Caixin
Aug 29, 2012 05:12 PM

Overseas-Listed Firms Seek a Path Home

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(Beijing) – Under the increased pressure of competition and regulatory oversight in the U.S. market, many Chinese companies that are primarily listed on overseas markets are returning home. One by one these companies have fled overseas markets seeking the high prices and loose regulatory environment in China's A-share market.

The trend has started and is likely to continue in the near future. At least 36 Nasdaq-listed Chinese companies have announced plans to privatize since October 2009, based on Caixin's research.

At the same time, the Chinese government has tightened restrictions regarding record-keeping and data maintenance in response to muckraking reports by short sellers who have exposed several cases of fraud among foreign-listed Chinese companies.

"The United States still doesn't understand Chinese companies fully," said Zhang Yichen, CEO of asset management firm CITIC Capital Holdings Ltd. "When things are going well, there is no problem. But as soon as stock prices slip or a company's reputation slides, the company is beaten dead with a stick."

Private investors value a public firm that plans to go private with a variety of methods, yet normally a price represents a 15 to 30 percent premium on the weighted average price during the previous 10 to 30 days, he said.

Whether a privatization can be successful hinges upon whether there is appropriate financing, said Xue Fang, an attorney with American law firm Shearman & Sterling, which has participated in the privatization of 14 foreign-listed Chinese companies since 2010.

Whether to rely on a private equity investor to privatize depends on the size and structure of a firm, she said. Managements that cannot pull off the buyout with their own cash are more likely to partner with PE investors.

Borrowing from banks is less viable because most Chinese banks are inexperienced in this respect and adverse to the risk associated with a management buyout. To date, almost of all the loans provided to Chinese companies looking to delist abroad are provided by foreign banks or China's policy bank, the China Development Bank.

Overcoming Obstacles

Buyout-triggered lawsuits can derail a company's privatization plan, particularly in the United States where detailed laws concerning shareholder interests, board member duties and general delisting procedures vary state by state.

"Behind each privatization scheme there could be 3 to 5 million U.S. dollars spent on litigation," a source from a PE firm said. A company can easily be sued if its information disclosure during the privatization is flawed, and it may face investigation by the U.S. Securities and Exchange Commission if minority shareholders feel that their interests are not being adequately protected, the source said.

"Even if by corporate rules a majority vote means the buyout proposal is accepted, minority opponents can press on with their lawsuits," said Zhang Yi, a partner at Chinese law firm King & Wood.

There are other obstacles. The privatization process can take several months to a couple years to complete. In the interim, companies face economic uncertainties linked to industry volatility.

Once they have delisted, companies still face challenges trying to join the Chinese stock market.

Domestic firms that were wrapped into a foreign entity through contractual agreements with an overseas shell firm can easily resume their Chinese identity by terminating the agreements, King & Wood partner Zhang Yongliang said.

Yet if their equity was partly owned by a foreign company, he said, they would have to go through a lot more complex and more drastic restructuring and adjustment to qualify for an initial public offering in a Chinese stock exchange.

And the current securities regulations are apparently not in their favor. "The China Securities Regulatory Commission attaches great emphasis on a firm's asset quality and its history," Zhang Yongliang said.

Questions could be tricky to answer, such as how the firm tweaked its corporate structure to go public overseas, presumably having circumvented the securities regulator's oversight. Yet there is no way around it, and answering the questions may "take a long time," he said.

The regulator's stance has softened though, changing from zero tolerance to a more flexible attitude that allows companies to make up for mistakes, he added.

Yet there no firm that previously listed overseas has successfully gone public again on a Chinese bourse, a PE source said.

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