Disputes with legal representatives on the rise

Companies trying to replace legal reps in China-registered firms face resistance

By LYNETTE KHOO
05 April 2010

Power struggles in Singapore-listed companies operating in China are increasingly taking on a new form – the battle for the company seal.

Every registered company in China requires a legal representative. Problems arise when the legal rep refuses to be replaced and surrender the company seal.

This issue recently surfaced at SGX-listed Falmac Ltd, which had to pass a shareholders’ resolution to sack the legal rep of two subsidiaries in China after the latter refused to step down.

At another listed firm Sino-Environment, the former chairman and CEO Sun Jiangrong has not relinquished his post as legal rep, and surrendered the company seals despite having stepped down as director in January.

Xu Xiaodan, a partner at Chinese law firm King & Wood told BT that disputes over the removal of legal reps are rising. While this is not uncommon in China, the issue is more pronounced in foreign-invested companies rather than domestic firms as foreign investors have ‘no effective means to supervise the company’s management’ and the legal rep may not always act in their interest.

A case in point was Hong Leong Asia’s unit China Yuchai, which sued its subsidiary’s legal rep in 2003 for refusing to pay out approved dividends to foreign shareholders. The proceedings were later discontinued and the legal rep stepped down in 2005.

‘It is clearly a case of rule of man versus the rule of law in China, where many things depend on one’s own connections or guan xi,’ quips a market watcher.

Unlike many capital markets where power resides in the board of directors, the legal rep in China wields greater power than the board. The company seal is the official symbol of the company and provides the legal capacity to make and execute agreements, provide guarantees and transfer assets.

While companies can seek legal recourse if their removed legal reps refuse to step down or surrender the seals, there are technical obstacles, lawyers say.

The company stamp is still required to file a statement of claims to the Chinese courts or register a new legal rep with the Administration for Industry and Commerce (AIC). And only the registered legal rep can apply to the Public Security Bureau (PSB) for a new seal.

But Ms. Xu believes that with increasing company disputes with legal reps, governmental authorities and courts may begin to adopt a more flexible approach. Depending on the jurisdiction, some PSBs understand the situation and may approve the application for a new seal.

Bio-Treat, for one, managed to fire its former chairman Wing Hak Man as the legal rep and appoint its chief financial officer Alan Lau as the new legal rep. According to Mr. Lau, Mr. Wing has not returned the company seals yet, but this has no impact on the group as these seals pertain to dormant subsidiaries.

Shareholders also have the right to vote out the legal rep, as in the case of Falmac, or file a derivative lawsuit against the legal rep.

Chia Kim Huat, a partner at Rajah & Tann noted that the legal avenues are available and tried, but it depends on whether companies and shareholders proceed to enforce those rights. A bigger challenge, however, lies in finding a new legal rep to take up the gauntlet, especially if the company has already run into corporate governance issues, he said.

‘The question is: who is willing to go down to be a legal rep? The legal rep title comes with powers and liabilities. If the company in China gets into trouble, the first person to get locked-up is the legal rep.’

And while some governance advocates suggest that SGX should require Chinese companies listed here or S-chips to appoint only Singaporeans as legal reps, that argument is debatable.

‘It is pointless to have a Singaporean as a legal rep if he is not based in China’ as he may end up leaving the company seals with someone else in China, which can be ‘very dangerous’, said Oceanus Group executive chairman Ng Cher Yew.

‘Ultimately, the chosen legal rep must be a key appointment holder so that he is one who is also reliable and whom the company can rely on to do the right thing,’ he added.

Oceanus has three Chinese subsidiaries, each with a different legal rep. Its CEO and executive director Yu De Hua is the legal rep for Oceanus farming and processing subsidiaries while the legal rep for its restaurant subsidiary is a general manager who is a Hongkonger based in China.

For railcar profile maker Midas Holdings, its legal rep is group chief executive officer and founding member Patrick Chew, a Singaporean who spends much of his time in China.

Interestingly, problems concerning legal reps have not surfaced at larger Singapore firms with operations in China. Hyflux, for instance, has more than 30 Chinese subsidiaries with a mix of Singaporean and Chinese legal reps. Its spokesperson told BT that these legal reps are key appointment holders and this provides accountability.

Given the enormous powers of the legal rep in China, Dr Ng warns companies against appointing one ‘out of convenience’ just to fill the role.

‘You need to understand the responsibilities of the legal rep and the circumstances or requirements for someone to be selected,’ he said.

‘That person must be honourable, honest and be there in China most of the time.’

As it is often time consuming and onerous to seize control of the seal from a displaced and uncooperative executive, Ms. Xu advises that foreign investors regain possession of the seal before replacing the management – if this is at all possible.

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