Corporate Governance for Foreign Investors in China

Most Foreign Invested Enterprises (FIEs) are governed by a\r board of directors and senior management. An exception exists\r for Cooperative Joint Ventures that the parties have chosen not\r to incorporate (these are governed by a management committee).

Powers: The Chairman, as the legal representative of the\r enterprise, has the power to legally bind the enterprise and\r bears significant responsibility for its acts and \r omissions. Most of the powers and functions of the board are\r set forth in the Articles of Association and in the Joint\r Venture Contract.

Number of Directors: The board of directors of both Wholly\r Foreign Owned Enterprises (WFOEs) and Joint Ventures are\r required to appoint between 3 and 13 directors. FIEs with few\r shareholders may be able to convince the examination and\r approval authority to dispense with the board of directors and\r use an executive director.

Membership: In an Equity Joint Venture (EJV), board membership\r must be proportionate to capital contributions. The board must\r have a Chairman, but need not have a Vice Chairman. If both are\r used, however, then if the foreign investor selects the\r Chairman, the Chinese party must select the Vice Chairman, and\r vice versa.

Meetings: Joint venture board meetings must be held once a\r year, and a quorum is 2/3 of the directors. For Equity Joint\r Ventures, unanimous consent of the board is required for\r amendment of the Articles of Association, increase or reduction\r of the Registered Capital, merger or division, and termination\r and dissolution. The law is significantly more flexible for\r Wholly Foreign Owned Enterprises - board meetings and quorum\r requirements are governed by the WFOEs Articles of\r Association.

Director & Officer Liability: Director and officer liability\r law and enforcement is not as well-developed as in many Western\r nations. Correspondingly, the market for directors and officers\r liability insurance is not particularly well-developed either.\r The Chairmans role as the enterprises legal representative\r encumbers him with both civil and criminal liability for the\r acts and/or omissions of the enterprise. Directors can be held\r liable for board resolutions that are illegal or that\r contravene the Articles of Association and cause losses to the\r company. Directors, supervisors and senior management personnel\r can be held liable if they cause losses to the enterprise by\r violating laws and/or the Articles of Association.

Management

Equity Joint Ventures must appoint a General Manager, one or\r more Deputy General Managers, and a Finance Manager. Although\r not required for other FIEs, this is common practice for these\r enterprises as well. If a Chinese investor nominates the\r General Manager of an EJV, a foreign investor may nominate the\r Deputy General Manager, and vice versa.

General Manager: The General Manager is charged with day-to-day\r operation and may be a foreign national if the enterprise so\r chooses. The responsibilities of the General Manager should be\r listed in the Articles of Association even if Chinese law does\r not require the appointment of a General Manager (as in the\r case of WFOEs). The General Manager is charged by law with\r responsibility for formulating a management system for the\r enterprise; production, operations and management, employment\r and termination of staff (except those that must be employed\r and dismissed by the board of directors) and implementing board\r resolutions and investment and business plans.

Deputy General Managers: A Foreign Invested Enterprise may\r appoint one or more Deputy General Managers (EJVs are required\r to appoint at least one).

Finance Manager: An Equity Joint Venture is required to appoint\r one or more accountants to assist the General Manager with\r finances. This is also common practice for other FIEs.

Supervisors

LLCs are required to have supervisory boards, although this is\r often ignored in practice by WFOEs and Joint Ventures.

David Carnes is licensed to practice law in California. He speaks and reads Mandarin Chinese and has several years experience working with Chinese law firms and Sino-American joint ventures. Check out his website, Import From China.

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