subscribed capital contributions. Shareholders of a joint-stock limited company are generally liable to the extent of the shares they subscribe for.

This principle separates the company’s obligations from the personal assets of its shareholders.

For example, if a foreign investor owns 70% of a Chinese limited liability company, the investor does not ordinarily become personally responsible for 70% of every company debt. The company itself is responsible for its liabilities, while the investor must fulfil its legally binding capital contribution obligations and any other independent obligations it has undertaken.

Limited liability is not absolute. The Company Law provides mechanisms for holding shareholders, controlling persons, and other responsible individuals accountable where they abuse corporate structures, evade obligations, or cause legally recognised harm.

A shareholder who uses the company’s independent legal personality or limited liability to evade debts and seriously damage creditors’ interests may, in the circumstances specified by Article 23, become jointly and severally liable for company debts. The legislation also addresses situations involving the misuse of multiple controlled companies and the failure of a sole shareholder to demonstrate the separation of personal and corporate assets.

Foreign investors should therefore treat the company as a genuinely independent legal and financial entity. Maintaining separate accounts, proper accounting records, documented corporate decisions, and clear arrangements for transactions between related entities is essential to preserving the protection offered by limited liability.

2. Establishing a Company in China

2.1 Incorporation and Registration

A company established in China must comply with the registration requirements of the Company Law and the applicable company registration regulations.

The competent market regulation authority is responsible for company registration. Depending on the location and nature of the business, the relevant authority will generally be a local Administration for Market Regulation or another designated registration body.

The registration process normally requires the investor to determine:

• The proposed company name.
• The registered domicile.
• The business scope.
• The registered capital.
• The identity and ownership interests of shareholders.
• The articles of association.
• The corporate governance structure.
• The legal representative.
• The directors and other relevant officers.

The application must be supported by the documentation required for the particular registration. Foreign investors may also need to provide notarised or otherwise authenticated corporate documents, identity documents, translations, and evidence of authority for the persons acting on their behalf.

The exact documentation and procedure may vary depending on whether the investor is an individual or a foreign corporate entity and on the requirements of the relevant registration authority.

Following registration, the company receives a business licence and a Unified Social Credit Code. The company becomes a legal entity capable of conducting business within the limits of its registered business scope and applicable regulatory permissions.

Registration is only one stage of establishing an operational business. Depending on its activities, the enterprise may also need to complete tax registration procedures, open bank accounts, establish foreign exchange arrangements, register employees for social insurance, obtain industry licences, and comply with relevant reporting obligations.

2.2 Articles of Association

The articles of association are among the most important documents in a Chinese company’s legal structure.

They establish the company’s internal organisational framework and regulate the relationship between shareholders, directors, supervisors, and senior managers. Under the Company Law, the articles bind the company and its shareholders, directors, supervisors, and senior managers.

The articles should address matters such as:

• The company’s name and domicile.
• Its business scope.
• Its registered capital.
• The identities of shareholders and their capital contributions.
• The method and timetable for capital contributions.
• The corporate governance bodies and their powers.
• The appointment and removal of directors and supervisors.
• The method of appointing and changing the legal representative.
• Shareholder voting and decision-making procedures.
• Profit distribution and loss allocation.
• Procedures for amending the articles and dealing with dissolution.

For foreign investors, the articles should be considered a central governance instrument rather than a routine registration document.

A carefully drafted constitution can help prevent disputes over the exercise of control, the appointment of management, reserved matters, financing decisions, and the transfer of equity interests.

In a joint venture, the articles should be coordinated with the shareholders’ agreement. The two documents should not contain inconsistent provisions concerning voting rights, capital contributions, transfers, management appointments, or dispute resolution.

Where mandatory provisions of Chinese law apply, contractual arrangements cannot simply displace them. The articles and shareholders’ agreement must therefore be designed within the limits of the Company Law and other applicable legislation.

3. Shareholders and Their Rights

3.1 The Position of Shareholders

Shareholders are the owners of the company’s equity interests. Their rights arise from the Company Law, the articles of association, and other applicable legal arrangements.

Under Article 4, shareholders enjoy rights relating to the economic benefits of the company, participation in major decisions, and the selection of managers.

In a limited liability company, shareholders exercise their principal governance powers through the shareholders’ meeting. Where a company has only one shareholder, the sole shareholder exercises the relevant powers in accordance with the law and the company’s constitutional documents.

The shareholders’ meeting is the company’s principal decision-making body. Its authority includes considering reports, electing and removing directors and supervisors, approving profit distribution and loss recovery plans, deciding on increases or reductions of registered capital, and approving fundamental corporate changes.

The Company Law also permits certain decisions to be made in writing without convening a physical meeting, provided that the required consent is obtained and the decision is properly documented.

For foreign investors, this means that ownership percentages alone do not provide a complete picture of corporate control. Voting thresholds, reserved matters, board composition, and the rules governing the adoption of resolutions are equally important.

