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UPDATED: October 10, 2009 NO. 41 OCTOBER 15, 2009
Are You in Control of Your China Operations?

Since the global financial crisis began, we have seen two new trends develop in the management of foreign enterprises in China. First, as expected, the flow of foreign direct investment into China has decreased. Second, there has been an increase in oversight from overseas headquarters. This article looks at the latter trend, exposing some common difficulties that undermine the real control foreign managers should have when running their China operations.

Articles of association

All companies have articles of association, the body of rules, directions and regulations that govern the internal affairs within a company. Specifically, they express the relationships between the shareholders and the directors of a company and should indicate important aspects of that relationship such as the overall control of the company and who appoints the general manager.

When there is more than one shareholder, the shareholders' meeting becomes very important. A shareholders' meeting decides all of the important issues, including choosing candidates for director and supervisor positions, the budget, increasing or decreasing capital investment, mergers and acquisitions, division, liquidation, dissolution, or revisions of the articles of association. The method for discussions and the voting procedures of the board of directors need to be specified in the articles of association, with the concept being one vote for one director.

Exceptions related to JV

Although it might sound strange, the current regulation concerning joint ventures does not imply the existence of a shareholders' meeting but only the presence of a board of directors—the ultimate authority of the joint venture (JV). The decision process requires that each director has one vote with at least two thirds of the directors present to convene a board meeting. There are issues that require the unanimous consensus of the directors present at the board of directors' meeting; these include aspects such as the revision of articles of association, suspension or dissolution of the JV, or increasing or decreasing capital, merger and division. It then becomes clear that even with two thirds of the directors appointed by one party, this party may still not have full control of the JV.

Companies that have been running without looking closely into their articles of association may have weakly structured articles and should take the following steps to ensure that these weaknesses do not become a threat.

- Review the articles of association to make sure the content is favorable

- Make sure the management of the company follows the articles of association

- Detect potential flaws and take time to revise or amend them before problems arise

Employment-related issues

According to the current regulation, a written contract must be signed within one month to establish the employment relationship. If the employer fails to enter into a written contract with an employee for more than one month but less than 12 months, the employer shall pay the employee twice the salary for every month without a written contract. As stated in Article 14 of the contract law, if there is no written contract concluded for 12 months or more after commencement of work, the contract is deemed to be open-ended.

After being signed by the employer, one should deliver an original copy of the contract to the employee. Moreover, as stated in some standard labor contracts, if the employer fails to deliver one original copy to the employee, it will be treated as if there were no employment contract signed between the two parties. If there is any dispute, the employer might not be able to defend himself because the contract has already been signed and the employee might be entitled to take corresponding legal responsibilities. Employers should ensure employees sign off on receipt of contracts.

(This is part two of an article that appeared in Issue 37)

Zoe Zhou is manager and Rosario DiMaggio is senior associate of Dezan Shira & Associates Beijing Office (www.dezshira.com)

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