March 15, 2011 12:59 PM
The Lure of a U.S. Listing Remains Powerful for Some Chinese Companies
Posted by Anthony Lin
From The Asian Lawyer
With top U.S. capital markets firms virtually stepping over each other to launch Hong Kong law practices, one might think that the best days for U.S. securities law practices in Hong Kong and China are over, and that Chinese companies are now turning exclusively to Hong Kong, Shanghai, and Shenzhen for their capital-raising needs.
The New York Stock Exchange saw a record 22 listings by Chinese companies last year, with Nasdaq taking on another 12. Both numbers were up sharply from 2009, when only ten Chinese companies listed on either exchange. In 2008 there were only three U.S. listings by Chinese companies.
Firms have taken notice. Last week, Proskauer Rose recruited U.S. capital markets partner Gene Buttrill from DLA Piper. Just a few days before, Orrick, Herrington & Sutcliffe poached Jeffrey Sun Jie, a veteran of several U.S. equity and debt offerings for Chinese companies, from Latham & Watkins's Shanghai office. Wilson Sonsini Goodrich & Rosati opened a Hong Kong office last fall in part to aid its push for U.S. listing work on behalf of Chinese clients.
None of which is to suggest the growth of Hong Kong and other Chinese capital markets has been overstated. The 34 U.S. listings by Chinese companies last year raised about $4 billion, less than a fifth of the $22 billion that the state-owned Agricultural Bank of China raised in its debut last year in Hong Kong and Shanghai.
But for certain kinds of Chinese companies--mainly private instead of state-owned--the U.S. markets still have a certain appeal. Unlike in Hong Kong, which requires listing companies to have been operating for three years, there is no track record requirement in the major U.S. exchanges, a fact that favors startups. And Chinese technology companies in particular have also counted on U.S. markets, with their greater infrastructure of tech-savvy investors and analysts, to deliver them higher share valuations.
No one was more in the thick of last year's U.S. IPO boom than Julie Gao of Skadden, Arps, Slate, Meagher & Flom. A partner in the firm's Hong Kong office, Gao worked on 14 of last year's U.S. offerings by Chinese companies.
Gao calls her track record from last year "a coincidence," noting that a number of her clients that went public last year would have done so earlier but for the poor market conditions in the U.S. in 2008 and 2009. Things are looking good so far for 2011, however.
"Right now, based on the pipeline, it could be as strong as last year," says Gao.
She says Chinese tech companies find U.S. markets more congenial because there are many comparables to guide investors. For instance E-Commerce Dangdang Inc., which soared almost 90 percent to raise $272 million in its December 2010 NYSE debut has a business model roughly comparable to that of Amazon.com. Youku.com, another December IPO that jumped 161 percent and raised $203 million, is a Chinese hybrid of Youtube, Hulu, and Netflix.
U.S. listings work for Chinese companies has traditionally been dominated by a small number of firms that include Skadden, Simpson Thacher & Bartlett, Davis Polk & Wardwell, Latham & Watkins, and O'Melveny & Myers. But Proskauer's Buttrill says the market will grow enough to accommodate newcomers.
"There are going to be many more midmarket, midcap PRC companies that are drawn to U.S. listings," he says. Beyond technology, Buttrill says that Chinese makers of branded consumer products are finding a warm reception among U.S. investors, as are health care and education companies.
For other Chinese companies, there are definite downsides to listing in the U.S. The high cost of regulatory compliance is perhaps the main hurdle, though shareholder litigation has become a growing issue as well. It's no surprise then that U.S. firms find themselves busy these days not just with U.S. listings but with delistings as well.
Another Skadden partner, Peter Huang in Beijing, is presently helping four U.S.-listed Chinese companies go private. Among them are NYSE-listed specialty chemical manufacturer Chemspec International Ltd. and Nasdaq-listed electric motor maker Harbin Electric, Inc. The latter was one of several companies that entered the U.S. market through so-called reverse mergers, in which a Chinese company acquires a publicly traded U.S. company into which it then merges itself.
The decision to delist is "mainly a cost issue," says Huang. "Maintaining U.S. reporting status is very, very expensive."
Industrial and manufacturing companies tend not to get the share price boost of tech or consumer companies, says Huang, defeating the purpose of a U.S. listing in the first place. In the meantime, reverse-merged companies are drawing attention from the Securities and Exchange Commission and shareholder class action lawyers. (Nine of the twelve Chinese companies named in U.S. securities class actions in 2010 were listed in the United States through reverse mergers, according to Stanford Law School's Securities Class Action Clearinghouse.)
Huang says some of those Chinese companies now delisting will eventually relist in China or Hong Kong, lesson learned. But he says that U.S. reverse mergers will continue to attract other companies impatient to list.
"We strongly advise against [reverse mergers]," says Huang. "It's not the right way to do things. We tell clients to wait until their company is more mature and can have an IPO."
Contact Anthony Lin at firstname.lastname@example.org.
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