The Reality of Company Dissolution in China

Summary

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• One means of exiting a joint venture is through dissolution and liquidation
• However, the broad nature of the relevant Chinese legal provisions means this route can sometimes be difficult for foreign investors
• Autonomous dissolution can involve long delays, while court-mandated dissolution in the event of company deadlock often involves numerous legal complications
• Investors would be wise to think ahead when preparing their shareholders agreements in order to mitigate future difficulties

No investment lasts forever and there will inevitably be a time when the term of the contract expires, and the investor will seek to exit the market. Unsurprisingly, divesting from any location can be a risky and lengthy process which requires investors to consider a wide range of commercial factors. This is especially the case for China, which has experienced a notable amount of sector- specific divestment in recent years. Furthermore, the operational terms of some of the earlier foreign companies and Sino-foreign joint ventures ("JVs") to enter China are now gradually coming to an end. In light of this, it is worth considering some of the issues associated with the corporate governance structure of JVs, many of which were established under the old Sino-Foreign Equity Joint Venture Law (《中国人民共和国中外合资经营企业法》). There are numerous shortcomings associated with the corporate structure of a JV in China, with many having been subject to corporate deadlock, resulting in endless disputes. As a result, the dissolution and liquidation of JVs has become a topic of significant concern for foreign investors seeking to enter the Chinese market.

This uncertainty has created notable problems for foreign investors when they have sought to leave the market via one of these routes