New Deadlines for Company Capital Contributions: 'R&D, Operations, Marketing' Subsidiary Matrix Strategy Requires Advance Planning | Regulations on the Implementation of the Registered Capital Registration Management System under the Company Law of the People's Republic of China

The newly revised Company Law of the People’s Republic of China has been in effect since July 1, 2024.

Article 47 of the new Company Law stipulates that for newly registered companies, “all shareholders shall fully pay their subscribed capital contributions within five years from the date of the company’s establishment according to the company’s articles of association.”

Additionally, regarding existing companies, the new Company Law also requires a “gradual adaptation to the new rules,” but does not provide detailed provisions on how exactly this “gradual” process should be implemented.

Yesterday (July 1, 2024), the State Council issued the Regulations on the Implementation of the Registered Capital Registration Management System under the Company Law of the People’s Republic of China, effective immediately.

The Regulations impose new restrictions on the capital contribution deadlines for existing companies.

Considering that gaming companies typically adopt a “R&D, operations, marketing” subsidiary matrix strategy, these companies may need to re-plan their capital structure and funding arrangements after the issuance of the Regulations to avoid unnecessary costs and legal risks.

*This article reflects only the author’s personal views and does not constitute any legal advice or legal opinion.

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I. Capital Contribution Requirements Under the New Company Law

The new Company Law imposes strict regulations on capital contribution:

Article 47: The registered capital of a limited liability company shall be the total amount of capital contributions subscribed by all shareholders as registered with the company registration authority. All shareholders shall fully pay their subscribed capital contributions within five years from the date of the company’s establishment according to the company’s articles of association.

Where laws, administrative regulations, and State Council decisions have other provisions on the actual payment of registered capital, minimum registered capital, or shareholder capital contribution period for limited liability companies, such provisions shall prevail. New Company Law

Under the 2013 version of the Company Law, there were no strict provisions on the capital contribution period; shareholders merely needed to set their own payment dates in the articles of association. This led to the emergence of many enterprises with extremely high subscribed capital (exceeding 10 million yuan) and extremely long contribution periods (even up to twenty years).

However, from July 2024, newly registered enterprises must strictly comply with the new Company Law, requiring all shareholders to complete capital contribution within five years of the company’s establishment.

Therefore, starting this month, whether establishing new subsidiaries or new companies outside the system, shareholders need to treat the specific amount of subscribed capital as an important cost factor and give it full consideration.

II. Capital Contribution Period Requirements for Existing Enterprises

Regarding the capital contribution period for existing enterprises, the new Company Law only provides a general provision:

Article 266: This Law shall come into force on July 1, 2024.

For companies registered and established before the implementation of this Law whose contribution period exceeds the period provided in this Law, unless otherwise provided by laws, administrative regulations, or the State Council, they shall gradually adjust their contribution period to within the period provided in this Law; for those with obviously abnormal contribution periods or amounts, the company registration authority may lawfully require timely adjustments. Specific implementation measures shall be formulated by the State Council. New Company Law

On the very day the new Company Law took effect, the State Council issued new regulations to govern how this “gradual” process should work:

Article 2: For companies registered and established before June 30, 2024, if the remaining subscribed capital contribution period of a limited liability company exceeds five years from July 1, 2027, the company shall adjust its remaining subscribed capital contribution period to within five years before June 30, 2027, and record it in the company’s articles of association. Shareholders shall fully pay their subscribed capital contributions within the adjusted period; the promoters of a joint stock limited company shall pay the full amount of the share capital they have subscribed for before June 30, 2027.

Where the company’s production or operations involve national interests or major public interests, and the relevant competent department of the State Council or the provincial people’s government provides an opinion, the market supervision and administration department of the State Council may agree to the company’s capital contribution according to the original period. Regulations on the Implementation of the Registered Capital Registration Management System under the Company Law of the People’s Republic of China

In simple terms, for limited liability companies established before June 30, 2024, if their remaining subscribed capital contribution period exceeds five years after July 1, 2027 (i.e., exceeds July 1, 2032), the company must adjust its remaining subscribed capital contribution period before June 30, 2027, so that the new period does not exceed five years after July 1, 2027 (i.e., June 30, 2032).

For example:

A limited liability company established on January 1, 2023, originally had a subscribed capital contribution period of 20 years, i.e., before December 31, 2042. According to the new regulations, the shareholders of this company must adjust the remaining subscribed capital contribution period to no more than five years before June 30, 2027, i.e., payment must be completed by June 30, 2032.

If an existing limited liability company has agreed upon a capital contribution period before June 30, 2032, no adjustment is temporarily required.

