1. Introduction

A Wholly Foreign Owned Enterprise (“WFOE”) is an investment vehicle for for­eigners who want to establish a company in China. A WFOE has a separate legal status with limited liability of its shareholders (lim­ited by the amount of registered capital to be injected into the WFOE). Contrary to a Joint Venture, the shareholders of a WFOE must be foreign nationals (including legal persons), which includes Hong Kong, Macau and Taiwan nationals. 

  1. Key Organs

A WFOE has the following key organs:

  • Shareholders’ meeting
  • Board of Directors
  • Chairman of the Board
  • Legal Representative
  • Supervisor
  • General Manager
  1. Shareholders and Shareholders’ Meeting

The shareholders’ meeting is the highest corporate institution of the company and should be held at least once a year.

  • At least one shareholder (details have to be filed with the State Administration for Industry and Commerce or its local branch (“SAIC”));
  • Corporate shareholders possible (cannot be incorporated in Mainland China); and
  • Any nationality except for Mainland Chinese and residence anywhere expect for Mainland China.

The shareholders determine:

  • Contributing registered capital to the WFOE;
  • Establishing a Board of Directors or appointing an Executive Director;
  • Appointing a Chairman of the Board of Directors (unless delegated to the Board in the Articles);
  • Appointing a Legal Representative;
  • Establishing a Supervisor (or a Board of Supervisors);
  • Deciding on the long-term strategy of the WFOE; and
  • Changing and/or amending the Articles of the WFOE.
  1. Board of Directors

The directors shall decide all major issues concerning the company except those issues which shall be decided by the shareholders.

  • At least one director (otherwise 3-13 - any nationality, resident anywhere);
  • Method of appointment prescribed in WFOE’s Articles; and
  • Term of office prescribed in Articles (max. 3 years, can be reappointed).

The directors are re­sponsible to the shareholders regarding:

  • Reporting on the operation of the compa­ny;
  • Carrying out the shareholders’ resolutions;
  • Examining the operation and in­vestment plans;
  • Deciding on the establishment of the company’s internal manage­ment departments; and
  • Appointing and dismissing the general manager and other senior staff of the company and determining their sala­ries.

The shareholders may assign other tasks to the Board or the shareholders’ meetings in the Articles.

  1. Chairman of the Board

The Chairman heads the Board. He is

  • Appointed by shareholders or elected by all directors;
  • Convenes, organizes and presides over Board meetings (according to Articles); and
  • Responsible for record keeping of Board meetings (including the signature of all attending directors).
  1. Legal Representative

The Legal Representative is

  • Appointed by shareholders; must be either the Chairman of the Board or Executive Director or General Manager of the WFOE;
  • Signs all relevant documents on behalf of the WFOE;
  • Responsible for the acts of the WFOE towards the authorities; and
  • Implements shareholders’ resolutions.
  1. Supervisor

Supervisors are independent persons, supervising the acts of the directors and the senior staff.

  • Appointed by shareholders; and
  • Has to be independent (cannot be Chairman, Managing Director, General Manager, other senior staff; can be a shareholder):

Depending on the size of the WFOE, the authorities may require establishing a Board of Supervisors, comprised of three persons. In that case, at least one-third of the Supervisors must be employees of the company.

  1. General Manager

The General Manager (GM) organises the daily business of the WFOE.

  • The GM is appointed by the Board or the Executive Director; any Board member can be appointed;
  • The GM is responsible to the Board and exercises his duties under the leadership of the Board; and
  • The GM can be assisted by Deputy General Manager.
  1. Articles of Association

The Articles need to clarify the following:

  • Name, domicile, business scope and registered capital of the WFOE;
  • Names of the shareholders; shareholders’ contributions;
  • Organs of the WFOE and the methods of formation, authorities, and rules of procedure thereof;
  • Legal representative of the WFOE;
  • Term of office of each position;
  • Procedure for removal from office for each position;
  • Remuneration for each position; and
  • Tasks, responsibilities and duties of each position.
  1. Summary

A WFOE is the investment vehicle for 100% foreign owned investments in China. As laid out above, the different positions should be properly staffed, and the duties and responsibilities need to be distinguished. Experience shows that familiarizing oneself with the staff positions, stipulating the positions (e.g. terms, procedures for removal, etc.) pays off in the long run.