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The China Legal Representative. Its Risks And Responsibilities.

Posted in China Business, Legal News

Many months ago, co-blogger Steve Dickinson was interviewed regarding the Legal Representative’s role in Chinese companies.  I was cc’ed on one of the emails regarding that interview and I am running that now because much of what was discused is helpful to foreign companies doing business in China.

Question:  What are the biggest myths regarding the China legal representative?

Answer:  The legal representative is a concept that comes from China’s company law. The only meaning is that this person has the power to bind the company in contracts and this person also represents the company in submitting reports to regulators. It has no meaning regarding management of the company. The company is managed by the board of directors, the general manager and the senior management. Thus, liability does not accrue to the legal representative simply from his or her status as the legal representative.  Though many beleive that the legal representative is responsible for all the liabilities of the company, this is simply not true.

Directors and management are also not liable for the liabilities of the company unless they directly participated in the improper acts. Take the first big melamine milk scandal as an example. In that case, directors and officers were held criminally liable because they directly participated in the adulteration of milk program. In that case, the crimes/torts  were their own acts and they were therefore held liable. None of this liability was incurred because they were were the legal representative. The liabilities were incurred because they were involved in actively managing the company and the illegal acts were directed by them personally.

 

Question:  What are the legal responsibilities of a legal rep?

Answer:  See the above.

 

Question:  What are the legal responsibilities of shareholders?

Answer:  See the above. No liability or responsibility as shareholder. However, everyone is responsible for his/her own affirmative acts.

 

Question:  What’s your advice to foreign company representatives regarding exit strategies from China?

Answer:  This confuses the concepts of director, general manager, and legal representative and so I really cannot answer the question. Basically, however, do not allow the company to commit a crime if you are in a management position. This sounds simple but it is not. It is notuncommon for your Chinese staff to recommend that you commit a crime. They will tell you that “everyone does this” in China and they will make you out to be naive if you are not willing to do the same. Don’t’ do it. If you have issues along these lines, seek outside advice. Fast.  And if your staff insists, terminate them. Ask yourself whether what you are doing is worth spending time in a Chinese jail.

 

Question:  Is there a checklist worth following?

Answer:  See above. The other point is: if that if you are accused of a crime, without regard to whether the accusation has merit or not, leave China immediately, if possible. Do not wait for your family. Just leave. It is better for your family to follow behind in a week or two than to have your wife/husband visit you in a Chinese criminal detention facility.

  • Samuel Hung

    I correct you on the point that the Chief Representative has its roots in Chinese Company Law. It doesn’t. It comes from the position of “Legally Responsible Person” which was based upon civil law as China didn’t have any company laws at the time – they were fanatic communists and capitalism was evil, remember?

    The “Legally Responsible Person” was the poistion from the 1970′s until the early 2000′s when China liberaised its own legal services industry and issued practicing qualifications to Chinese lawyers, actually a civil position that undertook to oversee a number of responsibilites, including company overviews but also included other non-commercial duties as well. Some of the very early expats that ran law firms or consultancies in China were “Legal Responsible Persons” and that then morphed into “Chief Representative” when they enacted the new foreign investment laws in the late 1980′s and issued laws covering the operations of RO and WFOEs etc. But its roots and the definitions still today lie in civil and not company law. Which is one reason there is some ambiguity about it and why a Chief Rep can be held personally liable in a civil court for any breaches.

    Sorry to preach but you need to get your Chinese legal history right to fully understand the issues at stake here as you make some wrong assumptions in this article.

    • http://www.chinalawblog.com/ Dan Harris

      The statement was not an historical one. The statement was a present day one. The concept of legal representative exists in China TODAY because it is in the Company Law. We made no attempt to give its history in this post, but I thank you for having done so.

  • http://www.facebook.com/impactim8 Tyler Nash

    The ‘legal representative’ makes sure that there should be
    no harm to the company’s policies. Also they have responsibilities of managing
    law associated with the companies and the particular country and its policies
    by providing flexibility.

  • twofish

    Also some of the history of legal representative has to do with the fact that the first Chinese companies were SOE’s in there was an obvious person “in charge” of the company (usually a party secretary). The problem is that without a legal representative, you could have a situation in which people in the company would strip the company of its assets and then everyone would blame each other, and there would be no one person that you could send to jail. By putting someone powerful in the “hot seat” you could corporatize everything and have one person responsible.

