The company chop — the company seal, the gongzhang — is the legal signature of a Chinese company. A contract signed by an authorized person and stamped with the company chop is binding on the company. A document that carries the company chop is treated as the company’s official act. In a legal system that doesn’t have the same concept of corporate authority as a common law system, the chop is the physical evidence of authority.
A foreign executive who runs a WFOE in China must understand the company chop system because the chops control the company’s bank account, its tax filings, its contracts, and its legal existence. Losing control of the chops means losing control of the company. Here’s how the system works and how to manage it.
The Types of Company Chops
A Chinese company typically has five chops. The company chop — the gongzhang — is the primary chop, the one that represents the company as a legal entity. It’s round, it bears the company’s full name in Chinese, and it’s registered with the public security bureau. The company chop is used for the most important documents — contracts, government filings, bank account opening documents, company registration documents.
The financial chop — the caiwuzhang — is used for financial documents, specifically for the documents that the company submits to the bank for payment processing. The financial chop is typically square or rectangular, and it’s used together with the legal representative’s chop — or the legal representative’s signature — to authorize payments from the company’s bank account.
The legal representative’s chop — the faren zhang — is the personal chop of the company’s legal representative. It’s a small square chop that bears the legal representative’s name, and it’s used together with the financial chop to authorize bank transactions. The legal representative’s chop is the personal signature of the legal representative in chop form.
The invoice chop — the fapiaozhang — is used on the company’s tax invoices — the fapiao. The invoice chop is oval or rectangular, and it’s stamped on each fapiao to authenticate it. The tax bureau requires the invoice chop to be registered and to match the chop specimen on file with the tax bureau.
The contract chop — hetongzhang — is used on contracts. Some companies use the company chop for contracts, and some companies have a separate contract chop. The contract chop is typically round and bears the company’s name and the words “contract special-use chop.” A contract chop that’s used to sign a contract has the same legal effect as the company chop.
Each chop is a physical object — a metal or rubber stamp, typically with a red ink pad — that’s kept in the company’s office. Some companies use electronic chops — digital versions of the physical chops — for electronic documents, but the physical chops are still the primary chops for most purposes.
The Legal Effect of the Chop
A document that’s stamped with the company chop is deemed to be the company’s document — the company is bound by it. The chop is treated as conclusive evidence of the company’s intention to be bound, and a person who deals with the company in good faith and receives a chop-stamped document is entitled to rely on it. The company that claims that the chop was used without authorization bears a heavy burden of proof to avoid being bound.
The chop system creates a control problem. The person who has physical possession of the company chop can bind the company to contracts, can authorize bank payments, and can sign government filings. The company’s internal controls — the approval procedures, the signing authorities, the dual-signature requirements — are not visible to third parties who deal with the company, and the third party who receives a chop-stamped document is not required to investigate whether the person who stamped it had internal authorization.
The chop system creates a custody problem. The chop is a physical object that can be lost, stolen, or misused. A company whose chop is lost must report the loss to the public security bureau, publish a newspaper announcement of the loss, and apply for a replacement chop. The replacement process takes time, and during the process, the company can’t use the lost chop — effectively, the company can’t conduct business that requires the chop.
A company whose chop is stolen and used by the thief to sign contracts or to withdraw money from the bank is in a difficult position. The company is bound by the contracts signed with the stolen chop unless it can prove that the counterparty knew or should have known that the chop was stolen. The company may be able to recover the money from the bank if the bank’s procedures for verifying the chop were not followed, but the recovery is not guaranteed.
The Chop Custody Rules
The company chop should be kept in a secure location — a safe, a locked cabinet, a restricted-access drawer — and the location should be known to a limited number of people. The general rule is that two people should be required to access the chop — dual custody. One person has the key to the safe, and another person has the combination, or two people have two different keys that are both required.
The legal representative’s chop and the financial chop should be held by different people. The separation prevents a single person from having control of both chops that are required for bank transactions. The legal representative’s chop is typically held by the legal representative personally or by a senior manager designated by the legal representative. The financial chop is typically held by the finance manager.
