Legal Representative in China
If you intend on creating a legal entity or having an office in China, it is required by the Chinese government to appoint a legal representative for your Chinese subsidiary. In a Western context, the term “legal representative” generally refers to a lawyer or legal officer of a company, who advises the company on legal matters. However, the role of a legal representative within a Chinese entity is considerably different. In this article we explore what a legal representative is, their duties, powers and more.
What is a Legal Representative in China?
A legal representative of an entity in Chinapossesses general legal authority and controlover a company’s business practices and operating accounts.
The legal representative of a company serves as the authorized legal agent of the company, with the power of acting as a company’s principal representative . As the main figurehead, the legal representative must act in alignment with Chinese regulations and the articles of association.
This chosen individual is responsible for representing a company’s interests and undertakes the duties and risks of the role. Given the level of responsibility, and potential liability connected to the position, careful consideration should be taken regarding who is assigned to the role.
Duties of a Legal Representative in China
The legal representative of a company acts as the decision maker and has the highest authority of the entity in China. They possess the power and authority to act on behalf of the company and are responsible for performing the following:
- Entering into agreements: including negotiations, contracts and other legally binding agreements on behalf of the company.
- Holding power of attorney: for administrative, banking and regulatory affairs as well as corresponding with government agencies.
- Ensuring financial oversight: even though financial management is generally delegated to other professionals or agencies; the legal representative is ultimately responsible for the financial operations of an entity and must make sure all financial reporting and tax compliance adheres to local regulations.
- Maintaining company seals: due to the importance of the company chop in China, the legal representative is charged with the safekeeping of the chops and ensuring their correct use.
Are a Legal Representative’s Powers Limited?
The legal representative’s level of authoritative control is not limited unless otherwise specified in the articles of association. They not only have the authority to sign official documents, but are also able to provide the approval of the organization through use of the company chops.
Legal representatives have a duty to act in the best interests of a company but have in some instances acted in contravention of this. In cases where a legal representative acts against the best interests of the company and the shareholders, and instead acts in their own interests, they are then exceeding their authority. In such a case the company will be held liable.
A company who has suffered loss as a result of a legal representative acting in their own interests or acting negligently may be able to claim compensation for any damages suffered.
How to Mitigate a Misuse of Power?
Articles of Association
The shareholders of an enterprise can mitigate the misuse or abuse of power by an individual by clearly identifying the roles, responsibilities and limitations of the legal representative in the articles of association. These articles establish internal legal safeguards for the company that ensure their authority cannot bypass implemented safeguards.
Separation of powers
By ensuring that the power is not concentrated in one individual, shareholders of a company can ensure that power is not misused or used negligently. In standard practice, shareholders generally appoint the executive director, and as such have the power to remove the director and change the legal rep if the need arises.
Does the Legal Rep Have to be in China?
According to Chinese law, there is no requirement for the legal representative to be physically present in China. While having the representative based in China offers a number of advantages, such as faster communication and streamlined document processing, some companies opt to have the representative located overseas in their home country.
This decision depends largely on the company’s specific circumstances and interests, in addition to the role the representative fulfills in their day-to-day duties. For instance, a WFOE (wholly foreign-owned enterprise) company may not have board members with expertise in Chinese trade and bureaucracy. In such cases, having a individual based in China may provide and advantage as they will have the requisite knowledge and understanding of local regulations and processes.
Alternatively, some WFOE companies may consider it too risky to have a physically distant legal representative. Such an individual could possibly assume more autonomy than warranted and make decisions that are at odds with the organizational board’s intentions. As such, companies in this situation will choose to keep their legal representatives for the Chinese subsidiary within its local offices.
In some instances, companies prefer to have their legal representative outside of China to avoid personal liability in China. This does, however, make getting certain documents approved quite challenging and therefore in such cases the company may opt to have a 3rd party company to hold the company chops or legal rep chops for cases when the documents need to be approved.
Things to Consider When Selecting a Representative
The choice of a legal representative can significantly impact the degree of success of your Chinese business. A number of key factors must be carefully considered when selecting a representative.
The level of trustworthiness in a legal representative is highly important. Despite the presence of legal recourse and safeguards, shareholders need to have a high level of trust in the individual selected for this position of authority.
- Thinking in the long term
Shareholders should consider this position in the long-term, given the authority and responsibilities attributed to the role. Consider individuals who have a significant stake in the company, such as board members, in-house legal counsels, or executives. Selecting someone who has shown commitment to the company should be prioritized.
- Importance of the individual
Due to the nature of the role, the selected individual would be a decision maker and possess considerable power and authority to make decisions on behalf of the company. Therefore aside from trust, it would be important to select an individual who is able to carry out important decisions.
Selecting the Right Partner
In addition to selecting the optimal individual as legal representative of your company, navigating the Chinese regulatory environment can be a challenging process. Moore – MS Advisory has helped a number of foreign businesses with overcoming any barriers with corporate establishment in China. Get in touch with us to right away and learn more about our services.
Disclaimer: all articles and its related content are the property of Moore Stephens Consulting Company Limited and may not be reproduced either in part or in full without prior consent.
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