The revised Company Law (2023) came into force on July 1, 2024. It imposes restrictions on the capital contribution period, triggering a wave of corporate capital reductions. Meanwhile, due to the backdrop of the economic environment in recent years, numerous enterprises have opted for capital reduction for various reasons. Although the Company Law prescribes relevant procedural requirements for capital reduction, specific rules vary across practical scenarios. We have compiled key matters concerning capital reduction for limited liability companies for reference.

Firstly, the procedures for capital reduction differ depending on the reasons for such action.

Secondly, documentation requirements for capital reduction vary according to the reduction ratio.

Where a company has multiple shareholders, capital reduction falls into two categories: pro rata capital reduction and targeted capital reduction. Targeted capital reduction means the reduction applies only to specific shareholders, or the reduction ratio for certain shareholders differs from that of others. Article 66 of the Company Law stipulates that unless otherwise provided for in the articles of association, a capital reduction resolution shall be adopted by shareholders holding more than two-thirds of the voting rights. If this rule were applied to targeted capital reduction, majority shareholders could easily override minority shareholders. To address this issue, Article 224 of the Company Law makes special provisions, that is, targeted capital reduction is permissible only if otherwise stipulated by law or separately agreed upon by all shareholders. In other words, targeted capital reduction shall obtain unanimous consent of all shareholders.

Thirdly, procedural rules for capital reduction differ due to varying industrial regulatory requirements. For instance, capital reduction in the financial sector (including banking, insurance, securities, futures, etc.) is subject to prior approval. Relevant approval documents must be obtained before proceeding with subsequent procedures. State-owned enterprises are also governed by special rules. For example, an asset appraisal is mandatory prior to targeted capital reduction for state-owned enterprises.

Lastly, directors, supervisors and senior management personnel shall fully perform their fiduciary duties. The Company Law (2023) strengthens the liabilities of directors, supervisors and senior management for maintaining the company’s registered capital. Article 266 of the Company Law prescribes that where an unlawful capital reduction causes losses to the company, the liable directors, supervisors and senior management personnel shall be held liable for compensation.

In judicial practice, there are four major categories of circumstances widely recognized as grounds for determining that the contract cannot be further performed:

• Disqualification of the parties, such as, the employer goes bankrupt, the employee reaches the statutory retirement age, or the contract expires with no legal obligation for renewal.
• The employee has a new job, which indicates the employee has no actual intention to continue performing the contract. This ground is subject to certain disputes in practice, yet the mainstream judicial stance confirms that the contract cannot be further performed.
• The position has been abolished or replaced. This is a highly contentious ground, as courts hold varying views on whether the employer’s abolition or replacement of the position is reasonable. Additionally, if the employer offers a new position under such circumstance and the employee refuses, most courts will rule that the contract cannot be further performed.
• Complete breakdown of mutual trust between the parties. This is the most controversial ground in judicial practice. Even in Beijing, where courts tend to uphold requests for reinstatement of the contract, judicial opinions and considerations vary from case to case. For example, in case No. (2023) Jing 01 Min Zhong No. 11628, the court held that both parties are entitled to pursue remedies via arbitration or litigation in accordance with the law, and such proceedings do not objectively render the contract unenforceable. By contrast, in case No. (2025) Jing 03 Min Zhong No. 16197, the court held that prolonged litigation and confrontation between the parties had destroyed mutual trust, so there was no foundation for continued performance of the contract.

Article 76 of the Answers to Issues Concerning the Trial of Labor Dispute Cases (I) issued by the Higher People’s Court of Beijing and the Beijing Labor and Personnel Dispute Arbitration Commission, summarizes six specific circumstances, alongside the general rule that “the parties have lost the foundation of mutual trust”. These six circumstances cover the four categories mentioned above.

Article 16 of the Judicial Interpretation (II) of the Supreme People’s Court on the Application of Law in the Trial of Labor Dispute Cases, which took effect on September 1, 2025, prescribes six circumstances under which an employment contract cannot be further performed.

From the employer’s perspective, unilateral dismissal carries the risk of being deemed an illegal termination, which may even lead to an order to reinstate the employment relationship. Hence, employers must exercise caution throughout the entire process.

