WFOEs leaving China is nothing new and though we have not seen a massive uptick in that (with the possible exception of 1-5 person consulting WFOEs that had essentially stopped doing much if any business in China years ago). But we have over the last few months been increasingly hearing from our clients that they “can’t take China anymore.” It seems the combination of a poor economy and COVID lockdowns, as well as increasingly poor treatment of foreign companies and of foreigners, has driven them to the edge. These companies have been asking us a lot of questions about how to shut down a China WFOE. For the 101 on how to do exactly that, check out Shutting Down a China WFOE: Don’t Go There.
In addition to questions about how to shut down a WFOE, some of our clients ask about the possibility of selling their WFOEs, rather than shutting them down. On the surface, this makes complete sense in that it will allow them to make money by leaving China, rather than having to pay money to leave China. Unfortunately, for a whole host of reasons, it is extremely difficult to sell a WFOE, as we explained in Selling Your China WFOE: Yeah, That’s the Ticket:
The problem is that to buy a WFOE requires 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.
It is indeed possible to sell a WFOE and our China M&A lawyers have been involved with a number such sales and they typically are not terribly difficult from a legal perspective. See Private Equity Deals Involving China Assets: Due Diligence and Normal Noncompliance.
We sometimes see WFOE sales to employees (either expats or Chinese citizens or even combinations thereof) who want to see the WFOE keep going so they can hold onto their jobs. It is possible to sell a WFOE to a Chinese company or a Chinese citizen (and this would include to an employee) and then it converts to a Chinese domestic company. This too is not difficult legally, but such sales are rare because usually the employee knows exactly why the WFOE is closing and chooses to essentially take over the WFOE after the foreign company has left, and do so “informally” and without any payment.
We also have seen WFOEs sold to companies that essentially specialize in buying up and consolidating Chinese companies, mostly manufacturers and service companies.
The problem with many (most?) of the companies that are looking to leave China these days is that they have become shadows of their former selves and though they typically are not losing money, they typically are not making money either and their future is not terribly bright. Recognizing this, our clients often float the idea of stripping down their company and essentially just selling the WFOE to someone who wants to avoid having to go through the pain of having to form a new company in China.
This sort of sale of what is essentially a shell company virtually never makes sense. First off, the number of foreign companies looking to start from scratch in China is way down. Second, selling this sort of company has many inherent difficulties, which we detailed in Buying And Selling China WFOE Shell Companies.
Those trying to sell their WFOEs usually tout them as liability-free and therefore ready to go much faster and at a much lower price than forming a brand new WFOE. Though it is true that forming and registering a WFOE in China is a difficult and time-consuming process, buying an existing WFOE is in most cases not much easier, if at all.
The thing about off-the-shelf 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 in the IT-outsourcing business in a second-tier Chinese 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 the WFOE’s 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 to make sure it truly does not have liabilities of any kind (including, tax, employee, environmental, tort, etc.) you can quickly see why forming a WFOE would be safer and probably equally as fast and cheap as buying one. The biggest benefit in buying a shell WFOE would be speed, but it is going to be the rare instance in which saving a few months will warrant the extra risk.
The odds of a shell WFOE’s city and scope lining up perfectly with what is needed by potential WFOE buyers are low and we are not aware of any website that tries to match up WFOE sellers with potential WFOE buyers.
Steve Barru, a former China business blogger, wrote many years ago about trying to “get out of his China WFOE” [his blog is no more but because we previously quoted him here; his words on selling a China WFOE live on]:
Selling the company, even for next to nothing, quickly moved to the head of the line. But transferring the business license and my legal person status to the wannabe new owner involved far more than filling out a couple of forms.
It was the buyer who had to jump through the bureaucratic hoops. For all intents and purposes he went through the same process one goes through to establish a WFOE. With one key difference – he did not have to invest new capital in the company. The original US $70,000 in registered capital (that I had put in and had later managed, for the most part, to take out) was all that was required. Since registered capital for a WFOE had increased to US $200k by 2005, there were demands for additional investment, but rather convoluted negotiations eventually got around this obstacle. Fortunately, the buyer was located in Nanjing. The need to move the WFOE to a new locale would have been a deal breaker.
Eventually, after several months of discussions and chopping forms, all the questions about registered capital, business scope of the company, the good character of the new owner, and the license transfer had been answered and the sale was complete. The price probably covered my express mailing costs and bought me a couple of dinners. But I was out from under what had become an enormous, very time-consuming headache.
The same is pretty much true today. Selling a stripped down (off the shelf) WFOE seldom works. Sorry.