Legal Representative Series

The Company Law of the People’s Republic of China (effective July 1, 2024) (the “New Company Law”) responds to theoretical and practical needs by improving the legal representative rules, contributing to the optimization of the corporate governance system. This series of articles will systematically examine legal representative issues under the New Company Law, combining relevant provisions and judicial practice for practical reference. This article focuses on the role positioning and representation authority of the legal representative.

I. Origin and Evolution of the Legal Representative System

The legal representative system was not a product of modern company law designed based on rational corporate governance structures. Rather, under specific historical circumstances, the practice of legal representatives first emerged, and company law subsequently incorporated and continuously adjusted this institution.

During the planned economy era, enterprises were characterized by collectivization and nationalization. To facilitate top-down management, a factory director was selected as the person in charge, entrusted by the state to oversee production, operations, and administration. This “factory director responsibility system” suited the particular social conditions of that historical period. With the development of the market economy and the need for state-owned enterprise reform, the legal representative system emerged. Through legislation, legal representatives were granted a core position in the legal person management system with full responsibility for legal person affairs, aiming to enhance the independence of state-owned enterprises and achieve separation of ownership and management. Article 38 of the 1986 General Principles of Civil Law provided: “The person who, in accordance with the law or the articles of association of a legal person, represents the legal person in exercising its powers and functions, is the legal representative of the legal person.” Subsequently, the legal representative system became standard for companies and other legal persons.

The 1993 Company Law established a modern corporate governance structure with the shareholders’ meeting, board of directors, and board of supervisors as the main organizational bodies. Within this structure, the legal representative was a heterogeneous institution. Due to institutional inertia, the 1993 Company Law did not establish a new company representation system but directly inherited the legal representative system, creating conflicts between the legal representative system and the modern corporate governance structure. How to embed the legal representative into the corporate governance structure became a major corporate governance issue.

II. Role Positioning of the Legal Representative

The evolution from Article 38 of the 1986 General Principles of Civil Law (which defined the legal representative as “the person responsible for exercising powers on behalf of the legal person”) to Article 61 of the Civil Code (which defines the legal representative as “the person responsible for engaging in civil activities on behalf of the legal person”) reflects a shift from being responsible for all legal person affairs to being the representative for the legal person’s external civil activities. The Civil Code, as the basic law regulating legal relationships between equal subjects, appropriately focuses on the legal relationship between the legal person and external third parties. However, the internal division of responsibilities of the legal representative falls within the realm of company autonomy under organizational law. Returning to the source, the Civil Code’s adjustment shifts the legal representative’s role toward company representation.

Article 10 of the New Company Law clarifies for the first time that the company’s legal representative shall be a director or manager “who represents the company in executing company affairs” in accordance with the company’s articles of association, and adds a new paragraph 2: “Where a director or manager serving as the legal representative resigns, they are deemed to have simultaneously resigned as the legal representative. ”

On this basis, where collective action is inconvenient, the board of directors may, through internal resolution, authorize one or several members of the board to serve as representatives, determining the scope of authority, identity requirements, and other matters, and may remove non-conforming representatives through resolution. In this sense, the legal representative is not an independent institution but a derivative channel for the company’s external expression of intent from the board of directors.

III. Scope of Representation Authority of the Legal Representative

The “legal” aspect of the legal representative refers to the statutory nature of the representative authority of the legal representative as an institution. The representative authority of the director or manager serving as the legal representative is not statutory but rather subject to the company’s operational needs and the board’s management authority. The representative is merely a company representative bearing the title of legal representative, whose scope of power does not extend beyond the company’s management hub—the board of directors. Routine matters under the board’s management and control are executed by the legal representative. Matters that should be handled by the shareholders’ meeting or board of directors based on legal provisions or the company’s nature fall outside the scope of the legal representative’s authority.

As discussed, the legal representative is a derivative external expression channel of the board of directors. Under Article 67(1) of the New Company Law, besides the powers enumerated by law, the board of directors’ powers are granted by the shareholders’ meeting or stipulated by the company’s articles of association (which are formulated with shareholder participation). Under Article 67(2), the powers of the board of directors may also be restricted by the shareholders’ meeting or the articles of association. Correspondingly, the shareholders’ meeting and the articles of association may both restrict the representative authority of the legal representative. Consistent with Article 67(2)‘s provision that restrictions on board powers cannot be asserted against bona fide third parties, Article 11(2) of the New Company Law provides that restrictions on the legal representative’s authority by the articles of association or the shareholders’ meeting cannot be asserted against bona fide third parties.

In conclusion, the legal representative possesses broad and comprehensive external representative authority. Positively, as the derivative external expression channel of the board of directors, it should correctly and fully convey and execute the company’s will externally. Negatively, for matters that should be handled by the shareholders’ meeting or board of directors under the law, the legal representative has no representative authority. Under company autonomy, the articles of association and shareholders’ meeting may restrict the legal representative’s authority, but such restrictions cannot be asserted against bona fide third parties.

This article has examined the origin and evolution of the legal representative, its role positioning, and representation authority, providing an overview of the legal representative system’s past, present, and future. Returning to current legal provisions, the legal representative possesses comprehensive representative authority, including daily business execution, signing of important corporate documents, liaison with administrative authorities, and representation in judicial proceedings. Due to space limitations, further discussion will be continued in subsequent articles.