First, employers could take the following measures to minimize the risk of a ruling of unlawful termination: (1) Ensure the company’s rules and regulations have undergone due democratic procedures and that their provisions are reasonable. (2) Enforce the rules and regulations strictly on a daily basis. Many employers lose litigation cases because they adopt a lax management style in daily operations but impose harsh penalties when dismissing employees. (3) Follow all due procedural requirements for dismissal.

Second, if an employer planned to fire an employee, it shall identify and organize valid grounds and supporting evidence proving the employment contract cannot be performed in advance.

1. Does the new standard specify a transition period?

Article 35 of the “Measures for the Administration of National Standards (2022)” and Article 21 of the “Measures for the Administration of Industry Standards (2023)” stipulate that a reasonable transition period shall be reserved between the issuance and implementation of the new standards.

The “Measures for the Administration of Local Standards (2020)” does not prescribe a transition period. In practice, however, provincial and municipal authorities generally set a transition period in their local standard administration rules.

The “Provisions on the Administration of Association Standards” also does not prescribe a transition period. Nevertheless, association standards only apply to enterprises that have joined the relevant association, resulting in limited impact scope.

In terms of normative hierarchy, the validity period of industry standards and local standards may be affected by the implementation of national standards. For instance, Article 21 of the “Measures for the Administration of Industry Standards (2023)” stipulates: “After the implementation of the corresponding national standards, industry standards shall be abolished by the competent administrative departments of the State Council on their own initiative.”

In practice, enterprises still need to check whether a transition period is specified in the updated standard, and make appropriate plans and arrangements for raw material procurement, production, sales and other business links in advance.

2. Which standard shall be applied during the transition period?

In accordance with Article 35 of the “Measures for the Administration of National Standards (2022)”, Article 39 of the “Measures for the Administration of Mandatory National Standards” and Article 21 of the “Measures for the Administration of Industry Standards (2023)”, enterprises may choose to implement either the original standard or the updated standard from the issuance date to the implementation date of the standard.

3. How to handle unsold inventory manufactured under the old standard before the new standard takes effect?

Article 25 of the “Standardization Law” stipulates that products and services that fail to comply with mandatory standards shall not be produced, sold, imported or provided. After an updated mandatory national standard comes into force, there is no one-size-fits-all rule on whether inventory goods manufactured under the old standard prior to the implementation date can be sold. For example, upon the implementation of China’s National VI Emission Standard, National V vehicles were prohibited from both production and subsequent sale of existing inventory. By contrast, the “Requirements for Restricting Excessive Packaging of Fresh Edible Agricultural Products” (GB43284-2023) stipulates that fresh edible agricultural products produced or imported prior to the implementation date may be sold until the end of their shelf life.

In principle, enterprises may independently choose the applicable non-mandatory standard. However, it shall be noted that some local regulations may impose non-mandatory standard from the local regulatory perspectives. For example, Hainan province has stipulated that milk tea cups must use fully degradable paper cups. In addition, voluntarily adopted association standards are binding on member enterprises of the association.

4. Are there special points related to imported products?

Enterprises shall pay special attention to the following two points in practice:

First, there is no unified rule governing the applicable timing of new standards for import procedures, which needs case-by-case confirmation. For example, Announcement No. 41 of 2012 (abolished in 2025) previously required the customs to inspect all imported food in accordance with the new national food safety standard based on the inspection application date starting from the implementation date of the newly issued standard. General Administration of Customs Announcement No. 136 of 2022, “Announcement on Relevant Requirements for Import Inspection of Products Such as Infant Formula Foods and Processed Cheese in Compliance with National Food Safety Standards” clearly specifies that products manufactured and imported prior to the implementation of the new national standard and complying with the old standard may continue to be imported and sold within their shelf life in accordance with domestic standard implementation rules and WTO rules. It is recommended that enterprises keep an eye on announcements issued by the General Administration of Customs for specific import and export commodities, and consult the customs in a timely manner in case of ambiguity.

