The “Company Law of the People’s Republic of China” (hereinafter referred to as the “New Company Law”) came into effect on July 1, 2024. To address the issue of transitioning between the old and new laws following the implementation of the New Company Law, the Supreme People’s Court issued the “Provisions of the Supreme People’s Court on the Temporal Effect of the Company Law of the People’s Republic of China” (Fa Shi [2024] No. 7,) (hereinafter referred to as the “Provisions”) on June 29, 2024, which came into effect simultaneously with the New Company Law.
The “Provisions” consist of 8 articles, including general provisions on temporal effect and favorable retrospective rules, favorable retrospective rules for the validity of civil legal acts, favorable retrospective rules for contract performance, blank retrospective rules for new provisions, retrospective application rules for refined provisions, legal application of liquidation responsibilities, the precedence of res judicata over retroactivity, and effective time. This article will analyze and interpret the key contents of the “Provisions”.
I. Application Rules of the “Provisions” Article 1 of the “Provisions” reiterates the basic principle of “non-retroactivity of law.” For legal facts that occurred before the implementation of the New Company Law, the laws and judicial interpretations in effect at that time are generally applicable. The “Provisions” also provide limited exceptions to the non-retroactivity principle, applying the favorable retrospective rule stipulated in Article 104 of the Legislation Law, which is designed to better protect the rights and interests of citizens, legal persons, and other organizations. In particular circumstances where the application of the new law better reflects legislative intent, specific provisions of the Company Law may be granted retrospective effect.
II. Favorable Retrospective Rules Paragraph 2 of Article 1 of the “Provisions” establishes the favorable retrospective application of the Company Law in seven scenarios:
1. Improper convening procedure where shareholders were not notified of the meeting: The exclusion period begins when the shareholder “knew or should have known” of the resolution, with a maximum exclusion period of one year. This is a new provision compared to the old Company Law. 2. Resolution invalidity, the civil legal relationship formed with a bona fide third party based on the resolution remains unaffected. This new provision aligns with the old law’s treatment of invalid or revoked resolutions but clarifies the non-establishment of resolutions. 3. Debt as a legitimate form of capital contribution. The New Company Law clarifies that equity and debt can be capital contributions, resolving previous controversies. According to the new law, contributions in the form of debt must follow two principles: first, they can be valued in monetary terms, i.e., they can be assessed, measured and their value determined in monetary terms; and second, they can be transferred in accordance with the law. 4. External transfer of equity without majority shareholder consent. Instead of requiring majority consent from other shareholders, the New Company Law only requires notification of essential details, with other shareholders having preemptive rights. 5. Liability for illegal profit distribution and capital reduction: The New Company Law specifies compensation responsibilities for shareholders and liable directors, supervisors, and senior executives, improving the clarity of accountability. 6. Profit distribution within six months. The New Company Law mandates that profits be distributed within six months of the resolution, enhancing shareholder rights and reducing disputes. 7. Prohibition of disproportionate capital reduction. The New Company Law allows exceptions only under specific conditions such as legal provisions, unanimous agreement among shareholders of a limited liability company, or provisions in the articles of association of a joint-stock company.
III. Favorable Retrospective Rules for Contract Performance
Article 3 of the “Provisions” addresses applying the law to “cross-law contracts” - contracts signed before the New Company Law but performed afterward. Disputes arising from performance before the New Company Law are governed by the old law, while those arising from performance after are governed by the new law. Exceptions include delays caused by either party, for which responsibility is determined based on fault. Simultaneously, the “Provisions” enumerate three circumstances under which the favorable retrospective application of contract performance rules is allowed: 1. Prohibition of illegal holding of listed company shares on behalf of others. Compared to the old “Company Law,” this is a new provision aimed at preventing the actual controllers of listed companies from engaging in improper transactions that could harm the company and creditors’ interests and disrupt securities market regulations. Suppose an illegal holding contract was signed before the new law but the performance period extends beyond the new law's implementation. In that case, the new law stipulates that such performance should be prohibited. 2. Restriction on cross-shareholding between a listed company and its subsidiaries. This is also a new provision compared to the old “Company Law.” It aims to regulate the management of listed companies from using cross-shareholding to undermine shareholders and establish internal control. Under the favorable retrospective application rule, contracts regarding cross-shareholding between a listed company and its subsidiaries signed before the new law but performed after the new law should be prohibited under the new law. 3. In principle, a joint-stock company should not provide financial assistance for the acquiring of its own or its parent company’s shares, except for implementing employee stock ownership plans. This is a new provision compared to the old “Company Law”. However, three points are worth noting: Firstly, the principle is that the company should not provide financial assistance except in implementing employee stock ownership plans. Secondly, financial aid may be allowed in specific circumstances. However, it requires a resolution from the shareholders' meeting or authorization from the board of directors and is subject to a total amount limit. Thirdly, if the authorized board resolves directors, it must be passed by at least two-thirds of all directors.
