How to Understand Executive Power & Governance in Chinese firms
There are important differences between China and elsewhere in the world in the application of executive power and corporate governance. Many western companies, especially when establishing Joint Ventures (JV) with a Chinese partner or even when establishing their own Wholly Foreign-Owned Enterprise (WFOE) in China do not understand well these differences. This can lead to significant problems in the management and governance of the Chinese entity. In this first segment of three on executive power and governance in China, we will discuss the use of corporate stamps/seals.
In the West, executive power traditionally relies on hand signatures whereas in China, legal documents and transactions are executed using corporate stamps. There are various types of corporate stamps, as follows:
- Company Stamp
- Legal Representative Stamp
- Financial Stamp
- Customs Stamp
- Contract Stamp
- Invoice Stamp
- Other Stamps (depending on business type)
What foreign shareholders and the CEO/Legal Representative of JVs or WFOEs in China need to understand, is that once a person has possession of the company’s stamps, they immediately have executive power. For example, if your employee has the Company Stamp, the Legal Representative, and possibly the Financial Stamp, they can lawfully execute binding contracts and even make important transactions directly from the company bank account.
A clear understanding of which managers and employees are authorized to use corporate stamps within your Chinese company is the responsibility of the company’s shareholders and CEO/Legal Representative. In most cases, a clear definition of responsibilities and procedures regarding the use of stamps within your management and local staff, and proper control of access to the different stamps is sufficient.
A full understanding of how to affix corporate stamps and which stamps to use in each situation is also important. For example, in order for an important contract to be properly executed, the company chop, which can be used to sign all of the company’s legal documents and is therefore the most important and most powerful chop, should be affixed to each page of the contract. In addition, the company chop should be affixed on the signature area of a contract and placed on-top of the legal representative’s signature.
In all cases, we strongly recommend that you seek legal advice as you begin establishing corporate governance systems for your business in China – and especially before you start using corporate seals and entering into international contractual commitments, including contracts with Chinese business partners, customers or suppliers.
Carl Breau, Shanghai, November 2018
At Saimen, we have considerable expertise in supporting the expansion and in helping manage supply chains of foreign entities in China. Our team of over 50 experts based in Shanghai will help you achieve your China Success. Our CEO is also a UCLA Certified Board Director. Our China-based team can further support your organization regarding broader Governance and Executive Power strategy, while maintaining a healthy and successful relationship with your Chinese Business partners.
Your China Success, Driven by Saimen. (c) 2018