Second, to keep track of updates to both domestic and foreign standards. Article 7 of the “Import and Export Commodity Inspection Law (Revised 2021)” provides that catalogued import and export commodities shall be inspected in accordance with mandatory national standards; if no mandatory national standards are available, inspection shall be conducted in accordance with relevant foreign standards designated by the national commodity inspection authority. Therefore, the basis for inspection is not limited to mandatory national standards.

According to relevant provisions, the procedures for the conclusion and entry into force of a collective employment contract are as follows:

(1) Drafting Stage: Representatives of the employer and the employees reach a consensus through negotiation to formulate the draft.

(2) Voting Stage: The draft shall be submitted to the employee representative congress or all employees for discussion. The discussion shall be attended by more than two-thirds of employee representatives or employees, and the draft shall be adopted only with the consent of more than half of all employee representatives or all employees.

To be noted that, although the “Labor Contract Law” does not restrict the voting method, Article 20 of the “Provisions on Democratic Management of Enterprises” (Zong Gong Fa [2012] No.12) stipulates: “The election and voting on relevant matters at the employee representative congress must follow the principle of the minority submitting to the majority and be adopted by more than half of all employee representatives. Voting on important matters shall be conducted by secret ballot on an item-by-item basis.” Accordingly, some provinces and cities have imposed restrictions on the voting methods. For instance, Article 11 of the “Regulations of Shanghai Municipality on Employee Representative Congresses” prescribes: “The following matters shall be reported to the employee representative congress for deliberation and adoption: (1) Draft collective employment contracts involving labor remuneration, working hours, rest and vacation, insurance and welfare benefits, and other matters…” Meanwhile, Article 31 of the same Regulations states: “Matters deliberated and adopted by the employee representative congress shall be voted on by secret ballot and shall pass only with affirmative votes from more than half of all employee representatives.” Therefore, in Shanghai, it is recommended that such draft involving labor remuneration be adopted by secret ballot. Otherwise, the labor administrative authority may reject such draft at the review stage.

(3) Signing Stage: Upon adoption by voting, the draft shall be signed by the chief representatives of the employer and the employees respectively.

(4) Review Stage: Within 10 days from the date of signing the collective employment contract, three copies thereof shall be submitted to the labor administrative authority for review. The labor administrative authority shall complete the review within 15 days from the date of receiving the document. If any objection is raised, a Review Opinion Letter shall be delivered to the employer and employee representatives. If no objection is raised within the aforesaid time limit, the collective employment contract shall take effect automatically. In judicial practice, if a collective employment contract is not reviewed by the labor administrative authority, the court shall rule that it has no legal effect, such as (2025) Er 05 Min Zhong No.2364 and (2020) Jin 07 Min Zhong No.556.

(5) Publication Stage: The collective employment contract shall be promptly publicized to all employees in an appropriate manner from the date it takes effect.

What if the draft fails to pass the voting stage? For example, due to an economic downturn, a company intends to cut some benefits stipulated in the collective employment contract, while most employee representatives disagree. Article 49 of the “Provisions on Collective Employment Contracts” stipulates that if a dispute arises during the negotiation process, either party may apply to the labor administrative authority for negotiated settlement; even without such an application, the labor administrative authority may take the initiative to coordinate and settle the dispute when it deems necessary. This essentially transforms bilateral negotiation into tripartite negotiation and coordination. Nevertheless, the intervention of the labor administrative authority has its limitations. Its role is limited to coordination and mediation, which does not guarantee a negotiated settlement or the issuance of other binding administrative measures.

What if the term of the existing collective employment contract expires and the new one fails to pass the vote? Hainan province has explicitly stipulated that the relevant terms of the expired collective employment contract shall continue to apply. Although other provinces and cities have not issued similar regulations, they generally follow the same judicial and practical practice as Hainan province.

For employers, when formulating the terms of a collective employment contract, it shall be taken into account that most welfare benefits can generally only be raised rather than reduced. Hence, it would be a good choice to set conditional clauses on welfare benefits, such as, if the company’s revenue drops by X% or the company incurs losses, some welfare benefits may be adjusted or cancelled accordingly.