3.2 Voting Rights and Decision-Making

In a limited liability company, shareholders generally exercise voting rights in proportion to their capital contribution, unless the articles of association provide otherwise.

This flexibility can be important in joint ventures. Investors may agree on an ownership structure that does not correspond exactly to the allocation of voting rights, where such an arrangement is legally permissible and properly reflected in the company’s constitutional documents.

Ordinary shareholder resolutions are generally adopted by shareholders representing more than half of the voting rights, unless the law or articles establish a different rule within the permitted legal framework.

Certain fundamental decisions require a higher threshold. Under Article 66, resolutions concerning amendments to the articles of association, increases or reductions of registered capital, and merger, division, dissolution, or change of company form must be approved by shareholders representing at least two-thirds of the voting rights.

These thresholds are particularly relevant to foreign investors holding minority interests. A shareholder with less than one-third of the voting rights may be unable to block certain fundamental resolutions if the other shareholders vote together in favour.

Conversely, a shareholder holding more than one-third of the voting rights may possess an important blocking position in relation to decisions subject to the two-thirds requirement.

The practical value of a shareholding therefore depends on the relationship between ownership, voting rights, board representation, and the company’s decision-making rules.

3.3 Information and Inspection Rights

Shareholder access to corporate information is an essential element of corporate accountability.

Article 57 of the Company Law grants shareholders of limited liability companies the right to inspect and copy specified corporate documents, including:

• The articles of association.
• The register of shareholders.
• Minutes of shareholders’ meetings.
• Resolutions of the board of directors.
• Resolutions of the supervisory board.
• Financial accounting reports.

Shareholders may also request access to accounting books and accounting vouchers. Such requests must be made in writing and should explain the purpose of the inspection.

A company may refuse access where it has reasonable grounds to believe that the shareholder has an improper purpose and that disclosure could harm the company’s legitimate interests. The company must provide a written response explaining its reasons within the statutory period.

The shareholder may challenge an unjustified refusal through the courts.

The Company Law also permits shareholders, subject to the applicable conditions, to arrange for professional intermediaries such as accounting firms or law firms to assist with the inspection.

Importantly, the revised legislation extends certain inspection rights to materials relating to a company’s wholly owned subsidiaries. This can be particularly relevant to foreign investment structures in which a Chinese holding company owns operating subsidiaries.

Inspection rights are not unrestricted. Access must comply with applicable rules protecting state secrets, commercial secrets, personal privacy, and personal information.

For a foreign shareholder, these rights provide a legal basis for monitoring the company’s financial position and corporate conduct. However, their practical effectiveness depends on maintaining accurate shareholder records, making properly documented requests, and respecting the confidentiality obligations imposed by Chinese law.

3.4 Dividend and Profit Distribution Rights

Shareholders may receive distributions from the company’s profits, but they do not have an automatic right to withdraw company funds or demand distributions whenever they choose.

The Company Law establishes rules governing the preparation of financial statements, the recovery of accumulated losses, the allocation of statutory reserves, and the distribution of profits.

Under Article 210, a company must generally allocate 10% of its after-tax profits to its statutory reserve fund until the accumulated reserve reaches 50% of its registered capital. The company must first use available profits to cover accumulated losses before making the relevant reserve allocation.

Distributable profits may then be allocated in accordance with the applicable law and the company’s constitutional arrangements.

For limited liability companies, profit distribution is generally based on the shareholders’ actual capital contributions, unless all shareholders agree otherwise.

A foreign investor should therefore examine the company’s accounting records and distribution provisions before assuming that a particular percentage of ownership guarantees an equivalent annual cash return.

The company’s ability to distribute profits depends on its financial position, accumulated losses, statutory reserve obligations, and other legal restrictions.

3.5 Protection Against Unfair Corporate Decisions

The Company Law recognises that shareholders may misuse their rights and that corporate decision-making can cause unlawful harm.

Article 21 prohibits shareholders from abusing their rights to damage the company or other shareholders. Shareholders who cause losses through such conduct may be required to compensate the affected parties.

Article 22 prohibits controlling shareholders, actual controllers, directors, supervisors, and senior managers from using affiliated relationships to damage the company’s interests.

The legislation also provides remedies against certain unlawful or defective corporate resolutions.

A shareholder who suffers direct harm as a result of unlawful conduct by directors or senior managers may bring an action in accordance with Article 190. In addition, the Company Law provides procedures for challenging or seeking a declaration of invalidity or non-existence of corporate resolutions in appropriate circumstances.

These protections are relevant to minority investors, particularly in joint ventures where one shareholder exercises substantial practical control.

Foreign investors should not rely exclusively on general statutory remedies. The articles of association and shareholders’ agreement should also address information access, reserved matters, deadlock, related-party transactions, management appointments, and exit mechanisms.

4. Registered Capital and Shareholder Contributions

4.1 The Meaning of Registered Capital

Registered capital is a central feature of the Chinese company system.

