Should our investment be non-performing or the business need to close, we’re interested in what we as a Chinese foreign investor should be sure to work into an exit strategy.
I'll need a bit more context for your situation specifically but, typically, there are 5 types of exit strategies for foreign investors: (1) Mergers and acquisitions, (2) Initial public offering, (3) Selling to an individual or a friend (4) Dividend and (5) Liquidation and close.
The typical exit strategy negotiated is that the investor has the right to trigger the sale of the Project or the Venture itself (including the Sponsor's interest), after a certain period of time, which can be expanded to include other trigger events than the just the passage of time (for example, failure of the Sponsor to contribute additional capital contributions allowed by the agreement, significant adverse financial developments pertaining to the project, or Sponsor misbehavior (along with other possible remedies such as removal of the Sponsor in its management functions, the right of the Investor to dissolve the entity and supervise the liquidation, etc.). Another approach is the so-called "shotgun buy-sell," wherein the Investor can name a price and demand that the Sponsor either buy the Investor's interest at that price or sell the Sponsor's interest to the Investor at that price.
It would be typical in a joint venture for the off-shore investor to have consent rights to specific major decisions and in the case of a deadlock in a major decision or any time after the end of a stipulated lock out period, the investor should be able to effectuate an exit through one of several mechanisms, such as a buy/sell or forced sale of the property. While there are many variables to all of these concepts as applied to the parties to a transaction and the investment itself, these concepts are generally accepted as appropriate exit mechanisms for a JV. There may be more stringent exit mechanisms for an exit brought on by the Operating Partner’s defaults or bad acts, which would be more immediate and one sided given the circumstances giving rise to the exit. I hope the foregoing is helpful.
In general, the liquidation/wind-up would take as long as 6 to 24 months, and a local advisor and agent should be appointed to complete the proper proceedings including the public notice and the deregistration. It would be easier to complete the exit by selling off the shares of the overseas holding vehicle. Most foreign investment companies in China would have a non-PRC holding structure in say Hong Kong, Cayman, etc. The act of transferring the shares of these offshore structures would face much less administrative burdens. You would be obligated to clear the withholding tax as the selling party has gains originating from sales of the onshore operation/real estate in China resulting from the offshore transfer of equity. The WHT for indirect transfer of the onshore real estate is 10% of the gains.
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