Prior to 2026, export controls targeting specific countries/regions mainly involved the United States. On December 3, 2024, the Ministry of Commerce issued Announcement No. 46 of 2024 “Announcement on Strengthening Export Controls on Relevant Dual-Use Items to the United States”. Subsequently, five announcements were issued in 2025, adding varying numbers of U.S. entities to the export control list for dual-use items. In addition, on July 9, 2025, the Ministry of Commerce added eight entities in the Taiwan region to the export control list for dual-use items.

Statements by the Japanese Prime Minister in November 2025 triggered heightened tensions in China-Japan relations. On January 6, 2026, the Ministry of Commerce issued Announcement No. 1 of 2026 “Announcement on Strengthening Export Controls on Dual-Use Items to Japan”. The announcement stipulates that: “The export of all dual-use items to military end-users and for military uses in Japan, as well as to other end-users and for other uses that contribute to enhancing Japan’s military capabilities, is prohibited.”

This announcement is highly concise and bears similarities to the aforementioned Announcement No. 46 of 2024 targeting the United States, yet also differs. Both explicitly prohibit the export of dual-use items to military end-users or for military uses in the target country. The difference lies in Article 2 of Announcement No. 46 of 2024, which further provides: “In principle, export licenses for dual-use items related to gallium, germanium, antimony, and superhard materials to the United States shall not be granted; stricter end-user and end-use reviews shall be imposed on exports of graphite dual-use items to the United States” — a clearly operational provision. However, Announcement No. 1 of 2026 does not include similar prohibitions or strict restrictions on specific dual-use items. Beyond banning exports of all dual-use items to military end-users and for military uses in Japan, Announcement No. 1 of 2026 adds the phrase “as well as to other end-users and for other uses that contribute to enhancing Japan’s military capabilities”, which laying groundwork for the subsequent release of a watch list.

Overall, Announcement No. 1 of 2026 has broad coverage but lacks specific targeting. It is more declaratory or cautionary in nature, rather than a set of operational rules.

Nevertheless, tensions escalated further thereafter. On February 24, 2026, the first business day after the 2026 Spring Festival holiday, the Ministry of Commerce issued two announcements.

Among them, Announcement No. 11 added 20 Japanese entities involved in the military and defense industries to the export control list. For entities on the control list, the export of dual-use items to them is explicitly prohibited and shall cease immediately. With reference to the earlier export control lists targeting the United States, such a control list represents a standard practice.

Announcement No. 12 added 20 Japanese entities to a watch list, on the grounds that the end-users and end-uses of dual-use items cannot be verified. The announcement does not ban exports of dual-use items to entities on the watch list, but explicitly prohibits applications for general licenses or obtaining export vouchers through registration and declaration. Meanwhile, applicants for individual licenses must submit a risk assessment report and written commitments regarding entities on the watch list. Furthermore, the announcement stipulates that entities that fulfill their obligation to cooperate in verification may be removed from the watch list upon application and verification by the Ministry of Commerce.

The legal basis for the watch list is Article 26 of the Regulations on the Administration of Export of Dual-Use Items, marking its first practical application. In terms of industries involved, unlike the control list, entities on the watch list are mostly enterprises related to automobiles, electronic components, and raw materials. Upon closer examination of their backgrounds, the Ministry of Commerce of China appears to have targeted entities with potential diversion from civilian to military applications, strengthening end-user and end-use reviews to prevent military use. In other words, this reflects a shift in dual-use item administration from purely regulating the “items” themselves based on whether they qualify as dual-use, to governing end “uses” and “users” through supply chain scrutiny.

In view of the above announcements and circumstances, it is urgent and critical for Japanese companies or enterprises exporting to Japan to take proper measures. In general, the following measures could be taken into consideration.

First, to conduct an inventory of whether exported products fall under dual-use items.

Second, if dual-use items are involved, to clarify and map out the supply chain. Monitor whether entities in the supply chain have been included in the control list or watch list, or are suppliers to listed entities, to assess the existence and magnitude of risks.

