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Changing a Legal Representative in China is a complicated and document intensive process

Every company in China, local or foreign, must appoint a legal representative, a position which will have considerable authority and powers within the organization. The person in this position is accountable for all actions of the company and is most at risk of being potentially exposed to liability. 


In the past few years, many foreign companies operating in China have decided to leave the country. In this case, their legal representative is responsible for leading the shut down and facilitating the process. 


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However, some companies find themselves navigating a complicated legal environment when their legal representative departed the country months of even years before the transition. In this circumstance, a company must scramble to appoint a new legal representative under time pressure. 


A company’s legal representative holds significant authority and responsibility for all corporate and compliance decisions. Many foreign companies in China often do not understand the importance of this crucial position, which is necessary to execute any changes in corporate structure, strategy, and personnel.  



Changing the Legal Representative 


In China, changing the legal representative is a complicated and document intensive process. 

A foreign enterprise interested in a change of legal representative must provide the following documentation: 


  • Amendment of the Articles of Association in Chinese and in English.  

  • Application letter for commercial bureau in Chinese and in English. 

  • Application letter for SAFE in Chinese and in English. 

  • Appointment letter in Chinese and in English.  

  • Introduction letter in Chinese, with company chop. 

  • Introduction letter in English.  

  • Letter of undertaking in Chinese and in English. 

  • Removal letter in Chinese and in English.  

  • Resolution of the Investor/WFOE owner in Chinese and in English.  

  • Power of attorney in Chinese for seal record and in English. 

  • Power of attorney in Chinese and in English.  

A company may also need to present: 


  • Business license  

  • Approval certificate 

  • Most recent full year audit report.  

  • Most recent capital verification report.  

  • Foreign exchange IC card.  

  • Enterprise code certificate.  

  • Tax certificate.  

  • Custom registration certificate.  

  • Financial certificate.  

  • Registry Book for Foreign-Invested Enterprises.  

  • Notice of annual inspection.  

  • Annual examination certificate.  


The document requirements may vary depending on the city and district, and even on the examiner within each city. Each company should verify this information with local authorities.  


According to the law, a legal representative must be always registered. From a procedural point of view, rather than just de-registering the former legal representative, a company must replace him/her with a new one instead.  


Article 40 of the Administrative Regulations on Company Registration states that an application must be filed within 30 days from the date of the passing of the company’s resolution in respect of the decision to replace the legal representative. 


It is important to account for the period between the removal of the existing legal representative and the official appointment of the new one. The existing legal representative (still officially registered) can grant the new one or another individual a power of attorney until the necessary formalities have been completed. 


Precautionary measures  


If the former legal representative committed any violations, resulting in his/her removal from office, it is important to safeguard against malicious behavior. Company chops should be confiscated in advance.  


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It is not rare for resentful legal representatives to take the company chop “hostage” and demand a “ransom” for it. In some cases, further precautionary measures may need to be taken, such as changing the authorization codes for online banking as well as notifying key customers and other stakeholders. 


Functions of a Legal Representative 

While China’s Company Law stipulates that all legal entities designate a legal representative, the role’s functions are rather loosely and ambiguously defined.  According to the General Principles of the Civil Law, a legal representative shall administer the company in accordance with the purpose and methodology for achieving its goals as set out in the articles of association. 


The role of a legal representative would roughly equate to that of a CEO. Some of the functions that fall within the scope of the role include: 


  • Legally conserving the company’s assets; 

  • Executing the powers of attorney on the company’s behalf; 

  • Authorizing litigation and legal representation thereof on the company’s behalf; 

  • Entering negotiations and signing contracts in the company’s name without needing to produce evidence of corporate authority. 


A new Legal Representative 


Prior to the amendment of the Company Law, coming into effect on July 1, 2024, the role of the legal representative could only be assumed by the chairman of the board of directors, executive director, or general manager of the company. Now, companies will have the flexibility to appoint any director conducting company’s affairs on its behalf as the legal representative, if it is stipulated in the articles of association. 


The new Company Law provides for the eventuality of a suitable successor not being found. It includes a provision that prevents the legal representative from being indefinitely bound to the position. Where a director or the general manager concurrently serving as the legal representative steps down from their role, their resignation will be considered as resignation from the legal representative position as well. Within 30 days from the date of resignation, a new legal representative must be appointed.  


Despite the restrictions imposed on the selection of a suitable candidate, there are no residence or citizenship requirements so long as the legal representative is a natural person, i.e., not a corporate entity or other forms of legal persons. 


Potential Risks 


It is extremely important to select a suitable candidate for the position. The legal representative will have statutory power to represent the company, which means that their acts can bind a company in relation to third parties.  


Any wrongful acts by the legal representative that do not comply with the law and the provisions in the articles of association could be considered wrongful acts committed by the company. 


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At the same time, the legal representative also risks being held liable for wrongful acts committed in the name of the company by directors and employees, leaving him or her exposed to administrative sanctions or fines.  


The decision to appoint an “absentee” legal representative, or indeed become one, should be carefully deliberated and approached with utmost caution. According to Article 49 of the General Principles of Civil Law, the legal representative may be held liable if the company: 





  • Conducts illegal business activities that are beyond the business scope approved by and registered with the relevant authorities; 

  • Engages in fraudulent activities; 

  • Conceals material facts from the relevant authorities; 

  • Withdraws funds or conceals assets to evade debt payments; 

  • Disposes of assets without authorization after a company has been dissolved, declared bankrupt or closed; 

  • Fails to register or make public announcements regarding changes to the company in a timely fashion, which as a result has caused material loss to interested parties; 

  • Engages in other illegal activities that harm the interests of the state or the public. 


Legal representatives do not need to have actual knowledge of, or be personally involved in, any of the offending activities to be held liable. However, legal representatives are not exposed to criminal liability in respect of criminal acts committed in the name of the company, unless they have directly participated in the crime. 


The process of changing the legal representative is not easy and can take a long time. Before starting, companies should evaluate their situation closely.  


 

Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms.


Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.

 

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