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Since travel restrictions to China has severely impacted the
governance of Chinese subsidiaries. Namely, the absence of c-suite
management within China can increase compliance and operational
issues. Without an onsite management to control the company,
headquarters may not be able to resolve issues and risks in a
timely manner, hence Chinese entities can quickly spiral out of
control.
Furthermore, company management may have abruptly departed China
due to the recent epidemic measures to contain the new COVID-19
variant Omicron. Hence, Horizons’ multidisciplinary team of
legal and finance experts have been called to conduct investigation
audits which highlight the current red flags and the best practices
moving forward. In the below, we highlight five aspects that
headquarters face in company governance during epidemic
measures.
Remote management
Companies may face the sudden departure of management during
epidemic measures and subsequent consequences. Specifically, the
company may establish an interim remote governance and change
company policy to align with such management changes and establish
new communication and reporting channels between the overseas
management and local employees. However, human resources should
note that any amendment to company policy should be consulted and
agreed with employees and notifications of the amendments shall be
formally announced such as email circulation.
Company seals
In practice, the corporate governance of a Chinese entity is
held within its corporate seals and company seal policies. Once the
seal of a company is affixed to a document, the company is legally
bound and contract is effective, whilst signatures are not
enforceable under Chinese law. Robust corporate seal management
should be formulated and implemented to instruct proper use and
safeguard the
company’s corporate seals. Especially for companies
remotely managed due to impact of epidemic measures, poor seal
policies or misplaced seals leaves companies extremely vulnerable
to mismanagement and risk.
Administrative amendments
Equally, where a new governing body is established for the
company after the departure of general manager, execute director,
directors or supervisors shall be amended through the
administrative procedures. Failure to amend the governing body may
result in certain penalties such as being listed in the unreliable
list of entities.
Latest regulation compliance
Last year two main data legislation was adopted (Data Security
Law and Personal Information Protection Law). Both Laws
substantially affect companies in the collection, handling and
storing of data, and any cross-border data transfer. As a result,
companies should understand that such Laws are not a duplicate of
the General Data Protection Regulation and whilst it would be
simpler to replicate related GDPR policies into the Chinese entity,
it is crucial for management to formulate a China specific data
policy based on the data legislation in China.
Re-establishing a robust governing structure
Long term, companies may wish to replace remote management with
local personnel (for example, senior executives include the general
manager, deputy general manager, chief financial officer, and other
personnel designated by the company’s articles of
association). Companies should utilise such opportunity to review
their Articles of Association (‘AoA’), ensure the
reporting line is clearly stated in the AoA and governing structure
adheres to the AoA. Usually, the governing structure was not
correctly implemented in the establishment of the company and
previous senior executives may have neglected duties without facing
consequences. As a result, prior to recruiting new senior
executives for the Chinese entity, the scope authority of each
senior executive should be defined and governed within the AoA. In
this manner, the AoA can serve as a governing mechanism to clearly
define the responsibilities of senior executives and hold senior
executives for any abuse, negligence or violation of their
responsibilities.
Investigations equip headquarters with informative intelligence
to navigate their Chinese entities though the current economic and
political landscape in China. Often, once the red flags highlighted
in the investigation report are solved, the company can move
forward and steer towards profitable revenue.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
POPULAR ARTICLES ON: Corporate/Commercial Law from China
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