China Company in America listed legal risk and cost considerations

Kindu law firms  Hu Mei  Liu Haitao

In recent months, a number of China enterprise was accused of violating USA securities law and listing Corporation criterion, and therefore subject to investigation and court proceedings. These problems usually arise from exposure hired accounting firm to doubt the authenticity of financial information, or for the outside of the company some unfair trading accusations. These firms are internal audit committee, America CSRC and stock exchange survey at the same time, is also facing lawsuits filed aggrieved shareholders. Most of the China Company is not expected to face these lawsuits and investigations, also did not expect the strength and therefore will have a high cost. All this to the company and its directors, officers and employees of the enormous pressure. Company is cooperating with the investigation or responding to the need to mobilize a large amount of manpower and fund, related spending hundreds of thousands of dollars, but also inevitably affected the daily operation and staff morale.

In order to compliance and coping in the litigation must pay a high cost of capital, plus the downturn of stock price and trade volume dropped, for Chinese enterprises, America capital market appeal has than usual. These factors are prompting some China Company to consider whether to continue to retain their American listing Corporation qualification. The company has a variety of exit mechanism available. The company can withdraw from the market, the private purchase privatized. The company can also choose to exit after the OTC, or as a single listing Corporation powder. The cost will be very high, so the company decided to withdraw from the market on the need to carefully consider before.

A survey, the audit committee

Accounting firms in the company hired to doubt the authenticity of financial information, or is outside the blame on certain unfair trading company, the company's audit committee may be forced or decide to start internal investigation procedure. The audit committee by the USA lawyers hired external auditors and China lawyer, and American lawyer team together to form an independent investigation team. This arrangement ensures the investigation group and the audit committee of the exchange of information, as well as the investigation team work, including its final investigation report and other documents, investigation group to be identified as "attorney - client privilege", and also enjoy the "attorney work product immunity". At the same time by regulatory investigations and court proceedings in the company, the information security privileges may be particularly important. Privilege belongs to the company, is the only company in the favorable situation will choose to give up.

Scope of internal investigation determined by the audit committee, will be far more than the company's annual financial audit scope. General including the outside accused of verification, and to identify those suspected of trading. The purpose of the survey is to as widely as possible to verify whether the company has engaged in activities contrary to the law, or other similar behavior. Investigation team will collect electronic data and computer hard disk in the archives, expand forensic audit, interviews with employees, customers, suppliers, banks, and other relevant third party. The internal investigation is likely to last three to six months, or even a year. The length of the length of time depends on the range of investigation and the size of the company. May cost more than $1000000.

After completing the survey, investigation group to the Audit Committee on the results of the investigation provide oral or written report. These reports to the CSRC or the stock exchange America voluntary disclosure, but may also in the civil litigation in the future being used as evidence disclosure of such information. The audit committee shall determine the investigation group investigation results in what must be listed as a disclosure after the receipt of the report; whether they need to take any remedial measures; and whether to make adjustment to the internal control machine, in order to prevent any unfair transactions happen again.

Two, USA SFC investigation

If some behavior suspected that the company has violated the or is about to violate USA securities law, American CSRC may start the investigation procedure of formal or informal. The CSRC has the right to investigate widely American listing Corporation and its directors, managers and executives, but it is very difficult to hit a person, in Chinese territory management entity and assets. Not with the SFC investigation may arise in the America civil and criminal responsibility, can affect the individual including companies who have USA home directors, senior executives and other employees, and employees who America short trips to the.

American the Commission's investigation is not open to the truth of the investigation, to determine whether the company has been or will be violated USA securities act. The CSRC may in its authorized scope, by subpoena, documents and information disclosure requirements to USA listing Corporation. As long as it is not affected by the "attorney - client privilege" the protection of information, the Commission documents and information disclosure requirements with the statutory mandatory. Provide full disclosure is prerequisite to obtain any legal immunity treatment. If it would help avoid or reduce the fines and penalties, the audit committee can also choose and American CSRC disclosure with, those "attorney client privilege," the protection of information. In this case, the company's lawyers must carefully consider the form and content of information disclosure, including the disclosure of risk information can be transferred to the judicial department USA as criminal investigation basis, or may be used in civil litigation.

