Chinese Take-privates: End Of A US Affair?

• Published date: 03 August 2020
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Shareholders
• Law Firm: Maples Group
• Author: Mr Matthew Roberts

2020 will be a year to remember as covid-19 and the associated economic disruption have put many businesses in liquidation or under immense strain like never before. As a result, a number of Chinese-operated Cayman Islands public companies listed on major securities exchanges such as the New York Stock Exchange (NYSE) and the NASDAQ have experienced volatility in the prices of their publicly traded securities. Couple this volatility with ongoing regulatory developments in the US, such as the US Senate recently putting forward the Holding Foreign Companies Accountable Act in May 2020 and the NASDAQ proposing new "Restricted Market" Listing Rules involving increased audit and reporting requirements these potential changes could materially and negatively impact Chinese-operated Cayman Islands companies listed on NYSE and NASDAQ.

Presently most relevant companies appear to be closely watching and monitoring developments. Some companies may consider a secondary (dual) listing closer to home on the Hong Kong Stock Exchange such as Alibaba and more recently, JD.com. However, in certain instances, the founders and management of public companies may consider a privatization or "take-private" deal whereby the company is taken private by becoming a private Cayman Islands company and, as a result, delists from these US securities exchanges. Since 2010, over 50 Chinese public companies have been privatized and delisted from US securities exchanges.

Privatization process

Typically, on these deals, the founders and management may partner with private equity firms and institutional investors usually with the support of financing institutions such as the investment arms of major Chinese and Western banks, to provide a proposal to the relevant company's shareholders and holders of publicly traded securities such as American Depositary Receipts (ADRs), whereby such shares/ADRs will be cancelled in exchange for cash, with the bidders becoming the owners of the delisted private company. Given the interests of the founders and management, a special committee comprising disinterested members of the company's board is formed to negotiate the deal with the bidder group on an arm's length basis.

Cayman mergers

These transactions are generally structured through a Cayman Islands merger under the statutory merger regime of the Cayman Islands Companies Law, which provides a mechanism whereby the publicly listed Cayman Islands company merges with another Cayman Islands company...