Exiting China: procedures to ensure the orderly liquidation of a business.

• Author: Richards, Brad

1. INTRODUCTION II. EXIT PLANS III. RECENT DEVELOPMENTS IN CHINA PERTAINING TO VOLUNTARY LIQUIDATION IV. CREATING A LIQUIDATION TEAM FOR A VOLUNTARY LIQUIDATION V. GATHERING INFORMATION VI. DEVELOPING A DETAILED EXIT PLAN VII. EXECUTING THE PLAN VIII. CONCLUSION I. INTRODUCTION

   The global financial crisis has affected nearly all businesses in all industries in all markets. Weaker companies are floundering and failing, while stronger companies are reevaluating their business models and operations worldwide. The situation has led companies to reduce their payrolls, sell non-strategic assets, eliminate unnecessary business units and liquidate foreign operations. (1) Even the booming economy in China may no longer be a prize worth pursuing in this difficult economic environment. (2) This Article focuses on the procedures for and effects of liquidating a business in China and addresses relevant strategies for undertaking an orderly exit. Although the immediate context is China, many of the strategies discussed may be applied to any foreign market.

2. EXIT PLANS

   When liquidating foreign operations, most businesses hope to spend as little money and resources as necessary because they are "done" with their business in that particular country. It is important, however, to liquidate properly and adhere to a well-developed exit plan. Particular attention must be given to unique laws governing liquidation (or gaps in such laws that fail to specify how liquidation may occur). (3)

   An appropriate exit plan will help any business enterprise by strategizing how best to avoid financial penalties and fines but still recover maximum returns on assets abroad. Failure to liquidate properly in many countries can result in the imposition of taxes and fines that encumber all assets in the particular country. (4) These fines may affect an affiliated or related business enterprise, minimizing the gains made through liquidation. Moreover, businesses typically have paid taxes or made deposits to foreign governmental entities that may be recovered if liquidation is completed properly. (5) Careful planning can also help preserve the opportunity to resume operations in the future or otherwise do business again in the country, which will remain important for investors, if not for the business itself. Most importantly, a good plan will help the company and its officers avoid criminal liability under local law. Many countries impose criminal liability on designated local and foreign representatives of a business. (6) In China, if certain liabilities are not properly addressed, such as statutory severance payments for employees, local and foreign representatives may be criminally liable. (7) A viable plan will consider: relevant law; administrative procedures; local, regional and national governmental filings; existing contractual and financial obligations; local assets; affected employees; bank accounts; judicial proceedings; and related issues. The exit plan should lay out the time for execution, necessary actions and persons required to carry out the actions, and any risks (such as potential delays) that may impact an important aspect of the plan. (8)

   Given the complexity of opening a business and operating it successfully in most Asian markets, as well as the expectations that accompany any investment in the Chinese market, it is not surprising that these concerns are particularly relevant when one is liquidating a business in China. Thus, a good plan is vital to successful liquidation in the Chinese market.

3. RECENT DEVELOPMENTS IN CHINA PERTAINING TO VOLUNTARY LIQUIDATION

   At the 1447th meeting of the Judicial Committee of the Supreme People's Court on May 5, 2008, the Provisions of the Supreme People's Court on Some Issues about the Application of the Company Law of the People's Republic of China (II) (Liquidation Provisions) were adopted. (9) The Liquidation Provisions provide a framework for dissolution and liquidation of Chinese enterprises and foreign-invested enterprises while also increasing creditors' and shareholders' rights. (10) The Liquidation Provisions apply to a company that needs to liquidate but does not necessarily need bankruptcy relief. (11)

   Prior to the enactment of the Liquidation Provisions, enterprises could have their finances depleted in China with little effective recourse for creditors or shareholders. (12) The Liquidation Provisions now provide a structure and incentive for an orderly liquidation. These changes are particularly important for...