After introducing the possible liabilities a legal representative in China may assume (see “Legal Representative in China: Civil Liabilities”, “Legal Representative in China: Administrative Liabilities”, “Legal Representative in China: Criminal Liabilities”), we would like to offer you some advice about reducing the relevant legal risks of serving as the legal representative in a Chinese company based on our experience as Chinese lawyers.
1. Making collective decisions for important issues
As a legal representative who is also the chairman of the board of directors, the executive director or the manager of the company, he should have the decision related to the daily operation of the company (especially some important issue) made by a shareholders’ meeting or board meeting according to the provisions of the articles of association. Meanwhile, in case of any violation of laws and administrative regulations or the articles of association, the legal representative should raise an objection thereto explicitly and record the same in the minutes to reduce the potential risk.
2. Purchasing senior management liability insurance
At present, liability insurances are available in the major insurance companies in China for the senior management of companies. When a senior manager is liable to any third parties due to performing his duties, the insurance company will compensate such third parties so that the senior manager can avoid personal property risks. Therefore, it is advised that companies buy liability insurance for the legal representative who is also a senior manager to minimize the potential legal risks of serving as the legal representative in China.
3. Restricting authorization
As far as we know, it is often the case that the legal representative of a foreign-invested company is permanently living abroad. Some of such legal representatives are used to granting their rights to others generally, which may increase the risks of abuse of rights in case of lack of supervision. Therefore, as Chinese lawyers, we would advise that the legal representative should impose specific restrictions on the scope and duration of the authorization.
(1) Scope of authorization. Except for the general authorization, additional written authorization of the legal representative should be obtained as a prerequisite for matters concerning revision of the articles of association, change of shares, increase or decrease of the capital and signing of contracts involving huge amount.
(2) Duration of authorization. The ideal duration of each authorization should be one year. After the expiry of the duration, the legal representative should assess the risks based on the performance of the authorized and extend the duration only when the assessment is satisfactory.
(3) Checks and Balances. Some foreign investors may choose to adopt a system where the authorization of the legal representative shall become effective only when such authorization is signed by the chief executive officer and the chief financial officer. We owe this suggestion to some of our clients, who have developed this system and achieved positive results.
So far we have explained the basic principles of how legal representatives can reduce their legal risks. We would like to draw your attention to a special circumstance, where the legal representative is a nominal legal representative. Still, when the company violates the laws, the nominal representative shall bear corresponding liabilities. As for criminal liabilities, if the nominal legal representative is not the person in charge of the company or the directly responsible person, which is usually the case, such nominal legal representative shall be spared relevant criminal liabilities.
Therefore, as far as the judicial practice is concerned, designing a legal representative’s legal risk control mechanism needs to be carefully considered on a case-by-case basis. And it should also be noted that any design of such risk control mechanism cannot prevent the legal representative who violates the laws or damages the interests of the company from legal liabilities or punishment.
However, please rest assured. Generally speaking, the legal risk is relatively low if the legal representative abides by the laws and performs his due diligence obligations during his term of appointment. And the above-mentioned legal liabilities will not be incurred unless the legal representative himself has some faults or violations.
As Chinese lawyers experienced in the field of foreign investment for a long time, we have assisted many foreign invested enterprises in their legal issues related to legal representatives. If you have any legal questions regarding the legal representative, please feel free to contact us via firstname.lastname@example.org.