What is a legal representative?
According to Article 38 of the General Principles of Civil Law of the People’s Republic of China (Whitmore Gray and Henry Ruiheng Zheng published a translated version), the legal representative of a company is defined as follows:
“The legal representative of a legal person is the person with [management] responsibility (fuzeren) who, in accordance with law or the provisions of its charter, exercises authority on behalf of a legal person”
Therefore, he is the main principal and represents the whole company. He has many powers, including the power to conclude contracts on behalf of the company.
Who can be a legal representative?
- The Chairman of the board of directors (for any type of company that has a board of directors)
- The executive director (possible if a contractual joint venture establishes a joint management board, or if the company is a WFOE)
- The manager (for WFOEs)
Good to know: There are no restrictions regarding nationality or residency.
Who cannot be a legal representative?
- A person without or with limited civil capacity.
- An individual who is being pursued for a crime or ordered for arrest.
- Someone who has been convicted of bribery, corruption, misappropriation of property or disruption of the social or economic order within the last five years.
- A former director or manager of a company that been liquidated or declared bankrupt less than 3 years ago, and who was personally responsible for the bankruptcy or liquidation.
- Someone who has been the legal representative of a company where, less than three years ago, the business license has been revoked or the company has been ordered to close due to breach of law, and who was personally accountable for it.
- An individual who has a large amount of outstanding personal debt.
If a person fulfills at least one of the above mentioned criteria, he/she may not be appointed to be the legal representative of a company.
The duties of a legal representative
One of his duties is to manage the company’s chops and keep them safe. Company chops – also called seals – are of major importance for a company in China. It is crucial to understand their role in business.
Tip: In order to make sure that the company seals are not abused, it is advisable to keep record of its utilization.
Furthermore, the legal representative’s signature is required for many documents and administrative formalities such as the business registration, any modifications, applications and the liquidation. Therefore, a copy of his signature needs to be registered with the competent authorities in China.
The legal representative also has to act within the Chinese law and the articles of association of the company. This means that he has to refrain from exercising some forbidden activities, including the following:
- Misappropriation of the company’s funds
- Illegal disclosure of trade secrets
- Misuse of power
- Any action violating the articles of association of the company or without consent of the shareholders, as well as any act going against the obligation of fidelity to the company
This generally corresponds to what we may call duty of loyalty and duty of care.
The liabilities of a legal representative
In order to control the legal representative and to make sure that he does not overstep his legal powers, Chinese law imposes some liabilities. These liabilities can be divided into 3 categories: civil liability, administrative liability and criminal liability.
According to Chinese law, a legal representative cannot incur civil liability for his duty-related actions even if they have caused losses for the company – due to the legal representative’s negligence or intentional wrong-doing for example. However, the company may claim compensation from its legal representative.
This refers to the violation of Chinese laws and regulations. In this case, both the legal representative and the company will face punishments. These are some examples:
- Faults involving vicarious liability: The legal representative may face fines up to RMB 2,000 and detention up to 15 days.
- False or inaccurate disclosure: Fines range from RMB 30,000 to RMB 300,000.
- Faults related to liquidation procedures: In this case, the fines imposed on the legal representative vary between RMB 10,000 and RMB 100,000.
The legal representative may defend himself by proving that he was not aware of such actions and not responsible.
Both previous liabilities can be upgraded to criminal liability depending on the seriousness of the case. To be pursued with criminal liability, the legal representative has to personally participate, be “directly in charge of” or “directly responsible” for the crime committed. Otherwise, the legal representative will not be held accountable for the company’s crimes.
Be careful: To minimize risks for the company, the articles of association should explicitly limit the powers of the legal representative.
Supervisors: How to monitor the legal representative
According to the law, appointing a supervisor or board of supervisors is required for all Chinese companies established on or after January 1, 2006.
Who can be a supervisor?
If the company establishes a board of supervisors, one third of it has to be composed of employees.
Who cannot be a supervisor?
The same rules apply here as mentioned above for legal representatives.
Duties of supervisors
The main purpose of a supervisor is to make sure that the company is lawfully operated and to supervise the management members. In order to do so, the supervisor has a certain number of powers, such as:
- Financial inspections
- Supervision of the direction and senior management
- Recommendation for the dismissal of directors and senior managers who infringe laws or company rules
- Suggestion of shareholder meetings
The supervisors should exercise these powers with due respect for diligence and loyalty to the company.
Liabilities of supervisors
Supervisors can be subject to civil liability and criminal liability, but not to administrative liability. Generally, their civil and criminal liabilities work the same way as for legal representatives.