By Dave Michaels and Alexander Osipovich
WASHINGTON -- Lawmakers next week are likely to force Chinese
companies with shares traded on American exchanges to finally
comply with audit-oversight rules -- or leave U.S. markets
altogether.
House leaders plan to consider a measure as early as Wednesday
that would force Chinese firms such as Alibaba Group Holding Ltd.
either to transition to getting an annual audit that is reviewed by
U.S. regulators, or remove the shares from trading in the U.S. The
House plans to vote under rules that limit debate and require a
two-thirds majority for passage, according to an online notice
posted Friday.
The legislation, if it becomes law, would give Chinese companies
and their auditors three years to comply with inspection
requirements before they could be kicked off the New York Stock
Exchange or Nasdaq Stock Market.
Chinese officials have criticized the bill, saying there are
better ways to resolve differences between Washington and Beijing
over audit inspections, and that delisting Chinese companies would
harm U.S. capital markets.
The legislation has bipartisan support. It unanimously passed
the Senate in May, meaning it would be eligible for President
Trump's signature if the House approves it. The measure is more
punitive than a proposal under consideration at the Securities and
Exchange Commission, which would require audit inspection as a
condition of continued listing on a stock exchange, but would allow
noncompliant companies to trade over the counter.
The Senate bill was sponsored by Sens. John Kennedy (R., La.)
and Chris Van Hollen (D., Md.). The legislation is meant to fix the
disparate treatment that has applied for years to Chinese companies
going public in the U.S. The firms have long been able to sell
shares in the U.S., yet their auditors violate a key investor
protection because China hasn't allowed their work to be
inspected.
In the U.S., audit supervision is handled by a special watchdog,
the Public Company Accounting Oversight Board, which was set up
after the accounting scandals that took down Enron Corp. and others
nearly 20 years ago.
The SEC has tried for more than a decade to get Chinese
cooperation with the PCAOB -- from suing Chinese audit firms, to
negotiating with Chinese regulators and issuing warnings to U.S.
investors about the problem.
China puts up various hurdles to foreign oversight of its
companies, including laws that block firms from cooperating with
overseas criminal or securities regulatory investigations. China
also has a broad view of state secrets, which influences its
willingness to let authorities in other countries supervise its
domestic firms, legal experts say.
"I am hopeful if this legislation passes that it would be a
lever for the Chinese to sit down and work something out with the
U.S.," said Dan Goelzer, a former SEC general counsel and a PCAOB
member. "It's not a tolerable situation to go on indefinitely
ignoring the fact that one country won't comply with the same
inspection norms that the rest of the world does."
More than 170 companies based in China or Hong Kong have
completed IPOs in the U.S. since January 2014, raising about $58.7
billion, according to data from S&P Global Market
Intelligence.
SEC Chairman Jay Clayton supports the legislative action, even
as his agency crafts new proposals to enable the sharing of audit
work papers between the two countries. "There is broad bipartisan
Congressional support, as well as support across the federal
financial regulators, for bringing this significant asymmetric
treatment to a conclusion on a time frame that allows investors to
adjust their holdings as they believe appropriate," Mr. Clayton
said in a written statement Friday.
Still, American investors who own shares of Chinese companies
face risks and complications if the legislation forces a mass
exodus of them from the U.S. market.
Typically, when the NYSE or Nasdaq delist companies, their
shares continue to be traded over-the-counter, so investors can
keep buying and selling them. But Mr. Kennedy's bill also would ban
OTC trading of Chinese companies whose audits hadn't been inspected
after three years.
U.S. investors wouldn't have an easy way to hold Chinese stocks
if such a ban takes effect. Depending on how a company responds,
its U.S. shareholders would either sell their shares back to the
company, or swap them for shares listed on overseas exchanges.
Some companies have already said they would switch to non-U.S.
exchanges if the legislation passes. E-commerce giant Alibaba,
which is listed on the NYSE with a secondary listing on the Hong
Kong Stock Exchange, has said the legislation could force its U.S.
investors to convert their holdings into Hong Kong shares. But some
investors will have trouble doing that, since not all U.S.
brokerages offer access to foreign stocks.
"Investors may face difficulties in migrating their underlying
ordinary shares to Hong Kong, or may have to incur increased costs
or suffer losses in order to do so," Alibaba said in a July filing
with the SEC.
Other Chinese companies may go private instead. The mechanics of
that process would be relatively simple, with investors getting
cash for their shares. But management teams could buy out American
stockholders at a low share price, benefiting insiders at the
expense of outside investors.
"They could use the threat of an impending delisting to take the
company private at a low price," said Jesse Fried, a law professor
at Harvard University. "Then this law would have made U.S.
investors worse off."
--Paul Kiernan contributed to this article.
Write to Dave Michaels at dave.michaels@wsj.com and Alexander
Osipovich at alexander.osipovich@dowjones.com
(END) Dow Jones Newswires
November 27, 2020 18:24 ET (23:24 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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