According to PRC law, the legal representative of a company generally refers to a person who is authorized to exercise power on behalf of the company. Foreign-invested enterprises in China also need to appoint legal representatives. The legal representative has a dual identity and status: internally he/she is responsible for company affairs, with decision-making power and management power; externally, he/she engages in business activities on behalf of the company, with the right of representation. Therefore, it is very important to understand the rights and obligations of legal representatives and appoint suitable legal representatives to foreign-invested enterprises.
The internal and external rights and power of the Legal Representative
As per the PRC Law applicable, the legal representative shall be recorded within the Articles of Association or via bylaws of the Company, and then duly recorded in the administrative departments. After the Implementation of the New Foreign Investment Law, the Chair of the Board of Directors, the executive director or the General Manager can all be appointed as the legal representative. The legal representative of the company often has the highest control and decision-making power within the company, therefore, the company should, in accordance with the law, specify and restrict the scope of its senior management in the Articles of Association or bylaws, including the legal representative.
The action of the legal representative within the scope of authorization shall be deemed as that of the company, and therefore holds the company liable. For example, the purchase and supply contract signed by the legal representative within the scope of authorization generally shall be deemed binding, and the company shall perform accordingly. An aspect to note is that even without being chopped with the company stamp, a contract will still be binding as long as it is duly signed by the legal representative, even sometimes binding in cases when the legal representative is acting beyond the scope of authorization. Therefore, the Foreign-Invested Company shall be cautious in choosing their legal representative in China and shall set up such supervising systems as supervisors.
The legal liability of the Legal Representative
The activity of the legal representative naturally embodies the legal effect to represent the company, which is so powerful an authorization that, together with the legal effect of the public announcement of the registration of the legal represntative, the legal representative shall bear comparable liabilities and risks in order to ensure the safety of transactions.
Among the crimes stipulated in the Criminal Law, a system of double punishment is applied, that is, in addition to the punishment of organizations, the main person in charge or directly responsible persons (including legal representatives) may also be held criminally responsible. For example, if a foreign-invested enterprise commits illegal fund-raising, capital evasion, intentional destruction of accounting vouchers, bribery, illegal operations and other related unit crimes, its legal representative may also face fines and imprisonment as stipulated in the Criminal Law.
The risks of the administrative responsibilities that legal representatives need to assume are scattered throughout many laws and regulations and may have a larger effect within a related industry. For example, in the pharmaceutical industry, the legal representative and main person in charge of a foreign-invested enterprise engaged in pharmaceutical production shall be fully responsible for the pharmaceutical production activities of the enterprise. Another example is the issue of environmental impact assessment in the process of project construction — if a foreign-invested company starts its work without approval by the environmental protection administrative department, the legal representative may be subject to administrative detention.
As the senior management of the Foreign-invested Company, if the legal representative breaks the laws and regulations or the company AOA or bylaws when performing his duty, (including activities beyond the scope of authorization), which causes harm to the company, the company and the stockholders have the right to claim compensation from the legal representative. For example, the Articles of Association of foreign-invested company (A) may stipulate that the signing of a contract with a target amount of more than 1 million yuan requires the resolution of the shareholders’ meeting in order to be valid, but the legal representative (B) signed the contract without authorization from the shareholders’ meeting of company A. If Company A suffers any loss, it can claim compensation from B.
The legal representative may also be restricted from high-spending behaviors due to the company’s failure to perform the payment obligations determined by the effective legal documents within the period specified by the court, including their children’s enrollment in high-fee paying private schools, tours, vacations, taking high-speed trains and aircraft, etc.
Conclusion
To avoid the risks of the aforementioned liabilities, overseas investors should always realize that the legal representative is embodied with great power, which shall be restricted in the Article of Association and bylaws or by appointing supervisors and hire legal counsels in order to ensure that the executive shall comply with the law. Meanwhile, the legal representative of a foreign invested company shall realize that with that great power, they are also burdened with great fiduciary duties and liabilities. To fulfil the duty and prevent the risks associated with such liability, the legal representative needs to be duly informed about the material matters of the foreign invested company and take cautious decisions to act in good standing.
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