MNCs: select your advisors carefully

By Raphael Li, Martin Hu & Partners
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An increasing number of the PRC entities of multinational corporations have established in-house advisory committees generally composed of experts and scholars in relevant fields, as well as people with rich experience, with the aim of offering counsel to management and their overseas headquarters.
Although it is legally permissible for PRC entities of multinationals to establish in-house advisory committees, there are no PRC laws or regulations that directly address the appointment of such advisor candidates. However, it should be noted that the restrictions imposed by laws and regulations on different advisor candidates will differ, depending on their varying statuses.

Raphael Li Martin Hu & Partners
Raphael Li
Associate
Martin Hu & Partners

Public officials

The PRC entities of multinationals will often wish to invite active or former public officials (particularly government officials) to join their advisory committees.
However, participation by state public officials, government officials or other such civil servants in the operation and work of other social organisations, particularly profit making organisations, is usually subject to more and stricter restrictions, or entirely prohibited.
Pursuant to the Law on Civil Servants, a civil servant is required to abide by disciplinary rules and may not engage or participate in for-profit activities. A civil servant concurrently serving with an enterprise or other such profit making organisation is in violation of this provision and will face administrative sanctions including a maximum of dismissal. Furthermore, if as required by work a civil servant needs to work on a part-time basis outside his or her office, he or she requires the approval of the relevant authority and may not receive remuneration for such work. Accordingly, an active civil servant generally cannot take up a position in a profit making organisation like a multinational corporation, or provide advice in respect to the business decision-making of a multinational.

Who’s affected?

The question is then, who are the civil servants subject to restrictions? Pursuant to the Law on Civil Servants, the term “civil servants” means the working personnel who perform public duties in accordance with the law, are included in state administrative staffing and whose wages and benefits are paid from state finances. Civil servants mainly include the full-time working personnel of administrative authorities, legislative authorities, judicial authorities, party authorities and political consultation organisations. However, due to the complexity of the PRC’s administrative staffing system, there are an additional two categories that are administered with reference to civil servants, and to which attention needs to be paid:

  1. The working personnel (other than support staff) of institutions that have public affairs administration functions as delegated to them by laws and regulations; and
  2. The working personnel of the organs of mass organisations compiled by the State Commission Office for Public Sector Reform. These include the organs of the China Law Society, the All-China Federation of Trade Unions, the China Association for Science and Technology, the All-China Federation of Industry and Commerce, the China Federation of Literary and Art Circles, the All-China Journalists Association, the China Council for the Promotion of International Trade (China Chamber of International Commerce) etc.
  3. In addition to active civil servants, the Law on Civil Servants specifies that, “Upon resigning from his or her public duties or retiring, a civil servant may not accept a position with an enterprise or other profit making organisation that is directly related to his or her former work, or engage in for-profit activities directly related to his or her former work for a period of three years after leaving his or her position if he or she was a senior officer, or for a period of two years after leaving his or her position if he or she was another civil servant”.

Scholars and experts

Generally speaking, there are few restrictions on a scholar concurrently serving as an advisor to the PRC entity of a multinational. However, pursuant to the Notice of the Organisation of the Communist Party of China in the Ministry of Education on Further Strengthening the Administration of Part-Time Work by Party Member Officers in Directly Subordinate Institutes of Higher Learning, institution-level party member officers in directly subordinate institutions of higher learning may not in principle serve concurrently in profit making entities. If, for work reasons, such a person genuinely needs to concurrently serve in the asset management company established by the school, the same is subject to the consideration and decision of the school’s party (standing) committee and must be submitted to the Ministry of Education for approval and placed on the record with the discipline inspection group and inspection bureau within the Ministry of Education.

The concurrent service with a social organisation or other such entity by an institution-level party member officer in a directly subordinate institution of higher learning is subject to consideration and consent of the school’s party (standing) committee and then submitted to the Ministry of Education for approval. A party member officer in a directly subordinate institution of higher learning who has received approval to serve concurrently in an economic entity, social organisation or other such entity may not receive any remuneration from the entity in which he or she is serving part-time.

Accordingly, if a candidate who serves as a party member officer in an institution of higher learning directly subordinate to the Ministry of Education appears on the list of candidates for advisor, it is imperative to determine whether the person has obtained the relevant approvals. It is also necessary to note that even if the candidate has secured the permission of the school to become an advisor with the PRC entity of a multinational, he or she may not be paid any manner of remuneration, other than reimbursement of his or her travel expenses, and meal and accommodation expenses.

Know the obligations

With respect to advisor candidates of various fields, including the two categories of special advisor candidates, it is advisable for the PRC entity of a multinational to comprehensively understand the statutory and contractual obligations, including confidentiality obligation, non-compete obligation etc. that such candidates bear before they formally become members of the advisory committee. In this way it is possible to avoid the normal operation of the advisory committee being hampered after the engagement of an advisor due to the obligations he or she bears, or the restrictions to which he or she is subject.

Raphael Li is an associate of Martin Hu & Partners (MHP Law Firm)

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Martin Hu

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Raphael Li

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E-mail: raphael.li@mhplawyer.com