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?