Foreign Investors Controls Chinese Subsidiary in Appointment of Legal Representative

　　　　　　　　　　　　　　　　　　　　　　　　　　　(2014)民四终字第20号

Thumb Environmental Protection (Fujian) Limited Co. VS SINO-ENVIRONMENT TECHNOLOGY GROUP LIMITED

In this case PRC Supreme Court upholds foreign investor’s controls of legal representative appointment for its subsidiary in dispute between the investor and subsidiary.

Thumb is a Whole Owned Foreign Enterprise (WOFE)set up by Sino in 2005 in Fuzhou Fujian province. The initial registered capital was RMB130 mil, and in July 2008 Sino applied to increase the registered capital to RMB 380 mil, and committed to contribute the increase within two years thereafter. Sino appointed Mr. Hong Zhen as the legal representative of Thumb. On Jan.20, 2011, Sino made resolution to change designation of legal representative of Thumb from Mr.Hong Zheng to Mr. Bao Guowu, but the change was not registered due to management dispute. Till Agust, 2012, Sino still had RMB 35mil in short of capital contribution. On Augest 26, 2012, Thumb filed the lawsuit against Sino, requesting contribution of the committed capital contribution of RMB 35 mil.

The first instance took place at Fujian High court. Sino rebutted that it had make resolution of replacement of the legal representative; the resolution shall be binding once it was made. The original registered legal representative abused his rights and refused to cooperate to change the registration, and he has been deprived of the right to represent Thumb to file the lawsuit.

The first instance court ruled that the official registration of legal representative shall be superior than the shareholder’s appointment when they are in conflict. Because the official registration is for public interest and is the only reliable source of information.

Sino appealed the case to Supreme Court with the same argument. The Supreme Court rendered its final judgment in June, 2014, overthrowing the first instance judgment made by Fujian High Court. The judgment reasons that the shareholders has the authority to appoint the legal representative, when the officially registered legal representative and the shareholder appointed legal representative is in conflict, the officially registered shall be the binding and reliable information only in relations between the company and third parties as the registration is for public interest. Therefore in the internal relations between shareholder and subsidiary, the appointed legal representative shall be superior to the official registered. In this case, the appointed legal representative opposes the law suit against Sino, therefore filing of the case is not the true intention of the Thumb, and the case shall be rescinded.