Gains and Losses in the Introduction of the Authorized Capital System a Commentary on the Relevant Provisions of China’s 2023 Company Law

Abstract

The authorized capital system introduced in the 2023 Company Law of China is, in essence, modeled after the German "permitted capital system." Its distinctive feature lies in the requirement that the company's articles of association specify the number of issued shares, which, when multiplied by a legally prescribed ratio, determines the authorized capital limit. Each issuance of shares increases the number of issued shares, thereby necessitating amendments to the articles of association. Special provisions must be established to exempt such amendments from requiring shareholders’ resolutions. The statutory choice between the authorized capital system and the statutory capital system reflects a combination of autonomy and compulsion. However, limited liability companies (LLCs), characterized by the separation of ownership and management, may have a legitimate need to improve financing efficiency by delegating authority to the board of directors. Transitioning to a fully optional mode could better serve this purpose.