Monday, 5 December 2011

Changing legal representatives not easy, say observers

Observers are questioning the effectiveness of a Singapore Exchange (SGX) directive to China firms listed here over the position of legal representatives, who play a powerful role in mainland firms.

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Guanyu 道 said...

Changing legal representatives not easy, say observers

Administrative complexities in China may throw up road blocks

By Jonathan Kwok
05 December 2011

Observers are questioning the effectiveness of a Singapore Exchange (SGX) directive to China firms listed here over the position of legal representatives, who play a powerful role in mainland firms.

In March, the SGX told SGX-listed China firms to change the articles of association of key subsidiaries in China to allow them to hire and fire their legal representatives when the need arises.

Some China firms listed here - known as S-chips - such as Falmac and Sino-Environment Tech Group have faced problems in removing uncooperative legal representatives in recent times.

The SGX was aiming to avert such disputes in future.

However, the observers say that while making this change will give the firms the right to replace their legal representatives, the administrative complexities of doing so in China may pose a barrier.

‘Once you do the amendments, by law you will have the right to remove the legal rep of the subsidiary,’ said Mr Lin Song, partner of China practice at RHT Law. ‘But to implement it, there are some other factors and uncertainties determining whether you can implement it smoothly when the time comes. That’s another issue.’

Legal representatives are required for every registered company and they effectively hold more power than the board.

The seal is the company’s official symbol and gives the representative the legal capacity to execute agreements, transfer assets and provide guarantees.

Mr Lin said most affected firms seemed to have made the necessary amendments to articles of association.

He said that the effectiveness of the changes has yet to be tested. Since the directive went out, no incident has come to light where a firm has been required to forcefully remove its legal representative.

But he noted that there could be some problems or obstacles in removing the existing legal representative if he or she tries to resist. ‘Whether you are able to cross this obstacle will really depend on a few other factors,’ said Mr Lin.

A lot will depend on the local Chinese government, and whether it complies with the law or whether it tends to protect the interests of the legal representative, often a local resident, he said.

The listed company will also need to help resolve any dispute with the legal representative, said Mr Lin. ‘It may have to engage the right legal professionals, while the board members, whether they are based in Singapore or China, really need to coordinate the removal.

‘They will need people who are experts or have the right connections... But this may bring up an issue of costs, which may be a barrier for the firm to effectively remove the legal rep.’

Mr Chia Kim Huat, a partner at Rajah & Tann, said there could be ‘practical difficulties’ and procedures in China in removing a legal representative.

‘If the local company is also in trouble, for instance, if they have credit problems, employees’ wages unpaid, then the affected parties will just confront the local government... What starts as a corporate issue then becomes a government issue.’

Complications could arise in changing the legal representative, he said.

For instance, a firm may submit to the local authorities a letter indicating the removal of the representative.

But the local Industry and Commerce Bureau might insist on the firm producing the resignation letter of the legal representative, The Straits Times understands. That could create an impasse if he or she does not want to give a resignation letter.

Mr Leow Wei Chang, chief financial officer of Anchun International, which makes chemical systems and components for the petrochemical and chemical industries, said he was told by his firm’s China lawyers that the capacity to remove the personnel has ‘not yet been tested’, even after changing the articles of association.

Guanyu 道 said...

‘This is unknown territory,’ he said.

But Mr Leow called the directive from the SGX ‘a good move’. ‘In the past, some firms had difficulties in this aspect (in removing their legal representatives), so they realised it’s good to formalise the process. At least the process is in place.’