US-listed Chinese firms wracked by infighting amid delisting threat

Minority shareholders risk losing out as Sinovac and Hollysys refuse to accept buyout offers. But, seemingly unfazed by the prospect of delisting, will the firms pursue value creation elsewhere?

Over 160 Chinese companies listed on US exchanges face the likelihood of being forced to delist due to a recent US law, but some have rejected buyout offers providing an alternative route – privatisation. These include Nasdaq-listed Chinese companies, Sinovac Biotech and Hollysys Automation Technologies, which are yet to follow a concrete path due to internal conflict between shareholders and directors.

The threatening legislation is the Holding Foreign Companies Accountable Act (HFCAA), which was signed into law by former US President, Donald Trump, in December 2020 and requires all US-listed firms to appoint a financial auditor recognised by the Federal Reserve-supported Public Company Accounting Oversight Board (PCAOB). Before an indication of concession from Beijing in April, the People’s Republic of China (PRC) only permitted a list of reviewed regulators to inspect Chinese companies trading in New York. However, in spite of ostensible compliance from Beijing, many are yet to satisfy the conditions laid out by the US Securities and Exchange Commission (SEC).

“The HFCAA in particular threatens to cause delisting of Chinese Listcos from US securities exchanges and prohibit trading of their securities in the US "over-the-counter" (“OTC”) market by 2024, if not earlier,” explained a commentary by law firm, White & Case, published in August.

Under the HFCAA, US-listed firms identified by the SEC that match certain criteria for three consecutive years, will become subject to trading restrictions and additional disclosure obligations. After this period, failure to comply will result in a full ban from trading, with the earliest prohibition to take effect from 2024.

“Although the HFCAA does not mandate that securities subject to trading bans be delisted…. we fully expect stock exchanges will delist Commission-Identified Issuers once trading bans are imposed,” the White & Case document predicted.

The SEC has identified 164 companies subject to delisting due to their use of a foreign auditor based in China or Hong Kong as of September 30, outlined a report by the US-China Economic and Security Review Commission (USCC). The body, which advises the US Congress on US-China relations, noted 131 of these as Chinese companies listed on the three major US exchanges, with a combined market capitalisation of $760.2 billion.

“With the US labelling China as a strategic competitor and having shifted their view that non-state-owned companies cannot be truly separated from the Chinese Communist Party, this is part of an overall strategic plan to block China’s access to finance and foreign reserves,” Andrew Wheeler, chief executive officer (CEO) of Asia Pacific Connex, an Australian business consultancy, told FinanceAsia.

“The fact that the SEC is already listing non-state-owned companies at risk, suggests that China companies listed in the US may well come to regret their decision to hold out based on a misreading of the current geopolitics at play,” he added.

Sinovac is one of the US-listed companies conclusively identified under the HFCAA, while Hollysys, a supplier of automation and IT solutions, headquartered in Beijing, is provisionally identified under the HFCAA, according to the SEC.

A bitter pill

While Sinovac continues to produce the main vaccine against Covid-19 used in China, it has also produced its own metaphorical “poison pill” as an antidote to shareholder coups. An agreement dated March 28, 2016, introduced a move to limit the number of Sinovac shares that any one shareholder could acquire.

The poison pill was activated ahead of a shareholder meeting in 2018, to prevent Li Chiangjia, owner of family office, 1Globe Capital, from conspiring to take over the firm alongside other minority investors, in a move that the firm has since disputed.

On August 19, investor rights-focussed legal firm, Rosen Law Firm,  announced the filing of a class action lawsuit against 1Globe and several of its executives, including Li. By not revealing the nature of their Sinovac stock ownership, the defendants had caused the exercise of the poison pill to be delayed by almost three years until February 2019, which resulted in some Sinovac shareholders losing the opportunity to acquire additional shares sold in the interim, the law firm alleged.

On May 13, 2020, the SEC charged Li and 1Globe for failing to disclose their increased stake in Sinovac, as well as collaboration with other shareholders to replace nearly the entirety of its board.

An SEC document dated the day of the charge, revealed that in 2016, 1Globe owned 16.44 percent of Sinovac. Over the next two years, relatives of Li acquired Sinovac shares, such that by December 2017, Li and 1Globe beneficially owned 31 percent of the firm. Boston-based Li and his associates agreed to pay a combined fee of $290,000 in civil penalties, to settle all charges.

Hollysys refuses offers

Hong Kong forms part of the geographical battleground for a similar legal dispute, involving former CEO and chairman of Hollysys, Shao Baiqing, and several other Hollysys parties, including its current CEO, Wang Changli.