For a limited liability company, Article 47 defines registered capital as the total amount of capital contributions subscribed by all shareholders and registered with the company registration authority.

The distinction between subscribed capital and paid-in capital is important. A shareholder may undertake to contribute a specified amount but pay it at a later date in accordance with the company’s articles and the statutory rules.

The registered amount is therefore not necessarily identical to the funds already transferred to the company.

However, registered capital should not be regarded as a merely symbolic figure. It represents a legally binding contribution obligation and may be relevant to the company’s financial credibility, its ability to meet business commitments, and the assessment of creditor interests.

4.2 The Five-Year Contribution Rule

One of the most significant changes introduced by the revised Company Law concerns the timetable for paying subscribed capital.

Under Article 47, shareholders of a limited liability company must generally pay their subscribed capital contributions in full within five years from the company’s establishment, in accordance with the company’s articles of association.

This replaced the previous system under which companies had considerably greater freedom to establish long contribution periods.

The revised rule is intended to discourage the registration of unrealistically high capital amounts supported by excessively long payment schedules.

The five-year period applies to ordinary limited liability companies unless a different rule is established by legislation, administrative regulations, or a decision of the State Council for a particular category of company.

Investors should therefore assess the amount of capital that the company genuinely needs and can reasonably commit to providing. A large registered capital figure may create substantial future obligations even where the company initially requires only modest operational funding.

4.3 Transitional Rules for Existing Companies

The revised Company Law also introduced transitional arrangements for companies registered before 30 June 2024.

Under the State Council’s Provisions on Implementing the Registered Capital Registration Management System under the Company Law, existing limited liability companies whose remaining contribution periods would exceed five years from 1 July 2027 must generally adjust their remaining contribution periods to within five years by 30 June 2027.

The adjusted timetable must be recorded in the company’s articles of association.

The rules also address existing joint-stock companies, whose promoters must pay the subscribed share capital in full within the applicable transitional period.

These arrangements are important for foreign investors acquiring interests in existing Chinese companies. An acquisition should not be assessed solely by reference to the amount of capital already paid. The purchaser should also examine the remaining contribution obligations and any transitional adjustment that may be required.

The company’s capital structure, articles of association, registration records, and shareholder contribution history should be reviewed before completion of the transaction.

4.4 Forms of Capital Contribution

Shareholders may contribute capital in money or through qualifying non-monetary property.

Non-monetary contributions may include assets capable of being valued in money and legally transferred, such as:

• Tangible property.
• Intellectual property rights.
• Land-use rights.
• Equity interests in other companies.
• Certain creditor rights and other transferable property interests.

The asset must be capable of lawful transfer and must be properly valued. Where non-monetary property is contributed, the valuation should reflect its actual value and the relevant transfer procedures must be completed.

A foreign investor may therefore contribute qualifying intellectual property or other assets rather than relying exclusively on cash investment. However, the contribution must satisfy Chinese legal requirements concerning ownership, valuation, transferability, and registration where applicable.

The use of an asset as registered capital should not be confused with licensing that asset to the company. A shareholder who merely grants the company permission to use intellectual property may not have fulfilled an obligation to transfer ownership of that intellectual property as a capital contribution.

4.5 Failure to Make Capital Contributions

Shareholders are legally obliged to fulfil their subscribed contribution commitments.

Where a shareholder fails to pay its contribution on time or makes a non-monetary contribution whose actual value is substantially lower than the amount subscribed, the Company Law provides mechanisms for addressing the shortfall.

The company must undertake the relevant verification and may issue a written demand for payment. Under the statutory mechanism, the company may establish a grace period and, where the shareholder continues to default, initiate the forfeiture procedure for the relevant equity interest.

The legislation also places responsibilities on directors in relation to the verification and collection of shareholder contributions. Directors who fail to perform the relevant duties and cause losses to the company may face liability.

A shareholder who transfers equity before fulfilling its contribution obligations may also remain exposed to liability under Article 88. Where the subscribed contribution has not yet fallen due, the transferee generally assumes the payment obligation, while the transferor may bear supplementary liability if the transferee fails to pay when required. Where the contribution was already overdue or the non-monetary contribution was deficient, the transferor and transferee may be jointly liable within the relevant shortfall, subject to the statutory conditions.

These rules make the due diligence of capital contributions especially important in share acquisitions.

4.6 Accelerated Payment and Creditor Protection

The revised Company Law strengthens the relationship between shareholder contribution obligations and creditor protection.

In certain circumstances, where a company is unable to pay its debts as they fall due, the company or a creditor whose claim has become due may request shareholders to pay subscribed contributions before their original payment dates.

This mechanism prevents shareholders from relying indefinitely on future contribution dates where the company is already unable to satisfy its obligations.

The precise application depends on the statutory conditions and the facts of the case. Nevertheless, foreign investors should recognise that a capital contribution obligation may become enforceable earlier than originally anticipated in circumstances covered by the law.

