The first step in seeking dormancy is for the company to make an arrangement with its employees. Most likely, this will involve termination with the payment of negotiated sums (not being less than severance pay) for most employees. Negotiations with employees can be challenging.

Once employees are settled, the company needs to apply for dormancy to the local Administration for Market Regulation (AMR). The AMR will consider the application, and decide whether to accept or reject the application, within six business days.

The dormant status of the company will be made public on the National Enterprise Credit Information Publicity System (Publicity System). The company is free to resume business at any time during its dormant period; however, once it recommences business, it must change its status on the Publicity System within 30 days. Failure to change its status may result in fines of up to RMB 30,000 (approx. US$4,500).

Selling equity

Selling a company as a going concern is generally an attractive way to exit China. The main steps are:

• Finding a buyer: This can be done through trade networks or by engaging an intermediary.
• Due diligence: This can be time-consuming for sellers. Given the risk of a company having unknown liabilities, many buyers will want extensive due diligence. It’s critical for a seller to have an appropriate non-disclosure agreement in place (either by way of a separate agreement or as part of a term sheet) before due diligence commences; the agreement needs to cover strict confidentiality, non-use, return/destruction of materials, and significant liquidated damages for non-compliance.
• Merger-control filings and national security reviews: The thresholds for filings require, among other things, a China turnover of RMB 400 million (approx. US$59.5 million) per annum. It follows that the sale of small- to medium-sized companies generally are not subject to merger-control filings. With China’s limitations to foreign investment in sensitive sectors, it would be unusual for the sale of a foreign-invested company to be subject to national security review.
• Negotiations: Given China’s continuing Covid-19-related travel restrictions, it’s more common for negotiations to be conducted online. The main issues for any particular negotiation will depend on the deal and priorities of the parties.
• Closing: The parties may decide between themselves when legal ownership of equity changes. However, the transfer is only effective against third parties when the government approves the application to change the company’s registered information and issues a new business license. It is not common for the parties to be informed on the same day that the new business license is issued. This requires careful attention to the closing provisions and payment schedule during negotiations.

For many purposes, asset sales are seen as an alternative to equity sales. However, an asset sale will mean that the company itself still needs to be closed down if the goal is to exit China.

Bankruptcy

A company may enter bankruptcy proceedings if it cannot pay due debt and (i) its debts exceed its assets, or (ii) it obviously lacks the ability to pay of all its debts. Bankruptcy in China is supervised by the People’s Court in the area where the debtor is registered.

Bankruptcy proceedings may be commenced by the company itself or by creditors.

Closure

China has a general procedure and a fast-track procedure for closing solvent companies. The two procedures differ in required application materials, steps and timing. Companies that don’t qualify for the fast-track procedure will be required to enter the general procedure.

General procedure

The general procedure involves the following steps:

• Liquidation committee establishment;
• Liquidation, including creditor notification, public announcement (45-day announcement period), tax de-registration (can take many months), and customs de-registration;
• De-registration with the AMR; and
• Follow-up de-registrations, including in relation to social security and housing-fund, foreign trade operator status, and foreign exchange. The company’s basic RMB bank account must also be closed.

It’s not uncommon for the general procedure to take six months, and even longer if complications arise.

Fast-track procedure

A fast-track procedure has become available in practice for companies that have no outstanding debts and obligations. The fast-track procedure involves the following steps:

• Online public announcement, which will be reviewed by other authorities (such as the tax bureau, Ministry of Commerce, and Social Security Department) and relevant stakeholders. Objections may be raised during the 20-day announcement period. If any objections are made during the announcement period, then the AMR may decide that the company should go through the general procedure;
• De-registration with AMR; and
• Follow-up de-registrations.

Just walk away?

Each of the above options require attention to detail and will incur costs to implement. Faced with the time and extra cost, some investors can be tempted just to walk away. Abandoning a company in China, however, is not a recommended strategy. Among other things, businesses should consider whether:

• They have other investments or trading relationships in China;
• Security has been provided to creditors of the company;
• Personal liability or shareholder liability will arise;
• The directors and officers of the company are based in China or will travel to China again;
• Creditors or competitors have any ability to damage their reputation; and
• They want the exiting experience to drag on potentially for years.

In a connected world in which China continues to be a significant market, it’s best to use the door, and leave it open, when exiting.