Closing a Chinese limited liability company by way of a merger

In the fourth video on how to close a company in China, our expert Kai Kim will discuss how a company in China can be dissolved by merging it into another company.

Generally, there are two forms of mergers available for limited liability companies in China: A “merger by absorption” and a “merger by new establishment.” In the case of a “merger by absorption”, one company, the so-called “absorbed company” is merged into another company, the so-called “accepting company”. In the case of a “merger by new establishment”, two or more companies are merged into a newly established company .

In both cases, any company that is merged into the accepting company, or the newly established company, will cease to exist as a legal entity and will be de-registered upon completion of the merger. The accepting company or the newly established company, on the other hand, will become its complete legal successor, which means that it will assume all rights and liabilities, all assets, employees, contracts etc. of the absorbed company.

Foreign-invested companies in China may also be merged in such way, for example into another foreign-invested company, or into a domestic company. It is, however, not possible to merge any kind of Chinese limited liability company into a foreign company, which means a cross-border merger. For foreign investors this will likely mean that dissolving and de-registering a subsidiary in China by way of a merger, may only be an option, if the foreign investor has another and second company in China, which could then serve as the accepting company in a merger by absorption.

Regardless, however, of whether the absorbed company is merged into an affiliated company, or an unrelated company, or newly established company, there are two things that should be noted: For one, it will have to be reviewed whether the accepting company fulfils all the qualifications to continue the business of the absorbed company. For another, it must be ensured that the merger does not result in a situation where a foreign-invested enterprise becomes active in an industry that is either prohibited or restricted for foreign investors.