Board of directors article

We recommend keeping the board of directors small and allowing for board meetings to be held outside China or even by telephone conference. Emergency board meetings should be just that, "an emergency" and called at 24-hour notice, not one-month notice! Pay attention to the duties and responsibilities of directors.

General manager article

This is a legally responsible position so put it in the hands of someone you trust, ideally your expat manager in charge of production. Limit the term of office to a year to give you some leeway. General managers can be notoriously difficult to fire if employed under the long terms often used in standard articles.

Profits repatriation article

Can't find it in the basic draft? That's because it's not there. This needs to be built in, essentially giving your parent company the right to bill the wholly foreign-owned enterprises for services for management expertise, royalties, licensing agreements, interest on loans, research and development cost allocations, sales and marketing cost allocations and so on. If you don't have these drafted in, it becomes difficult to overlay the service contracts into the articles and obtain approval for this mechanism. It could save you between 4-13 percent on your profit tax bill. Get it in there.

Trade union article

Again, standard clauses in the articles appear innocuous. However if not dealt with and redrafted, these can lead to interference at the highest level in the way in which you operate your business. This is additionally compounded by the fact that new regulations are due to be issued that strengthen the role and responsibilities of the labor union.

All companies in China have the right to form a "grass roots" labor union if there are at least 25 employees (including foreign workers). This structure is part of a massive national reporting and monitoring union that has its ultimate power base firmly within the National People's Congress, so this is a powerful organization.

If a union is formed, then the elected representative has the right to attend company management meetings, and the company must also fund the union with 2 percent of all employees' salaries each month (staff must also make a small contribution). Funds should be used for workers education, welfare and entertainment. Funds may also be used to provide legal support to employees with grievances against the company.

Restricting the union representative's access only to the portion of meetings during which staff and workers' rights are to be discussed, while budgets for the use of union funds can also be agreed upon and implemented, can minimize management interference.

So, some measures of control can be exercised via the articles of association as concerns the role of the labor union. However, we are still waiting confirmation of changes to their powers that may also need to be taken into account.

Merger and acquisition article

Again, not in basic drafts. So if you want to sell the business, how can you value it? It's easier to identify a set of rules beforehand. Identify asset valuers, accountants and industry professionals who can value the business. Make their decision final and binding with a time limit for offers to be accepted or bettered, and a mechanism for payment and share transfer itself. You never know what will happen down the road, and who can tell what China or your business will be like in five years?

Liquidation article

As mentioned earlier, try and link this to the production and profitability scales. Typically they are rather woolly in basic drafts, meaning interpretation can creep in and the local government, whose approval is required, may have different ideas as to what is and what is not a liquidation scenario, not least as they will want to maintain employment. The way to deal with this is to have the articles of association worded so as to link the termination clauses to production clauses (this is not in standard drafts). In this way, an economic trigger is identified that can be pulled should the business under-perform. This needs to be built into the articles of association prior to registration with the authorities. If approved, the licensing authority must follow its own approval process for the behavior of the company if it decides to exit for economic reasons. It neatly puts the ability to exit back in the realms of measurable financial performance and away from any ambiguity.  

Chris Devonshire-Ellis is the Senior Partner of Dezan Shira & Associates www.dezshira.com

This is the fourth in a series of articles on this topic. Previous sections have appeared in Issues No. 7, 9 and 11.