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White House Signs Chinese Delisting Bill Into Law

By:
Chris Gaetano
Published Date:
Dec 21, 2020

The president has formally signed into law a bill, aimed mainly at Chinese companies, that will require foreign companies listed on U.S. exchanges to receive audits compliant with Public Company Accounting Oversight Board (PCAOB) standards or else be delisted, reported Bloomberg.

PCAOB access to Chinese audits has long been a source of tension between the two countries. While the PCAOB and its Chinese counterpart tried for years to negotiate a joint inspection agreement similar to the ones established in many other countries, the talks ultimately collapsed in 2015. A major sticking point in negotiations was that a program of the type the PCAOB was proposing would have run afoul of China's strict laws on sharing information with foreign entities. The PCAOB, meanwhile, has expressed concern on numerous occasion about the accuracy of the numbers coming from Chinese audit firms on companies seeking to be listed on U.S. exchanges.

The bill, the Holding Foreign Companies Accountable Act, applies to public companies that have retained an accounting firm in a branch or office that, first, is located in a foreign jurisdiction and, second, cannot be inspected by the PCAOB. Generally, if the issuer goes more than three years in a row without its accounting firm being inspected by the PCAOB, then that firm will be unable to sell securities on any U.S. exchange. This prohibition will continue until the issuer retains an accounting firm that the board has inspected. If it then switches back to another firm outside the board's reach, the prohibition would be back on.

The bill also requires that companies submit documentation establishing that they are not owned or controlled by a governmental entity in the foreign jurisdiction (despite the difficulties of proving a negative). If they can't do this, they will be barred from U.S. exchanges.

The Senate bill passed in May; the House version passed on Dec. 2. Shortly afterward, the Wall Street Journal reported that Chinese companies listed on U.S. exchanges had been setting up secondary listings in Hong Kong in anticipation of the bill passing. As of the beginning of this month, 10 Chinese companies with a combined market capitalization of $1 trillion had set up secondary listings in Hong Kong as a hedge against possible delisting, as have several smaller companies. Eleven other Chinese companies chose to leave public exchanges altogether and go private, with deals to do so totaling $16.7 billion, the highest amount since 2015.

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