Third, to establish a compliance management system for export control response, which mainly includes: (1) Regarding the corporate operation, to demonstrate integrity and independence across organization, management, transactions, and other aspects. (2) To design operational rules for customer screening, item and technology screening, contract clause optimization, supply chain management, etc, which not only projects the enterprise’s compliance image but also effectively prevents risks through daily management. And (3) To establish a crisis early warning and response mechanism. In the event of medium or high-risk incidents or indicators, enable prompt and effective actions, timely submission of supporting evidence, and proper response.

In practice, when implementing employee job transfers, many employers only focus on whether the employee handbook stipulates the employer’s right to unilaterally adjust positions, while ignoring the special requirements applicable to positions exposed to occupational disease hazards.

In fact, given the potential impact on employees’ health posed by positions exposed to occupational disease hazards, when transferring an employee to such positions, the employer shall inform the employee, and reach a mutual consultation according to the “Law on the Prevention and Control of Occupational Diseases”. Paragraph 2 of Article 33 thereof states: “Where, during the term of an existing labor contract, a worker engages in operations involving occupational disease hazards that were not disclosed in the labor contract due to a change in job position or job content, the employer shall fulfill its obligation of truthful disclosure to the worker in accordance with the provisions of the preceding paragraph, and negotiate amendments to the relevant clauses of the original labor contract.” If an employer violates this provision, according to Paragraph 3 of Article 33: “The worker shall have the right to refuse to engage in operations involving occupational disease hazards, and the employer may not terminate the labor contract concluded with the worker on such grounds.”

Therefore, an employer’s right to manage and adjust employment is restricted when transferring an employee to a position involving occupational disease hazards, and mandatory provisions of the aforementioned laws must be implemented. There are many cases in judicial practice have proved this opinion. This opinion has a reasonable logic, that is, if an employer’s right to manage employment were to take precedence over Paragraph 2 of Article 33, that provision would undoubtedly become a dead letter. Furthermore, an employer could recruit a worker for a position free of occupational hazards, then easily transfer the worker to a position exposed to such hazards by exercising its unilateral job transfer right, which would effectively render Article 8 of the “Labor Contract Law” and Paragraph 1 of Article 33 of the “Law on the Prevention and Control of Occupational Diseases” meaningless.

Then if we transfer an employee from a position exposed to occupational disease hazards to a non-hazardous position, is there any risk? The answer is positive. Special attention must be paid to the following matters:

First, Article 35 of the “Law on the Prevention and Control of Occupational Diseases” requires that an employee be transferred to another position if found to have suffered health damage related to the occupation. Therefore, in such circumstances, transferring the employee from a position exposed to occupational disease hazards to one free of relevant occupational disease risk factors is a statutory obligation of the employer.

Second, the job content of the new position shall be reasonable to the employee’s physical condition, as well as the reasonableness of any salary adjustment (positions exposed to occupational disease hazards usually include hazard allowances and thus may offer higher pay than other positions at the same level). For job transfers made on statutory grounds, the salary reduction should not be excessive, and the salary level of other employees in the same post after transfer shall be taken into account.

In addition, in practice, where an employee falls under the circumstances requiring mandatory job transfer under Article 35 of the “Law on the Prevention and Control of Occupational Diseases”, the employee may propose to waive the transfer and voluntarily sign a commitment letter for reasons such as seeking higher income. If the employer accepts such an arrangement, it will face the risk of being penalized. Pursuant to Article 75 of the “Law on the Prevention and Control of Occupational Diseases”, the employer shall be ordered to make corrections and imposed a fine of not less than CNY50,000 but not more than CNY300,000; if the circumstances are serious, heavier penalties shall apply. In such cases, if the employee insists on refusing the transfer, the company may, on the basis of retaining relevant evidence, terminate the labor contract pursuant to Article 40 of the “Labor Contract Law” on the ground that a “major change in the objective circumstances” has rendered the original contract unperformable and no agreement can be reached through consultation.

In judicial practice, the key to determining the validity lies in whether there is an identifiable main contract or fundamental principal claim.

Firstly, if the guarantee contract specifies the title of the main contract, it cannot be extended to other contracts. For example, in the case (2019) Xin 01 Min Chu No. 612, the guarantor undertook joint and several liability for debts under the Framework Agreement. However, the parties did not perform the Framework Agreement but separately signed a General Engineering Construction Contract and other agreements. The creditor later demanded liability based on these later agreements and the guarantee. The court held that the main contract was limited and could not be extended to other separate agreements for the same business.

