The legal representative is a key role in corporate governance. Selecting the wrong person for the position can significantly expose your Chinese subsidiary to high legal risks.
Often, the European or American headquarters do not conduct thorough due diligence on candidates or understand the legal liabilities of the role. Under such circumstances, an unqualified candidate is commonly selected, which results in either negligence and/ or abuse of the role. And the legal representative can face civil, administrative and criminal liabilities accrued by the company.
Before an individual is appointed, both stakeholders and the candidate should carefully consider the roles and responsibilities.
Below, we provide a Q&A to assist stakeholders in selecting a legal representative.
Q: Who Can Be Appointed in the Role?
A: The Company Law of the People’s Republic of China (revised 2014) stipulates that the chairman of the board of directors, the executive director or the general manager, under the articles of association of the company, can serve as a legal representative.
Q: What are the Roles and Responsibilities?
A: The General Principles of the Civil Law of the People’s Republic of China (effective 1987) stipulates that under the law or the articles of association governing the legal person, the responsible person who acts on behalf of the legal person in executing a company’s functions and powers shall be its legal representative.
In plain terms, the position represents the company by exercising its functions and power, as well as the daily management.
The responsibilities include, but are not limited to:
- conserving the company’s assets;
- executing powers of attorney on the company’s behalf;
- authorising legal representation of and litigation by the company;
- entering into contracts and taking responsibility for legal obligations in the company’s name.
Therefore, stakeholders should select an individual who is able and qualified to hold such broad powers and potentially be exposed to unlimited liability.
Q: Can a Board Member Serve in this Role?
A: At Horizons, we advise against a board member serving as the legal representative, as the additional responsibility of daily management can increase the legal risk for the board member.
Q: Can a Third Party be Appointed?
A: A third party such as a lawyer could be elected. Although a lawyer may lack corporate knowledge of the company, the lawyer may be highly effective in governing the company.
For example, the lawyer as the legal representative could ensure contracts correspond with the resolutions of the board of directors or board of shareholders.
Q: What Legal Liabilities can be Accrued?
A: The law holds the legal representative to a higher standard of due diligence and care. Below are several liabilities that the role may face.
Civil Liability
The actions of the legal representative are deemed as activities of the company. Any civil liabilities arising from the legal representative’s actions are borne by the company. However, the company may claim damages from the legal representative for any losses caused by improper actions.
Administrative Liability
If a company violates any PRC laws, the legal representative of such company may be subject to fines and punishment. Where the violation is deemed serious, the legal representative may be subject to criminal liability.
Criminal Liability
The PRC Criminal Law imposes criminal liabilities on both the individual and the company when the individual is in charge of or is responsible for, commits a crime. As the main principle of the company, the legal representative will not be pursued with any criminal liability unless they have participated in the crime and are directly in charge of or responsible for the crime committed by the company.
Conclusion
Overall, it is an essential role in the management of a company and should not be underestimated. Selecting an appropriate, trustworthy person as a legal representative is crucial to minimise risk. Although the scope of the authority may be defined in the Articles of Association to limit the powers of the legal representative, selecting the wrong legal person may still cause major damage to a company.
Contact Us
If you would like more information about corporate governance in China or other related corporate matters, send us an email at talktous@horizons-advisory.com, and we’ll have a Horizons professional contact you.
