THE PITFALLS OF LISTING ABROAD

Summer
2012
Chinese companies must play by different rules when listing in more mature markets like the US in order to stay competitive
Chinese companies must play by different rules when listing in more mature markets like the US in order to stay competitive, say Shanghai-based Geir Sviggum and Tormod Ludvik Nilsen of international law firm Wikborg Rein

Chinese companies are ever more active in international capital markets, and foreign stock exchanges are no exception. Between 2006 and 2010, 339 Chinese companies listed on US stock exchanges. But recently certain Chinese companies, particularly those in the US, have run into what might have been unnecessary trouble. In the US alone between 2009 and 2011, 41 class action lawsuits were filed against Chinese companies in federal courts for issuing false and misleading information or for omitting adverse facts that would have a material impact on the companies’ businesses. Moreover, even those Chinese companies that are not subject to lawsuits have suffered a dramatic drop in their share values as a result of negative publicity.

These companies may not have been able to completely avoid lawsuits, but improved handling of information may at least reduce the risk of such suits, the costs incurred by a company as a result and the negative impact on a company’s stock price.

Understand the environment

Chinese companies who are either currently listed or are considering listing must thoroughly understand relevant laws and regulations in order to gain investor confidence. This is a necessary step to be competitive in mature international markets where there are sound legal systems, such as in the US. Every effort to come into compliance and remain in compliance should be made.

These companies would also do well to study the major differences between the regulatory framework of a mature market, such as the requirements of the US Securities Exchange Commission and a developing market which has only begun to find its feet. 

The main purpose of information disclosure requirements is to require issuers and/or listed companies to disclose material information to investors so that they can make informed decisions. There are major differences in information disclosure practices between Chinese-listed companies and US-listed companies. In the Chinese stock market, many listed companies seek to meet the minimum disclosure requirements only and are reluctant to voluntarily disclose anything beyond that. This does not translate well in more mature markets, where favorable information is often shared and companies vary in how willingly they disclose negative information.

In China, only a few cases where proper disclosures have not been made come to the attention of the regulators because these agencies are often operating with limited resources. Even when noncomplying companies are caught, penalties are rarely enforced. Also, many Chinese investors are too passive and at the same time not familiar with class-action lawsuits or other measures to protect their rights. Moreover, and in contrast to the US, many law firms in China are not very proactive in inciting litigation.

On the other hand, most US-listed companies are more conscious of the importance of timely, adequate information disclosure and of maintaining positive investor relations.  Many have investor relation officers devoted to investor inquiries and other relevant issues to secure trust and understanding with existing and potential investors. To boost investor confidence and be competitive in the US market, overseas-listed Chinese Companies (OLCCs) not only need to comply with information disclosure obligations under applicable laws and regulations, but need to be willingly transparent and interact with investors in a proactive and professional manner.

Costs of noncompliance

The repercussions of noncompliance may vary greatly between developing markets like China and mature markets. In China, costs of noncompliance are generally much lower than in the US.  Not only because the legislation is less comprehensive and penalties are less severe, but more importantly because the penalties are rarely enforced. 

Costs of noncompliance for US-listed companies are much higher. Regulatory authorities can take enforcement actions including trading suspension, and law firms play a significant role in facilitating class actions against noncomplying companies as well as their officers and directors. Enforcement actions and litigation are not only highly costly and time consuming for OLCCs, but often lead to share price decline, loss of investors and damage to the companies’ image. It’s always smart to take compliance seriously.

Enforcement actions, class action lawsuits and negative publicity have already driven some OLCCs to delist, and others are now considering delisting from the US stock market. For those who want to remain listed or are interested in listing, they should be aware of how crucial compliance, transparency and interaction with investors are to success.