How to close up shop in the PRC

Background
When a sourcing project gets to a certain size, it often makes sense to set up a permanent presence on-the-ground in China to help manage the supply chain.  This series of blog posts covers some of the key areas of consideration when it comes to setting up in China.

Exit Strategies

Sale of Equity Interest

The most efficient way to exit from an investment in a China FIE is to transfer the equity interest to an existing partner or a third party. Transfer of the direct equity interest in an FIE requires partner consents and waivers of pre-emptive rights (not applicable in the case of a WFOE), unanimous FIE board approvals and local COFTEC (or MOFCOM) approvals. Sale of an indirect interest in an FIE via sale of shares in an off-shore SPV can be simpler but, will still require EIT approval and collation of remaining partners as a practical matter.

Termination and Liquidation

Events permitting termination of an FIE are generally left to the negotiation of the parties and are set out in the FIE’s AA (and, in the case of an EJV and CJV, the joint venture contract). However, termination of an FIE also typically requires an unanimous FIE board resolution (some exceptions apply), so termination of an EJV and CJV still requires consensus action as a practical matter. (The parties can be put under obligation to cause their appointed directors to approve such a resolution in agreed circumstances, but parties can instruct their directors to breach such obligations, delaying the process).

Typical termination events include: breach of joint venture contract or ancillary contract, insolvency of a party or of the joint venture company, regulatory changes by PRC government authorities or force majeure with adverse effect on the joint venture’s business, inability to access forex jeopardizing operations, operating losses exceeding defined ceilings etc.

Termination is followed by liquidation and dissolution of the FIE. Under the FIE Liquidation Procedures liquidation can be standard or special. In the standard liquidation, the board of directors unanimously appoints a liquidation committee which follows the procedures in the FIE Liquidation Procedures and in the FIE’s constitutional documents (joint venture contract and/or AA).

 

A creditor’s meeting is not required. Special liquidation usually applies in situations where the board members of the FIE, typically a joint venture, disagree on dissolution and thus liquidation can only be triggered by an application to the original approval authority. In case of such a special liquidation, the procedures are taken out of the hands of the joint venture parties.

The approval authority will appoint a liquidation committee which exercises the powers of the board of directors and reports directly to the approval authority. Also a creditor’s meeting will be required, after liquidation is complete, the FIE is to complete dissolution by filing for a liquidation report, approved by the board of directors, with the approval authority.

 

Within ten (10) days of filing the liquidation report the liquidation committee has to complete FIE de-registration procedures with the tax and customs authorities, and within a further ten (10) days, with the administration for Industry and Commerce. Finally a public announcement of de-registration has to be made in a national and local newspaper.

 

Termination, liquidation and dissolution can be very time consuming and expensive, and may not realise the best value for investors. Accordingly many FIE investors prefer to negotiate a buy-out by one of the parties in order to avoid having to go down that particular road.

Written for CSIC by Sophie Mao
China based lawyer at www.AsiaBridgeLaw.com

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