IV. Blank Retrospective Rules Article 4 of the “Provisions” provides for the blank retrospective rules of new provisions, aiming to fill gaps in the old law while protecting legitimate rights and maintaining social and economic order. Specific scenarios include: 1. Equity transfer of unpaid subscribed capital: The transferee assumes the obligation to pay, with the transferor bearing supplementary responsibility if the transferee fails to pay on time. 2. Abuse of rights by majority shareholders: Minority shareholders can request the company to repurchase their shares if their rights are severely infringed, with the company required to dispose of the shares within six months. 3. Dissenting shareholders of a closed joint-stock company have the right to request a share repurchase under specific circumstances. The company must dispose of the repurchased shares within six months. 4. Controlling shareholders and actual controllers who do not serve as directors but actively manage company affairs have fiduciary and diligent duties to the company. 5. If controlling shareholders or actual controllers instruct directors or senior management to engage in actions that harm the company or shareholders’ interests, it constitutes joint tort liability, and they should bear joint and several liability.
V. Retrospective Rules for Refined Provisions Article 5 of the “Regulations” details the retroactive application rules for refined provisions. When the relevant provisions of the old Company Law are abstract, general, or ambiguous and thus open to interpretive disputes, and the new Company Law provides clearer, more specific interpretative provisions, the new Company Law may be directly applied to unify adjudication standards. The specific applicable situations for this article are as follows:
1. The company’s articles of association may restrict on the transfer of shares. Article 137 of the old Company Law stipulates that “shareholders’ shares may be transferred in accordance with the law.” On this basis, Article 157 of the new Company Law further clarifies that the articles of association of a joint-stock company can set restrictions on share transfers. 2. Supervisors are prohibited from engaging in behaviors such as misappropriating company funds.
Article 147, Paragraph 2 of the old Company Law lists prohibited behaviors for directors, supervisors, and senior executives (DSS), and Article 148 specifies prohibited behaviors for directors and senior executives. The new Company Law consolidates these provisions, specifying prohibited behaviors for DSS in Article 181, restricting related-party transactions in Article 182, limiting the pursuit of business opportunities in Article 183, and prohibiting competition within the same industry in Article 184. The new Company Law provides more detailed definitions for these prohibited behaviors. 3. With a report to the board of directors or shareholders’ meeting and the formation of an effective resolution according to the company’s articles of association, directors and senior executives may pursue business opportunities available to the company and engage in similar business activities. Article 148, Paragraph 1, Item 5 of the old Company Law stipulates that, without the consent of the shareholders’ meeting or shareholders’ general meeting, directors and senior executives are not allowed to use their positions to seek business opportunities belonging to the company for themselves or others, or to operate businesses similar to the company’s. Articles 183 and 184 of the new Company Law expand the decision-making body from “shareholders’ meeting or shareholders’ general meeting” to “shareholders’ meeting or board of directors,” allowing the articles of association to authorize the board of directors to make such decisions, thus effectively addressing the practical difficulties of convening shareholders’ meetings. 4. The subjects of related-party transaction restrictions include DSS and their close relatives, as well as enterprises directly or indirectly controlled by DSS or their close relatives. The new Company Law extends the restriction subjects of related-party transactions from “directors and senior executives” to “directors, supervisors, and senior executives.” Additionally, Article 182, Paragraph 2 of the new Company Law includes “close relatives of DSS,” “enterprises directly or indirectly controlled by DSS or their close relatives,” and “other related parties associated with DSS” as restriction subjects.
