Corporate China - evicting onshore management via reproduced chops
<p>Another <a href="https://www.bloomberg.com/opinion/articles/2022-08-25/hedge-funds-can-be-taken-hostage-by-china-s-ancient-business-practice-the-chop#xj4y7vzkg" rel="nofollow noreferrer">weird and wonderful story</a> out of corporate China has captured my attention. Relevant excerpt:</p>
<blockquote>
<p>It’s a situation that’s difficult to picture in much of the capitalist
world, with its emphasis on private property rights, contract law and
the prerogative of owners to hire and fire. Imagine the CEO of an
American corporation who’s just been terminated after a successful
takeover leaning back in his chair and saying: <strong>“You know what? I’m
doing a pretty good job. I think I’ll just stay.”</strong> In China, though,
it’s far from rare.</p>
</blockquote>
<p>Essentially, despite having ticked all the relevant boxes in terms of conventional activist investing, the shareholders couldn't achieve their goal of evicting management because management knew how to use their legal representative / chop-holding status to entrench themselves amid the legal process. Things got really slow and ultimately disclosures were not filed in time and the entity in question seems to have been delisted altogether.</p>
<p>So, hypothetically, what if the offshore shareholders tried to beat them at their own game. What if they reproduced an exact replica of the chop -- it's a physical object after all. And what's more, all the multinationals operating in China are always complaining about IP theft: &quot;they're taking my manufacturing plant tech, machinery IP, blah blah blah.&quot; Well, fight fire with fire: use the lax IP environment to your advantage.</p>
<blockquote>
<p>They’ve been around for thousands of years but they’re still tripping
up foreign investors in China. Company chops are the carved seals
that, when used with a red inkpad to stamp documents, confer
legitimacy on corporate actions. Investors accustomed to the norms of
Western business may think they control the company when they hold a
majority of the shares. Nuh-uh. The chops are the keys to the kingdom.
He or she who possesses them is the master.</p>
</blockquote>
<h2>Question</h2>
<p>In this kind of situation, could offshore shareholders improve their legal leverage by simply making their own chop?</p>
<p><strong>Note:</strong> What I feel this story is misleading on is it might not be about the chops per se, but the legal representative (anybody can &quot;hold&quot; a chop, but only in the hands of the legal rep can it be recognized by the onshore courts). But still I think it's a valid thought experiment that we can explore.</p>

<h2>Fraud is illegal in China (just like everywhere else)</h2>
<p>Using a forged chop is exactly the same as using a forged signature in other jurisdictions. In fact, it's easier to detect because while a person's signature varies each time, the chop does not (save for gradual wear) and the government has a record of the mark each and every chop makes.</p>
<p>A person who holds the legitimate <a href="https://www.eurobiz.com.cn/abuse-of-the-seal-in-china/" rel="nofollow noreferrer">chop</a> (noting that there is more than one type but never more than one of each) can bind the company. Worse, without the right seal the company cannot do anything - they can't pay wages, they can't withdraw money, and they can't effectively operate.</p>
<p>Now, obviously, there are ways of dealing with a lost or stolen chop:</p>
<blockquote>
<p>If a seal is lost or stolen, an announcement must be published as quickly as possible in an official journal recognised by the local authorities. This public advertisement makes it possible to request the cancellation of the lost or stolen seal, to have it remade and to register the new seal with the Public Security Bureau. The company can then prove that any documents stamped subsequent to this new registration were stamped using a stolen seal and will thus be able to annul them.</p>
<p>The original business licence must be presented in order to officially register the new seal. If the licence has been stolen too, another declaration of theft and a request for a replacement will have to be made, which can take several weeks.</p>
</blockquote>
<p>However, in the linked article, the chop is neither lost nor stolen. It's not lost because everyone knows who has it and it's not stolen because that person is an agent of the company and the Chinese police (like police in most parts of the world) don't get involved in commercial disputes.</p>

corporate-law finance china