Over the years my law firm has been called in a number of times to try to get rid of an out of control Legal Representative of a WOFE.  Typically, the company calling us thinks that it ought to be able to rid itself of its WFOE Legal Representative simply by issuing a resolution making it so.


The last time we executed a change of Legal Representative for a Beijing WFOE, we had to draft/provide the following:

  • Amendment of the Articles of Association in Chinese. Four originals.
  • Amendment of the Articles of Association in English.  For reference only.
  • Application letter for commercial bureau in Chinese.  Two originals.
  • Application letter for commercial bureau in English: For reference only.
  • Application letter for SAFE in Chinese.  Two originals.
  • Application letter for SAFE in English. For reference only.
  • Appointment letter in Chinese. Four originals.
  • Appointment letter in English. For reference only.
  • Introduction letter in Chinese. One original, with Beijing company chop.
  • Introduction letter in English. For reference only.
  • Letter of undertaking in Chinese. Four originals.
  • Letter of undertaking in English. For reference only.
  • Removal letter in Chinese. Four originals.
  • Removal letter in English. For reference only.
  • Resolution of the Investor/WFOE owner in Chinese. Four originals
  • Resolution of the Investor/WFOE owner in English. For reference only.
  • Power of attorney in Chinese for seal record. Two Originals.
  • Power of attorney in English for seal record in English. For reference only.
  • Power of attorney in Chinese. Four originals.
  • Power of attorney in English. For reference only.

We also needed the following documents from our client:

  • Business license. Original and two copies with Company Chop.
  • Approval certificate.  Original and two copies with Company Chop.
  • Most recent full year audit report.  Two copies with Company Chop.
  • Most recent capital verification report. Two copies with Company Chop.
  • Foreign exchange IC card. Original.
  • Enterprise code certificate. Original and one copy.
  • Tax certificate. Original and one copy.
  • Custom registration certificate. Original.
  • Financial certificate. Original and one copy.
  • Registry Book for Foreign-Invested Enterprises. Original.
  • Notice of annual inspection. One copy with Company Chop
  • Annual examination certificate. Two copies with Company Chop

The above was what was required the last time we did this in Beijing.  The requirements vary by city and even by district and by examiner within each city.

Bottom Line: Choose your legal representative wisely because it will take a lot of time and a lot of effort to remove him or her involuntarily.

“Stole” the below from an email on which I was cc’ed from one of my firm’s China lawyers setting forth who from a China SOE (State Owned Entity) should sign its China contract.

1. SOEs have business licenses just like other Chinese companies.

2. Each Chinese company has only one “legal representative” (a term of art under Chinese law). That person is identified as such on the company’s business license.

3. Any agreement signed by the legal representative is binding, whether or not a chop is attached.  (Of course, to enforce the contract you will need to prove that the signature is really that of the legal representative.)

4. Any agreement affixed with the company chop is binding, regardless of who signed on behalf of the company. (Of course, to enforce the contract you will need to prove that the chop is actually the correct chop from the correct company.) This is why control of the company chop is quite important, and the chop is usually kept by the legal representative or some high-ranking company officer/director.

5. Having an agreement signed by the legal representative AND affixed with the company chop is therefore a belt-and-suspenders approach. In China, it is also advisable.

6. It is also possible that an agreement that is not chopped and not signed by the legal representative will be enforceable against a company, if a company executes a number of agreements in this fashion. This is fact-specific and is definitely not a desirable approach.

7. One way to verify (or at least to gain some more certainty) that an agreement is executed in a technically correct fashion is to go to the company’s offices and review several other contracts that have been executed by the Chinese party. And, if possible, also contact other parties that have executed contracts with the Chinese party. Does the execution page bear the same chop? The same signature? If there are any differences, are the differences consistent? For instance: perhaps the chop is always used, but depending on the type of contract or type of customer, maybe the sales manager signs or maybe the VP signs or maybe the legal representative signs.

8. In larger companies, many (if not most) of the contracts are signed by someone other than the formal “legal representative.” For instance, the _______ contract on which we are currently working will be signed by ___________’s president and co-founder, who is not the company’s legal representative.

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.

The other day, in “Personal Liability For Failed China WFOEs: The Law And The Reality,” we wrote about how Chinese law generally does not hold WFOE (Wholly Foreign Owned Enterprise/Wholly Foreign Owned Entity) general managers, legal representatives or directors responsible for the debts of a failed WFOE, but creditors and local government officials sometimes do. A few days later, in-house counsel for a United States company wrote us to inquire about the risks of an “absentee” legal representative for a soon-to-be formed WFOE.

Co-blogger Steve Dickinson responded (roughly) as follows:

You are right to be concerned about this. Too many employees sign up to be an “absentee” legal representative without fully understanding what they are getting into. I just published a piece on China Law Blog on this issue. It is entitled “Personal Liability for Failed Chinese WFOEs.”

The summary is: absent fraud on your part, you owe no liability to the company, creditors or employees from your normal work as a director of the WFOE. In particular, for closely held companies, I have never seen a case in China where a director was held liable to shareholders. In this case, the liability of a director of a Chinese company is less than that of a director of a U.S. company.

