Articles of Association – Key terms for a Foreign Invested Company in China

The Articles of Association (“AoA”) are required in China and have to be approved by the authorities when setting up a Foreign Invested Company. Therefore it is important to know the functions of the AoA and how they can protect or guide your business activities in China. This article will address these issues as well as the key items to be incorporated in the AoA.

1. The functions of the Articles of Association

First of all, the AoA are the legal basis for a company to do business with third parties. They provide the principles of a company’s management structure, business activities, rights and obligations etc., and can be seen as the basis for a company to do business with clients, business partners, investors, creditors or any other third party. After approval by the Chinese authorities, the AoA are binding regulations for the company, investors, directors, the management team as well as all parties related to the company. In case the company’s business activities are not in compliance with the AoA, punishments by the related government authorities might follow.

In China, for setting up a company, the drafting and approval of the AoA is a mandatory step. The inspection by relevant authorities is a crucial point and should be taken seriously in order to save time as well as money.

Besides, the AoA form the self-governed rules of a company. Although the AoA have to be in accordance to the Chinese Company Law, but it is possible to implement company specific regulations. They provide a code of conduct for the company and the company itself can solve violations of the AoA internally as long as such is not violating the Chinese laws or regulations.

2. Mandatory items of the AoA

The following points are mandatory items of the AoA:

• The name and domicile of the company;
• Business Scope of the company;
• Registered capital of the company;
• Names of shareholders;
• Forms, amount and date of capital contributions made by shareholders;
• The organizations of the company and its formation, their functions and rules of procedure;
• Legal representative of the company;
• Stipulations concerning the assignment of equity, the ratio of profit distribution and losses to be borne by parties of a joint venture;
• Principles governing finance, accounting and auditing;
• Labour management;
• Dissolution and liquidation.

3. Freely agreed items in the AoA

According to the Company Law, the company is able to decide on some legal matters within the company on its own, including the following points:

• Principals of the shareholder’s voting at the shareholders meeting;
• Basis for dividend distribution and/or subscription of the increased capital;
• The power of the organizations of the company;
• Share transfer.

This was just a short introduction of the meaning and content of the Articles of Association in China. If you need help with drafting the AoA or setting up your business in China, please don´t hesitate to contact: richard.hoffmann@ecovis-beijjing.com