2023-05-26
On December 24, 2021, the Standing Committee of the National People's Congress announced the "Revised Draft of the Company Law of the People's Republic of China" (hereinafter referred to as the "Revised Draft"), soliciting opinions from the public. The revised draft consists of 15 chapters and 260 articles. On the basis of Article 218 of Chapter 13 of the Company Law of the People's Republic of China (2018 Amendment) (hereinafter referred to as the "Current Company Law"), approximately 70 articles have been substantially added and modified.
The revised draft has made many efforts to improve the company's capital system, corporate governance, and other aspects, especially in the capital system and corporate governance of limited liability companies. It has introduced systems such as authorized capital system, class share system, and non par value share system, and has lifted the restrictions on the transfer of shares by initiators in the current company law, allowing the establishment of one person limited liability companies. These to some extent respond to the current situation and demand of market practice for a more flexible capital system and corporate governance system for limited liability companies. Based on the revised draft, there are also expectations in the market that the establishment of limited liability companies may further popularize.
This article systematically compares and sorts out the differences between limited liability companies and joint stock limited companies from several dimensions: company establishment/registration/information disclosure, company capital system, corporate governance system, equity trading rules, and other shareholder rights arrangements such as information rights, in order to provide reference for market entities to choose the form of company establishment. Given that this article aims to systematically compare and sort out the aforementioned dimensions, the system mentioned in the article is not limited to the content of the revised draft that has been adjusted relative to the current company law, but also includes content that is meaningful for the comparison between the two, although there have been no adjustments to the current company law. As for the provisions of the Company Law mentioned in the text, in the absence of a clear definition of whether it is the "current Company Law" or the "revised draft", it generally refers to the fact that both the revised draft and the current Company Law have substantially similar provisions.
Overall, the general view in theory and practice is that limited liability companies tend to be more inclined towards a "human cooperation nature", while joint stock limited companies tend to be more inclined towards a "capital cooperation nature". The mandatory provisions applicable to limited liability companies and joint stock limited companies under the revised draft (which do not specify rules that can be excluded by agreement in the company's articles of association) and the "default rule" (which refers to the rules that are applicable by default unless otherwise agreed in the company's articles of association, and the company's articles of association can make different agreements on these default rules) also basically follow this difference in nature. However, this difference in the nature of 'should be' may not be consistent with the actual situation in many cases. In practice, many limited liability companies do not have the "should be" level of "human cooperation" mentioned above. After multiple rounds of financing, whether from the perspective of business or shareholder size, they may no longer have strong "human cooperation" or their "capital cooperation" has to some extent exceeded "human cooperation". For such limited liability companies, the institutional arrangement of limited liability companies may be more efficient; And some limited liability companies may have stronger "human cooperation" than their "capital cooperation", for example, many joint venture financial institutions exist in the form of limited liability companies. Therefore, in terms of market entities' choice of company form, it is necessary to evaluate the company's different development stages in order to choose a suitable company form for their own development stage.
Company establishment/registration/information disclosure
1. Company establishment: The difference between a limited liability company and a joint-stock company mainly lies in the method of establishment and the number of people. Specifically:
(1) Establishment method (revised draft articles 38 and 92): A limited liability company is jointly established by the initiating shareholders, who can regulate their rights and obligations through articles of association and signing agreements; A joint stock limited company can be established through promotion or public offering. The "fundraising method" for the establishment of a limited liability company is actually a manifestation of the "capital cooperation" of the company. If the company is established through fundraising, shareholders who are not initiators do not need to be signatories to the initiator agreement, and they can fulfill their investment obligations. In order to protect non initiator shareholders to a certain extent, the Company Law requires that the total number of shares subscribed by initiators shall not be less than 35% of the total number of shares at the time of establishment, and no shares shall be offered to others until the initiators have fully paid in the shares subscribed for. Although the Company Law provides a method for the establishment of joint stock limited companies through fundraising, there are very few joint stock limited companies established through fundraising in practice. One reason may be that in the initial stage of the company's establishment, there are few investors willing to invest as purely passive investors. Therefore, from a practical perspective, the difference in establishment methods between the two has limited practical significance.
