Handling disputes over corporate representation

To everyone’s surprise, the seemingly insignificant particle bei in the Chinese language, which traditionally indicates the passive, has suddenly gained a new meaning – “false”, “unauthorized” or “ultra vires”. In the area of corporate governance, as a company is merely a legal fiction and requires natural persons as its representatives to implement any actions, its true intentions may be slanted and even completely distorted by inappropriate behaviour on the part of its representatives. Taking shareholder disputes in foreign-invested enterprises as an example, this article analyses the reasons for the recent controversy over “representation” and “false (bei) representation”, and suggests some measures to help companies guard against the risks described above.

Authorized or false representative

Foreign investors in foreign investment enterprises (FIEs) often tend to focus their attention on the domestic company’s management and neglect the control exercised by foreign shareholders and their local authorized representatives. There are many reasons for this. Sometimes it occurs simply because of negligence; sometimes it is because the overseas company is itself a “shell” company. Also, in some countries the chairman of the board does not have the same substantive powers as in Chinese companies, and the position is thus not accorded enough attention.

In an arbitration case we have dealt with, the principal, as the major shareholder in both the domestic and foreign shareholder in an FIE, had the advantage in terms of shareholder’s rights and board seats. However, the other party used the seemingly insignificant position of an authorized representative of the foreign shareholders to launch a premeditated surprise attack, and overnight deprived the major shareholder of his right to manage the domestic company.