The reverse is true of liability to the general public. In general, directors of Chinese companies can be held liable for “bad acts” that they committed or that they supervised. Where severe damage occurs, there is strong pressure in China to make the legal representative a scapegoat, even where legal liability under the law is unclear. Common situations include all of the following:

a.  Losses to creditors due to diversion of funds/assets to the director.

b.  Willful failure to pay employees when funds are available.

c.  Violation of labor rules by the Chinese company. For example, most foreigners are not even aware that China has a 40 hour work week. It is routine for Chinese companies to break this rule. Your own Chinese advisers may well urge you to break all the labor rules. Later, when there is a major protest, it is the legal representative (the foreigner) who will be held responsible, not the Chinese party who gave the advice.

d.  Violation by the company of environmental or safety regulations where significant damage is suffered by the public. For this, note that the directors of the milk companies that sold melamine contaminated milk in China were prosecuted and imprisoned. This risk only applies, however, in cases where the director knew or should have known of the offending activities. In the cases of which I am aware, all directors held liable were actively involved in the offending activity. However, there is a strong inclination in China to impose liability on the legal representative based on the “should have known” standard, even when the legal representative was not directly involved. As with c. above, your Chinese advisers and employees will urge you not to follow the law. This will then leave the legal representative “holding the bag” when problems arise.

Note also the concluding paragraphs of my blog post. The legal representative is often the target of pressure tactics by government officials, creditors and employees in cases where payments are not made. This can be a major problem in China.

To summarize, the risk of a director/legal representative to the shareholders of a company is very low in China. The real risk in China is for liability to third parties. As you can tell from reading current press reports, the greatest risks arise from treatment of employees and from safety/environmental violations. The risk here is real since foreign companies are held to a high standard in these areas.

The above discussion is somewhat general. If you have specific concerns, I would be pleased to discuss the matter with you in more depth.

What have you seen out there in terms of WFOE legal representatives being held liable for the acts of their WFOE?

If you want to greatly increase your chances of being able to enforce your contract with your Chinese counter-party, you should do the following (you should do a lot more than this, both within and outside your contract, but I am limiting this post to just those things directly related to being able to enforce the contract and its terms)

  1. Have a written contract (see this, this and this);
  2. Have that written contract be in Chinese;
  3. Have that written contract set out clearly how disputes are to be resolved and, even more importantly, pick the right forum for those disputes;
  4. Have that written contract set out in excruciating detail what the Chinese company must do to be in compliance with the contract;
  5. Set out the liquidated damages the Chinese company must pay if it fails to comply with the contract;
  6. Make sure the Chinese company signs AND seals your contract. 

This post is going to focus on the signing/sealing requirement, because it matters and because American (that includes Canadian) and British companies seem to get this wrong way too often.

In many countries, including the United States, apparent authority is a pretty broad concept. Grossly simplified, it means that if an employee reasonably looks as though he or she has authority to enter into a specific contract on behalf of the company, the company will be bound to that contract. Here is an example. At my law firm, our legal assistants/paralegals are always ordering office supplies from Office Depot in fairly small increments — maybe USD$50 to $150 at a time. And our law firm always pays these Office Depot bills. If my law firm were to refuse to pay a $75 bill tomorrow by claiming that we had never authorized the Office Depot order, Office Depot could sue us and they would surely win. They would win because we have clearly let the outside world believe that our legal assistants and paralegals have authority to make such orders on our law firm’s behalf. But what if one of our legal assistants ordered $50,000 in computer equipment sent to his or her house? Would we have to pay? Almost certainly not. 

But that is the United States. China has a much more limited apparent authority concept and it can be so prone to dispute that you may better off pretending that it does not exist.  

For written contracts in China to be effective, one of the following must be true: 

  1. The company’s legal representative signed it. Chinese law provides that a company’s legal representative has apparent authority to bind the company. This means that even if that representative lacks the actual authority to bind the company (maybe because the board of directors or the shareholders never gave the representative the authority to contract with you), the legal representative’s signature will bind the company. There is, however an exception to this and that is when you know that the legal representative lacks the authority to bind the company.
  2. The contract is appropriately sealed.  An appropriate seal (oftentimes called a chop) is applied to the contract. It does not matter who applies the seal, so long as it is the right seal. This means it must be sealed either with a contract seal that sets forth the name of the company or, as is more commonly done, with the Company Seal. Each Chinese company has only one company seal (no copies).

Chinese companies are notorious for trying to get out of contracts by claiming they never actually signed them or that they were signed without the proper authority and so if your contract is big enough and important enough, you should consider doing all of the following to minimize even further the likelihood of the Chinese company seeking to get out of your contract: 

  1. A signature from the company’s legal representative. Of course, you must first confirm from the company’s business license who exactly is the company’s legal representative.
  2. A resolution from the company’s board explicitly approving the contract and authorizing the legal representative to sign it. 
  3. The affixation to the contract of the company seal or the company’s contract seal.

What do you think?