After the completion of the investigation, USA CSRC will decide whether to take further legal complaint procedures. The CSRC has the right to apply to the court to make a series of civil penalties, including fines, confiscated of the illegal gains, command to disclosure, strengthen internal control, or by the third party to monitor illegal company. The SFC most cases eventually ended in an out of court settlement, but this does not affect the China Securities Regulatory Commission, the Ministry of justice or other government law enforcement agencies to take further civil or criminal proceedings against the company or individual.

Three, the stock exchange survey

American listing Corporation listing of securities exchange may also carries on the investigation to the company, but the scope of the survey is usually less than the company internal investigation or USA SFC investigation. If the company fails to meet the requirements listed in stock exchange, may suspend the trading of shares, and require the company to submit a self correcting program. If the stock does not accept the plan, or the company cannot be planned do full compliance, the exchange may start the delisting procedure, but the company during this period to continue on as a listing Corporation disclosure.

The NASDAQ delisting hearing is conducted by an independent commission of inquiry of non public hearings, the company must prove its recovery and continued compliance with the listing rules and USA securities law. May be asked to testify to individuals including members of the audit committee, the board of directors of the company, management personnel and the administrative personnel, and even members of the investigation team. And the Nasdaq, New York stock exchange delisting hearing is carried out in public listing Corporation. Companies must carefully weigh the choice of disclosed information, because this information is likely to be as the CSRC, other government agencies and the dependence of the individual in the prosecution of the company when the evidence.

If not be asked to withdraw from the market, the company must be in a very short period of time to complete its listing Corporation disclosure documents. If you are asked to withdraw from the market, company to solve the auditor, the Commission and other government regulatory issues, and to meet the listing requirements, to re submit the listing application can. As described below, to meet the requirements of disclosure, company may have the qualification in the otc. Of course, this way of financing will narrow lot.

Four, collective action

If the company has announced that it will delay the disclosure statement is listing Corporation, internal audit, is to accept the Commission of investigation, or improper charges, all these will lead to stock price declines, civil litigation may also follow close on succession. In the securities class action, plaintiff lawyers tend to represent a certain number of shareholders, the prosecution reason is America company in violation of securities laws or improper management and its shareholders suffer losses. The company and its directors and executives. In 2011, the merger and acquisition in the United States listed China Company through the reverse of the collective action of USA securities class action 1/4.1.

According to the American law, jurisdiction over defendants depends on its relevance and American. USA court first have jurisdiction over USA listing Corporation. At the same time, for those who signed American Commission documents, living in USA, in America assets (such as a bank account), or are American who travel, American courts also have jurisdiction. Escape American procedure may cause the company was ordered to withdraw from the market, or face other official sanction, and may affect the company or the accused person existing or future in USA domestic assets.

Different from the Chinese court, as long as it is not affected by the "attorney - client privilege" the protection of information, American court allows any proceedings relating to the document review, the defendant company information, and other evidence in general. Although China legal restrictions on foreign litigants to collect evidence in China for USA litigation, in America court jurisdiction under the China defendant or the third party may still be required to submit the relevant evidence in accordance with the American procedure. Due to the Chinese territory for the America litigation evidence collection exist legal obstacles, a party to a civil action will mainly depend on the defendant company submitted to the CSRC, the stock exchange USA, or even the company's audit committee evidence.

Although the securities class action lawsuits most meeting prior to the start of the trial by an out of court settlement closed, but the settlement payment amount may be very high. The average amount of the settlement in 2010 American securities class action suit for $11300000.2.In addition, legal defense costs are also very impressive. If you cannot reach a settlement, the defendant companies and individuals must pay in a lot of money and time in America court lengthy judicial procedure. If the defendant companies and individuals at the same time lost, even if America court in Chinese territory to take enforcement measures, the judge can freeze the defendant in America existing or future assets, including bank accounts and accounts receivable.

