China's sweeping December 29, 2023, amendments to its Company Law have seen foreign compliance teams scrambling to figure out the new rules and have South Korean businesses feeling on edge.
Change places!
China's 14th National People's Congress Standing Committee passed amendments set to take effect from July 1, 2024, reported Aju Korea Daily. The substantial amendments are geared toward aligning with global standards, modernizing corporate governance structures, and adapting China's socialist characteristics.
An unnamed representative from China's NPC Standing Committee's Legislative Affairs Commission told Sohu that the amendments were "closely tied to the establishment and improvement of China's socialist market economy system." The revisions are aimed at "optimizing corporate governance," the representative said.
However, parts of China's optimization embodied in the amendments have South Koreans concerned about the increased risk of operating in the country. South Korean companies are reportedly worried about two specific additions to China's Company Law.
Aju reported that the stipulation that LLCs with more than 300 employees are required to have an employee representative on their board of directors has struck a nerve in South Korean industry circles. Major players entering China, such as Samsung, SK Hynix, POSCO, and Hyundai Motor Group, will be subject to this requirement.
Cloudy with a chance of union
The employee representative is a function within China's Staff and Worker Representative Congress System, and the employee representative is reportedly elected from and by a company's staff according to the Trade Union Law of the People's Republic of China.
The employee representative has the right to speak and vote on the board. The representative could foreseeably present challenges to executing decisions taken by South Korean companies, including those relating to downsizing or withdrawal.
The Legislative Affairs Commission representative told Sohu that this was adopted to "ensure employee participation in democratic company management."
Similar laws only apply to public companies in South Korea and never to private enterprises. The prospect of pushback from a legally empowered employee representative, particularly against China's political and economic volatility, has South Korean executives feeling twitchy.
Show me the money
The other clause of the amendment allegedly rubbing South Korean business leaders the wrong way relates to shortening the period for capital contributions. The new law states that shareholders in limited liability companies cannot have a contribution period exceeding five years.
Small and medium-sized South Korean enterprises in China typically pay their capital in installments over ten years or more. It is believed that some companies may face fundraising challenges under the new amendments.
