By: Peter N. Rasmussen
Uploaded January 2020
By Peter Rasmussen and Alex Wu, Asia Base Law & Projects
In the Western world corporate documents and agreements are confirmed by the handwritten signature of a duly authorized officer of the company. Whereas the ratification of corporate documents by way signature is a widespread practice in Western countries, this practice does normally not extend to companies located in China.
In China, official legal documents are confirmed by a corporate stamp or seal or “chop” - not (normally) by a handwritten signature. Chops are therefore essential for establishing, managing and operating a business in China. They serve as confirmation and way to execute official financial, banking, corporate, legal, and other documents. As such chops are powerful tools used to bind Chinese companies.
A company must be validly registered in China to obtain official company chops. These are issued by the government, who entrusts and appoints retail-like chop-engravers to carve the chops. Every chop must be approved by the local Public Security Bureau (PSB), a governmental body that acts similarly to a police station. The PSB keeps "specimen prints" of the chops for comparison in cases of fraud and misuse.
There are situations where the official chops can not stand alone. In special cases such as for example increasing or decreasing the company's registered capital, investing in new entities, appointment and dismissal of the CEO, and lending and borrowing money, a written board resolution is required together with the chop in order to bind a company.
But is it so that a hand signature is never binding in China you may ask? The answer is no. In the special cases of pure commercial contracts between private legal entities a handwritten signature can normally stand alone and bind a company - also without the presence of corporate chops.
One thing is for sure. The official chops - regardless whether accompanied by a signature or not - are always binding the company on official documents, regardless of who affixes the chop. The same is valid for contracts between private enterprises unless it specifically stipulated otherwise. Thus, also an ill-willing employee or third party person in possession of the official company chop can bind the company.
Commonly, the company’s Legal Representative delegates the authority to use chops to relevant employees. According to Chinese law, the legal representative of the company is responsible for the company’s acts and omissions. This responsibility is imputable to the legal representative, even if the legal representative did not ratify or approve such acts.
The company chop constitutes the company’s official signature and binding authority, and is required under Chinese law. The official company chop may be used to ratify, authenticate and sign documents, transactions, internal and external company affairs. The company chop affixed on a document signifies the company’s acceptance of the document and its terms. Typically it will be the General Manager of the company who has custody of the company chop.
The contract chop is the company’s seal applicable to executing contracts and agreements. It is common to delegate the authority relating to the contract chop to person overseeing contractual matters. The contract chop holds less power than the company chop and can be substituted by the company chop.
The legal representative name chop replaces the legal representative’s signature unless it is specifically stipulated that a handwritten signature is required. It may be used for financial purposes, such as the approval of payments and withdrawals, together with the finance chop. If the legal representative is not based in China, this chop will often be entrusted to a proxy. This can be the CEO or any other person.
The finance chop is a mandatory chop, primarily used to validate financial transactions or other banking operations, including but not limited to issuing checks, and wire transfers. Normally, the CFO or another high-ranking officer in the company holds the finance chop.
The finance chop must be registered with the Public Security Bureau. The finance chop is typically used side-by-side with the legal representative chop - and therefore it would make sense that these two chops should are not controlled by the same person.
The company’s bank in China keeps a "specimen print" of the finance chop and legal representative chop for comparison to protect the company against unauthorized usage and fraud.
The invoice chop is used by the company on its official invoices and tax receipts. In addition, purchases and business expenses should be evidenced by official tax invoices - affixed with the invoice chop of the vendor or supplier.
The customs chop is employed by Chinese companies who engage in import-export activities and cross-border trades. This chop is used for on customs declarations reported by the company to Chinese customs. Such chop must be registered with the appropriate customs authority.
Considering that the chops constitute the signing mechanism applicable to Chinese companies, the implementation of safeguard and control policies are essential to protect the company. The chops should be stored in a safe environment to prevent theft, or access by unauthorized employees.
A common way to control the usage of the company’s chop is to impose an obligation for a chop to not stand alone, and instead be accompanied by another specific chop or the company chop. To avoid misuse, the company may elect to delegate different chops to different managers or officers, so no two chops are on the same hands.
Every company should have a clearly communicated and understood chop-policy. Internal audits and controls should be in place to ensure compliance. When possible and practical records of chop use should be kept.
At Asia Base we help foreign investors getting started China. One crucial aspect of that is to ensure good corporate compliance. On www.asiabase.com you may download a copy of our standard dual language chop policy template (click here).
As a party to a transaction involving a Chinese company, it can be beneficial to verify the validity of the counterparty’s chops. Firstly, it is recommended to ask for the signatory’s title, in both English and Chinese. Requesting a copy of the signatory’s business card can most often validate the identity of the signatory. Further, it is recommended to request a copy of the counterparty’s business license.
The revised version of China’s Electronic Signature Law, effective since 2015, stipulates that an electronic chop is legally binding on the condition it is owned and controlled by the company’s authorized representative at the time of its usage. The representative has a legal obligation to advise all affected parties of any compromise of the electronic chop.
There is always a risk that a company official misuses a chop for own personal gain. In cases of employee termination, attempts at extortion may consist of refusing to release the chops. The company may need to resort to legal action to protect the chop.
There is also the risk of counterfeit or falsified chops in China. Such falsified chops could essentially bind a company.