How to change a Legal Representative in China

Introduction

The Legal Representative (LR) is a basic company organ under the current China Company Law. That means that any company is required to appoint a natural person as the company’s LR. He/she is the main principle of the company and is the employee with the legal power to represent the company and create binding obligations on behalf of the company. The special position of the LR grants extensive power, along with a great deal of legal responsibilities. 

In practice, it is not rare for a company to change its LR. It can be initiated for various reasons; most commonly the reason is termination of the LR’s employment contract. In these situations, it is necessary for both the company and its LR to realize the importance of, and the possible risks related to, the changing procedure under Chinese regulations.  

Legal framework

Pursuant to Article 13 of the China Company Law, the board director, executive director or manager shall act as the LR of the company in accordance with the provisions of the articles of association of the company, and registration shall be completed in accordance with the law. In case an LR is replaced, a new of registration shall be completed with the State Administration for Market Regulation (SAMR). It is noteworthy that every company needs a registered LR at all times in the SAMR company register, so a company can only replace the LR with a new candidate instead of merely de-register the former one.

It is stipulated, under Article 30 of the Administrative Regulations of the People’s Republic of China on Administration of Company Registration, that for a change of LR of a company, an application for change registration shall be submitted within 30 days from the date of the company’s resolution or decision on the change of LR. The decision to replace an LR can be made by means of a shareholders’ meeting resolution or a unanimous written consent signed or sealed by the shareholders.

Relief approaches when company refuses to change registration

A company shall give requisite collaboration in changing its LR. In practice, however, some companies might be reluctant to cooperate, especially when the resignation/dismissal of a LR does not go smoothly and when there is no new LR to be appointed. The LR can refer to below approaches in order to remove such obstacles:

1. Reconfirm the change and de-registration with the company by written means, or convene shareholders’ meetings if it is within his/her power;
2. Notify counterparties, for example by means of sending a notice letter to the opening bank notifying that the registered LR seal has become invalid;
3. The LR may take legal actions, such as filing a lawsuit in court so as to urge company to speed up the change of registration.

Courts opinions 

In the process of trial, opinions in local courts within China can be mainly divided into the following two tendencies:

• Courts in favor of changing registration

In order to protect the legal rights and interests of the parties concerned, the court may request the company to handle the change of registration in a timely manner. However, courts will also take the company's autonomy into account and only interfere when all other measures available for the LR have been taken.

Example case: Feng Wei vs. Wan Yi Capital Management Co., Ltd., Wan Yi Capital Management Co., Ltd. Shanghai Branch (Shanghai Jing'an District People's Court, 2016) 

In this case, the plaintiff handled the resignation formalities with the defendant Wanyi Company on January 15, 2016. After this, he repeatedly communicated with the defendants requesting to change the business license, organization code certificate and tax registration certificate, but the defendant refused to process those requests.
The court held that the plaintiff and the defendant had terminated the labor contract relationship, and the defendant should apply to the registration authority to change the registration of the LR. Although it should be deemed as internal affairs of company to handle de-registration procedure, given that the plaintiff has repeatedly requested the registration change, and has been repeatedly refused by the defendants, the plaintiff should be granted judicial relief and his claim was supported by the court.

• Courts rejecting changing registration

The court may hold that it is up to within the internal management of a company to change registration of LR. If no effective resolution has been made, or no new LR has been appointed, the court should not intervene.

Example case: Hou Zhongyi vs. Beijing Oriental Yangfan Advertising Media Co., Ltd. Hainan Branch, Beijing Oriental Yangfan Advertising Media Co., Ltd. (Beijing Second Intermediate People's Court, 2017)

In this case, the appellant Hou terminated his labor relationship with the appellee Oriental Yangfan Hainan Branch in 2014. The appellee did not change registration of LR since then and the appellant remained registered as its LR.

The court held that Article 48 of the Regulations on the Administration of Company Registration of China clearly stipulates that the change of business registration regarding the (change of) the LR needs to be applied for by including the appointment and dismissal documents. The appellee did not carry out any internal procedures for the replacement of the LR. It belongs to the company’s internal management to change and de-register the LP as requested by the appellant, and so it does not fall within the people's courts’ scope of case acceptance. Therefore, the appellant’s claim to change registration of LR should not be supported.

Based on the existing cases, courts will usually take the following factors into account when deciding whether or not to use judicial intervention:

1. Whether the LR that is to be replaced remains employed by the company[1];
2. Whether the LR conducts substantial management in a company operation, namely, act on behalf of company in external business activities [2];
3. Whether the LR has informed relevant parties, including the company, shareholders and authorities such as tax bureau, regarding his/her dismissal and requested to change registration within a definite time limit [3];
4. Whether the LR has taken all other remedies available prior to filing case before courts. For example, whether the LR has sent his/her request of changing registration by a) convening shareholders’ meetings, b) conducting rounds of communication with the company’s substantial controller in regard to his/her resignation as well as change of registration of LR, and c) urging the company to change registration by written means, etc. [4]

Risks for company if the de-registration is late

Not only is it very advisable for an LR to seek the promptest way to finalize the change registration so as to minimize and eventually eliminate his/her liabilities as an LR, the company itself should also start the procedure in due course. Under Chinese law, one of the responsibilities of an LR is to engage in the company’s external business activities and to function as a representative to the company’s counterparties. The LR is usually in possession of the LR seal and his/her signature can be used on behalf of the company on important documents such as external contracts. So in the case that, for example, the LR has already terminated his/her employment contract with the company, but the change registration has not been completed/finalized by the company (i.e. the LR still appears on public record), the company should basically accept any liability created by the LR towards (uninformed) third parties, regardless of the fact that the employment agreement has been terminated. 

Observation

Overall, a change of the LR always requires the company’s coordination and cooperation to complete the de-registration/change of registration of LR. If the company fails to do so, both the LR and company will encounter certain risks and may be held responsible by third parties who cannot be aware of the internal changes. Therefore, it is essential to ensure the change process to be finalized internally and, more important, externally. 

^{[1] He Fuxiang vs. Guangzhou Fanse Clothing Co., Ltd., People's Court of Yuexiu District, Guangzhou City, Guangdong Province, 2014
[2] Wang Yijun vs. Shanghai Rongcuo Information Technology Co., Ltd., Wang Zhenhua, People's Court of Pudong New Area, Shanghai, 2016
[3] Feng Wei vs. Wan Yi Capital Management Co., Ltd., Wan Yi Capital Management Co., Ltd. Shanghai Branch, People's Court of Jing'an District, Shanghai, 2016
[4] Yu Lijun vs. Tianjin Haitaitian Network Technology Co., Ltd., People’s Court of Xiqing District, Tianjin, 2018}