(2) Number of shareholders (revised draft articles 37 and 93): The number of shareholders of a limited liability company is limited to 50; There is no upper limit on the number of shareholders in a joint stock limited company, but the number of initiators is 1-200. For situations where the total number of shareholders exceeds 200 or involves public offering of shares, it is the main regulated object of the Securities Law. In addition, the revised draft adds new provisions allowing a natural person or a legal person to establish a one person limited liability company, which is in line with the provisions of limited liability companies. The difference in the number of shareholders is also a reflection of the difference in "human cooperation" and "capital cooperation" between the two. This difference will run through the entire survival period of the company, not just during the establishment phase; In fact, its significance mainly does not lie in the establishment stage, because in practice, few companies have exceeded 50 people (even limited liability companies) during the establishment stage. However, when the company gradually develops and grows with continuous financing needs, especially when it is necessary to publicly issue shares, the significance of this difference is highlighted. If a limited liability company has continuous financing needs in the future, It may be necessary to undergo a "share reform" to become a limited liability company (which is mandatory in the case of public issuance of shares).
2. Company Registration/Information Publicity (Chapter 2 of the revised draft): The modifications related to company registration/information disclosure in the revised draft mainly aim to elevate the basic provisions in subordinate laws (such as the "Regulations on the Administration of Company Registration") and the effective provisions in practice to law, without any substantial modifications. In terms of establishment registration, there is basically no difference between a limited liability company and a joint stock limited company. However, there are some differences between the two in terms of subsequent registration of changes in equity structure and corresponding information disclosure. The most core is that the equity transfer of a limited liability company requires change registration, and the newly added shareholder information is also a matter of registration and information disclosure; The transfer of shares in a limited liability company does not require a change in registration, only a change in the company's register of shareholders, and new shareholder information is not a matter that needs to be disclosed. In addition, in the case of capital increase or decrease, limited liability companies not only register and publicize changes in registered capital itself, but also register and publicize changes in shareholders themselves. However, joint stock limited companies only register changes in registered capital and do not register or disclose identity information of non initiator shareholders. This difference is also a reflection of the difference between the "human cooperation" and "capital cooperation" of the two companies.
Company Capital System
The corporate capital system has always been one of the main lines that runs through the company's legal system. In terms of the company's capital system, the revised draft has supplemented and improved some specific details and implementation of the capital enrichment principle and shareholder contribution responsibility compared to the current company law (see the interpretation of the revised draft series of Haiwen · Observation | Company Law - Capital Enrichment Principle and Shareholder Contribution Responsibility). Most of these supplements and improvements are uniformly applicable to limited liability companies and joint stock limited companies. In addition, there has been no substantial adjustment to the capital system of limited liability companies as a whole, and they still apply the subscribed registered capital system.
In terms of limited liability companies, on the basis of maintaining the basic system of subscribed capital, many adjustments have been made relative to the current company laws. This includes the introduction of the authorized capital system, class share system, and non par value share system, all of which are arbitrary norms that allow companies to independently choose whether to apply, creating greater flexibility in the setting of capital systems for limited liability companies. Specifically
1. Authorized capital system (Article 97 of the revised draft): The company's articles of association or the shareholders' meeting may authorize the board of directors to decide to issue the portion of the total number of shares of the company that is not the number of shares that should be issued at the time of establishment. The core purpose of this system should be to improve the financing efficiency of limited liability companies, which is a manifestation of their "capital cooperation". Correspondingly, the authorized capital system is not applicable to limited liability companies, but it seems that limited liability companies do not need to apply the authorized capital system and it will not affect financing efficiency, because the shareholders of limited liability companies theoretically have strong "human cooperation", and there should be effective communication mechanisms between shareholders. Many times, shareholders of limited liability companies also serve as directors or managers of the company.
2. Class share system (Article 157 of the revised draft): Although the tone of a limited liability company is still "equal rights for the same class of shares" (each share of the same class should have equal rights, and the issuance conditions and prices for each share of the same class of shares issued at the same time should be the same), But the revised draft adds the "class share system": the company can issue the following classes of shares with different rights from ordinary shares in accordance with the provisions of the company's articles of association: (1) shares with priority or inferior distribution of profits or remaining property; (2) Each share has more or less voting rights than ordinary shares; (3) The transfer of restricted shares requires the consent of the company; (4) Other categories of stocks specified by the State Council. Please refer to the Interpretation of the Revised Draft of the Company Law Series - The Impact of Establishing a Class Share System on the Domestic Equity Financing Market
The class share system is not only a system of corporate capital, but also a system of corporate governance. The class share system largely responds to the market practice's demand for more flexible capital and corporate governance systems for limited liability companies. Taking private equity investment as an example, a series of special shareholder rights and obligations arrangements have been formed between founders and investors in market practice. The revised draft of the class share system has to some extent adopted some of the arrangements in such market practice, including preferential dividends/liquidation in economic rights, special voting rights in corporate governance, and transfer restrictions. Regarding these special arrangements, limited by the current company law's principle of "equal shares and equal rights" for limited liability companies, the current market practice mainly involves the shareholders of limited liability companies agreeing through shareholder agreements on the rights and obligations attached to the shares held by specific entities, largely relying on specific shareholder identities rather than the rights inherent in the "shares" themselves. Although this approach to some extent responds to and solves the needs of market practice, it also has many inconveniences. For example, during the transfer of shares, although it can be agreed in the shareholder agreement that the transferee should inherit the rights and obligations of the transferor, this is a contractual arrangement. If the new transferee fails to sign an agreement with other shareholders to clarify their rights and obligations after the completion of the share transfer, The new transferee may not be able to enjoy the special rights originally enjoyed by the acquired shares, which will to some extent limit the efficiency of share circulation and increase transaction costs. The revised draft establishes a class share system, so that these special arrangements are attached to the "shares" themselves and will not change due to the change of the holding entity of these shares, which helps to clarify the rights and obligations of shareholders and improve transaction efficiency. Of course, the category stock system does not prevent market entities from continuing to stipulate other rights and obligations through agreements.
