In practice, the corporate governance of a company in China is established in the utilisation of a company’s corporate seals and company seal policies.
The corporate seal, often called a “chop”, represents an unlimited power of attorney vested in the holder of the corporate seal(s). Once the seal is affixed to a document, the company is legally bound and effective, whilst signatures are not enforceable under Chinese law. Therefore, as a matter of best practices, a corporate seal policy should be formulated and implemented to instruct proper use and safeguard of a company’s corporate seals.
It can’t be emphasised enough that a company without a proper seal policy and adherence to that policy can result in serious company mismanagement and failed governance.
Each company is required to hold a set of corporate seals, which is deposited at the public security bureau for approval. Once the corporate seals are approved, they are micro-fined and registered. Where the company changes the seal, the company is required to once again perform the approval and registration procedures with the public security bureau.
Corporate seals may be produced cheaply by laser craving (Figure 1) or handcrafted (Figure 2). Handcrafted corporate seals are less easy to replicate since the depth of each cut differs. Through micro-fining, the depth of cut is easily exposed, and any copies can be recognised.
In instances where the seal is damaged, it is required that the seal be destroyed. A new seal shall then be produced, and the registered procedures shall be carried out, similarly where the seal is changed, and be followed accordingly.
The Corporate Seal
The Corporate Seal is the representative of the company and utilised to conclude contracts. Upon affixation of the corporate seal, the contract is concluded and effective. Even if the corporate seal by the power of attorney is entrusted to the person, and an entrusted person concludes a contract, the responsibility and liabilities of the contract falls upon the company of the corporate seal.
Legal Representative Seal
The legal representative seal represents the will of the legal representative and quorum of the board of directors. Therefore, the legal representative seal and the corporate seal are required for a payment transaction; the bank shall not approve the payment without the seal of the legal representative.
If the legal responsibility seal is utilised by an unauthorised person, in court, such unauthorized use of the seal is difficult to verify since the seal is the tangible representation of the legal representative’s will. It is permissible that the seal policy of a company requires the affixation of both the corporate seal and legal representative to mitigate risk.
The invoice seal is utilised on debit notes and VAT invoices. The invoice seal verifies Pro-forma invoices as a debit note to the third party and the VAT invoice as evidence of the payment received by the company from the third party. Where the invoice seal is not affixed on the VAT invoice, there no payment verification.
Department seals (the corporate seal with a department name and special use such as ‘quality department special use’ written on the seal) and personal seals (the Chinese character name of the department manager or director) can be issued to each department director or manager as additional safeguard mechanism.
In this manner, the risk of the general corporate seal is limited, as the use of the corporate seal is limited to each department. For example, the corporate seal for quality department special use is restricted to quality related documents; any misuse of the seal is traced back to the department.
A seal policy should be devised to require the affixation of both the corporate department seal and the personal seal of the department director or manager to safeguard the company. Equally, the seal policy may require the affixation of the legal representative and general corporate seal for major contracts.
At Horizons, we find many foreign companies lacking in firmly established seal policies or often misplacing corporate seals, which leaves the company extremely vulnerable to mismanagement and risk. Therefore, proper corporate seals management is a must in all companies.
Particularly for shareholders or decision-makers who do not partake in the day-to-day management of a company, a proper corporate seal management policy will go a long way to ensuring the proper governance of the company.
If you would like more information about the corporate seals or other related corporate matters, send us an email at email@example.com, and we’ll have a Horizons professional contact you.