On 28 August 2023 the third reading draft of the revised Company Law was submitted to the fifth session of the Standing Committee of the 14th National People’s Congress. The draft further refines the subscribed capital registration system, democratic management, minority shareholder protection and rules on controlling shareholders and actual controllers.
The most closely watched change is the requirement that shareholders of a limited liability company pay in subscribed capital within five years of incorporation. If enacted, it would end the widespread practice of very long subscription periods with minimal paid-in capital.
The substance of five years
Under the current regime, shareholders may agree long subscription periods in the articles, producing companies with “ten million subscribed, zero paid in”. A five-year limit turns the subscription promise into an obligation with a clear time boundary; the articles can no longer defer indefinitely.
For existing companies, the draft points to gradual adjustment rather than immediate recovery. But gradual does not mean irrelevant. Companies with obviously abnormal periods may be required by the registry to adjust, and shareholders need to assess whether cash flow can support payment when due.
Effect on equity structures
A five-year limit changes equity design. Arrangements that used high subscriptions and low paid-in capital to signal strength will face real cash pressure. Shareholders may need to reduce registered capital, bring in new shareholders to share contribution, or scale back the business.
Capital reduction is a common route, but it requires creditor notice, publication and other procedures. Reducing capital solely to ease contribution pressure, without proper procedure, leaves shareholders potentially liable within the original subscription.
Directors’ call-up duty
The draft also addresses board verification and call-up of capital. Where a shareholder fails to pay in full on time, the board should call for payment; if payment is still not made, the company may issue a forfeiture notice. Forfeiture gives companies a tool to clean up unpaid equity, but requires proper procedure to avoid infringing shareholder rights.
For investors, contribution arrangements, default clauses and equity adjustment mechanisms in investment agreements need to align with the new rules. Contractual terms alone may not override statutory contribution obligations.
Controlling shareholders and actual controllers
The draft further strengthens rules on controlling shareholders and actual controllers, including related-party transactions, competing businesses and duties of loyalty and diligence. For family businesses, group structures and multi-layer holdings, the boundaries of actual controller conduct will be clearer and harder to avoid through layering.
What can be prepared now
First, inventory subscription periods and paid-in status across existing companies to identify maturity pressure. Second, assess whether capital reduction, revised contribution plans or new funding are needed. Third, revise articles and shareholder agreements to set contribution timetables, default liability and forfeiture mechanics. Fourth, review related-party transactions and competing business arrangements against actual controller risk. Fifth, follow the legislative process after third reading and avoid designing new transactions on the old rules.
For incorporation and articles design, see our incorporation service; for equity financing and contribution arrangements, see equity financing; for M&A exit and equity restructuring, see M&A and exit.
This article is based on the third reading draft of the revised Company Law submitted for deliberation on 28 August 2023. It is for reference only and does not constitute legal advice.