BOSTON--(BUSINESS WIRE)--An unprecedented wave of Chinese management offers to buy out U.S. shareholders are at premiums well below average, despite these companies exiting American stock markets with six times the amount of cash they arrived with, according to a white paper study by Heng Ren Partners.
“With their piles of cash these companies could ease the abrupt curtailment of value or permanent capital loss for shareholders by sweetening the buyout offer,” stated Peter Halesworth, Managing Partner of Heng Ren Partners and the author of the white paper.
Since 2015, 38 Chinese companies whose stocks trade on U.S. stock exchanges announced buyouts of U.S. shareholders totaling $44.4 billion in value. Many U.S. and Chinese investors are disappointed and discontented with the low offers, which are only three-fourths of the average premium paid in U.S. buyouts.
However, because of jurisdictional issues and a relative lack of shareholder rights in the offshore tax havens where these companies are domiciled - primarily the Cayman Islands - a regulatory gap exists, leaving U.S. investors with little to no recourse to challenge these low offers.
“U.S. investors find themselves in an adversarial zero-sum game with managements of foreign companies,” stated Halesworth. “These companies perversely enjoy immunity to many U.S. stock exchange rules and securities laws, all the while raising funds in the U.S. and trading in American stock markets. This gaping loophole needs to be closed.”
Managements use their control of these companies to “squeeze out” investors below their IPO price. After 32 of these companies who sold Initial Public Offerings (IPOs) on U.S. stock exchanges raised $6.3 billion from U.S. investors, ostensibly for a long-term investment, 19 of these 32 are now seeking to “go private” at prices below their IPO price. For these, their buyout price on average is 54% below their IPO price.
Worse, after successfully buying out U.S. shareholders and delisting their stock from American stock exchanges, these companies move on to sell a new offering in Chinese markets and reap spectacular windfalls, as much as seven times the amount U.S. shareholders were paid at buyout. These windfalls highlight buyout prices offered to U.S. investors are far too low, and also the magnitude of the value destruction incurred by U.S. investors.
“Ultimately, we would like to gain the ability to effectively contest low-bid ‘squeeze outs’ by foreign issuers,” Halesworth stated. “This would allow holders to make their case, and likely result in higher offers much closer to fair value. Most of all, it would deter foreign issuers from trying to game the system at the expense of U.S. investors.”
Despite the investor discontent in the U.S. and China, no U.S. regulator or institution has moved to close the regulatory gaps. This allows mistrust to breed between U.S. investors and Chinese companies.
“Unfortunately, U.S. stock markets have become corporate governance havens for foreign companies to take coercive actions after raising investor funds from American stock markets while trading under the trusted logos of the NYSE and NASDAQ,” Halesworth said. “Enforcement action and legal reform are needed to provide investors recourse to challenge one-sided deals that enrich managements at the expense of U.S. investors.”
Here is a link to the Heng Ren White Paper:
http://hengreninvestment.com/whitepapersqueezeouts-english.pdf