International Law

China Dispute Resolution Issues - The Company Seal

By Stan

Anyone who has done business in China knows all about the importance of the company seal (a/k/a “chop”). If you’ve ever seen a legal document from over here and noticed all those round red stamps, well, that’s what we’re talking about.

Western companies know about company seals and use them on limited occasions. In most cases, it’s fairly easy to explain to foreigners about the heightened importance of the seal here in China.

What is much more difficult is to explain the relationship between the seal and apparent authority (the latter being a corporate law concept), and how messy it can be when your manager runs off with the company seal.

This sort of a dispute is the subject of a good little post from King & Wood’s blog/newsletter. Here is the introduction:

A Chinese company’s top executive is usually the company’s legal representative, and he or she is legally entrusted with the company seal, which is the company’s official symbol. The company seal provides the legal capacity to make and execute agreements, provide guarantees, transfer assets, and legally bind the company.

When a legal representative is replaced, the displaced legal representative must return the company seal to the company so that the new legal representative can represent the company. However, if the displaced legal representative refuses to return the seal, the company could be liable for all the agreements that the former legal representative binds the company to.

In other words, even if the articles of association can be used to remove an executive it does not necessarily mean that the foreign investors have been able to regain control of the company in practice. Therefore, retrieving the terminated legal representative’s unlawfully held company seal is an important step toward the foreign investors recapturing control of the company.

The article then goes on to explain just how tough it can be to get rid of a Legal Representative who has the seal, or to get the seal back from a disgruntled Legal Rep. You’re essentially faced with a Catch 22 situation: you can fire the Legal Rep, but you need the seal to do so. You can get the seal back, but the Legal Rep needs to sign documents.

There are ways to fix the situation, but it’s a very nasty process. I’ve had to deal with this myself a couple of times in the past for clients, and even if you are successful, no one is really happy in the end.

Anyway, my one criticism of the King & Wood article is that they do not provide any solutions. I assume they are holding this information back on purpose as a marketing strategy. Can’t fault them with that, I suppose, but it would have been interesting to know how they would handle the problem.

I seem to recall from the cases I dealt with in the past that we ultimately had to rely on relationships (guanxi) with the local officials to bend the normal bureaucratic rules and either have the first seal cancelled (and a new seal made) or somehow have the Legal Rep replaced without having the seal in hand. Normal procedures just didn’t work. That was several years ago, though, so perhaps more options are now available.

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Full post as published by China Hearsay on September 25, 2009 (boomark / email).