Many things in China, such as signing a contract, happen differently than in the investor’s home jurisdiction. For example, an employee within a Chinese company can sign official documents using the company chop. This is because in China a stamp is used to to “sign” documents. When registering a WFOE, the company receives such a Chinese company stamp, among several others with specific functions. Such stamps are the legal representative stamp, financial stamp and contract stamp. Even though signatures can be used to sign documents, often only the stamp makes a document legally binding.
The big difference
So how does the Chinese company stamp or chop compare to a signature? Due to some simple characteristic differences, there is a large difference in how a legal representative should operate with a stamp.
A signature is generally interconnected to a person. A stamp is a piece of machinery handled by a person. The power lies with the operator of that piece of “machinery”. From the janitor right up to the CEO, all can operate a stamp. This is a crucial detail WFOE and joint venture owners overlook. Many of them leave the Chinese company stamp in the hands of an employee.
When a CEO needs to be abroad for most of the year, it is convenient that documents can be stamped by an employee who is locally present. This seems practical; however, this comes with a compliance risk. How much can you trust the employee handling the stamp? He or she is perhaps not responsible for the WFOE and therefore not liable. In the end, the company’s legal representative always bears the responsibility.
How to work with a company stamp
So should you keep the stamp under your control? That is a decision only the company’s legal representative can make. As consultants, we strongly advise companies to make sure their stamp is used solely for the purposes you want it to be used. If you do not have full insight, we advise you to check documents regularly.
For brand new WFOE owners, this is not a surprise, but this detail is one many people tend to forget when starting a business in China. We also strongly advise WFOE’s to have a stamp register book where employees sign off when using the stamp. This register should always correspond with the documents signed.
Another important compliance issue regarding the use of stamps comes from the opposite signing party. Sometimes, if an organisation has a foul intent, they sign contracts with fake stamps. A Chinese company stamp should always be chopped in red ink, and should be circular. If the chopped seal is illegible, it may become legally invalid.
Furthermore, the name on the chop should always be the Chinese name of the company, not the English one. If you find a blue, English and/or rectangular stamp on your agreement, then something is probably not right.
Finally, you have to confirm that the document is signed by a legally allowed person to stamp or sign such documents within the company.
Checking is normal and needed
Checking a Chinese company stamp on being valid is a costly but common process among local Chinese entrepreneurs. They visit the local authorities where the company is registered to see if a stamp is registered to a company. Some stamps are not registered but still legal. When a stamp is not registered, you need to compare the stamp to other signed deals by the counterpart.
Many Western firms believe this to be an expensive waste of time. Chinese counter such claims by stating that being cheated is more expensive and an even larger waste of time. Many of the stories Westerns tell when they fail doing business in China ends with finger pointing to the Chinese.
We believe that many of those mistakes could have been prevented. Making sure you are compliant could reduce certain mistakes and increases your chances for success. In China your counterpart does not cheat you, you let yourself become cheated. Check your China compliance.