Secondly, the validity shall be determined based on the interpretation of “all contracts” shall be determined by the context, wording, and circumstances of signing. In the case (2013) Zhe Hang Shang Wai Chu No. 2110, the court interpreted the term “all contracts” in the guarantee by comparing it with “accessory contracts” used elsewhere in the same clause. Combining the facts that Company J authorized the legal representative of Company JT to handle the coal tar cooperation and sign the Cooperation Agreement, the court held that Company J knew the status of all existing contracts and the creditor’s demand for additional security. The guarantee for “all contracts” was interpreted as covering all outstanding business contracts between Company JT and Company W, and the court upheld Company W’s claim.

Thirdly, the validity shall be recognized based on the principle of party autonomy. In the case (2023) Su 0214 Min Chu No. 6515, the Guarantee Contract stipulated that the principal debt contracts included all contracts (both existing and future) signed between the Company A and the Company B. Afterward, multiple sales and procurement contracts were executed. The court ruled that requiring the guarantor to bear joint and several liability for these debts complied with the law and the agreement, and supported the claim.

In addition, the signing dates of the principal and guarantee contracts may also be taken into consideration. In the case (2022) Yu 0527 Min Chu No. 2289, the guarantee undertaking was signed in 2015, while the principal contract was signed in 2016. The court held that the one-year-earlier guarantee could not be deemed to correspond to the later principal contract.

In summary, in judicial practice, there is no unified judicial standard has been formed, so judges would define the relationship between the principal contracts and the guarantee contracts case by case. Given the accessory nature of guarantee contracts, the above-mentioned issues shall be taken into consideration in defining the validity regarding the relationship between the principal contracts and the guarantee contracts. Therefore, for enterprises, it is recommended to avoid the above issues.

In the early days, most judgments were rendered in accordance with Article 26 of the “Explanations on Certain Clauses of the Labor Law” (Lao Ban Fa [1994] No. 289, hereinafter referred to as “No.289”), which states: “Objective circumstances refer to the occurrence of force majeure or other situations that render all or part of the contract clauses unperformable, such as relocation, merger, or asset transfer of the enterprise.”

Nevertheless, as time goes by, the domestic and international economic environment, as well as China’s implementation of full national treatment for both domestic and foreign-funded enterprises, have changed drastically compared with 1994. Local jurisdictions have adopted a relatively broader standard in defining “material changes in objective circumstances”.

Article 79 of the “Answers to the Trial of Labor Dispute Cases (I) issued by the Higher People’s Court of Beijing Municipality and the Beijing Labor and Personnel Dispute Arbitration Commission” (Jing Gao Fa Fa [2024] No. 534) stipulates: “ ‘Material changes in the objective circumstances on which the labor contract was concluded’ refer to unforeseeable changes occurring after the conclusion of the labor contract, which render all or the main clauses of the labor contract unperformable, or make continued performance obviously unfair due to excessive costs, thus frustrating the purpose of the labor contract.” This provision also lists more situations constituting material changes in objective circumstances, including production restructuring, corporate restructuring, changes in the business scope of franchised enterprises, etc. However, in judicial practice in Beijing, courts still keep a relatively conservative and caution in defining such material changes.

Although Shanghai has not issued specific provisions, its judicial criteria have also changed since 2020. In some cases, courts have exceeded the scope prescribed by No. 289. For example, in the case (2021) Hu 01 Min Zhong No.15455, the court held that, “The situations covered by No.289 are merely illustrative examples and not exclusive. If an employer indeed needs to adjust or change its organizational structure due to market conditions, international competition, technological innovation, etc., such situations shall also be recognized as material changes in objective circumstances.” However, courts still keep a relatively conservative and caution in defining such material changes.

However, since the end of 2025, judicial practice in Shanghai has shown a further relaxing trend, that is, “Situations such as department dissolution or merger are often recognized as material changes in objective circumstances, provided they are not caused by pure business decisions.” This trend means that amendments to labor contracts—such as organizational restructuring and salary adjustments—resulting from a deteriorating economic environment and operational difficulties are more likely to be supported by judicial authorities.

