On August 29th, 2011, Nathan Bush, Partner at O’Melveny & Myers, Beijing, delivered a lecture titled “Corruption & Fraud in Contemporary China: Challenges for U.S. Companies & Investors.” Mr. Bush’s lecture addressed two equally important questions:
(1) What pressures do U.S. companies face when operating in China, and
(2) What challenges do Chinese companies face when listing on American stock exchanges?
In answering the first of these queries, Mr. Bush took the lecture attendees through a brief history of Chinese political and social culture, Chinese anti-bribery laws, the Foreign Corrupt Practices Act, Dodd-Frank’s strengthened whistleblower protections, and the U.K. Bribery Act. In tackling the second question, Mr. Bush focused on reverse- takeover mergers of shell U.S. companies listed on American stock exchanges by Chinese companies and the recent intensification of investigations into those companies’ dealings.
Challenges Facing Chinese Business Listing on U.S. Stock Exchanges
Mr. Bush focused his discussion on Chinese companies listed on U.S. exchanges where those companies that have executed reverse takeovers (RTOs). As Mr. Bush explains, Chinese companies who wish to bypass the initial public offering process will use defunct, shell U.S. corporations that are listed on an exchange and have that shell corporation acquire the Chinese corporation. However, behind the scenes, the Chinese corporation is essentially the one controlling the newly resurrected American company and enabling the new company to resume trading.
The past twelve months have seen a flurry of activity from the Public Company Accounting Oversight Board (PCAOB) and SEC regarding U.S. companies that have been acquired by RTO. SEC Chairwoman Mary Shapiro stated before Congress “the SEC has moved aggressively to protect investors from the risks that may be posed by certain foreign-based companies listed on U.S. exchanges.” Following the rise in RTOs and the heightened scrutiny, there has been a trend toward greater securities litigation against U.S. listed Chinese companies.
Mr. Bush closed by reiterating that the opacity of the operating environment has made it difficult for U.S. investors to reliably determine which Chinese companies operating in America are genuinely good companies from those that are genuinely bad or need some retooling to bring them up to par. Mr. Bush emphasized that going forward there would undoubtedly be greater U.S. regulatory action, but it is unclear exactly how the Chinese will respond. Finally, Mr. Bush ended on a hopeful note by highlighting some of the problems that the Chinese government and many of its individual officials have made some strides in identifying, admitting, and fixing shortcomings in their governing process.
To view Mr. Bush’s lecture and accompanying slideshow, please visit http://media.law.berkeley.edu/qtmedia/bclbe/20110829_BCLBE.mp4.