Limiting the General Manager's power at appointment, and ensuring that his departure from the company is not paired with unnecessary damages.
This article was written for, and first appeared on Business Forum China
It is all too common that a foreign investor appoints a Chinese or expatriate as the General Manager of its Chinese wholly-owned subsidiary or joint venture (or respectively the Chief Representative of its Representative Office), but at some point concludes that this Manager or Chief Representative (GM) does not meet expectations. More often than not, firing the GM is not easy. In a typical case, the GM – who was also the company's legal representative and a director of the Hong Kong holding company – refused to leave. Instead she took the company's stamps, licenses and accounting books home, and even threatened to poison relations with Chinese customers if she was not given a very high severance package.
Preparations to fire any senior manager in China start when he (or she) is appointed. Another crucial time is between when the decision is made to fire him, and when he is informed. And even after terminating the employment relationship, an investor must ensure that all bases are covered. The goal in these processes is usually to have him walk away without further damaging the investor's interests.
Making the Right Decisions when Appointing the Manager
Many foreign investors rely on their GM to develop the business, but another task is to represent the shareholders' interests in decision-making. How much freedom is he given? When establishing a Chinese subsidiary or when appointing a new GM, the investor must first decide whether the GM should also be the company's legal representative.
In China, the legal representative is the only authorized representative of the company towards external parties, and consequently this position comes with a lot of power. Fortunately, the legal representative does not have to be in China! To avoid too much reliance on a China-based manager, many companies prefer to appoint someone at headquarters as the legal representative (who will also be the Chairman of the Board of Directors or the Executive Director). This comes with some potential (criminal) liabilities to the appointee, but with a lot of convenience if a dispute arises with the local manager.
Even if the GM is not the legal representative, in practice he will still manage and control operations. Practical control should be paired, however, with legal restrictions. In the Articles of Association and in Board Resolutions (or Executive Director Decisions) and internal rules, the investor can set legal limitations to the GM's authority in decision-making. For example, contracts valued at more than X-amount, may be subject to BoD or investor approval. If the GM makes decisions beyond his scope of authority, then at least the investor can legally terminate his employment and pursue him for both civil and criminal liability.
Another practical way to limit the GM's power is through the company's stamps. Every company in China has a company chop or seal (a physical stamp that is registered with the Public Security Bureau) that represents the company's legal commitment. It is usually kept by the GM, but it can also be kept by a law firm or accountant. In that case use could require specific approval from the investor, or the company's legal representative. Through this mechanism, the GM is unable to sign contracts, make company amendments or take other actions that would damage the investor's interests.
Taking Important Steps Before Breaking the News to the Manager
Once the decision has been made to terminate the GM, the most important considerations of the investor should be the following:
- Is there a legal basis for terminating the employment
Presuming that the employment contract is signed under Chinese labor law, there are only a limited number of situations that allow a company to fire an employee. This includes breaching the company's material rules (and thereby causing damages), but not a lack of commercial performance. Also, the burden is on the employer to prove that there was legal cause for the termination. Investors should understand their legal position in advance, and be ready for labor arbitration if the GM refuses to go quietly.
- Will the GM be in a position to blackmail the company?
More often then not, if the GM disagrees with his termination, he may not only fight it in arbitration, but he could also refuse to hand over important materials such as the company stamp, business license, accounting books and keys to the office. As these materials are needed for continuation of operations, his refusal to cooperate could paralyze the business. If this is a real risk, it is better to secure these materials before notifying him of the employment termination – preferably under the guidance of a professional to ensure both pressure on the GM and that the company does not breach his rights.
The situation is even more complicated if the GM is also the company's legal representative. The legal representative has the (only) legal right to represent the company until he has been removed from this position at the company registrar; technically speaking however, the company's registration cannot be amended without the use of the company stamp and the business license, which are usually in the hands of the GM. One way out is to report the stamp and business license missing, apply for new stamps, and then remove the GM from his position using the new stamps, but this will take a lot of time and does not always work (depending on the flexibility of the local officials). Furthermore in the process, the GM has full control over the company, and plenty of opportunity to cause further damages. This is another argument against appointing the GM as the legal representative, and securing important materials before the news of his termination breaks.
What to Expect After Terminating the GM's Employment
Once the GM is informed of the investor's intentions, it is often crucial that he hands over his work immediately. This should include not only his commercial tasks, but also (if not already secured in advance) all the company's stamps, licenses, cash, bank account information etc. To ensure that he holds nothing back, investors are advised to work with experts that have done this before, and know what to ask.
Besides, companies should not forget to notify suppliers and customers of the new situation. Even if legally he has no more authority, third parties that are unaware of the situation may presume his authority, which could lead to problems.
Finally, investors are wise to remember that if the former GM is unsatisfied with his severance package, then it costs him very little in time and money to file a claim in labor arbitration. In the worst case this claim would be for reinstatement (which may be granted if there was no lawful reason for termination), though more often it is about money: severance or economic compensation, pay for unused holidays, overtime payments (even a GM may be entitled to overtime pay) etc. Investors should therefore be prepared to provide evidence on the (lawful) reasons for their decision to terminate, and their notification of the same.
Firing a GM in China is not easy. Chinese employment law is generally regarded pro-employee and so firing any employee is difficult except with due cause. Moreover, the company or its investor(s) must consider in advance the risk that the manager will threaten to paralyze the business, and take appropriate steps to safeguard important materials and thereby minimize this risk.
Just as important, however, is to ensure that the legal framework against which the termination will take place, is supportive. In most cases, it is better not to appoint the GM as the legal representative. Depending on the level of trust, an investor may decide to use a law firm or accounting firm to hold the relevant stamps, to restrict the GM's practical authority. But perhaps most important of all, investors should never rely on standard Articles of Association to create sufficient liabilities in case the GM abuses his position. In a recent case, the GM of a US-invested company had emptied the client's company and personal bank accounts in China booked as vague expenses, but the GM argued that all payments had been (verbally) confirmed with HQ. Without clear written evidence on the limits of her authority (i.e. describing her position and what she was not permitted to do on behalf of the company), the investor had no legal basis to claim against her.
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.