It should be noted that the procedure on defining material changes in objective circumstances shall be completed, which means there shall be a failure to reach an agreement on the amendments to labor contracts. Meanwhile, the amendments on the adjustment of positions and relevant terms after negotiation shall be operational and reasonable.

From the perspective of judicial practice rules, a memorandum is generally deemed legally binding if it has the following characteristics:

Firstly, it contains the essential terms of a contract. Some parties believe that a document titled as a memorandum is not a contract or agreement, and thus is not binding. This opinion is incorrect. According to the relevant provisions of the “Civil Code”, the formation of a contract depends on its content rather than its title. Paragraph 1 of Article 3 of the “Judicial Interpretation of the Supreme People’s Court on Several Issues Concerning the General Provisions of the Contract Book of the Civil Code” stipulates: “Where a dispute arises between the parties over the formation of a contract, if a people’s court can ascertain the names of the parties, the subject matter and the quantity, it shall generally affirm the formation of the contract.” Paragraph 2 of Article 6 stipulates: “Where the parties only express the intention of a transaction by signing a letter of intent, a memorandum or other documents, without agreeing to enter into a contract within a certain period in the future, or even if there is such an agreement, the subject of the contract to be entered into in the future, the subject matter and other contents cannot be ascertained, and one party claims the formation of a preliminary contract, the people’s court shall not support such a claim.” Therefore, a memorandum shall be legally binding if its content includes the essential terms of a contract. For example, in (2025) Ji 08 Min Zhong No. 857, the memorandum stipulated that the equity transferee would be Company A or Company B, based on which the court held that the subject of the future contract had not been agreed upon, and thus the memorandum was not a preliminary contract and had no legal effect.

Second, even if a memorandum does not contain the essential terms of a contract, it is often deemed legally binding if the essential terms of a contract between the parties can be inferred from the actual performance. This is mainly based on Article 490 of the “Civil Code”, which stipulates: “Where one party has performed the principal obligations and the other party has accepted the performance before the signature, seal or fingerprint affixation, the contract shall be formed.” For example, in (2023) Jing 01 Min Zhong No. 2853, (2018) Lu 14 Min Zhong No. 3391 and (2017) Hu 0116 Min Chu No. 4529, the courts held that the memorandums were binding on both parties because one party had actually performed the obligations agreed upon in the memorandums.

In addition, judicial authorities usually take the following factors into account when determining whether a memorandum is legally binding:

(1) The parties of the contract shall be valid, such as, whether the official seal, special contract seal, or the signature of an authorized representative is affixed. For example, in (2021) Jing Min Zai No. 158, although only the relevant personnel signed the memorandum, there was evidence proving that an apparent agency was formed between the parties, and thus the court held the memorandum to be legally binding. In another example, (2020) Er 01 Min Zhong No. 8420, the court held that the memorandum had no legal effect because only one party had signed it.

(2) The content shall not violate the mandatory validity provisions of laws and administrative regulations. For example, in (2025) Hu 74 Min Zhong No. 30, the court held that the memorandum was invalid because it violated the principles of fairness, impartiality and investor risk self-bearing in the bond market transaction order.

(3) If the memorandum is an accessory contract, the principal contract shall have legal effect. For example, in (2025) Jing 03 Min Zhong No. 12011, the court held that the agreement on the dispute resolution method in the memorandum constituted an amendment to the arbitration clause in the capital increase agreement and its supplementary agreements, and such amendment was not binding because it lacked a legally valid prior procedure. In another example, (2018) Shan Min Zhong No. 454, the court held that the memorandum was a supplementary contract to the construction contract, and thus the memorandum was also invalid because the construction contract was invalid.

This perception is incorrect. If handling additional benefits improperly, companies may encounter troubles and burdens. Then how to handle additional benefits properly?

Firstly, it is recommended to formulate clear rules for additional benefits. These rules should cover the eligible recipients or eligibility criteria, specific content, payment methods and timelines of the benefits, as well as revocation rules, among other details. Otherwise, if disputes arise over issues such as eligibility, it would be difficult for companies to eliminate those disputes. In addition, if the rules are not clear enough, the implementation of those rules will bring risks to companies.

