All Wholly Foreign Owned Enterprises (WFOE) are required to fill several critical employee positions in order to comply with Chinese Company Law as well as laws specifically relating to foreign investment in China. Understanding the specifics of how these positions must be filled as well and how they relate to one another is critical to shielding your business from legal risks while operating in China.
Depending on their size and scale, most WFOE operating in China must fill the following positions in order to legally operate in China:
- Board of Directors/ Executive Director
- Legal Representative
- General Manger
- Supervisor/ Supervisory Board
It should be noted that, although this article covers these positions as mandated by Chinese law, companies should feel free to add additional restrictions or responsibilities to these positions if they do not conflict with existing Company Law. These additions should be reflected in the articles of association and these documents must be amended if job descriptions change further.
Board of Directors/ Executive Director
The Board of Directors represents the highest authority in the company, having the final say in all decisions not directly decided by the shareholders during general meetings. If a company is relatively small, it is allowed to choose a single individual to serve as the Executive Director of a company. Otherwise a board of directors should have between 3 and 13 members of any nationality. Director positions last for 3 years, after which new elections are held by the shareholders. All directors’ personal information must be registered with the State Administration for Industry and Commerce (SAIC). A board of directors/ executive director is responsible for the following:
- Reporting to shareholders/ convening shareholder meetings
- Executing shareholder resolutions
- Electing a chairman of the board
- Amending the articles of association including registered capital, share, debt, mergers, acquisitions, and dissolution
- Day-to-day operation of the company, including investment planning, budget and accounting planning, as well as profit and loss distributions
- Planning internal management structure
- Any other responsibilities as outlined in the articles of association
All companies operating in China must identify a legal representative when registering for a business license. As the name suggests, a legal representative is empowered by the company to represent their interests in a legal capacity and holds one of the most powerful positions in any business. In businesses without a board of directors, the executive director is made the legal representative by default. If operating with a board of directors, a company can appoint a specific individual from among the chairman, executive director, or senior manager, without regard to nationality, to be the legal representative.
Legal representatives have the following responsibilities by default:
- Complying with Chinese law and reporting to regulatory authorities
- Entering into legal contracts on behalf of the company
- Certifying corporate debt and equity
Acting in this capacity, the legal representative will make use of the company chop to certify the company’s assent in legal matters. Proper use and management of the company chop by the legal representative is critical to avoiding legal risks for your company and is outlined in Acadia Advisory Group’s article “Company Chops in China.”
It should be noted that legal representatives are among the most legally exposed individuals in a corporate structure and are subject to the following civil liability in their professional capacity as legal representative:
- Civil liability for any damages caused to the company due to intentional or unintentional conduct
- Civil liability for serious misconduct or collusion in contract signing
- Civil liability to the company for any misconduct on the part of the legal representative
And to the following criminal liability:
- Illegal activities or activities that are beyond the registered business scope of the company
- Providing fraudulent information to investors
- Engaging in or aiding shareholders in tax evasion, evading debt repayments, or hiding assets
- Unauthorized use of company assets during corporate dissolutions or bankruptcy proceedings
- Not reporting changes in the company’s core information (i.e. Information contained in the business license or articles of association)
- Any other activities prohibited in Chinese law or that are deemed to run counter to national interests
Ensuring that procedures and rules are completely understood and strictly implemented by the entire company is critical for any legal representative in performing their job correctly.
The role of the general manager in a WFOE is to implement in a daily capacity the resolutions issued by the board of directors. Like the legal representative, this person must be identified when registering a WFOE with the local authorities. The general manager may also be the executive director or a board member and should also be appointed for a three-year period without regard to nationality.
In their capacity as executor of the Board’s resolutions, a General Manger is usually responsible for the following:
- Implementing the company’s annual business and investment plans
- Drafting an internal management structure for a business, pending board approval
- Drafting the company’s basic management system, pending board approval
- Formulating specific company policies, rules, and regulations
- Requesting the dismissal of the company’s deputy managers and financial officers
- Dismissing any employees not requiring board approval
- Any other functions or powers as granted by the board of directors
While the General Manger’s role may seem relatively straightforward, ensuring that a general manager is both competent and trustworthy is critical to the success of a WFOE in China.
Supervisory Committee/ Supervisor:
The primary role of the supervisory committee or a supervisor is to provide oversight for the shareholders in order to better protect their interests. This person cannot be a director, a legal representative, or a general manager, but may be a shareholder, without regards to nationality. If a company is small enough, a single individual may be designated supervisor, otherwise a board of supervisors must be formed with a minimum of three members, one third of whom must be company employees. Supervisors are appointed for three-year terms.
In their capacity providing oversight to shareholders, the supervisory committee has the following rights and responsibilities:
- Investigating improper behavior by management against shareholder interests
- Inspecting the financial affairs of the company
- Supervising upper management and request the dismissal of any non-compliant corporate officer
- Proposing actions to the shareholders to protect their interests
- Filing suits against the company on the behalf of shareholders
- Attending meetings of the board of directors and making suggestions
Setting up an efficient and independent Supervisory Committee is both a legal and moral obligation of any foreign-invested business in China and critical to protecting the broader interests of shareholders.
An individual is disqualified from holding any important corporate position in a WFOE if they meet the following criteria:
- Previous criminal record
- Wanted by the police
- Less than three years since a company that they were involved in underwent legal proceedings
- Less than three years since the business license of a company that the legal representatives for was revoked
- Large personal debt
- Any other legal restrictions as stipulated by the State Council
Understanding how the most important positions Chinese corporations are structured is essential before committing to an investment in China. Making sure that these positions are implemented efficiently and according to existing law will ensure the efficient operation of a WFOE and ensure that legal and operational risk are minimized for all stakeholders. In addition to harming shareholder interests and risking operational difficulties, illegal behavior can incur extremely severe civil and criminal penalties in China. Look out for Acadia’s upcoming article on piercing the Corporate Veil in China to learn under what conditions management and shareholders can be held liable for a company’s behavior and debt.