The role of the company’s legal representative in China is of great importance, and a proper selection of this position is crucial for the company’s stability and success in the Chinese market. How should a company select a legal representative in China? What are the liabilities of the position and how much power does the position hold? Here is everything you need to know.
The legal representative’s role
The legal representative is the employee that has the legal authority to interact with Chinese officials; to execute the powers and duties of the company, and is accountable to them. Consequentially, the legal representative serves in practice as one of the company’s executives. That individual is a key figure involved in all aspects of the company’s day-to-day operations, as well as having power and authority which may determine the company’s future, for better or worse.
The legal representative’s responsibilities in China
The legal representative leaves their mark, quite literally in some cases, on anything and everything that reflects the company’s objectives. Therefore, the legal representative’s responsibilities include, amongst others, safeguarding the company’s assets; having power of attorney on behalf of the company; signing contracts and agreements; filing financial reports, and legal representation to the Chinese regulatory bodies.Our services assist international companies in the Chinese market. Contact us
The legal representative’s unlimited power
The Chinese law does not clearly define the power of the legal representative, but in order to carry out this authority, the legal representative holds their own “chop” (red stamp), which serves as a formal and affirmative signature. It gives the person holding the position almost unlimited power over the execution of the company’s business. In fact, the legal representative can arbitrarily decide when and how to use the chop, and so has a significant effect on both the company’s normal function and ultimately its fate, too.
It should be noted in this context that, because of the legal need to stamp any official document, there can be difficulty in firing an uncooperative or “corrupt” legal representative (for example, if they refuse to sign their own termination document).
One more aspect that makes the legal rep’s power almost unlimited is the possibility of nominating the legal representative as the company’s Chairman of Board or the sole Managing Director (in case the board consists of one person only). These three positions are mandatory to appoint when setting up a company in China, so the company cannot operate without them. While new companies in China would find it easier and less troublesome to have one person responsible for two positions, it’s advised to bear in mind that putting the two roles’ powers in the hands of one employee could be too risky.
The legal representative and the company are essentially the same thing. The company is bound by the legal representative’s actions, so it is the sole responsible entity for the representative’s proper or negligent behavior. In addition, actions that exceed the representative’s power may also impose sanctions on the company. In order to avoid being fined, a third party who comes in touch with the legal representative has the right to claim that the latter acted inappropriately. Since the third party might not be familiar with the company’s articles of association and has no access to its documents, it does not know when and how the legal representative’s authority has been exceeded. At the same time, in the event of a violation of the rules, the legal representative will be held liable.
Is there a way to limit the legal representative’s power?
The answer is yes, and there are two main ways to do it:
- It is recommended to explicitly define the legal representative role, responsibilities, and power in the company’s Articles of Association.
- Separation of powers – Appoint different people for the legal representative, the managing director, and the chairman of the board roles.
- According to one of the 2006 Chinese Company Law amendments, the company is required to form a supervisory body, whose job it is to oversee the activities of the legal representative and, when necessary, to limit its powers. The size of this body changes according to the size of the company.
Considerations when selecting a legal representative for your China company
Due to the great power attributed to the position, the selection of the legal representative during company registration in China is an important task that must be given deep consideration and attention. It’s worth knowing that the Chinese Company Law does not demand that the legal representative necessarily be Chinese, or reside in China, so there are a variety of options to choose from.
The natural choice of foreign investors when appointing a legal representative is to select an existing employee, usually from the parent company, who is familiar with the company culture, identifies with its values and can be trusted. However, such an employee may be inexperienced and unacquainted with the Chinese market, and may face many cultural, linguistic, and other obstacles. In addition, the legal representative is required to travel to China to take some significant actions, for instance, opening a bank account, closing the company and during legal actions. It is also important to note that in times of a crisis, Chinese authorities lay the responsibility on the legal representative, and there is a chance that a legal representative who comes from overseas to solve the crisis will be detained in China until the crisis is over, which may take months in some circumstances.
Another option is to appoint a Chinese employee. In this case, the employee is involved in the local market but is not sufficiently oriented with the corporate culture and the company’s policies, etc.
Therefore, whether it is using a Wholly Foreign-Owned Enterprise (WFOE) or a Joint Venture (JV), it should be carefully considered who is most suitable to serve as the legal representative.
PTL Group can assist and advise you in making this important decision, as part of the range of services we provide regarding business support in China.
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