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.