In 2020, Shao formed a consortium to make an unsolicited offer to acquire all of Hollysys’ outstanding shares, which was rejected by its board in January 2021.

Shao was removed from his position as CEO and chairman of Hollysys in July 2020, “for putting his own interests ahead of shareholders and for questionable decisions that negatively impacted the stock, losing the confidence of the Board and shareholders,” a letter from the Board of Directors to shareholders would detail a year later.

In February 2021, Shao and ACE Lead Profits, a company which he owns, brought legal proceedings against Hollysys in the British Virgin Islands (BVI) High Court – where the firm is incorporated. Shao and ACE Lead’s team accused the firm’s directors of acting with an “improper purpose” and contrary to their fiduciary duties. When the BVI court dismissed these claims and Hollysys won, incumbent CEO, Wang, sought to bring additional summons against Shao and Ace Lead Profits in Hong Kong’s Court of First Instance, in an attempt to take control of their shares. Shao and Ace Lead made an appeal to prevent the summons from going forward, but in November 2022, Hong Kong justice, Keith Yeung, dismissed it.

All bets are off

Between summer 2021 and year-end, Hollysys received six buyout offers at prices ranging from $23 per share to $25 per share. These included one at a price of $23 per share from a consortium led by Ascendent Capital Partners-controlled Superior Emerald (Cayman), alongside current Hollysys CEO, Wang, and co-chief operating officers, Xu Yue and Fang Lei. Another constituted a $25 per share offer in December 2021, by a consortium comprising RECCO Control Technology and China Electronics Technology Group Corporation.

Yet, since the beginning of 2020, the company’s share price has not exceeded $21.

A representative for the RECCO consortium discussed the situation with FA. “Our consortium’s proposal for an all-cash acquisition at a substantial premium would provide immediate and certain value to shareholders.”

“We reiterate our call for the board to engage with our consortium in good faith negotiations and allow for due diligence in line with their fiduciary duty,” the contact said, reiterating the firm’s requests for the offer to be reviewed in line with best interests and to maximise shareholder value.

But in January 2022, Hollysys announced it would not consider any full sale, nor any further evaluation of unsolicited buyout proposals. The firm reiterated this in a SEC filing dated September 2022.

The filing cited the firm’s consideration of “value creation potential” and its priority to “strengthen and optimise” business operations. It noted “the complexity and uncertainties in the global and PRC regulatory landscapes, which, in the opinion of our board of directors, would create significant difficulty in obtaining a fair valuation of our Company and increase the uncertainty of consummating a potential sale transaction.”

The SEC filing was timed amid media reports detailing Wang's plans to pursue a $29 per share bid in partnership with Warburg Pincus, Legend Capital, and support from Beijing municipal government. The consortium allegedly aims to relist the company on China's tech-focused STAR bourse.

Greener pastures

Jean-Marc Blanchard, the founding executive director of the Wong MNC Center, a US think tank which studies East Asian multinational corporations (MNCs), shared his thoughts on the developments with FA.

“In concept, the rejection of a premium buyout offer may hurt shareholders, but the cost and benefits of rejecting a premium buyout bid depend upon many things, including the sellers' tax situation, their views of the firm's future prospects, the potential for an even higher bid or the potential to relist elsewhere (like Hong Kong or Singapore) at a favourable price and to get even more money,” he explained.

The possibility of relisting on another exchange with the opportunity to earn more money must be one reason as to why these Chinese firms may not be feel urgency to avoid a possible delisting from US exchanges, Blanchard added.

Considering other possible reasons, he said that the Chinese government may not want a sale of the company, or the company’s management may be averse to the future roles they would likely be given under new owners.

Indeed, market research supports Blanchard’s former view. A project conducted by accounting firm, GMT, investigated those Chinese companies that delisted from the US between 2011 and 2020, and instead chose to relist on the Hong Kong or Chinese exchanges, going on to enjoy  huge increases in market capitalisation. Some saw their valuations soar by more than fivefold. 

Although Hollysys’ share price rose from $16.72 on October 10, to $18.87 on November 14, its share price has been in decline since the publication of its most recent quarterly report, for the period ending September 30. In spite of achieving a 50.1 percent surge in net profit to $21.4 million and a 10.9 percent increase in revenue to $170 million, on November 21, the company’s value sat at $16.89 per share.

Regardless of whether the firm’s management is able to deliver tangible “value creation potential” and to “strengthen and optimise” its business operations successfully, the stock price on November 21 suggests a lack of investor confidence.

Hollysys and Sinovac did not reply to questions from FA.

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