The class share system is not applicable to limited liability companies, which is also in line with the "human cooperation" that limited liability companies should have. However, as mentioned earlier, in practice, many limited liability companies already have a strong "capital cooperation" or their "capital cooperation" has been substantially stronger than the "human cooperation". Therefore, its application to the institutional arrangement of limited liability companies may be more efficient. Of course, for the preferential/inferior distribution of profits, special voting rights, and transfer restrictions in the class share system, the Company Law allows for provisions in the articles of association of limited liability companies based on the wishes of shareholders. However, regarding the priority/inferior distribution of remaining assets during company liquidation, the Company Law does not stipulate that the articles of association of a limited liability company can make provisions different from "distribution according to the proportion of shareholders' contributions". This priority/inferior arrangement is reflected in private equity practice as the "priority liquidation right" of investors and shareholders, which is one of the very important economic rights of investors. Although currently in the context of a limited liability company, Each shareholder clarifies the priority liquidation right through contractual rights and obligations, but its judicial effectiveness may still be uncertain (although the author believes that this contractual arrangement should be effective). Based on this consideration, from the perspective of investors, the class share system of joint-stock companies may better meet the needs of market practice. Of course, from a legislative perspective, since limited liability companies can make arrangements for priority/inferior distribution of remaining assets during company liquidation, it cannot be seen that it is reasonable not to allow limited liability companies to make such arrangements.
Non denomination share system (Article 155 of the revised draft): The introduction of non denomination share system in the revised draft further reflects the "capital compatibility" of limited liability companies (for the analysis of non denomination shares, please refer to the Interpretation of the Revised Draft of the Company Law - Introduction of Non denomination Share System), which is also a manifestation of the widely accepted theory that "the foundation of company credit is asset credit rather than capital credit".
Non denomination shares are only applicable to limited liability companies and not limited liability companies. Strictly speaking, the concept of shares or stocks does not apply to limited liability companies, and the shareholder rights of limited liability companies are reflected through the subscribed registered capital. Although the system of no par value shares is not applicable to limited liability companies, based on the principle of "human cooperation" and not limited to the principle of "equal rights and shares", shareholders of limited liability companies can actually achieve the effect of "no par value shares" through agreements between shareholders. For example, one of the effects of the no denomination stock system is that it allows shareholders with specific identities (such as founders of start-up companies) to acquire a majority of the company's shares with minimal capital investment, while limited liability companies can also achieve this through structural design, such as founders and investors subscribing to the company's registered capital at different prices. Of course, the "capital" convenience provided by the non denomination stock system is not limited to this point.
Corporate governance system
In terms of corporate governance, as a whole, there is no substantive difference between limited liability companies and joint-stock limited companies in terms of basic framework. Both are a three-level governance structure of "shareholders' meeting, board of directors, and senior management", and the division of powers among shareholders' meeting, board of directors, and senior management There is no substantive difference in responsibilities and obligations (as a listed company with limited liability, there are special requirements for corporate governance, but these requirements are based on the company's listed company status rather than limited liability, so this article will not discuss them). In terms of supervising directors/executives, a supervisory board or a committee under the board of directors can be established. Of course, a question that may be worth considering is whether this substantive convergence is reasonable and whether it can reflect the difference between the "human cooperation" of limited liability companies and the "capital cooperation" of joint-stock companies. For example, as far as directors are concerned, under the natural "human nature", many times the identities of directors and shareholders may tend to overlap, and many times the company's articles of association will make clear provisions on the delegation authority of the company's director seats. Therefore, the directors of a limited liability company may represent the interests of their directly appointed shareholders more. In this situation, it may be worth exploring whether it is reasonable to make no distinction between the responsibilities and obligations of directors. For convenience of reference, please refer to the comparison table at the end of this section for a comparison of the differences in corporate governance systems between limited liability companies and joint stock limited companies.
