A Comprehensive Guide to Company Restructuring in China

Company restructuring is a critical process businesses undertake to align their operations and finances with strategic goals and market demands. Motivated by financial pressures and the need for greater efficiency in a competitive environment, it involves various approaches tailored to a company's needs. These include realigning management structures and reorganizing financial and operational frameworks. Grasping these processes is key to achieving corporate resilience and highlights the necessity of adaptability and foresight in today's business landscape.

Contributing Advisor

Allan Xu

Partner

What is company restructuring?

Corporate restructuring is a multifaceted strategy essential for companies aiming to fortify their operational resilience and adapt to changing market dynamics. This strategy involves a comprehensive reorganization of a company's management, finances, and operations to enhance efficiency and effectiveness.

Such restructuring may require the closure of non-performing units or a strategic realignment of business segments better to reflect the company's core objectives and values.

This approach is not merely a reactive measure to financial distress but also a proactive strategy to prepare for significant corporate events such as mergers, acquisitions, or shifts in ownership. The end goal is to reduce financial vulnerabilities and boost the business's overall viability and competitive edge.

In the context of China, this restructuring process gains additional significance. The nation's economy presents a unique landscape for growth amidst a globally unenthusiastic economic climate. This resurgence underscores the necessity for businesses, particularly those with regional stakes, to adapt strategically through restructuring. By doing so, they position themselves to not only survive but also to capitalize on emerging opportunities.

Factors influencing restructuring success

The success of a restructuring plan hinges on several critical factors. Key among these is how the strategy is perceived and enacted by stakeholders. A thorough comprehension of the potential challenges inherent in each restructuring option allows businesses to select the most suitable approach. This ensures that the restructuring addresses immediate financial and operational pressures and aligns with long-term strategic objectives.

Restructuring in various scenarios

Restructuring can manifest in various forms, driven by different motivations such as:

• Organizational strategy: Discontinuing divisions or subsidiaries that do not align with the company's primary strategy to sharpen focus.
• Economic loss: Addressing divisions causing financial drain due to changes in market dynamics or flawed strategic decisions.
• Reverse collaboration: Divesting units that are more valuable separately than as part of the larger entity.
• Cash flow management: Selling off assets to generate cash and reduce debt, particularly when securing new financing is challenging.

Why do businesses restructure?

Business restructuring has become more than a necessity; it's a strategic move towards sustainability and growth. The compelling drive for businesses to restructure can be attributed to various factors, each critical in ensuring long-term success and adaptability.

Adapting to market dynamics and emerging opportunities

For example, China's remarkable recovery from the coronavirus outbreak, underpinned by its stable social environment, integrated industrial system, and robust service and logistics networks, presents unique opportunities. Despite the ongoing global economic turbulence, China has maintained its position as an attractive destination for foreign direct investment (FDI), mainly due to its large, well-educated workforce and substantial domestic market. However, the competitive market landscape and the potential vulnerability to global shocks necessitate a strategic approach to business operations, making restructuring a vital tool for survival and growth.

Strategic restructuring for a competitive edge

The essence of restructuring in this context goes beyond mere survival; it's about positioning for future growth. Businesses are now looking to adapt to more competitive markets, become leaders in niche sectors, enter new promising markets swiftly, and reshape their overall market strategies. This agility is crucial for immediate challenges and long-term resilience against potential future setbacks.

Inorganic growth strategies with Mergers and Acquisitions

A significant aspect of restructuring involves inorganic growth strategies like mergers, amalgamations, and acquisitions. These strategies are lifelines for struggling businesses and avenues for creating synergies, increasing market share, and achieving rapid growth. Through these methods, companies can realize benefits such as cost reduction, tax advantages, technological advancement, brand acquisition, and diversification into new sectors.

Cost reduction and operational efficiency

One of the primary reasons for restructuring is cost reduction, achieved through eliminating redundant processes, consolidating debts, and streamlining operations. This process is integral not only in times of financial distress but also as a proactive measure to enhance efficiency.

Preparing for industry-wide changes and regulatory compliance

With the constant flux in industry standards and regulations, businesses often find themselves restructuring to stay competitive and compliant. This could involve organizational changes to enhance efficiency, such as adopting a flat hierarchy, restructuring departments, or aligning with new legislation.

Different approaches to corporate restructuring

Businesses that want to optimize their operations and resources should consider external restructuring involving more than one party and internal restructuring.

