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How To Shut Down Your China Operations

Posted in China Business, Legal News

Our China lawyers have been seeing a massive increase in inquiries from American companies looking to close down their operations in China. On top of that, I shared an early morning taxi today from my airport hotel to O’Hare with a guy who was heading to China to aid in shutting down his company’s China WFOE.

I do not necessarily see this increase in company closures as all that indicative of the economic situation in China. Rather, I see it as a combination of timing and the increasing difficulties for foreign companies doing business in China. By timing, it just seems that many of the companies looking to shut down their China operations have been there for 5-7 years and that just seems to be about the time that companies decide one way or the other whether to go forward. Because so many American companies went into China from 2006 to 2008, now just seems to be the right time for so many American companies to leave.

Anyway, the big issue for companies looking to leave China is how to do that.  The below is an email (slightly revised) that I recently wrote to one company asking about its closure options:

If you are going to talk with people in China about the possibility of shutting down your China operations and leaving China for good, you do NOT want to go to China to have this discussion. See, for example, this blog post as to why: The Single Best Way To Avoid Being Taken Hostage In China

If you are going to leave China, there are essentially four ways for you to do so — at least from the facts you have given us to date. One, you close up shop there by doing everything by the book. This is very expensive, very difficult, and very time consuming. This makes sense if your company or some of its key people may be going back to China at some point in the future or you have valuable assets in China that you do not wish to relinquish. Two, you just suddenly walk out “in the middle of the night” and leave it to the local government and to your employees to pick up the pieces. Ignoring the moral issues involved with this (which I will leave up to you), this makes sense only if both you and your company plan never to return to China. Three, you do some sort of middle ground departure. This might consist of your paying your employees some severance (not because you have to do so but because you want to do so) or in some form or another turning the company over to the manager. Four, you sell the company to the manager for little or nothing but by doing so, you leave China completely legally and that means that both your company and its people can return there someday. This would almost certainly be the best solution, by far, assuming it is possible.

You might also be able to sell your company and its assets to another foreign company. This might work as it is now taking about six months to form a WFOE and a foreign company interested in getting into China to engage in the business for which your WFOE is licensed might find your company and your facility intriguing.

Let’s talk more next week so we can work on figuring out which option is best for you.

What are you seeing out there?

  • Terry Newman

    Is there really a market for existing WOFE’s? We have been operating for five years now and we are certainly fully aware of how hard it is, but I do not intend to quit, but certainly there will come a time when we need to exit China. One option is sale, but I really doubt that is possible. Does anyone know of examples? Also partial sale to key staff, for a peppercorn perhaps, seems to be a good idea from a business point of view. Does anyone know if this is possible?

    • http://www.chinalawblog.com/ Dan Harris

      Not much of a market at all. The problem is that to buy a WFOE requires that the buyer essentially want to do exactly what the seller has been approved to do. So for example, if I want to do a consulting business in Qingdao, I must buy a consulting business in Qingdao. And then I also have to make sure that the costs of my doing due diligence on the WFOE and the risks of buying into the liabilities and problems of the WFOE, do not outweigh the advantages of taking over a WFOE, as opposed to forming a new one.

  • Andy Cui

    Several years ago, lots of South Korean Companies left Shandong with Option 2, left lots of hopeless employee and creditors. It seriously damaged South Korean Companies’ reputation here in Shandong. I can not belive this is an option for American companies. Option 3 &4 are much better.

    Andy Cui

    Dacheng Qingdao

    chuanzhong.cui@dachenglaw.com

    • http://www.chinalawblog.com/ Dan Harris

      It is an option. Not a good one, but it is there and there are definitely those that have done it.

  • Devin Petty

    I am standing in the line to get on the roller coaster as a second comer. I can only here the clack, clack, clack, of the cars ascent. Not the screams of the occupants on the descent.

    • http://www.chinalawblog.com/ Dan Harris

      I can hear both.

  • KAWO

    Seems like this past year, there was a big push against foreign companies, both overtly and subtly, ostensibly in support of growing national companies