[Comment] In summary, the “Provisions” clarify the transitional principles between the old and new Company Law, providing detailed guidelines on favorable retrospective, contract performance, and blank retrospective rules. This ensures legal fairness and consistency, effectively protecting the legitimate rights of relevant civil entities. With the implementing of the New Company Law, all parties concerned should fully understand and utilize these provisions to safeguard their rights and promote sound corporate governance and development.
The “Provisions” consist of 8 articles, including general provisions on temporal effect and favorable retrospective rules, favorable retrospective rules for the validity of civil legal acts, favorable retrospective rules for contract performance, blank retrospective rules for new provisions, retrospective application rules for refined provisions, legal application of liquidation responsibilities, the precedence of res judicata over retroactivity, and effective time. This article will analyze and interpret the key contents of the “Provisions”.
I. Application Rules of the “Provisions” Article 1 of the “Provisions” reiterates the basic principle of “non-retroactivity of law.” For legal facts that occurred before the implementation of the New Company Law, the laws and judicial interpretations in effect at that time are generally applicable. The “Provisions” also provide limited exceptions to the non-retroactivity principle, applying the favorable retrospective rule stipulated in Article 104 of the Legislation Law, which is designed to better protect the rights and interests of citizens, legal persons, and other organizations. In particular circumstances where the application of the new law better reflects legislative intent, specific provisions of the Company Law may be granted retrospective effect.
II. Favorable Retrospective Rules Paragraph 2 of Article 1 of the “Provisions” establishes the favorable retrospective application of the Company Law in seven scenarios:
1. Improper convening procedure where shareholders were not notified of the meeting: The exclusion period begins when the shareholder “knew or should have known” of the resolution, with a maximum exclusion period of one year. This is a new provision compared to the old Company Law. 2. Resolution invalidity, the civil legal relationship formed with a bona fide third party based on the resolution remains unaffected. This new provision aligns with the old law’s treatment of invalid or revoked resolutions but clarifies the non-establishment of resolutions. 3. Debt as a legitimate form of capital contribution. The New Company Law clarifies that equity and debt can be capital contributions, resolving previous controversies. According to the new law, contributions in the form of debt must follow two principles: first, they can be valued in monetary terms, i.e., they can be assessed, measured and their value determined in monetary terms; and second, they can be transferred in accordance with the law. 4. External transfer of equity without majority shareholder consent. Instead of requiring majority consent from other shareholders, the New Company Law only requires notification of essential details, with other shareholders having preemptive rights. 5. Liability for illegal profit distribution and capital reduction: The New Company Law specifies compensation responsibilities for shareholders and liable directors, supervisors, and senior executives, improving the clarity of accountability. 6. Profit distribution within six months. The New Company Law mandates that profits be distributed within six months of the resolution, enhancing shareholder rights and reducing disputes. 7. Prohibition of disproportionate capital reduction. The New Company Law allows exceptions only under specific conditions such as legal provisions, unanimous agreement among shareholders of a limited liability company, or provisions in the articles of association of a joint-stock company.
III. Favorable Retrospective Rules for Contract Performance
Article 3 of the “Provisions” addresses applying the law to “cross-law contracts” - contracts signed before the New Company Law but performed afterward. Disputes arising from performance before the New Company Law are governed by the old law, while those arising from performance after are governed by the new law. Exceptions include delays caused by either party, for which responsibility is determined based on fault. Simultaneously, the “Provisions” enumerate three circumstances under which the favorable retrospective application of contract performance rules is allowed: 1. Prohibition of illegal holding of listed company shares on behalf of others. Compared to the old “Company Law,” this is a new provision aimed at preventing the actual controllers of listed companies from engaging in improper transactions that could harm the company and creditors’ interests and disrupt securities market regulations. Suppose an illegal holding contract was signed before the new law but the performance period extends beyond the new law's implementation. In that case, the new law stipulates that such performance should be prohibited. 2. Restriction on cross-shareholding between a listed company and its subsidiaries. This is also a new provision compared to the old “Company Law.” It aims to regulate the management of listed companies from using cross-shareholding to undermine shareholders and establish internal control. Under the favorable retrospective application rule, contracts regarding cross-shareholding between a listed company and its subsidiaries signed before the new law but performed after the new law should be prohibited under the new law. 3. In principle, a joint-stock company should not provide financial assistance for the acquiring of its own or its parent company’s shares, except for implementing employee stock ownership plans. This is a new provision compared to the old “Company Law”. However, three points are worth noting: Firstly, the principle is that the company should not provide financial assistance except in implementing employee stock ownership plans. Secondly, financial aid may be allowed in specific circumstances. However, it requires a resolution from the shareholders' meeting or authorization from the board of directors and is subject to a total amount limit. Thirdly, if the authorized board resolves directors, it must be passed by at least two-thirds of all directors.