External restructuring

This approach involves restructuring company equity and controlling rights and assets for specific business goals. Key strategies include:

Equity acquisition

Involves purchasing a controlling stake in another company and inheriting its debts and liabilities. This strategy is ideal for companies seeking to acquire new capabilities, famous brands or enter niche markets quickly, gaining access to established frameworks and potentially hard-to-acquire licenses.

Asset acquisition

It focuses on purchasing valuable company assets, such as real estate, equipment and inventories, intellectual property rights, employees, and client relationships. etc. It allows selective assumption of liabilities and is often used when the buyer is interested only in specific aspects of a business.

Merger

A merger combines two companies into one entity, often pursued for market share expansion, competition reduction, and operational efficiency.

Split-Up

This involves dividing a company into separate entities, each focusing on different business lines for strategic advantages or compliance with anti-monopoly regulations.

Divestiture

Entails selling non-core assets or business units to streamline operations, generate funds, and ensure business stability.

Internal restructuring

Internal restructuring focuses on internal alterations in operations, capital, supply chains, human resources, and legal frameworks. This approach is vital for companies to become more integrated and profitable. Key aspects include:

Supply chain management

Implementing risk management strategies, diversifying supply sources, and adopting technology for better supply chain visibility.

Human resources optimization

Regular HR audits, re-designing HR policies, adopting tech-powered solutions, and exploring flexible employment forms are crucial for efficient HR management.

Cash flow management

Performing financial stress tests, producing rolling forecasts, and establishing new expenditure policies are essential for effective cash flow optimization.

Compliance and risk control

Regular compliance reviews, developing standard protocols, and revising contract templates are necessary for maintaining compliance and mitigating risks.

Reduction of operations

Temporarily reducing operations and maintaining compliance with tax and regulatory requirements can be a strategy during times of crisis.

Bridging external and internal restructuring

Combining external and internal restructuring strategies can offer comprehensive solutions for businesses in China. External restructuring focuses on equity and asset management to enter new markets or consolidate operations.

Conversely, internal restructuring streamlines and optimizes internal processes, supply chains, and human resources. These strategies enable businesses to adapt to market changes, enhance operational efficiency, and maintain competitive advantage in the ever-evolving Chinese market. Professional advisory services are often crucial in navigating these complex restructuring processes to ensure effectiveness and compliance.

The corporate restructuring processes

The key phases and considerations in the restructuring journey are stated below:

• Identifying objectives: The first step in restructuring is clearly defining the goals. It's essential to be specific about objectives, such as setting a target amount for reducing operating costs and tax payments, rather than a vague goal.
• Formulating a plan: Once objectives are set, the next phase is to outline strategies and actions. This involves detailed planning, such as identifying assets for divestiture and potential buyers in a divestiture restructuring. Collaboration with compliance departments is crucial to ensure legal adherence.
• Implementing the plan: This phase varies depending on the restructuring strategy. It may involve transferring equity, selling assets, hiring or laying off staff, and establishing new organizational guidelines.
• Managing transitional challenges: During implementation, changes in operations, procedures, departments, or ownership take place. This often requires hiring financial and legal advisors. Parts of the company might be sold, new leadership, such as a CEO, may be appointed, and changes in computer systems, networks, and locations could occur. Unfortunately, this phase can also lead to job redundancies and layoffs.

In some cases, closing the entity all together and starting from scratch may be easier, or even mandatory. For these reasons, it is always better to start out with a clear and informed business plan, rather than attempt to make on-the-fly adjustments later on.

In this section, we discuss:

• Company name;
• Business scope;
• Registered capital;
• Shareholder structure;
• RO to WFOE conversion; and
• Relocation

Company name

The procedure for changing the name of a company in China is quite complex. Because a company’s name is displayed on several types of official documents (such as its business license and company chop), any changes to this information must be filed with each respective governing authority.

• Step 1: After preparing several new company name options that are in line with the company name requirements imposed by the laws and regulations, the company should conduct a company name self-declaration on the platform maintained by the AMR, which can spotlight duplications, similarities, and other prohibitive or restrictive situations at the same time. In some cities, the self-declaration might be integrated with the company name change registration. Under certain situations, the company may need to go through a company name pre-approval procedure instead, such as when the new company name contains “China”, “national”, “international”, etc.
• Step 2: The company should prepare the documentation required for the company name change registration, which includes a board resolution1 (or shareholder resolution) on the matter and an amended Articles of Association signed by the legal representative, among others.
• Step 3: The company must file an application with the local AMR for company name change registration. Upon examination and approval, a new business license with updated information will be issued to the company.
• Step 4: FIEs are also required to submit a change report through the foreign investment reporting system, which might be integrated with the company name change registration in cities offering one-stop services.
• Step 5: After the name change procedures has been successfully made with the AMR, the company must then go about updating other documents on which its name appears, including various types of chops (Financial Chop, Company Chop, Customs Declaration Chop, etc.), which must be newly carved and registered with the company’s local public security bureau. Moreover, the company will have to make changes to all ongoing contracts with suppliers, clients and employees.

