The other day we wrote about how to shut down a China WFOE. One of the solutions I suggested was to just let the company slowly wither on the vine, without formally shutting it down. The advantages of this solution are that there is no large cost for getting squared away with the government and there is still an existing WFOE, available should it make sense to revive it at some later date.
In response to this suggestion, we received the following comment/question:
Btw, do you think there will be a secondary market for such ‘dormant’ shells?
My answer is no. The benefit of buying such a shell is that it would give its buyers are WFOE fast and probably fairly cheaply. However, the disadvantages will almost always outweigh the advantages. The biggest disadvantage is that it is very unlikely that the scope of the dormant WFOE will line up exactly with the scope desired by the potential buyer.
In a post entitled, “How To Form a China WFOE. Scope Really Really Matters.” we discussed the importance of a WFOE having a proper scope:
BUT — and this is why I am writing this post now — if you under or overreach on the description of your business scope, you might find yourselves in big trouble. We are getting an increasing number of calls from American companies in trouble with the Chinese government for doing things in their business that were not mentioned in the business scope section of their initial WFOE.
In some cases, the companies have admitted to us that they were never “really comfortable” with the business scope mentioned in their applications, but that the company they had used to form their WFOE had “pushed” them into it as it would “make things much easier.” In some cases, the scope of the business changed after the application was submitted and the company had failed to secure approval in advance for the change. And in some cases, the company probably would never have been approved at all had it been upfront and honest in its application. In nearly all instances, the companies had managed to secure local approval but were now in trouble with Beijing, which constantly is auditing these applications. In one instance, the local government went back and changed its mind, probably after conducting an audit of its own.
I cannot go into any more detail on these matters, but I can give this advice: applying for a WFOE in China involves a heck of a lot more than just filling out a form and getting approval. It does matter for what you get approved and you (or whomever you are using for your WFOE application) need to know China’s foreign investment catalog inside and out before applying. You then must tailor your application to meet both the requirements of the foreign investment catalog AND the reality of what you will be doing in China. A failure to comply on both fronts will lead to, at best, a rejection of your application and, at worst, being shut down months or years later.
The odds a dormant WFOE seller’s scope lining up perfectly with that of the WFOE buyer are just too slim. On top of that, the cost of conducting the due diligence on the dormant WFOE, coupled with the risk of missing some latent liability, are likely to be greater than any cost savings that might be realized by not having to pay to go through a WFOE formation from scratch. The biggest benefit in buying a WFOE would be speed, but it is going to be the rare instance where saving a few months will warrant the extra risk.
I have not participated in the buying or selling of a dormant WFOE nor am I aware of anyone else who has. I just ain’t seeing it.
Have you?