III. Impact on and Recommendations for Gaming Companies

Adjust Entities with High Registered Capital in a Timely Manner

In the past, many companies set high registered capital amounts (over 10 million yuan) to “demonstrate strength” or meet old ICP application requirements, while also setting a long contribution period in hopes of “buying time with time.”

However, this approach may no longer be suitable in the current environment.

Companies should set reasonable registered capital amounts based on actual business needs, avoiding enormous capital contribution pressure in the future.

For companies/entities that have already registered high capital amounts without actual business needs, it is recommended to reassess and appropriately reduce the registered capital before the deadline, thus better balancing company development and shareholders’ financial pressure.

Consider Appropriate Adjustments to the Operating Matrix

Many gaming companies often adopt a matrix operating model, establishing multiple independent entities responsible for different functions such as R&D, operations, and marketing, and even registering separate companies for each studio or multiple operating entities to meet operational and promotional needs.

Companies can now consider consolidating and reducing unnecessary subsidiaries or operating entities to avoid the parent company having to disperse funds across too many entities (large amounts of funds being used to pay for subsidiaries’ registered capital).

Timely Identify and Clean Up Abandoned Entities

Due to business changes or strategic adjustments, many gaming companies may have company entities that are no longer in use. Under the new law, these entities may face mandatory capital contribution requirements in the future.

Therefore, companies should conduct a comprehensive review and clean up of abandoned or long-inactive company entities, handling deregistration in a timely manner to avoid legal penalties for failing to make capital contributions.

IV. Penalties

For companies, failure to timely adjust the capital contribution period will result in a warning followed by public notice:

Article 6: If a company fails to adjust its capital contribution period or registered capital in accordance with these Regulations, the company registration authority shall order corrections; if corrections are not made within the time limit, the company registration authority shall make a special notation on the National Enterprise Credit Information Publicity System and publicly announce it to the public. Regulations on the Implementation of the Registered Capital Registration Management System under the Company Law of the People’s Republic of China

For shareholders, failure to make timely capital contributions will result in penalties under the Company Law:

Article 252: If the promoters or shareholders of a company make false capital contributions, fail to deliver or fail to deliver on time the monetary or non-monetary assets as capital contributions, the company registration authority shall order corrections and may impose a fine of not less than 50,000 yuan but not more than 200,000 yuan; if the circumstances are serious, a fine of not less than 5% but not more than 15% of the false capital contribution or the unpaid amount shall be imposed; the directly responsible person in charge and other directly responsible personnel (note: for corporate shareholders) shall be fined not less than 10,000 yuan but not more than 100,000 yuan. Company Law

V. Supplementary Knowledge: Capital Flight

Capital flight refers to the act where, after completing capital verification during company establishment or capital increase, shareholders secretly withdraw the contributed funds through various means, thereby affecting the integrity of the company’s capital and the interests of creditors.

According to relevant legal provisions, once a shareholder’s capital contribution enters the company’s account, it becomes the company’s capital. Shareholders can only obtain returns or withdraw funds through reasonable and legal means, such as transferring equity or going through compliant capital reduction procedures.

Common acts of capital flight include:

• Directly withdrawing monetary capital contributions from the company without justifiable reasons;

• Withdrawing funds from the company through fictitious transactions, related-party transactions, etc.;

• Withdrawing funds from the company through false debts;

• Inflating profits, fabricating dividends, thereby withdrawing capital.

Capital flight not only violates the Company Law but is also a criminal offense subject to criminal penalties:

Article 159 [Crime of False Capital Contribution or Capital Flight]: If a company promoter or shareholder, in violation of the provisions of the Company Law, fails to deliver monetary or physical assets or transfer property rights, makes a false capital contribution, or withdraws capital contribution after the company’s establishment, if the amount is huge, the consequences are serious, or there are other serious circumstances, the offender shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention, and shall also be fined, or be fined separately, not less than 2% but not more than 10% of the false capital contribution or the amount of capital flight.

If a unit commits the crime mentioned in the preceding paragraph, the unit shall be fined, and the directly responsible person in charge and other directly responsible personnel shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention. Criminal Law

In light of this, it is recommended that all company shareholders, when handling capital contributions in the future, strictly follow legal requirements and operate in compliance, avoiding criminal penalties for capital flight.

VI. Conclusion

Although the deadline of June 30, 2032, seems far away, advance planning is still crucial. Proactive planning and developing relevant schemes will not only allow companies and their shareholders to more calmly address future capital needs but also effectively avoid potential risks.

While considering how to design the capital contribution plan, company shareholders should pay more attention to how to legally and compliantly manage the infusion of contributed funds, avoiding criminal liability for capital flight.