Five Ways to Facilitate Leaving China Laws

A couple months ago, in Five Ways to Accelerate Your China Market Entry, I wrote about how to facilitate a China market entry. I wrote that post because despite the US-China problems, there are still plenty of companies, both U.S. and otherwise, for whom entering into China still makes a lot of sense. But for various reasons — some particular to the company and some particular to the increasing complexities inherent in doing business in China, there are many companies (again, both U.S. and otherwise) for whom leaving China makes the most sense. Many businesses are  looking to get out of China (and Hong Kong) and in this post I discuss the basics on how to exit as efficiently as possible.

The first thing one needs to understand about leaving China, either fully or partially, is that everything —  and I do mean everything — you did wrong coming into China may come back to haunt you when you try to leave.  This includes everything that you from your company registration, to your tax payments, to whatever import/export duties you paid, to your accounting calculations, to your lease contracts and payments, to your employment contracts and payments, to your vendor contracts and payments. I can go on and on. Just be sure that whatever you have skirted or fudged or disputed or had disputed may impact your compliance with local, provincial, or PRC laws and can put you at risk when seeking to depart. If you have a joint venture, your joint venture partner will likely know your weak spots (even though it very well may have encouraged them) and it usually will not hesitate to point them out to Chinese government authorities if it is in their best interest. The same holds true with at least equal force for your employees, landlord, and vendors.

The following five recommendations can help you to manage your China exit process more successfully:

1. Your China exit should be part of a larger business strategy, particularly if you are disrupting supply chains and need to maintain manufacturing continuity. It is highly likely that your decision regarding China has many interdependencies elsewhere and they all need to be thought through, understood, and coordinated in the process.

2. Make an honest and realistic inventory and assessment of all your potential risks. This includes regulatory, contract, trademark, employment, supply chain, intellectual property, facilities, and business disruption.  Again, everything you may have done wrong entering China is a high risk to bite you going out.

3. Have a China knowledgeable project manager with recent in-country experience develop your project plan and lead the process. This is not the time or place for a growth assignment for someone. The risks are too great. Your China market exit process needs skillful project management to ensure all the balls in the air are being tracked and moving in the right direction.

4. Engage expert outside legal counsel right away. You will need and it will save you time and money on the back end. They will be invaluable in helping you identify the risks and possible mitigations.  They will be your project manager’s best friends.

5. Do not assume anyone in your China business is your friend, regardless of your past working relationships. Your leaving is changing all the relationship rules and you need to assume that they will look after their best interests even if it is at your expense. Your “trusted” local leader is one of the most likely to report you to Chinese government authorities or to seek leverage from your departure.  And remember, the China justice system is most certainly not your friend.

In many instances your departure from China will be accompanied by an entry into a new country.  It is essential that the China exit and the new market entry be well coordinated and seamless in your project management. Though the market entry requirements in the new country will likely be less time consuming and complex than China, most of the business and legal fundamentals will  be the same.  If nothing else, your experience in China should have instructed you on the importance of getting it right the first time.

The above is a guest post by Patrick O’Hara, an international business consultant with 25 years of high-level China business experience, with big public companies and private equity funded tech companies. I asked Patrick to write this post because our law firm’s China lawyers have worked with Patrick on many China matters and we view him him as one of the smartest and best prepared and easiest to work with clients ever. Our China WFOE lawyers worked with Patrick on setting up a WFOE in China and getting that WFOE operational and that WFOE set-up was easily one of the two or three smoothest, best run, and fastest WFOE formations we’ve ever done, and I attribute that largely to Patrick. He had lined up and prepared the right people to help every single step of the way in forming the WFOE and getting it operational. Our China WFOE lawyers are always asked: how long does it take to form a WFOE? Our answer invariably includes stating that the biggest factor in how long it takes to set-up a WFOE is you, the client, not us the WFOE lawyers, nor the Chinese government. A prepared client able to make quick decisions is key. I asked Patrick to write the above because I figured our readers could learn a lot from Patrick about how to leave China as well. For how to leave your  China manufacturer, check out How To Terminate Your China Supplier: Very Carefully