5. Corporate Governance and the Organisation of the Company

5.1 The Shareholders’ Meeting

The shareholders’ meeting is the company’s principal decision-making body in a limited liability company.

It determines fundamental matters such as the appointment and removal of directors and supervisors, approval of financial and management reports, profit distribution, capital changes, amendments to the articles of association, and major structural transactions.

The meeting may be convened in person or through electronic communication, subject to the law and the company’s articles.

The articles should clearly identify who may convene meetings, how shareholders receive notice, what information must accompany proposals, and how resolutions are recorded.

For foreign investors, reliable documentation is especially important. Corporate resolutions may later be required for registration changes, banking procedures, regulatory applications, transactions, or the resolution of disputes.

5.2 The Board of Directors

The board of directors is responsible for implementing shareholder decisions and managing the company’s business in accordance with the law and the articles of association.

Under the revised Company Law, a limited liability company generally has a board consisting of at least three directors, although smaller companies with relatively few shareholders may appoint one director instead of establishing a board.

Where a board is established, it exercises the powers allocated to it by the Company Law and the articles. These include convening shareholders’ meetings, implementing shareholder resolutions, deciding on business and investment plans, preparing profit distribution and loss recovery proposals, and determining the company’s internal management structure.

The board also appoints or dismisses the company manager, subject to the statutory framework.

The revised legislation provides more flexibility in organising corporate governance. Companies may design structures appropriate to their size and operational needs, but they cannot disregard mandatory statutory responsibilities.

Directors should understand that their role is not simply to represent the shareholder who nominated them. Once appointed, they owe duties to the company itself.

5.3 The Manager and Senior Management

The company manager is responsible for the day-to-day operation of the business under the authority of the board and the articles of association.

The manager may organise production and business activities, implement board decisions, propose internal management arrangements, and exercise other powers delegated by the board.

The Company Law also recognises other senior management positions, including deputy managers and financial officers. The articles may identify additional positions as senior management roles.

Foreign investors frequently appoint an overseas executive or a locally based manager to supervise the Chinese subsidiary. Such arrangements should be supported by clear internal authority documents and a proper understanding of the distinction between operational management and legal representation.

A manager does not automatically possess unlimited authority to bind the company in every matter. The scope of authority must be assessed by reference to the law, the articles, board decisions, registration records, and any applicable authorisation.

5.4 Supervisors and Supervisory Boards

The Company Law provides for a supervisory structure intended to monitor the conduct of directors and senior managers and protect the company’s interests.

A limited liability company generally establishes a supervisory board consisting of at least three members. The board includes shareholder representatives and an appropriate proportion of employee representatives, who must constitute at least one-third of its membership.

However, the revised legislation permits more flexible arrangements for certain smaller companies.

A company with relatively few shareholders or a relatively small scale of operations may appoint one supervisor instead of establishing a supervisory board. It may also dispense with supervisors where all shareholders unanimously agree, subject to the statutory conditions.

A company may alternatively establish an audit committee within its board of directors to exercise the supervisory functions assigned by law. Where the required audit committee arrangement is adopted, the company need not establish a separate supervisory board or supervisor.

The supervisory function is not equivalent to ordinary operational management. Supervisors are expected to examine the company’s financial affairs, monitor directors and senior managers, and take appropriate action where misconduct or unlawful conduct is identified.

A foreign investor should consider the company’s size, risk profile, ownership structure, and internal controls when selecting the appropriate supervisory arrangement.

5.5 Employee Representation

Chinese company law recognises a role for employee participation in certain corporate governance structures.

Employee representatives may participate in supervisory boards, and the revised legislation also addresses employee representation on boards of directors in specified circumstances, including companies with a sufficiently large workforce.

The applicable rules depend on the company’s structure and circumstances. Where employee representation is required, the company must follow the relevant democratic election procedures.

Foreign investors should therefore consider employee representation when designing the board and supervisory arrangements of a Chinese subsidiary, rather than treating corporate governance as an exclusively shareholder-controlled matter.

6. Directors’ Duties and Corporate Liability

6.1 Duties of Loyalty and Diligence

The revised Company Law strengthens the duties owed by directors, supervisors, and senior managers.

Article 180 establishes two central obligations:

The duty of loyalty requires the relevant individuals to avoid conflicts between their personal interests and the interests of the company. They must not use their position to obtain improper benefits.

The duty of diligence requires them to exercise the reasonable care generally expected of a manager when performing their responsibilities, acting in the best interests of the company.

These duties apply to directors, supervisors, and senior managers. Importantly, the law also extends them to controlling shareholders and actual controllers who are not formally appointed as directors but who actually carry out company affairs.

This is significant for foreign-invested enterprises because practical control may be exercised by individuals who do not hold formal corporate office.

For example, a controlling shareholder who directly instructs management, makes operational decisions, or effectively directs company affairs may fall within the statutory framework even if that individual is not registered as a director.

6.2 Conflicts of Interest and Related-Party Transactions

The Company Law restricts the ability of directors, supervisors, and senior managers to use their corporate positions for personal advantage.