Compared to the current Company Law, the following modifications to the corporate governance system in the revised draft deserve special attention:
(1) Regarding the class share system: Compared to the current company law, the revised draft introduces a class share system that further converges the governance structure of limited liability companies and joint stock limited companies. Specifically, under the current company law, limited liability companies adhere to the principle of "equal shares and equal rights" in all aspects, and require "one share, one vote" in voting rights related to corporate governance, without any exceptions. The revised draft introduces a class share system that allows for the establishment of differential voting rights. This system and the articles of association of a limited liability company can stipulate that voting rights may not be exercised in accordance with the proportion of capital contribution, which has a certain similarity. Of course, there are other modifications to the revised draft, such as canceling the difference in the number of directors between limited liability companies and joint stock limited companies under the current company law. However, compared to the class share system, the formal significance of these modifications outweighs the substantive significance.
(2) Regarding shareholder proposal rights: There is a detail in the revised draft that may also be important, regarding the proposal rights of a limited liability company. For limited liability companies, neither the current Company Law nor the revised draft provide for shareholders' temporary proposal rights for shareholder meetings. It is understood that this is also based on the assumption of "human cooperation" in limited liability companies, which means that shareholders of limited liability companies have efficient and direct communication based on "human cooperation" for matters that require decision-making. As for limited liability companies, the revised draft reduces the shareholding ratio requirement for temporary proposal rights in the current company law from 3% to 1%. This revision clearly aims to further strengthen the protection of minority shareholder rights. However, the revised draft also includes provisions that require special resolutions from the shareholders' meeting and that the election of directors/supervisors cannot be submitted through temporary proposals. This provision may have a substantial impact on corporate governance. Specifically, under the current company law, as a statutory right, It can be assumed that shareholders holding more than 3% of the shares can file a temporary proposal to the shareholders' meeting to dismiss or appoint directors and supervisors, which is equivalent to having a statutory right to nominate directors. The revision of the revised draft actually cancels this right.
On the basis of substantive convergence of the basic framework, based on the "human cooperation" of limited liability companies and the "capital cooperation" of joint-stock limited companies, there are still differences in the details of governance systems between limited liability companies and joint-stock limited companies. Overall, these differences can be divided into the following aspects (of course, the following distinctions are mainly for the purpose of discussion convenience, and these aspects are essentially highly correlated. The core is that limited liability companies give more autonomy space to company shareholders):
(1) Limited liability companies provide more autonomy for shareholders, such as the frequency of regular meetings (refer to point 2 of the comparison table), the notice time of shareholders' meetings (refer to point 4 of the comparison table), the methods of deliberation and voting of the board of directors (refer to point 12 of the comparison table).
(2) There are more mandatory regulations for the corporate governance of limited liability companies, such as in situations where temporary shareholders' meetings need to be held (see point 3 of the comparison table), except for those that are essentially the same as those of limited liability companies
Based on the sorting and summary of this article, although limited liability companies and joint stock limited companies exhibit significant convergence under various systems of the Company Law, they still have significant differences in the "default rules". It is indeed difficult for specific market entities to have a single correct choice regarding the form of a company. In current practice, it is relatively common to adopt the form of a limited liability company when initially established. Generally, it is established in the form of a limited liability company until it reaches the stage of public issuance and listing within China, According to the mandatory requirement of listing, the practice of transforming from a limited liability company to a joint-stock limited company may not be the most efficient. The company may have different needs and priorities at different stages of development, and specific considerations need to be made based on the differences in substance or form between limited liability companies and joint-stock limited companies, in order to choose the company form that is suitable for them at that time.
Introduction to Author
William Yan's main field of practice and research direction is capital market representative litigation in securities law, while focusing on bill law, company law, especially acceptance bill disputes in the field of financial bills, and the design of the company's equity structure.
In addition to having a strong legal background, he also holds a master's degree in economics from Jiangxi University of Finance and Economics, with a focus on international finance. His research on the impact of representative litigation system on intermediary institutions was included in the excellent master's and doctoral thesis database of China National Knowledge Infrastructure.
Joined Jiangxi Bode Law Firm in 2022, previously worked at Jiangxi Copper Group and provided services to large domestic listed companies such as Gree Electric Appliances, Midea Group, and Haier Group.
The working languages are Chinese and English.
