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Shruti J. Shah
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Eric Carlson
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Are Chinese Companies Being Sucker Punched?

Last year, according to the Deal Journal, about 40 Chinese companies listed on U.S. stock exchanges. If recent history is a guide, lots of them will end up in trouble with shareholders and U.S. regulators.

Some recently listed PRC companies come from the internet, biotech, and media space. They often have top private equity backing and sophisticated management. But many of the new listees are manufacturers from traditional industries, with less direct experience outside China.

In an outstanding post this week, Kevin LaCroix in his D&O Diary said already this year, eleven Chinese companies and their directors and officers have become defendants in U.S. shareholder securities litigation, up from ten for all of last year.

What’s it prove? Not that all Chinese companies are crooked, but that many don’t belong on U.S. exchanges. Can all Chinese owners and managers understand and appreciate the complex and hyper-stringent U.S. accounting and compliance rules? No way. What might be appropriate and acceptable in China — and may even exceed expectations there — just won’t cut it in the U.S.

But not all Chinese business people know that. And they don’t know what they don’t know until it’s too late — when they’ve been sued in the U.S. by shareholders or targeted by the DOJ or SEC for potential FCPA violations.

If so many of the Chinese companies don’t belong on U.S. exchanges, why are they trying to be there?

American professionals — lawyers, bankers, and accountants — are selling PRC companies on the idea of U.S. listings, sometimes by dangling unrealistically high valuations. There’s lots of sales talk that naturally trumpets the rewards of being on a U.S. stock exchange but downplays the risks.

Sure, the American professionals deliver warnings that they may think are adequate. But the Chinese owners and managers, for whatever reasons, aren’t understanding the extent of the risks they face once their company appears on a U.S. exchange. 

Who can fix the problem? The American professionals won’t do it. They’re in selling mode. Only the DOJ and SEC can plug this hole. What’s needed is a “scared straight” program for any foreign directors and officers who want a U.S. listing. They should hear that the real price of access to U.S. capital markets is exposure to the full weight and might of American law.

That would save everyone a lot of trouble.

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