While it was popular for Chinese companies to list their stocks in the US in the past, often via reverse mergers, Chinese companies are now exiting US capital markets and re-listing in other jurisdictions with 26 having been successfully privatised in the last 58 months up until August 2014. Many Chinese companies have been privatised because of undervaluation of stock prices, attacks by short sellers, and/or strategic adjustment.
Although the privatisation process for some companies has gone smoothly, others encountered obstacles and even failed eventually. Compared with Global Education & Technology Group, which spent 30 days to complete its privatisation process, Tongjitang Chinese Medicine Company and Harbin Electric spent over a year. Even CNinsure, the first Asian insurance intermediary company listed in Nasdaq with a valuation of nearly US$1 billion, failed. A privatisation bid fails if there is rejection by minority shareholders and insufficient buyout funds from the offeror.
After privatisation, some companies have successfully re-listed in other jurisdictions. For instance, China Metal Resources Utilization successfully relisted in Hong Kong in February 2014, and raised roughly US$96 million. It was formerly listed on the NYSE as Gushan Environmental Energy and was delisted in October 2012.
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What is ‘going private’?
“Going private” means all or most of the stock of a publicly listed company in the US is bought out and ends up in private hands. The stock may be bought out by private equity firms, by the major shareholders or management of the company, or by affiliates of the company. A listed company, if held by less than 300 shareholders of record – or 500 shareholders of record if the company does not have significant assets – can deregister its equity securities from the US Securities and Exchange Commission (SEC) and will from then not be subject to the periodic reporting requirements of the US securities laws.
There are different ways for a US public company to go private.
- Mergers: where a US public company merges with or sells all or substantially all of its assets to a newly formed private company owned by the buyout group;
- Tender offer: where a buyout group makes a tender offer to buy all or most of the company’s publicly held common stock; or
- Reverse stock split: where a US public company declares a reverse stock split that reduces the shares owned by small shareholders to less than one share, which will then be redeemed by the company and hence reduces the number of shareholders of record as a result.
One-step merger
A US public company may be privatised in a one-step merger. This will generally involve the following:
- Merger proposal: the buyout group makes a merger proposal to the board of directors of the US public company, with an indication of the price it will pay to acquire the company’s common stock in public hands;
- Merger agreement: it will be negotiated between the buyout group, the company and the special committee of the board (discussed later) to ensure that the terms of the merger and the entire process of merger are fair;
- Schedule 13E-3 filing: if an affiliate of the company, or the company, is involved in the merger proposal, a statement on schedule 13E-3 is required pursuant to the Securities Exchange Act of 1934, with discussions of the purpose of the transaction, and views and reasons as to fairness to the unaffiliated shareholders; and
- Proxy statement: the company has to file a proxy statement to seek shareholders’ approval of the transaction in a special meeting, and obtain their consent for deregistering and/or delisting the common stock, which will include views on the transactions of the board, the special committee and the independent financial adviser to the special committee.
Tender offer followed by short-form merger
Tender offer and mergers are often used to ensure that all common stock is purchased from the minority shareholders. If there is a tender offer prior to a short-form merger, additional documents will include a tender offer statement from the buyout group to the shareholders of the US public company and a letter of transmittal, which invites the shareholders to tender their shares.
Special committee, fairness and independence
In all going-private transactions, and in particular in one-step mergers, it is important to ensure that the transactions are fair, as conflict of interests between the buyout group and the company will invariably arise. Hence, the board of directors of a US public company will set up a special committee, comprising disinterested and independent directors, to negotiate the best deal to protect minority shareholders. The special committee must operate independently. It retains its own financial and legal advisers, remains fully informed in the decision-making process, and has the power to negotiate with the buyout group at arm’s length. The use of the special committee will, in the event of challenges by plaintiffs’ lawyers, shift the burden of proof of unfairness to the challengers.
The board of directors of a US public company owes fiduciary duties to the shareholders and should consider alternative transactions to maximise the value for the shareholders before approving the sale of the company.
Benefits and conclusion
Under the stringent regulatory regime of the SEC and considering the current investment climate in the US, going private may be a viable option for US-listed Chinese companies to refocus their energy and resources in developing their business, as well as to avoid surprise attacks by short-sellers.
It presents a good opportunity for companies to consider relisting on other stock markets where they may obtain better financing terms, and communications with local investors may be facilitated.
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Simon Luk is a partner and chairman of Asia practice at Winston & Strawn. He can be contacted at +852 2292 2222 or by email at sluk@winston.com
