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Chinese Companies’ Reaction to The Delisting Announcement

Background
The United States is one of the world’s most attractive places for a company to go public, especially for those mainland Chinese companies with funding needs. U.S. market gives those companies a chance to raise huge amounts of capital after their unsuccessful attempts to get bank borrowings in China. And compared with the traditional initial public offering process in the Chinese stock market, listing via reverse merger in the U.S. market seems to be much less expensive and time-consuming because mainland Chinese banks and China’s domestic capital market usually prefer the state-owned enterprises rather than privately owned companies.

There are three major reasons for Chinese companies to list in the U.S.:
First, the listing standards are lower in the U.S. Many Chinese Internet companies such as RenRen and YouKu did not meet Shanghai or Hong Kong listing standards at the time of their U.S. IPOs. They can either go public in the U.S. market or wait at least one year to meet the listing standards for Chinese exchange.

The Second reason is that those international investors such as venture capital firms prefer to invest in the U.S. market because it offers them an access to convertible currency and freely tradable shares.

The last reason is branding. Investors have always shown willingness to pay high prices for those Chinese stocks being listed in the U.S. market. It seems that there is prestige for those companies. So in order to get more attention in China, those Chinese companies would choose to list in the U.S. market.

However, the trend in Chinese listings on U.S. market has suddenly reversed and started accelerating in the opposite direction in recent years. Not only have less Chinese companies chosen to list on the U.S. market, there are also more and more Chinese companies leaving. In 2010, 42 Chinese companies issued initial public offerings (IPOs) and the number has dropped to just one IPO in the first half of 2012. According to incomplete statistics, three Chinese companies were delisted in 2010, twenty-six were delisted in 2011 and nineteen were delisted during the first half of 2012. The reasons for delisting are as follows:

1、Unable to file the annual report for the fiscal year timely in accordance with the Securities Exchange Act of 1934.

2、In the wake of repeated accounting fraud scandals and growing skepticism about the quality of Chinese accounting and auditing standards, American Exchanges start to delist those companies with fraud.

3、Unable to meet the minimum bid price requirement for continued listing rule.

4、Costs outweigh the benefits, companies choose to go private and voluntarily delist from the U.S. market.

Definition of Chinese Delisting
Usually, we define the removal of a listed security from the exchange on which it trades as delisting. We classify delisting into three broad categories. Firms that are removed from major exchanged are classified into mergers and acquisition, involuntary and voluntary delistings. We verify that none of the delisted firms trades under a new name or ticker on the NYSE or NASDAQ through December 31, 2004.

When foreign forms list on a U.S. exchange, they must meet both the listing requirements of the exchange and the registration requirements of the SEC. By contrast, delisting removes the obligation to meet exchange requirements but it does not eliminate SEC registration requirements. To eliminate all costs of compliance of U.S. regulation, foreign firms must also deregister which requires them to establish and maintain fewer than 300 U.S. shareholders over time.

If a foreign firm has ADRs trading and delists, there is also no reason to maintain its ADR program. An ADR program generally may be terminated by giving the depositary bank at least 30 days written notice of termination. Until the stated termination date, ADR holders typically receive the underlying ordinary