China Legal Representative Risks and Responsibilities.

Many months ago, co-blogger Steve Dickinson was interviewed regarding the Legal Representative’s role in Chinese companies.  I was cc’ed on one of the emails regarding that interview and I am running that now because much of what was discussed is helpful to foreign companies doing business in China.

Question:  What are the biggest myths regarding China legal representatives?
Answer:  The legal representative is a concept that comes from China’s company law. The only meaning is that this person has the power to bind the company to contracts and this person also represents the company in submitting reports to regulators. It has no meaning regarding managing the company. The company is managed by its board of directors, its general manager, and its senior management. Thus, liability does not accrue to the legal representative simply from his or her status as the legal representative. Though many believe the legal representative is responsible for all company liabilities, this is simply not true.

Directors and management are also not liable for the liabilities of the company unless they directly participated in the improper acts. Take the first big melamine milk scandal as an example. In that case, directors and officers were held criminally liable because they directly participated in the adulteration of milk program. In that case, the crimes/torts  were their own acts and they were therefore held personally liable. None of this liability was incurred because they were were the legal representative. The liabilities were incurred because they were involved in actively managing the company and the illegal acts were directed by them personally.

Question:  What are the legal responsibilities of a legal rep?
Answer:  See the above.

Question:  What are the legal responsibilities of shareholders?
Answer:  See the above. No liability or responsibility as shareholder. However, everyone is responsible for his/her own affirmative acts.

Question:  What’s your advice to foreign company representatives regarding exit strategies from China?
Answer:  This confuses the concepts of director, general manager, and legal representative and so I really cannot answer the question. Basically, however, do not allow the company to commit a crime if you are in a management position. This sounds simple but it is not. It is not uncommon for your Chinese staff to recommend you and/or your Chinese company commit a crime. They will tell you “everyone does this” in China and they will make you out to be naive if you are not willing to do the same. Don’t’ do it. If you have issues along these lines, seek outside advice. Fast. And if your staff insists, terminate them. Ask yourself whether what you are doing is worth spending time in a Chinese jail.

Question:  Is there a checklist worth following?
Answer:  See above.The other point is: if that if you are accused of a crime, without regard to whether the accusation has merit or not, leave China immediately — if possible. Do not wait for your family. Just leave. It is better for your family to follow behind in a week or two than to have your wife/husband visit you in a Chinese criminal detention facility.