Under Article 182, individuals who directly or indirectly enter into transactions with the company must report the relevant matters to the board of directors or shareholders’ meeting and obtain approval in accordance with the law and the articles of association.

The rules also extend to certain transactions involving close relatives, enterprises controlled by the relevant individuals, and other associated persons.

Related-party transactions are particularly important in foreign investment structures. A Chinese subsidiary may purchase goods from its foreign parent, receive management services from an overseas affiliate, license intellectual property from a related company, or provide services to another group entity.

Such transactions are not inherently unlawful. However, they should be properly disclosed, approved, documented, and conducted in accordance with applicable corporate, tax, competition, and transfer-pricing requirements.

Directors must also observe the statutory restrictions concerning the appropriation of corporate business opportunities and competition with the company.

A director or senior manager cannot simply divert an opportunity belonging to the company for personal benefit or operate a competing business without satisfying the statutory reporting and approval requirements.

6.3 Liability for Breach of Duty

Directors, supervisors, and senior managers may be liable where they violate laws, administrative regulations, or the articles of association and cause losses to the company.

Article 188 establishes the general basis for compensation liability arising from unlawful performance of corporate duties.

Article 191 also addresses situations in which directors or senior managers cause harm to others while performing their duties. The company may be responsible, while the individual may also be liable where the statutory conditions concerning intentional conduct or gross negligence are satisfied.

Article 192 provides for joint and several liability where a controlling shareholder or actual controller instructs directors or senior managers to engage in conduct that harms the company or its shareholders.

These provisions are intended to prevent individuals from avoiding responsibility simply because they act through formal corporate structures.

Foreign investors should therefore establish clear reporting lines, documented approval procedures, conflict-of-interest policies, and appropriate internal financial controls.

7. The Legal Representative of a Chinese Company

7.1 Meaning and Legal Function

The legal representative is a distinctive feature of the Chinese corporate system.

Under Article 10 of the revised Company Law, the person who represents the company in executing corporate affairs in accordance with the articles of association must serve as its legal representative. That person must be a director or manager who actually performs the relevant corporate functions.

The legal representative is registered with the competent company registration authority.

The role is not identical to the position of a shareholder, director, or general manager in every other legal system. A company may have numerous directors and senior managers, but it has one registered legal representative.

The legal representative acts externally on behalf of the company within the framework established by law. The position may therefore carry substantial practical and legal significance.

7.2 Appointment and Resignation

The articles of association determine the method of appointing and replacing the legal representative, within the requirements of the Company Law.

The revised legislation provides that where the director or manager serving as legal representative resigns, that person is deemed to have resigned from the position of legal representative at the same time.

The company must appoint a replacement within the statutory period, generally 30 days from the date of resignation.

This rule is important because the legal representative’s departure from the company may affect its external representation, banking arrangements, registration records, and ability to complete corporate procedures.

Foreign investors should ensure that the articles and internal procedures contain workable arrangements for replacing the legal representative, particularly where the appointed individual is an overseas executive or a person who may leave the business unexpectedly.

7.3 Authority and Responsibility

The legal representative’s authority is governed by the Company Law, the articles of association, and the relevant rules concerning representation.

The company may impose internal restrictions on the authority of its legal representative. However, restrictions on representative authority may not necessarily be effective against a good-faith third party who is entitled to rely on the company’s external representation arrangements.

The legal representative may also face personal legal consequences in circumstances specified by law.

It is therefore incorrect to assume that the legal representative is personally liable for every debt of the company. The company remains a separate legal person. Nevertheless, the legal representative may incur responsibility for personal misconduct, unlawful conduct, or specific statutory violations.

Certain enforcement measures may also affect legal representatives or other responsible individuals where a company fails to comply with court judgments or other legal obligations.

For foreign investors, the selection of the legal representative should be treated as a significant governance decision rather than a purely administrative appointment.

7.4 Company Seals and Corporate Authority

Company seals remain an important feature of Chinese business practice.

A company may use different seals for different purposes, including its general company seal, financial seal, contract seal, and other specialised seals.

The use and control of these seals can have substantial practical consequences. A document bearing an appropriate company seal may be relied upon as evidence of the company’s intention to enter into a transaction or undertake an obligation.

However, the existence of a seal does not eliminate the need to examine the authority of the person using it, the nature of the transaction, the relevant internal approvals, and the circumstances in which the document was executed.

Foreign investors should establish internal rules governing who may hold company seals, who may authorise their use, how they are stored, and how their use is recorded.

The legal representative’s personal signature, the company’s seals, and the authority granted to other representatives should be coordinated through a clear corporate authorisation system.

8. Transfer of Equity Interests and Changes in Ownership

8.1 Transfer Between Shareholders and Third Parties

The transfer of equity interests in a limited liability company is governed by the Company Law and the company’s articles of association.

Shareholders may generally transfer all or part of their equity interests to other existing shareholders.

