The legal representative in Chinese law is the individual with the legal power to represent the company in its dealings with third parties. The company may not constitutionally fetter the powers of the legal representative with respect to third parties, except where the third party is acting in bad faith.
The company is also liable for any civil wrongs it may incur as a result of the actions of the legal representative, subject to a right of recourse against the legal representative if they are at fault. The right to claim against the legal representative may have little practical value however if the legal representative is not in a position to compensate the company.
Removing and replacing the legal representative is one of the key steps that can help a secured offshore creditor, or the acquiror of the offshore parent company, take control. This may be made somewhat easier by new legislation that will take effect on 1 July 2024.
Easier interchange
Hidden away in Article 35 in the recently amended People’s Republic of China Company Law (the New PRC Company Law) is a provision which may facilitate the taking of control by creditors enforcing offshore security in order to gain control of entities incorporated in the People’s Republic of China (the PRC, or China, which, for the purposes of this article, excludes Hong Kong, Macau and Taiwan). The provision reads as follows:
“公司变更法定代表人的，变更登记申请书由变更后的法定代表人签署。
If the company changes its legal representative, the application for registration of the change must bear the signature of the new legal representative.”
It is hoped that this provision (which arguably merely restates existing law but in a law rather than lower status legislation and reflects recent practice) will enable the swapping out of legal representatives by only requiring the signature of the incoming legal representative, not the outgoing representative (who in a typical enforcement scenario is unlikely to be co-operative).
Under the current version of the PRC Company Law, only the Chairman of the Board, the Executive Director (where there is no Board) or the General Manager are entitled to serve as the legal representative. Under the New PRC Company Law, any director or manager who carries out the company’s affairs on behalf of the company (i.e. who has an executive role) can now also serve as legal representative.
Article 35 also says that any changes to registered particulars that involve an amendment to the Articles of Association (AoA) require the amended AoA to be submitted at the same time. This is why the name of the legal representative should not be set out in the AoA as if one party is opposed to the change of legal representative, by law changes to the AoA require a two-thirds majority of voting rights held by shareholders (Article 66 of the New PRC Company Law). This may unwittingly give the other party a blocking power when it comes to a proposed change in the identity of the legal representative.
Practical constraints on changing the legal representative tend to centre more on obtaining the original Business Licence (to be reissued with the name of the new legal representative) and the need to chop the application forms with the company chop before submission to the Administration of Market Regulation (AMR) for endorsement. These issues, which are not typically insurmountable, will however still remain live issues after 1 July 2024.
Registrable item
The name of the legal representative is one of the registrable items under Article 32 of the New PRC Company Law (and the same provision appears in Article 7 of the current PRC Company Law) and will appear on the Business Licence. The basic requirement under Article 35 of the New PRC Company Law is that registration of changes to registrable particulars generally requires the application for registration to be signed by the incumbent legal representative. However, the third paragraph of Article 35 cited above provides an exception to this general rule.
Vacancy permitted up to 30 days
The New PRC Company Law also provides for the first time for there to be a gap where there is no legal representative appointed, such that where the legal representative resigns, a new one must be appointed within 30 days. Previously it was not generally possible to leave a company without a legal representative and there had to be a replacement ready before the incumbent could be removed. There is a debate as to whether this means that the outgoing legal representative who has resigned must remain in post until a replacement is appointed.
Joint ventures
In joint venture scenarios, it will become necessary to say in the AoA which party has the right to nominate one of its slate of directors to serve as the legal representative (perhaps using a generic reference to “one of the directors appointed by party X will serve as the legal representative” when a party has a right to appoint more than one).
Previously it was always expressed as “party X has the right to appoint the Chairman/General Manager who acts as the legal representative” as there was only ever one of these. As before, it will still be possible to put in place a rotation system where the right rotates from one party to another at defined intervals.
Conclusion
Along with control of the company chop, swapping out the legal representative is a key element in assuming control over a company in China in an enforcement scenario. The provision in Article 35 of the New PRC Company Law whilst not new is welcome because it gives higher legal status to the requirement that the incoming legal representative can sign the application for changes to the legal representative.
The change still does not resolve the issues around the need to control the Business Licence and chops to get the AMR to process the changes. These practical issues apply to both single shareholders and joint venture companies.
However, the analysis for joint ventures is yet more complex as the process for removal and replacement depends on which party has the right to appoint and remove the officer assuming the role. Ultimately, it will turn on the appointment and removal rights in the AoA and other constitutional documents, some or all of which will have been drafted in light of the current PRC Company Law and not the revised version due to take effect on 1 July 2024.
