Buying and Selling China WFOE Shell Companies

Every few months or so (including this morning) I get an email or a call from someone who wants to know if our law firm has any clients that might be interested in buying a shell China WFOE.  And every few months or so (including this morning), I say “no.”

Let me explain.

The people trying to sell their shell WFOE usually pitch it as being completely liability free and therefore ready-to-go much faster and at a much lower price than if someone were to have to form their own China WFOE. For what it takes to form a WFOE in China, check out Forming A China WFOE. How Long Will That Be Going On?

Now if you just read the above post to which I linked (you did, didn’t you?) you have no doubt concluded that forming a WFOE in China is a convoluted and time consuming process, and it is. So why then do I always say “no” to anyone buying an off the shelf WFOE?

Again, let me explain.

The thing about off the shelf China WFOEs is exactly that: they are off the shelf and not customized. And that is where the problems arise. Let’s take as an example a WFOE that someone tried to interest me in many months ago. That company was in the IT outsourcing business in a second tier city. So right there, its only real potential buyer is someone interested in doing IT outsourcing in that second tier city. Because if the buyer of that WFOE is interested in doing anything other than IT outsourcing, it will need to petition the government to expand or change its business scope. Similarly, if the buyer is interested in doing IT outsourcing in some other city, it will need to petition the government to move its WFOE or it will need to set up a branch in that other city and thereby have to maintain two offices. When you throw in the fact that anyone buying a WFOE will need to conduct due diligence on it to make sure it truly does have no liabilities of any kind (including, tax, employee, environmental, tort, etc.) and you can quickly see why forming a WFOE will be safer and probably equally fast and cheap. The biggest benefit in buying a shell WFOE would be speed, but it is going to be the rare instance where saving a few months will warrant the extra risk.

In an article I co-wrote with one of our international corporate lawyers, 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 we are writing this now — if you under or overreach on the description of your business scope for your China WFOE, you might find yourselves in big trouble. Our law firm has been getting an increasing number of calls from foreign 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 they were never “really comfortable” with the business scope mentioned in their applications, but the entity formation company they used to form their WFOE had “pushed” them into it as it would “make things 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 audits these applications. In one instance, the local government went back and changed its mind, probably after conducting an audit of its own.

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 either front will lead to, at best, a rejection of your application and, at worst, being shut down months or years later.

The odds of a shell WFOE’s city and scope lining up perfectly with that of a potential WFOE buyer are pretty slim. Those odds would no doubt be better if there were a website that matches up WFOE sellers with potential WFOE buyers, but I know of no such site.

I am not aware of a single deal where someone has purchased a shell WFOE. Are you? Is there any market for China WFOE shell companies?

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