Where a shareholder proposes to transfer equity to a person outside the company, the revised Company Law provides a statutory pre-emptive right for the other shareholders.

The transferring shareholder must notify the other shareholders in writing of the relevant transfer terms, including the quantity of equity, price, payment method, and payment period. The other shareholders may exercise their pre-emptive rights under the statutory procedure, generally within 30 days after receiving the notice.

The articles of association may establish different arrangements, subject to the applicable legal framework.

This is especially important in joint ventures. The shareholders should consider whether transfers to competitors, entities from particular jurisdictions, or persons who may create regulatory difficulties should be restricted through lawful contractual and constitutional provisions.

8.2 Registration and Recognition of the New Shareholder

A transfer of equity should be followed by the necessary updates to the company’s shareholder register and, where required, the company registration records.

Under Article 86, the transferor must notify the company and request the corresponding amendment to the shareholder register. Where registration changes are required, the parties may also request that the company complete the necessary registration procedures.

The transferee may exercise shareholder rights against the company from the time the transferee is entered in the shareholder register, subject to the applicable statutory rules.

A foreign investor acquiring equity should therefore ensure that the transaction is not treated as complete merely because the purchase agreement has been signed or payment has been made.

The relevant corporate and registration procedures must also be completed.

8.3 Transfer of Unpaid Capital Obligations

An equity transfer may involve not only the transfer of ownership but also the transfer of outstanding capital contribution obligations.

Article 88 establishes rules governing transfers of equity where the subscribed capital has not yet become due or has already become overdue.

Where the contribution period has not expired, the transferee generally assumes the obligation to make the contribution. If the transferee subsequently fails to pay, the transferor may bear supplementary liability.

Where the contribution was already overdue, or a non-monetary contribution was materially deficient, the transferor and transferee may be jointly liable within the relevant shortfall, subject to the statutory conditions.

This is one of the reasons why a foreign investor should conduct a detailed capital contribution review before acquiring shares in an existing Chinese company.

9. Corporate Records, Accounting, and Compliance

A Chinese company must maintain proper corporate and accounting records.

The Company Law requires companies to establish financial and accounting systems in accordance with applicable laws, administrative regulations, and the rules of the competent financial authorities.

Companies must prepare annual financial accounting reports and comply with the relevant audit requirements.

The legislation also regulates the allocation of profits, statutory reserve funds, and the use of accumulated reserves.

For foreign-invested enterprises, corporate accounting must be coordinated with tax, foreign exchange, customs, labour, and other regulatory obligations.

The company should maintain accurate records of:

• Shareholders and their ownership interests.
• Subscribed and paid-in capital.
• Shareholder and board resolutions.
• Director and supervisor appointments.
• The legal representative and authorised representatives.
• Company seals and their use.
• Financial statements and accounting records.
• Related-party transactions.
• Equity transfers and changes in registered information.

The revised company registration framework also places importance on the accuracy of information submitted to registration authorities.

The Company Registration Administration Implementation Measures, issued by the State Administration for Market Regulation and effective from 10 February 2025, further regulate company registration and the disclosure of relevant corporate information.

Foreign investors should recognise that corporate compliance is not limited to the moment of incorporation. Changes in ownership, registered capital, directors, legal representatives, business scope, and other registered particulars may require filings or amendments.

10. Legacy Foreign-Invested Enterprises and the Transition to the Current System

The transition from the former foreign-investment laws to the Foreign Investment Law was particularly significant for older joint ventures and cooperative enterprises.

Before 2020, certain foreign-invested enterprises operated under governance arrangements in which the board of directors or a joint management committee served as the highest authority of the enterprise.

The Foreign Investment Law required existing enterprises whose organisational structures did not comply with the new legal framework to adjust their structures within a five-year transition period beginning on 1 January 2020.

That transition period ended on 31 December 2024.

From 1 January 2025, registration authorities no longer process certain change registrations or record filings for enterprises that failed to make the necessary adjustments. The relevant circumstances may also be publicly disclosed.

For foreign investors, this means that an older Chinese joint venture should not automatically be assumed to operate under a governance structure that remains valid simply because it was accepted when the enterprise was originally established.

The company’s articles of association, shareholders’ arrangements, governance bodies, appointment procedures, and registration records should be reviewed against the current Company Law.

This is particularly important where the foreign investor relies on historical joint venture agreements or governance arrangements negotiated under the previous legislative framework.

11. Minority Shareholder Protection and Corporate Disputes

Foreign investors do not always hold a controlling interest in Chinese companies. In joint ventures, minority shareholders may depend on contractual and statutory safeguards to protect their investment.

The Company Law provides several mechanisms for shareholder protection.

First, shareholders may inspect specified corporate documents and, subject to the statutory requirements, request access to accounting books and vouchers.

Second, shareholders may challenge unlawful corporate conduct and seek judicial remedies where their rights have been infringed.

Third, the Company Law provides for derivative litigation. Under Article 189, shareholders may request the supervisory board or board of directors, as applicable, to bring proceedings against directors or senior managers who cause losses to the company.

