Aberdeen Standard warns SEC on Chinese delistings

By Mark McSherry

Edinburgh-based asset management giant Aberdeen Standard Investments has written to the US Securities and Exchange Commission (SEC) to warn that proposed new legislation to force Chinese companies off American exchanges — unless they agree to audit inspections — could harm minority shareholders.

Aberdeen Standard said the Holding Foreign Companies Accountable Act (HFCAA), if enacted, could lead to more than 200 Chinese companies with a total market capitalisation of $1 trillion delisting from US exchanges.

The Scottish investment house said it owns stakes in around a dozen Chinese companies listed in the US, held across various Chinese Equities, Asian Equities, Global Emerging Markets and Global Equities funds. 

“The delisting of Chinese companies has implications for investors because existing US securities rules relating to ‘going private’ transactions do not provide sufficient protection for minority shareholders,” said Aberdeen Standard’s Global Head of Equities Devan Kaloo and Head of Corporate Governance for Asian Equities David Smith.

“The departure of Chinese firms from US bourses often involves a merger with a related company for which shareholder approval is required. 

“All shareholders, including those of the acquiring company or consortium, are eligible to vote. 

“That makes the vote a foregone conclusion, even if minority shareholders reject the terms of delisting.  

“Our letter urged the SEC to consider implementing, as a matter of urgency, the protections that we see in other jurisdictions, including Hong Kong. 

“In those markets, regulations are well developed to deal with the risks to minority shareholders from abuse by controlling shareholders. 

“For example, they require interested parties to abstain from voting on similar resolutions.”

Aberdeen Standard manages about $650 billion of assets worldwide and is the asset management business of Edinburgh-based Standard Life Aberdeen plc.

“Investors in foreign companies deserve the same protections as those enjoyed by investors in local US companies …” added Aberdeen Standard.

“Our investment process emphasises rigorous due diligence, and acquiring a level of comfort with promoters and/or controlling shareholders before investing.

“However, we also like to see that securities regulations promote fairness and transparency in a market.

“They must not permit the potentially harmful treatment of minority shareholders. 

“Where we see room for an enhancement of rules, we will engage with regulators to encourage change – a course of action that benefits the entire market.

“It is in that spirit that we wrote to the SEC. We will continue to liaise with them on these issues …

“Our concerns are long standing and predate the Holding Foreign Companies Accountable Act (HFCAA), which still needs US House of Representatives approval to become law.

“In fact, the move to greater scrutiny of US-listed foreign companies is welcome and should be applauded. 

“However, we wanted to use the opportunity to explain how minority shareholders may still suffer because of the HFCAA, adding to the existing ways in which many shareholders are treated unfairly when investing in US-listed foreign companies.”

The Aberdeen Standard executives added: “Although the legislation does not target a specific nationality, many Chinese companies will find it difficult to comply with its requirements.

“The HFCAA, if enacted, could lead to more than 200 Chinese companies delisting from US exchanges.

“These companies represent a total market capitalisation of some US$1 trillion. 

“The broad-based legislation requires companies listed in the US to demonstrate that ‘they are not owned or controlled by a foreign government’.

“Meanwhile, if the Public Company Accounting Oversight Board (PCAOB) is unable to inspect an issuer’s accounting firm for three consecutive years, the issuer’s stock will be delisted. 

“The US and China have been discussing audit issues for a number of years, and the PCAOB has voiced concerns over its difficulty inspecting the onshore audit work of accounting firms in China.

“Chinese law requires company books and records of transactions in China to be kept locally.

“China has also invoked its state security law at times to restrict records of audit work from being transferred overseas. 

“Progress on these audit issues has been slow.

“The dynamics around inspection are such that the companies themselves would have very little influence over their ability to facilitate them.

“As a result, there is a risk that Chinese companies will potentially seek to delist and relist elsewhere …”