Management Structures of a WFOE Part 2

by Richard Hoffmann

This is the second of an two part article series about the management structure of a Wholly Foreign Owned Enterprise(WFOE) in China. Read about the General Manager as well as about the Legal Representative and their duties.

General Manager                                 

The General Manger is employed by the Board of Directors or the Executive Director and is responsible for the daily operations of the WFOE. The WFOE should have one General Manager with a mandate of three years who is object to the leadership of the Managing Board or the Executive Director. The General Manager however, should execute the following functions and powers:

1. Supervising the production and business operations of the company and implement the resolutions of the Board or the Executive Director;
2. Executing the company’s annual operational plans and investment plans;
3. Formulating plans on the establishment of the company’s internal management departments;
4. Drafting the company’s basic management system;
5. Drafting the company’s specific policies;
6. Proposing the appointment or dismissal of the company’s Deputy Manager(s) and Financial Manager(s);
7. Deciding on the appointment or dismissal of Executive Personnel other than those whose appointment or dismissal is to be decided by the Board or Executive Director; and
8. Any other function or power authorized by the Board or Executive Director. 

The functions and powers of the General Manager are otherwise specified in the company’s Articles of Association

Legal Representative:

Who may take the Legal Representative position? 

Usually, the Chairman or the Executive Director is appointed as the Legal Representative of the Company. However, the WFOE may also have the General Manager being the Legal Representative. The change of the Legal Representative requires several relevant procedures for amendment, performed at the responsible Chinese authority.

The qualifications of the Legal Representative:

For the Legal Representative none of the following situations should be applicable:

1. Having limited civil capacity;
2. Having previous criminal records or criminal restrictions which are enforced;
3. Being pursued by the police or the security bureau;
4. Less than 5 years passed since serving a criminal sentence convicted for committing bribery, other property crimes or crime of disturbing social economical order; or other crimes; or less than 5 years since serving the sentence of depriving of political rights;
5. Less than 3 years passed since the completion of a liquidation of a bankrupt company, in which he/she did not only have the position of the Legal Representative, Director or Manager, but also held personal responsibility for the bankruptcy;
6. Less than 3 years passed since the Business License of a company, in which he/she held position of the Legal Representative, was revoked;
7. Bearing large amount of personal debts and those debts are not paid off;
8. Other situations stipulated by relevant laws or the State Council, which lead to the situation that the person is not allowed to hold the position of the Legal Representative

In case of the Legal Representative having any of the above situations applicable to the candidate, the company should consult the registration authorities in order to change the Legal Representative. Otherwise the Business License of the WFOE may be revoked by the government authorities in Charge.

Boundings between the WFOE and the Legal Representative:

The Shareholders should be aware that the position of the Legal Representative is a special and critical one. All the performances and activities of the Legal Representative when fulfilling his/her duties will be automatically considered as the intentions and activities of the WFOE.

In addition, in certain situations, the Legal Representative may also bear significant responsibilities for the acts and omissions of the WFOE. For instance, in accordance with the Article 49 of the General Principles of the Civil Law of the People’s Republic of China, the WFOE should stay liable and its Legal Representative may additionally be sentenced with administrative sanctions or penalties if any of the following circumstances are applicable. If the offence constitutes a crime, criminal responsibility shall be investigated in accordance to the law:

1. Conducting illegal operations beyond the range approved and registered by the registration authority;
2. Concealing facts from the registration and tax authorities and practicing fraud;
3. Secretly withdrawing funds or hiding property to evade the repayment of debts;
4. Disposing of property without authorization after the enterprise has been dissolved, disbanded or declared bankrupt;
5. Failing to apply for registration or not making a public announcement promptly in case the enterprise undergoes substantial changes or closes completely, which can cause heavy losses to the people invested in the company;
6. Engaging in other activities prohibited by law, damaging the interests of the state or the public interest.
7. The above mentioned is a brief summary of the WFOE’s management structure based on our understanding of the current applicable PRC laws and regulations. The Shareholders may consider to add additional restrictions on them in the Articles of Association in order to protect the Shareholder’s interests to the greatest extent.

If you would like to learn more about the management structure of WFOEs in China or have any inquiries, please do not hesitate to contact us via the following email address: Richard.hoffmann@ecovis.com

We would be more than happy to assist you