If the relevant corporate body refuses to initiate proceedings, fails to do so within the statutory period, or the circumstances are urgent, eligible shareholders may bring proceedings in their own names for the benefit of the company.

For a limited liability company, the statutory derivative action is available to shareholders subject to the applicable conditions. For a joint-stock limited company, the law generally requires the relevant shareholders to have held at least 1% of the company’s shares, individually or collectively, for at least 180 consecutive days.

The revised law also extends certain derivative action mechanisms to wholly owned subsidiaries.

These remedies should be understood as legal safeguards rather than substitutes for effective corporate governance.

A foreign investor should address the practical risks of minority ownership before investing. A shareholders’ agreement may regulate board nomination rights, reserved matters, access to information, restrictions on related-party transactions, deadlock procedures, and mechanisms for resolving disputes.

The agreement should also consider how the parties will respond if one shareholder fails to contribute capital, refuses to approve essential corporate decisions, or seeks to transfer its ownership to an unacceptable third party.

12. Practical Considerations for Foreign Investors

A foreign investor considering the establishment or acquisition of a Chinese company should approach corporate structuring as a long-term governance exercise.

The following matters deserve particular attention.

First, confirm that the proposed investment is permitted. The investor should identify the relevant sector, examine the applicable negative list, and determine whether foreign ownership restrictions, licensing conditions, or other regulatory requirements apply.

Second, select the appropriate corporate form. A limited liability company may be suitable for a privately held operating subsidiary or joint venture, while a joint-stock limited company may be more appropriate for a larger or more complex capital structure.

Third, determine realistic registered capital. The registered amount should reflect the company’s actual financing requirements and the shareholders’ capacity to meet their contribution obligations within the statutory period.

Fourth, draft the articles of association carefully. The articles should establish clear governance procedures, voting thresholds, management powers, appointment mechanisms, and shareholder protections.

Fifth, coordinate the articles with the shareholders’ agreement. Contractual protections are useful only if they are consistent with mandatory company-law rules and can be implemented through the company’s internal governance arrangements.

Sixth, select directors and the legal representative carefully. These appointments should reflect the company’s actual management structure and the responsibilities imposed by Chinese law.

Seventh, establish reliable internal controls. The company should have clear procedures for financial management, corporate seals, related-party transactions, authorisations, and the approval of significant commitments.

Eighth, review capital contribution obligations in acquisitions. A purchaser should examine not only the amount of capital already paid but also outstanding subscriptions, overdue contributions, non-monetary assets, and potential liability under Article 88.

Ninth, maintain accurate registration and corporate records. Changes in shareholders, directors, legal representatives, capital, and other registered particulars should be reflected in the relevant company records and filings.

Finally, establish a workable exit strategy. The shareholders should consider equity transfer restrictions, pre-emption rights, valuation mechanisms, deadlock procedures, and the legal consequences of dissolution or liquidation.

A foreign investor should also distinguish between corporate governance and the wider regulatory obligations of the business. Company registration does not replace industry licensing, tax compliance, employment obligations, data protection requirements, or foreign exchange rules.

13. Frequently Asked Questions

1. Does the Chinese Company Law apply to foreign-invested companies?

Yes. Under Article 31 of the Foreign Investment Law, the organisational form, structure, and rules of conduct of foreign-invested enterprises are governed by the Company Law, the Partnership Enterprise Law, and other applicable legislation. A foreign-invested limited liability company is therefore generally subject to the same principal company-law framework as a domestically invested limited liability company.

2. Can a foreign investor establish a wholly foreign-owned company in China?

Yes, where the relevant industry permits full foreign ownership. The investor must comply with the applicable foreign investment access rules, registration requirements, and any sector-specific licensing conditions. A wholly foreign-owned company is generally established as a Chinese legal entity rather than as a foreign company operating directly in China.

3. What is the difference between registered capital and paid-in capital?

Registered capital represents the total amount of capital contributions subscribed by the shareholders and registered with the authorities. Paid-in capital represents the amount actually contributed. Under the revised Company Law, shareholders of an ordinary limited liability company generally have five years from establishment to pay their subscribed contributions in full.

4. Can a foreign investor contribute intellectual property instead of cash?

Yes, provided that the intellectual property qualifies as transferable property capable of being valued in money and satisfies the statutory requirements. The relevant ownership rights must be properly transferred to the company, and the contribution must be appropriately valued and documented.

5. Who controls a Chinese limited liability company?

The shareholders’ meeting is the principal decision-making body. The board of directors manages the company’s affairs within its statutory and constitutional authority. The manager is responsible for day-to-day operations, while the supervisory structure monitors relevant corporate conduct. The actual allocation of authority depends on the Company Law and the company’s articles of association.

6. Must every Chinese company establish a supervisory board?

No. Although the Company Law provides for supervisory boards, certain smaller companies may appoint a single supervisor or, where the statutory conditions are met, dispense with supervisors by unanimous shareholder agreement. A company may also establish an audit committee within its board of directors to exercise the relevant supervisory functions.