Take additional annual leave as an example, Article 13 of the “Measures for the Implementation of Paid Annual Leave for Enterprise Employees” stipulates that if the annual leave days and/or wage compensation agreed upon by both labor and management parties or specified in the internal rules and regulations of an enterprise is higher than the statutory standard, the agreed or specified terms shall prevail. Therefore, in principle, additional annual leave shall be implemented in accordance with the agreements between labor and management parties or the internal rules and regulations of the enterprise. In the absence of such agreements or provisions, there are many dispute cases involving the order of taking statutory annual leave and additional annual leave, as well as compensation for unused leave. Judicial authorities have not yet formed a completely unified judgment standard on this issue. Regarding the order of taking leave, the mainstream judicial tendency is that statutory annual leave shall be taken first. However, in individual cases, it is held that in the absence of agreed or specified rules, an interpretation unfavorable to the company shall be adopted, which means the additional annual leave shall be taken first (e.g., (2021) Jing 03 Min Zhong No. 12973). In terms of compensation for unused leave, the mainstream judicial tendency is not to support conversion at three times the statutory annual leave wage standard, but to support conversion at the normal wage standard (e.g., (2019) Jing 0108 Min Chu No. 59471, (2023) Hu 0105 Min Chu No. 15965, (2023) Yue 01 Min Zhong No. 22172).

Secondly, for the vast majority of additional benefits beyond statutory requirements, there is no mandatory requirement requires to go through democratic consultation/notification procedures. However, even if democratic consultation is not conducted, companies must still notify employees and retain relevant evidence. This is to prevent employees from claiming that they are unaware of the relevant rules and thus refusing to accept adverse changes when the companies revoke such benefits for some or all eligible recipients. However, a few special additional benefits are legally required to go through democratic consultation procedures, such as the enterprise annuities.

Article 7 of the “Measures for Enterprise Annuities” stipulates that participation in an enterprise annuity shall be determined through collective consultation between the enterprise and its employees, and the enterprise annuity plan shall be submitted to the employee representative congress or all employees for discussion and approval. Articles 9 and 10 further stipulate that the enterprise annuity plan shall be submitted to the human resources and social security department at or above the county level where the enterprise is located, and shall not take effect until the relevant department raises no objection. It can be seen that although enterprise annuities are additional benefits beyond statutory requirements, the law has formulated detailed provisions for them because such benefits are not a one-way expenditure by the enterprise, but a joint investment by both the enterprise and its employees. However, in December 2025, the “Opinions of the Ministry of Human Resources and Social Security and the Ministry of Finance on Further Improving the Work of Enterprise Annuities” (MOHRSS Announcement〔2025〕 No. 77) stipulated the simplification of procedures for establishing enterprise annuities, which only require discussion and approval by the employee representative congress or all employees, and no longer take the opinion of the competent human resources department as a prerequisite for entry into force.

In practice, some companies fail to perform democratic consultation procedures in accordance with the law, or some companies bear the employee’s share of the annuity, which is equivalent to a special savings for employees, so they believe that it is not necessary to go through statutory procedures, and thus also ignore issues such as the scope of application, contribution standards, withdrawal standards and termination conditions of the annuity. If a company has not formulated an annuity plan or reached an agreement with employees on the annuity, is it required to go through democratic consultation procedures when it intends to lower the standards or revoke the annuity? According to MOHRSS Announcement〔2025〕No. 77, a company may unilaterally decide to revoke the annuity without going through democratic consultation procedures in case of “insufficient sustainable contribution capacity”. However, if the enterprise is operating normally without losses, it shall still go through the statutory democratic consultation/notification procedures.

In summary, it is definitely a win-win thing for employees, companies and society for providing additional benefits beyond statutory requirements. Nevertheless, companies must fully consider the risks of lowering the standards or revoking such additional benefits after they are granted. Therefore, it is necessary to attach great importance to the formulation of rules, as well as the handling of consultation/notification procedures and the retention of evidence in practice.