The company chop should not be kept by the same person who has the authority to sign contracts on behalf of the company. The separation of custody from signing authority prevents a person from unilaterally binding the company to a contract without the knowledge and approval of the company’s management.
The invoice chop should be held by the finance department — specifically by the person responsible for issuing fapiao — and should be used only for fapiao issuance. The invoice chop should not be used for any other purpose, and the person who holds the invoice chop should not also hold the company chop or the financial chop.
The Chop Usage Log
Every use of the company chop should be recorded in a chop usage log. The log records the date, the document that was stamped, the purpose of the document, the number of copies stamped, and the name and signature of the person who authorized the use and the person who stamped the document. The log creates a record of what was stamped and who authorized it, and it’s the company’s evidence that a particular document was or was not stamped with the company’s authorization.
The chop usage log is particularly important for the company chop and the contract chop because those chops bind the company to legal obligations. A contract that appears in the chop usage log with the signature of the approving manager is evidence that the contract was properly authorized. A contract that doesn’t appear in the log but bears the company chop is evidence that the chop was used without authorization.
The chop usage log should be maintained in a physical book — a bound book with numbered pages, so that pages can’t be removed without detection — or in an electronic system that records the entries permanently and prevents deletion.
The chop log should be reviewed periodically by the company’s management — monthly is a reasonable frequency — to confirm that every chop use was authorized and that the documents that were stamped are consistent with the company’s business.
The Chop and the Bank
The company’s bank account is controlled by the chops. The bank maintains specimen impressions of the company’s financial chop and the legal representative’s chop. When the company submits a payment instruction — a bank transfer form, a check — the form must be stamped with the financial chop and the legal representative’s chop in the same way as the specimen impressions. The bank compares the chops on the payment instruction with the specimen impressions, and if they match, the bank processes the payment.
The bank will not process a payment instruction that’s stamped with a chop that doesn’t match the specimen — a different chop, a chop that’s been altered, or a chop that’s been replaced without updating the specimen. The bank’s verification is visual — the bank’s teller compares the chop impression with the specimen — and the match must be visually identical.
A company that changes its legal representative must update the legal representative’s chop specimen with the bank. The old legal representative’s chop is destroyed or returned to the old legal representative — it’s a personal chop, not a company chop — and the new legal representative’s chop is registered with the bank with a new specimen card. The transition period — between the old legal representative’s departure and the new legal representative’s registration — is operationally sensitive because the company needs to make payments but the old legal representative may not be cooperative.
What Foreign Executives Should Do
The foreign executive who is the legal representative of the WFOE should understand the chop system and should assert control over the chops. The legal representative’s personal chop is the executive’s personal chop — it should be held by the executive personally, not by a Chinese staff member who may use it without the executive’s knowledge or consent.
The foreign legal representative who doesn’t read Chinese should have a trusted Chinese-speaking person — a bilingual assistant, a bilingual finance manager, a bilingual lawyer — review every document before it’s stamped with the company chop. A document that’s presented for stamping in Chinese and that the legal representative can’t read is a risk — the document may contain provisions that the legal representative wouldn’t agree to.
The chop custody rules should be written, communicated, and enforced. The rules should specify who holds which chop, where the chops are kept, how the chops are accessed, how the chop usage is recorded, and what happens if a chop is lost or misused. The rules should be part of the company’s internal control system, and the auditor should review the chop custody and usage as part of the annual audit.
The chop usage log should be maintained rigorously. Every chop use — no exceptions — should be recorded, and the record should be complete — no missing dates, no missing signatures. A chop usage log that’s incomplete or inconsistent is evidence that the company’s chop controls are not working.
The company should periodically verify that all chops are in the custody of the designated holders and that all chops are accounted for. A chop that’s missing — “I think the finance manager has it” — should be located immediately. A chop that can’t be located should be treated as lost and reported to the public security bureau.