7. Is the legal representative personally liable for company debts?

Not automatically. The company is a separate legal person and is generally responsible for its own debts. However, the legal representative may incur personal responsibility where the law imposes liability for their own misconduct or where specific statutory conditions are satisfied.

8. Can a foreign shareholder inspect the company’s accounting records?

Yes, subject to the statutory requirements. Shareholders may inspect and copy specified corporate documents and may request access to accounting books and accounting vouchers by submitting a written request explaining the purpose. The company may refuse where the statutory grounds for an improper purpose are established.

9. Can a shareholder sell its equity interest freely?

Transfers between existing shareholders are generally permitted. Transfers to outsiders are subject to statutory pre-emption rights and any applicable provisions in the articles of association. Foreign investment restrictions and registration requirements may also affect a particular transaction.

10. What happened to the old Chinese-foreign joint venture governance system?

The previous foreign investment laws were replaced by the Foreign Investment Law, effective from 1 January 2020. Existing enterprises were given a five-year period to adjust organisational structures that did not comply with the new framework. That period ended on 31 December 2024, and older enterprises should ensure that their governance arrangements and registration records comply with the current law.

14. Key Takeaways

• The revised Company Law, effective from 1 July 2024, is the principal legislation governing the organisation and management of Chinese companies, including foreign-invested companies.
• The Foreign Investment Law determines the conditions under which foreign investors may participate in particular sectors, while the Company Law regulates corporate structure and governance.
• Limited liability companies are commonly used by foreign investors establishing operating subsidiaries and joint ventures in China.
• Shareholders generally enjoy rights to participate in major decisions, receive lawful profit distributions, and inspect specified corporate documents.
• Shareholders of ordinary limited liability companies must generally pay their subscribed capital contributions in full within five years of establishment.
• Existing companies may be required to adjust older contribution schedules under the transitional rules.
• Directors, supervisors, and senior managers owe duties of loyalty and diligence to the company.
• Controlling shareholders and actual controllers who effectively conduct company affairs may also fall within the statutory duties framework.
• The legal representative is a registered individual who represents the company in executing corporate affairs and should be selected with particular care.
• The transition period for older foreign-invested enterprises to adjust their organisational structures ended on 31 December 2024.
• Effective corporate governance requires properly drafted articles of association, accurate registration records, internal controls, and clear arrangements between shareholders.

Conclusion

Chinese company law provides the legal foundation for the establishment, ownership, management, and accountability of enterprises operating in China. For foreign investors, understanding this framework is essential not only when incorporating a new subsidiary or entering into a joint venture but also when acquiring equity in an existing Chinese company.

The revised Company Law represents a substantial development in the regulation of corporate capital, governance, and managerial responsibility. Its five-year contribution rule, strengthened directors’ duties, expanded accountability of controlling persons, and more flexible governance arrangements have important consequences for both new and established businesses.

Foreign investors should pay particular attention to the relationship between registered capital and actual financing obligations, the distribution of authority between shareholders and directors, the responsibilities of the legal representative, and the enforceability of shareholder protections.

The most effective corporate structure is not necessarily the one with the simplest registration procedure or the lowest initial capital commitment. It is the one that combines lawful market access, realistic financing, transparent governance, clearly allocated responsibilities, and workable mechanisms for resolving disagreements and protecting the investment.

Chinese company law should therefore be approached not as a collection of administrative formalities but as the legal architecture through which a foreign investment is organised, controlled, financed, and protected.

Principal Legal Sources and Further Reading

1. Company Law of the People’s Republic of China (2023 Revision), adopted on 29 December 2023 and effective from 1 July 2024. The official Chinese text is available through the State Administration for Market Regulation. An English reference translation is available through Lexis China.
2. Foreign Investment Law of the People’s Republic of China, effective from 1 January 2020. English text available through the Ministry of Justice of the People’s Republic of China.
3. Provisions of the State Council on Implementing the Registered Capital Registration Management System under the Company Law, issued on 1 July 2024. See the State Council’s English-language announcement.
4. Company Registration Administration Implementation Measures, issued by the State Administration for Market Regulation on 20 December 2024 and effective from 10 February 2025. The Chinese text is available through the State Administration for Market Regulation.
5. Shanghai Municipal Government: Compliance with the Five-Year Transition Period for Foreign-Invested Enterprises, explaining the transition from the former foreign investment laws to the current company-law framework. Available at the Shanghai Municipal Government portal.
6. China’s Revised Company Law: A Guide for Company Directors and CEOs, CMS, providing additional analysis of directors’ duties, legal representatives, and governance structures. Available at CMS.

This article is intended for general legal education and informational purposes. It does not constitute legal advice or replace professional advice from appropriately qualified Chinese legal, accounting, or regulatory specialists. The Chinese-language legislation is authoritative where an English translation differs.