    The other thing is that I think it would be a *terrible* idea to leave China without your family. If the authorities think that you are responsible for a crime, then at the very least they can keep your family from leaving China pending investigation.

  • twofish

    Also under Chinese corporate law, the power to bind the company legally doesn’t come from the management but from the legal representative. The legal representative has control over the chop and can effectively veto the decisions of the management by refusing to authorize a document. It might be bizarre to give someone so much power, but if realize that domestic Chinese corporations are often state or quasi-state entities. Unlike the United States, most small businesses are not organized as corporations, and “pure capitalist” Chinese companies often not organized as domestic PRC corporations.

    The role of the legal representative makes a lot more sense if you realize that in most state-owned Chinese companies, the legal representative is the Party secretary. One big legal challenge in creating a market economy was to figure out how to “translate” a communist factory into a capitalist legal entity. What ended up happening was that the general manager became the CEO, the Party committee became the board of directors, and the Party secretary became the chairman of the board and legal representative. The fact that the legal representative has an effective veto on the decisions of the management is how the Communist Party controls domestic Chinese corporations and exercise general supervision without being involved in the day to day minutiae.

    This also explains why Chinese companies separate the chairman and the general manager and why the general manager can’t be the legal representative. If you put everyone in one person, they are no longer subject to effective Party control. It also explains why the duties of the legal representative are so vague.

    Ironically, having the legal representative of a WFOE be a director of a parent company lets a MNC do more or less the same thing as the CCP, which is one reason people keep it around.

    As far as criminal liability. Yes, a legal representative is not liable unless they are personally involved, but since the legal representative’s consent is necessary for corporate actions, its pretty hard for a corporation to do something bad without the legal representative having some personal knowledge of it. If the corporation did something really bad, and the legal representative in fact had zero knowledge, that would be grounds for an extreme negligence claim.

    Conversely, with some exceptions, the actions of the legal representative are the actions of the corporation, so in general, civil and criminal liability by the legal representative is assumed by the corporation.

    The other thing is that the more I think about it, the worse the “if you are accused of a crime try to leave China” advice sounds. If the police are about to charge you with something, and you try to leave the country and they’ve already told border control to deny you permission to exit, then you are going to have some pretty difficult conversations when they stop you at the border.

    Under Chinese law, you do *not* have the right to remain silent. You to have a right to a lawyer but the police have the authority to conduct one interrogation immediately after your detention before you are allowed to talk to a defense attorney, and standard police practice is to use extreme pressure to make you say something incriminating during that first interrogation (and to repeat, you do not have the right to silence and silence will be considered an automatic admission of guilt).

    My advice is that if you think you are going to be charged with a crime, find yourself a good criminal defense lawyer ASAP, and figure out what your situation is.

  • BA

    With regard to the exit strategies, I would add that a foreign company representative (legal rep or other management position) should also make sure that the company has been setup properly and is operating in compliance with Chinese law (has the proper licenses, is operating within an approved scope of activities, etc).

    The reply “everyone does this” comes from the foreign shareholders/directors as well as local Chinese staff. As the foreign company’s legal rep or manager in China, there is a good chance you will be held responsible for the company’s actions until the foreign shareholders/directors return to face the music, which can be a pretty long wait…

  • Domino MF

    I am an owner of a relatively small pipe fitting business, around 25 million annual sales. As of 2 weeks ago on a trip there I have a handshake deal with our the director of our supplier, he is supposedly the majority owner, with a trading company that does sales owning a minority stake but who really knows, right?

    Anyway he recently expanded and opened a new factory down the road and doesn’t have enough business to keep his second factory busy. In return for giving him the bulk of our business the factory will appear to belong to my company, logo on building, workers uniforms, drawings and that’s about it. In our industry the reason we even need this is a dog and pony show for end users not familiar with our business practices, and we need this to get onto approved manufacturers lists.

    We have 2 decades of experience manufacturing in China and have been through good and bad relationships. We had this exact same setup 5 years ago but pulled out after a bigger competitor of ours marginalized our presence causing delays etc.

    I have interviewed and after new year will hire a QA manager thru a FESCO company. He will be my only true employee, he would also be willing to take direct deposits by wire my understanding is the gov’t is cracking down on that.

    My question is do I need anything more than a rep office? I have an occasional requests for proof of my chinese business papers, I am not concerned that these will be audited in detail so a rep office seems to be the easiest solution. We have no profit as purchasing will continue to be done by the home office, and no equipment beyond computers and inspection tools.

    Is there any reason to not proceed as explained, in the current environment?