China Provides Clarification on the Implementation of Article 88 (1) of the New Company Law

China’s Supreme People’s Court clarified that Article 88(1) of the New Company Law won’t apply retroactively, easing concerns for prior shareholders in equity transfers before July 1, 2024.

Clarification on Article 88(1) Non-Retroactivity

The Supreme People’s Court of China has clarified that Article 88(1) of the New Company Law will not retroactively apply to equity transfer disputes occurring before July 1, 2024. This announcement aims to address concerns from existing shareholders and resolve discrepancies in judicial decisions nationwide. Companies are advised to strengthen risk management practices for future equity transactions.

Judicial Guidance and Legal Framework

On December 24, 2024, the Supreme People’s Court issued a response reaffirming that disputes tied to equity transfers before the July 1, 2024, deadline will be governed by previous laws. This decision follows inconsistencies in judicial rulings regarding capital contributions, prompting a review by the Legislative Affairs Commission, which concluded that retroactive application was not justifiable.

Risk Management Strategies Moving Forward

Despite the ruling, equity transfers after July 1, 2024, may still attract supplemental liability under Article 88(1). To mitigate these risks, businesses should consider reducing registered capital, conducting thorough risk assessments, and implementing contractual safeguards to protect against potential liabilities.

Source : China Clarifies the Application of Article 88 (1) of the New Company Law