Every business established in China, whether domestic or foreign, is required to have a legal representative. He/she is the main principal of the company and is the employee with the legal power to represent and enter into binding obligations on behalf of the company in accordance with the law or articles of association of the company. Essentially, the legal representative is someone who is appointed to act on the companys behalf and Article 38 of the General Principles of Civil Law of the Peoples Republic of China defines the role as the responsible person who performs the duties and powers on behalf of a legal person in accordance with the law or the constituent documents of the legal person.
However, foreign investors often have only a limited understanding of the legal representatives role and are startled when they learn of their power and how difficult it is to replace an un-cooperative one. Legal representatives possess broad powers and potentially unlimited liability. When concluding a contract a legal representatives acts are binding on the company even if he/she is acting beyond their authorized scope. Failure to properly understand the powers and responsibilities of a legal representative can therefore lead to a situation where foreign investors are held to ransom. In appointing a legal representative, it is vital to bear in mind that the legal representative will essentially have the full keys to the company, cash, and capital.
Amendments to the PRC Company Law require a new company established on or after January 1, 2006 to appoint a supervisor, or board of supervisors depending on the size of the company, whose role is to monitor the activities of the legal representative. Shareholders and employee representatives of a company can act as supervisors. However, members of the companys board of directors or senior management may not simultaneously serve as supervisors. If a company has a board of supervisors, it must have a proportion of employee representatives which accounts for at least one-third of supervisory membership. The supervisor, like the companys directors, is not required to reside in or visit China.
The main role of the supervisor is to safeguard and supervise the operation of a company and exercise supervision over the work of directors and senior management. The Company Law gives supervisors an array of powers, such as inspecting the companys finances, supervising the company directors and senior managers, recommending dismissal of directors or senior managers who violate laws or damage the companys interests, proposing shareholder meetings, and any other powers specified in the companys articles of association.
The role of supervisor is very relevant to the potential liabilities of the legal representative as they are permitted to supervise and constrain the legal representative in order to reduce the potential risks of a rogue legal representative acting on behalf of the company.
As we know, legal environment plays an important role for investment environment, and is also a necessary factor of attracting potential foreign investors. In this case, it has become an essential indicator for improving investment environment in China. Since reform and opening up of China, a series of foreign investment law was published during 1980s to build a legal system of foreign investments. “Law of the people’s republic of China on foreign-owned enterprise”1 and “the law of foreign-owned enterprise implementation regulations”2are parts of them. As a mount of foreign-owned company established in China in last century and China joined in WTO in 2001,”Law of the people’s republic of China on foreign-owned enterprise”and its implementation regulations have been amended in 2000 and 2001 respectively to adapt to the new changes in economic circumstances. Thus a free and open legal environment for foreign enterprises has been improved initially. For example: the enterprise’s obligations of exporting3 and reporting the production plan4 were canceled, which was stipulated in the old foreign-owned enterprise law. Moreover article of “the priority to buying Chinese raw materials and fuel under the same conditions5” was removed either, in order to esteem business autonomy; articles contrary to the provisions of the stipulation of WTO were deleted as well, including “balancing own foreign exchange”6, “requirement for local materials” , “requirements for exporting implementation” etc.
Though the new foreign-owned enterprises law considered more about the new economic situation, there are still some incomplete aspects which restrict the foreign-owned enterprises to go further in China market. Meanwhile, several conflicts are arising between new “company law”, which was published in 2006, and foreign-owned enterprise law. Those problems all affect the development of foreign-owned enterprises in China. From this point of view, this article will analyze the drawbacks of foreign-owned enterprise law and the effect of them on China’s legal environment:
1) Implementing issues of foreign-owned enterprise law.
