Episode 12: The legal representative in China – what it means
Chinese limited liability companies need to appoint a legal representative. In this podcast, I will tell you why this is the most important position of the company and what you should do to optimize a healthy environment in this respect.
Together with my team, I advise my clients who are usually companies from Europe on doing business in China. If the client already has a company in China or if they want to incorporate an entity, one of the most important topics is “who is or will be the legal representative”.
The legal representative is the key person of a Chinese company. He or she will be seen as the one who can make decisions on behalf of the company based on the authority given by the company’s shareholders. The name of the legal rep appears on the business certificate so it is clear for clients, business relations, government, suppliers, etc., who bears the responsibility of this company.
Who can be the legal rep?
Only the company’s managing director, chairman of the board or the general manager can become the company’s legal representative. The combination of managing director + legal rep is a good combination if the person is 100% reliable, so usually the owner/entrepreneur him or herself.
However, if this MD is not planning to supervise the daily operations because he/she travels a lot or is only sometimes in China, then it is not the ideal situation with respect to the legal responsibility while not having the actual opportunity to oversee what is actually happening.
In the combination of a GM + LR, the hierarchy can help to control the GM because the MD and the Board are higher in rank and they can fire and replace the GM LR. But I will have to warn you that although this will help to make it clear to all involved what the structure is, it is still needed that other measures are in place to avoid conflict situations or even worse, a lose of control scenario in which the GM refuses to cooperate.
What are the risks that parties are facing?
As mentioned, the risks discussed so far is that the head office can lose control over its Chinese subsidiary if the LR is unwilling to return control or give insight on how the company is managed. The LR can make decisions on behalf of the company with the LR name chop.
But it is not all just about having power as with the authority and powers of a LR also comes with risks for the legal representative for bearing the main legal responsibility for the company as well. In case of claims and law suits from third parties or investigation from the government, the legal representative will be the one representing the company. Formally the liability of the LR is limited to malicious acts and actions taken by bad faith but in reality, if the situation is unclear and undecided, authorities want the LR to stay put so restraining orders may be issued to prevent him/her from leaving the country or to travel within China.
What are healthy measures in a good functioning company?
Every company needs a LR so someone has to do the job. Ideally HQ appoints the most trust worthy person who can supervise the company from day to day. It will help to make use of some healthy measures within the company such as regulating the LR’s authorities and its limitations in the AoA, having a chop log with approval and chopping procedures and chop safeguard policies, invest in a balanced employment relation with the LR (and other employees in the company) with clear understandings about future and expected rewards and make sure that everyone in the company knows what the company ethics are. Usually there are red flags that indicate abuse of power before the situation really escalates so do not ignore those red flags of course!
And then from another point of view: to be appointed as one – should you do it?
Same applies here, someone has to do it and it is of course an opportunity to take that responsibility and lead the Chinese company. Most probably good for your career and you will be taken very serious in China while doing business. But as mentioned earlier, it will come with risks too. If the company is held liable.
In daily life the risks can be limited by good management such us keeping the chops safe and close to you, hiring the right people and make sure that they will follow the law and that they will not do things behind your back. Get good advisors who can guide you through legal and administrative procedures, make sure that the board from HQ will back you up, understands that risks you are exposed to and make sure that if you want to step down, you will get the support needed.
Listen to the podcast for more details. If you need further advice before you can make a final decision, please do not hesitate to reach out for a tailor made opinion on this.
