The Articles of Association (AoA) is a major document setting forth a company’s internal rules, and serves as the basis for effective operation of the company. However, in practice many investors and operators in China merely regard it as a document needed during the process of company registration, and pay little attention to clearly articulate important matters in it, which may result in serious legal risks.
Common risks in the AoA:
a. Legal risks relating to evaluation of capital contribution
Non-currency Contributions, for instance equity rights, creditor’s rights or trademark rights must be evaluated before contribution as part of the companies registered capital
.
If there is no clear agreement as to appointment of the evaluation authority in the Articles of Association, shareholders may encounter conflicts as to which evaluator is appointed, particularly in the case of Joint Ventures.
b. Legal risks as to division of power between board of shareholders and directors
One of the important functions of the AoA is to attribute the power of shareholders and the Board of Directors. However many companies simply state that such rule shall be determined in accordance with the
Company Law
. What this approach is legally acceptable, the law is quite general and may not be best suited to clarify concerns in relation to your company’s unique situation.
c. Legal risks on special resolutions
The company law does not state all conditions under which companies may need special resolutions. If a company does not stipulate in the AoA under what conditions special resolutions are needed, there is a change of confusion or liability in the event a special resolution is required.
A standard AoA designed to minimize risks shall meet the following conditions
:
- Stating clear and exercisable norms regarding management of the company;
- Explicitly regulating the rights and duties of shareholders, directors and supervisors;
- Having clear operational rules for dealing with unusual conditions;
- No content which violates mandatory rules of law.
As the AoA plays an important legal role in the operations of a China company, the document needs to be drafted to best suite the unique characteristics and actual operations of the company. To guard against risks that might occur because of inadequate drafting, contact your China lawyer to ensure the AOA is completed effectively and professionally.