What can overseas headquarters do if executives of its China-based foreign enterprises go out of control?

 

Company A, a German-based trading firm, procures plastic components from China for export to its German headquarters as per the latter's requirements.

To facilitate communication with Chinese suppliers, the German headquarters appointed Mr. B, a Chinese-speaking executive, as the legal representative and general manager of Company A.

However, due to the headquarters' negligence in managing Company A, Mr. B depleted the entire 2 million euro registered capital within two years of the company's establishment. Additionally, Company A frequently encountered delivery delays and quality issues with the components it procured from China. Consequently, the headquarters became highly dissatisfied with Mr. B and decided to replace the legal representative. Yet, Mr. B refused to cooperate, evaded contact, and withheld crucial documents and materials, such as Company A's business license, seal, and financial records, thereby paralyzing the company's operations.

At a loss, the German headquarters engaged a local Chinese third-party professional service agency to resolve the issue. Through thorough and discreet investigation, the agency uncovered Mr. B's misconduct, including soliciting kickbacks by overpaying Chinese suppliers and falsely claiming management expenses. Armed with evidence of Mr. B's embezzlement and asset misappropriation, the headquarters filed a criminal report with the economic investigation department of the Chinese public security authorities. Eventually, faced with mounting pressure and to avoid criminal liability, Mr. B reached a financial settlement with the headquarters and surrendered the business license, seal, and financial documents. Subsequently, the procedures for changing the legal representative were completed.

 

Dongjin suggests:

To prevent losing control of their China-based foreign enterprises, overseas headquarters should implement comprehensive legal and financial management. It is advisable for overseas headquarters to engage Chinese third-party professional service agencies to conduct legal and financial audits of the enterprises' operations and to perform regular internal audits annually. This ensures the timely identification and addressing of potential risks.

 

Mike Chang

Partner

mikechang@shanghaiinvest.com