Firstly, the amendments for “foreign- owned enterprise law” and their implementing regulations in respect of procedure matters were not enough; therefore, the fact that to set up a foreign-owned company would experience eventually a very complex, long and inefficient process, has not been changed fundamentally. Under the current regulations, the basic formation process includes the following steps: (1) Submit the application to the government of county level or above the county level where the foreign-owned enterprise will be established, and deliver relevant documents. (2) Submit the application through the above government to the approval authority for approving the establishment. (3) Registration in the industrial and commercial bureau. (4) And other related registrations. The completed process not only links many departments, but also requests for submitting a variety of written materials. The whole process usually makes potential foreign investors too confused to continue the investment. Finally, the enthusiasm of foreign investors is weakened badly. Fortunately, all levels of government have stood on the front line of attracting investment, and taken various measures to improve the investment environment to promote investment practically. At the same time county, district, development areas have been authorized to approve the project directly through various forms. Above all, it is absolutely significant and possible to simplify the procedures of foreign-owned enterprise establishment.
Secondly, the problem of long establishing period is also worth consideration. Foreign-funded enterprises will spend about six months on registration and approval procedures under current regulations. But in practice, a number of areas’ governments have reduced processing time to provide conveniences for foreign investors. For instance: Henan province commits that approval of foreign investment will be finished in five working days. In addition, the government of Shenzhen province also commits that the application, approval and registration in the industrial and commercial bureau of encouraged project7 will be finished within 12 working days. Therefore, from my point of view, establishing period should be shorted in order to enhance the enthusiasm of foreign investment.
2) Conflicts between foreign-owned enterprise law and new company Law Foreign-owned enterprise law, which is an important part of “Foreign Investment Law8” , has been outside the company law system alone for several decades, and formed a set of enterprise system and legal rules different from company law. One part of those rules is about the unique system and stipulations, which are related to the foreign economic relationship; the other part is about the general rules and system of corporation limited. In response to this conflict, company law provides that the limited corporation which is funded by foreign investor adapts company law; but also provides, at the same time, that if there are “other regulations” in the foreign-owned enterprise law, adapt its regulations. The problem is what the “other regulations” point. It is reasonable, if they refer to the unique system and rules of foreign-owned enterprise law; if, however, they include every aspect of present foreign-owned enterprise law, the situation of undermining the legal unification will emerge. Therefore how to deal with the situation? A legal pattern of the foreign-owned enterprise law ruling its unique system and the regular rules of a corporation adapting company law should be established. By doing so, these two laws would coordinate with each other smoothly. The confusions of foreign investors can be reduced to a great extent during the daily business contacts.
The authority has paid attention to above problems and recognized the negative effect of these drawbacks. Some officials of Commerce Ministry said that amendments of foreign-owned enterprise law are in the pipeline. I do hope these problems will be resolved in the amendments. A better and healthier legal environment for foreign-funded enterprises will be provided as a result.
1It will be simplified as foreign-owned enterprise law in the following text.
2It will be simplified as the implementation regulations in the following text.
3Refer to Article 3 of the old implementation regulations: “the annual output value of export products accounts for more than 50% of the annual output value of all products”.
4The foreign-owned enterprise should submit its product plan to relevant authority and enforce the product plan as an economic administrative contract.
5Refer to Article 15 of the old foreign-owned enterprise law: “within the scope of the operations approved, enterprises with foreign capital may purchase, either in China or from the world market, raw and
semi – produced materials, fuels and other materials they need. When these materials are available from both sources on similar terms, first priority should be given to purchases in China”.
6Refer to Article 3 of the old implementation regulations: “the annual output value of exported products accounts for more than 50% of the annual output value of all products, thereby realizing the balance between revenues and expenditures in foreign exchange or with a surplus”.
7Refer to the implementation regulations Article 3: A foreign-funded enterprise to be established must benefit the development of China’s national economy and be capable of gaining remarkable economic results. The state encourages foreign-funded enterprises to use advanced technology and equipment, engage in the development of new products, realize the upgrading of products and the replacement of old products with new ones, economize energy and raw materials, and it is also encouraged to establish foreign-funded enterprises which are export oriented.
8Chinese Foreign Investment Law concludes “Law of the peoples republic of China on Chinese-foreign equity joint ventures”,”Law of the peoples republic of China on Chinese-foreign contractual joint ventures”,”Law of the peoples republic of China on foreign-owned enterprises”, and their implementation regulations.
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