The delisting proposal five, China Company

In order to compliance and coping in American litigation and official investigations must pay a high cost of capital, plus the downturn of stock price and trade volume dropped, many in the United States listed China Company are considering alternative financing scheme. Wish to exit USA stock company can withdraw from the market, then to not public offering of shares of the Private Companies, or select the delisting after doing the over-the-counter trading, as a single listing Corporation powder.

Alternative financing:For the transformation into a Private Companies, enterprise can sell its shares, which have qualification and delisting of the cancellation of its public offering. The enterprise through the acceptance of another company or individual bid form, transfer the issuing of stocks. Can also merge with another company, sale of assets to another company or a reverse stock split to reduce the number of registered shareholders. The two types of transactions are subject to the relevant provisions of America securities laws, one requirement is that the approved before transition, enterprises need for full disclosure, and requires that the enterprise has to be fully considered this decision. In some cases, the exercise of a takeover would also trigger certain shareholders rights.

The company also can choose the stock in the OTC market, and the stock is still eligible for registration. Although this will limit the financing channels to a certain extent, but after all, financing the door or opening, during which the company can have time to improve our internal control compliance mechanism. Listed in the OTC market, compliance although don't like those companies listed on the exchange of that pay a high cost to achieve high standard requirements, but they must meet certain disclosure and trading standards. Before being allowed to over-the-counter trading, companies also need to limit disclosure documents submitted to the CSRC to all American.

The third option is delisting and deregistration of shares, in the Pink Sheet Market transactions. Powder single trading companies are not regulated, generally is not required to accept the transaction of listed securities, but still may have a certain degree of disclosure requirements. Of course, the compliance cost is a listing Corporation or even over-the-counter trading companies have much lower. But the fly single transaction corresponding financing channels narrow.

Overview of stock delisting and deregistration processes:A company to meet the two conditions are eligible to withdraw and cancel the stock: (1) if the shareholders registered number less than 300 people, or (2) the company assets of less than $10000000, while shareholders registered number less than 500 people. Under normal circumstances, the company must first obtain approval of the listing exchange delisting, and issued a press release to inform shareholders of the delisting intention. NASDAQ delisting procedure is simplified, the New York stock exchange is more stringent requirements.

Once the delisting request, the company can submit a formal application from American CSRC delisting or cancellation. After submitting the application tenth days after the company delisting is effective, then most of the company's disclosure requirements will be suspended. American CSRC to approve or refuse to approve of the decision in 90 days. Cancellation of registration is completed, according to the provisions of the CSRC or the stock exchange American, state law, or the registration rights agreement stipulated in the contract, the company still may have to follow certain public disclosure requirements. Because the delisting procedure is a process to go, the high cost firms may not so fast to avoid internal investigation or securities litigation brought by the.

Six, other matters for consideration

The delisting decision after careful consideration before making the required. Considering the privatized companies, choose private acquisitions may be the most efficient way, especially when the company in USA financing or loans to banks in the Chinese difficulties. Many private companies have plans to once again listed in the future, or Chinese Hongkong stock market shares in acquiring company. However Chinese mainland and Hongkong listing requirements for some companies would be too strict. In addition, in the process of purchasing private legal costs costs are high, and the dissenting shareholders may be in the court the price on offer in question, these risks will affect the result of the acquisition.

Finally, companies should be a choice in the retention or between the listing Corporation qualification both recovery. Even through the reverse merger, the costs will eventually be high. In spite of this, some companies still feel to American capital financing, pay the price is worth it. Moreover, to keep a American listing Corporation brand also can enhance the company's image in the Chinese, bring convenience to the domestic financing. But if you choose to continue to stay in American stock exchange, a company and its directors and executives still need to bear the legal liability caused by violation of securities laws and rules America listing Corporation. Recently, through the interpretation of American CSRC and the exchange officials, it is not difficult to see that they even if it is a little difficult to tolerate violations. If the company is the only excuse is the differences between Chinese and American culture, this kind of rhetoric is difficult to stand up in front of USA relevant officials.

Notes.
1, "in America Justice Department announced to start the investigation, the China Company American fell", New York Times, September 29, 2011.
2, Ellen M. Ryan and Laura E. Simmons, "analysis of the 2010 securities class action lawsuit reconciliation case".