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[NEW YORK] Chinese companies domiciled in offshore havens and listed on US stock exchanges are buying out their shareholders at low-ball prices, according to a report published on Tuesday, taking advantage of a regulatory gap within their jurisdictions.
Since 2015, 38 Chinese companies listed in the United States have announced management buyout offers, with around half seeking to go private well below their IPO price, says the report, produced by Hang Ren Partners LLC, a Boston-based research firm.
Because investors in these offshore-based companies hold American Depositary Receipt (ADR) shares, they lack certain shareholder rights, the report says.
"Unlike with buyouts by US companies, ADR holders have little to no recourse to challenge low-ball offers," said Hang Hen Managing Partner Peter Halesworth.
The report also points out the trend of Chinese companies buying out US shareholders, delisting their stock, and then reaping an even bigger windfall through a new offering in China. So far we have witnessed spectacular windfalls. The report used China Mobile Games and Entertainment Group Limited, 3SBio Inc, and Focus Media Holding Limited as examples of Chinese companies that delisted in the United States, only to raise larger offerings in China shortly afterward.
In Focus Media's case, the company went from raising US$3.7 billion after a management buyout in 2013 from the Nasdaq exchange to raising nearly double that amount in a China listing two years later, the report says.
"These lowball offers aren't due to a lack of cash," says the report.
"Many of these company owners not only give themselves a bargain when taking full control, but the companies depart the US for China much stronger financially after tapping US markets."