Many believe that forming a China WFOE consists mostly of filling in lines on an application and submitting it to a China government office and then sitting back and waiting. If you share this belief, you are, among other things, ignoring all that goes into deciding how to manage the WFOE once formed. I was recently cc’ed on the below email a from one of our China lawyers to a client explaining the initial issues involved in determining a China WFOE’s management structure:
We will need to determine how to set up management of your WFOE. The issues are below.
A PRC WFOE has the following three layers of management:
- Board of directors/legal representative.
- General manager.
- Supervisor.
You will need to decide on each. Here are the issues:
1. Board of directors. There are two choices:
Option A: You have a three or five person board of directors. The Chairman is the legal representative of the company.
Option B. You have one person be the managing director. The managing director is the legal representative of the company.
Under the Chinese system, the person who represents the company for executing contracts and government reports is not the CEO/President selected by the board of directors. Rather, the Chairman of the Board/Managing Director is the legal representative of the company and is the person who takes on that role. For this reason, the Chairman/Managing Director is involved in the day to day operations of the company in a way that is different from the U.S. system where director usually do not get involved in day to day management.
The role of a general manager in a Chinese company will be discussed below. It is permissible for the Chairman/Managing Director to also serve as the general manager of the PRC corporation.
It is not required that any director be a Chinese national or a resident of China.
2. General manager. The WFOE is required to appoint a general manager. The general manager is an employee, appointed by the board of directors. The general manager is charged with the day to day operations of the company. The general manager usually controls the banking relationship and directly interfaces with the local government on tax and operational issues.
It is not required that the general manager be a Chinese national or a resident of China. However, since the general manager is responsible for the WFOE’s day to day business operations, it can be awkward if the general manager is not resident in China.
As noted above, it is permissible for the Chairman/Managing Director to also be appointed as the general manager. However, this dual role results in great power being held in the hands of a single individual.
3. Supervisor. The supervisor is charged with monitoring the performance of the board and the general manager on behalf of the shareholders. For most WFOEs, the supervisor post is not significant. However, Chinese law requires that a supervisor be appointed and the supervisor cannot be a board member or the general manager. U.S. and European companies typically appoint their CFO as the supervisor.
As you can see, there are many options for management. Within this set of options, the typical single shareholder WFOE management structure is as follows:
1. Single managing director with active supervision over the shareholder. This person is usually resident in the U.S.
2. General manager who is an employee resident in the China office. Some companies appoint a general manager who is an employee of the U.S. shareholder, but who is not resident in China. This is usually done when that general manager will be spending a substantial amount of time in China. A completely non-resident general manager is possible but unusual.
3. Single supervisor who is the CFO of the shareholder.
Though the above are the most common management arrangements, there are many alternatives which can be adapted to your specific needs. Selecting the appropriate general manager is usually a very difficult decision.
Please consider the above before we talk tomorrow.
Getting the foundation of your China company done right the first time is usually crucial My law firm is often retained by companies whose WFOEs have “gone rogue” because of a bad management structure, and those situations tend to be difficult and expensive and oftentimes downright ugly to resolve. Don’t let this sort of situation happen to you.
