Foreign Companies in China: What We are Seeing and Hearing NOW, Part 2

It is indeed possible to sell a WFOE and our China M&A lawyers have been involved with a couple such sales and they are not difficult from a legal perspective, but they are usually difficult to justify from a business perspective. 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 usually the employee can choose to essentially take over the WFOE after the foreign company has left, and do so “informally” and without any payment.

You can sell your WFOE to a foreign company looking to do business in China, but that too has many inherent difficulties, which we detailed in Buying And Selling China WFOE Shell Companies. Not In My Lifetime?

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 For what it takes to form a WFOE in China, check out the following:

• How to Form a China WFOE: A Roadmap
• Forming a China WFOE: Scope is Key
• Forming a China WFOE: Ten Things To Consider
• How to Form a China WFOE: Choosing Your Chinese Company Name
• How to Form a China WFOE: Revealing Investor Ownership is NOT Optional
• 7 Rules on China WFOE Registered Capital

The above posts show that forming and registering a WFOE in China is a difficult and time consuming process but buying an existing WFOE is in most cases not much easier, if at all.

To quote from a previous post we did on selling your China WFOE:

The thing about off the shelf WFOEs is exactly that: they are off the shelf and not customized. And that is where all of 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 who is 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 not have liabilities of any kind (including, tax, employee, environmental, tort, etc.) you can quickly see why forming a WFOE is going to 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 where saving a few months will warrant the extra risk.

In the post, “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 I am writing this post now — if you under or overreach on the description of your business scope, you might find yourself in big trouble.  We are getting an increasing number of calls from American companies in trouble with the Chinese government for doing things in their business that they did not mention in the business scope section of their initial WFOE.

In some cases, the companies have admitted to us that they were never “really comfortable” with the business scope mentioned in their applications, but that the company they had used to form their WFOE had “pushed” them into it as it would “make things much 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 is auditing these applications. In one instance, the local government went back and changed its mind, probably after conducting an audit of its own.

I cannot go into any more detail on these matters, but I can give this advice: 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 both fronts 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 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.