IV. Blank Retrospective Rules Article 4 of the “Provisions” provides for the blank retrospective rules of new provisions, aiming to fill gaps in the old law while protecting legitimate rights and maintaining social and economic order. Specific scenarios include: 1. Equity transfer of unpaid subscribed capital: The transferee assumes the obligation to pay, with the transferor bearing supplementary responsibility if the transferee fails to pay on time. 2. Abuse of rights by majority shareholders: Minority shareholders can request the company to repurchase their shares if their rights are severely infringed, with the company required to dispose of the shares within six months. 3. Dissenting shareholders of a closed joint-stock company have the right to request a share repurchase under specific circumstances. The company must dispose of the repurchased shares within six months. 4. Controlling shareholders and actual controllers who do not serve as directors but actively manage company affairs have fiduciary and diligent duties to the company. 5. If controlling shareholders or actual controllers instruct directors or senior management to engage in actions that harm the company or shareholders’ interests, it constitutes joint tort liability, and they should bear joint and several liability.
V. Retrospective Rules for Refined Provisions Article 5 of the “Regulations” details the retroactive application rules for refined provisions. When the relevant provisions of the old Company Law are abstract, general, or ambiguous and thus open to interpretive disputes, and the new Company Law provides clearer, more specific interpretative provisions, the new Company Law may be directly applied to unify adjudication standards. The specific applicable situations for this article are as follows:
1. The company’s articles of association may restrict on the transfer of shares. Article 137 of the old Company Law stipulates that “shareholders’ shares may be transferred in accordance with the law.” On this basis, Article 157 of the new Company Law further clarifies that the articles of association of a joint-stock company can set restrictions on share transfers. 2. Supervisors are prohibited from engaging in behaviors such as misappropriating company funds.
Article 147, Paragraph 2 of the old Company Law lists prohibited behaviors for directors, supervisors, and senior executives (DSS), and Article 148 specifies prohibited behaviors for directors and senior executives. The new Company Law consolidates these provisions, specifying prohibited behaviors for DSS in Article 181, restricting related-party transactions in Article 182, limiting the pursuit of business opportunities in Article 183, and prohibiting competition within the same industry in Article 184. The new Company Law provides more detailed definitions for these prohibited behaviors. 3. With a report to the board of directors or shareholders’ meeting and the formation of an effective resolution according to the company’s articles of association, directors and senior executives may pursue business opportunities available to the company and engage in similar business activities. Article 148, Paragraph 1, Item 5 of the old Company Law stipulates that, without the consent of the shareholders’ meeting or shareholders’ general meeting, directors and senior executives are not allowed to use their positions to seek business opportunities belonging to the company for themselves or others, or to operate businesses similar to the company’s. Articles 183 and 184 of the new Company Law expand the decision-making body from “shareholders’ meeting or shareholders’ general meeting” to “shareholders’ meeting or board of directors,” allowing the articles of association to authorize the board of directors to make such decisions, thus effectively addressing the practical difficulties of convening shareholders’ meetings. 4. The subjects of related-party transaction restrictions include DSS and their close relatives, as well as enterprises directly or indirectly controlled by DSS or their close relatives. The new Company Law extends the restriction subjects of related-party transactions from “directors and senior executives” to “directors, supervisors, and senior executives.” Additionally, Article 182, Paragraph 2 of the new Company Law includes “close relatives of DSS,” “enterprises directly or indirectly controlled by DSS or their close relatives,” and “other related parties associated with DSS” as restriction subjects.
[Comment] In summary, the “Provisions” clarify the transitional principles between the old and new Company Law, providing detailed guidelines on favorable retrospective, contract performance, and blank retrospective rules. This ensures legal fairness and consistency, effectively protecting the legitimate rights of relevant civil entities. With the implementing of the New Company Law, all parties concerned should fully understand and utilize these provisions to safeguard their rights and promote sound corporate governance and development.