Business scope

Generally, when an enterprise intends to change its business scope, it must first come out with a board resolution (or shareholder resolution) and amend its Article of Association on this matter. After that, the company need to file the modified business scope with the local AMR within 30 days of the resolution being made, and submit a change report through the foreign investment reporting system (which might be integrated with the AMR registration in cities offering one-stop services). Upon registration with AMR being completed, the enterprise will get a new business license. Following this, other business certificates and bank information may need to be amended correspondingly.

To be noted, if the new business scope diverges significantly from the original business of the company, the company name should be changed as well, since this must generally reflect the main business of the company. Registered capital If companies plan to adjust their registered capital bases on financial, strategic, or regulatory considerations, similar to other changes, it is a time-consuming process that involves working with multiple government authorities. Generally, increasing registered capital is easier than decreasing registered capital, the latter of which involves additional procedures.

• Step 1: The company should reach a board resolution (for JVs that haven’t changed their organizational structure in accordance with the Company Law) or shareholder resolution on the matter and revise the Article of Association accordingly.
• Step 2: To decrease registered capital, a balance sheet and an inventory of assets must be prepared. The company needs to inform the creditor within 10 days of the company resolution and announce the decrease in a designated newspaper within 30 days of the company resolution.
• Step 3: The company should apply to the local branch of SAMR for a business license update within 30 days of the company resolution.
• Step 4: The company should make relevant updates in the bank regarding capital increase/ decrease.
• Step 5: The company should apply to the SAFE to make relevant foreign exchange registration.
• Step 6: FIEs are also required to submit a change report through the foreign investment reporting system, which might be integrated with the company name change registration in cities offering one-stop services. The bank will facilitate the capital increase afterwards. And other business certificates may need to be amended correspondingly.

Shareholder structure

A company typically decides to make changes to its shareholder structure upon the entrance of a new shareholder who is to receive an equity transfer from one or more existing shareholders.

Alternatively, it may be necessary to revise the shareholder structure as the result of equity transfers between shareholders or the exit of a shareholder from the company. Though information on company shareholders is not explicitly listed on a Chinese business license, in most cases, the company will still need to apply for a new business license, especially where the registered information listed on the business license needs to be changed as a consequence.

• Step 1: An equity transfer agreement should be signed between the transferor and the transferee. The transfer agreement must be a valid agreement that is reached through due procedure stipulated in relevant laws and regulations. For example, when equity is transfered to someone other than the original shareholders, there must be proper documents to show the transfer agreement is agreed by the current shareholders. In addition, there must be proper documentation to show the qualification of the new shareholder.
• Step 2: The equity transferor or transferee (the taxpayer) shall file with the competent tax authorities and obtain a tax payment certificate for relevant taxes incurred or a tax exemption certificate.
• Step 3: The company must apply to the original AMR of registration for a change of company shareholders within 30 days of the change being made.
• Step 4: The company should submit a change report through the foreign investment reporting system, which might be integrated with the AMR registration in cities offering one-stop services.
• Step 5: The company must apply for a new business license if relevant information listed on the business license gets changed. Following this, other business certificates and bank information may need to be amended correspondingly

Special Considerations in Restructuring

• Cost implications: Restructuring can be costly, involving expenses related to reducing product lines, canceling contracts, writing off assets, and relocating employees. Entering new markets or adding services also incurs additional costs.
• Debt and expansion considerations: Changes in operations can lead to new forms of debt, whether the company is expanding or contracting.
• Timeframe and complexity: The restructuring process is often lengthy and takes several months. It involves many internal and external stakeholders, making it a complex undertaking. In some cases, approvals from local government authorities are also required.

Restructuring aftermath

Post-restructuring, a company ideally finds itself in a more streamlined and economically efficient state. However, this transformation requires employees to adapt to new environments and operational changes. While successful restructuring can lead to greater efficiency in production and the achievement of set goals, it's also true that not all restructuring efforts are successful. Companies might sometimes have to sell or liquidate assets to settle debts.