By Eugene Y. Leeroy
OUTGOING US President Donald Trump has signed a bill calling for the delisting of foreign companies that don’t adhere to the same accounting transparency standards that securities regulators impose on US public companies. The US Congress passed the Holding Foreign Corporation Accountability Act on Dec 2, which prohibits foreign companies, despite being listed in the US, from trading in the country if they do not comply with the accounting requirements of the US Securities and Exchange Commission for three consecutive years.
To check the rise of China, the United States has been imposing restrictions on Chinese companies, institutions and other entities in fields ranging from trade to technology. And China’s response and the US’ further measures have intensified the conflict. Yet, if the passing of the HFCA Act could further intensify the conflict between China and the US, it could also prompt the two countries to resume cooperation.
Conflicting arguments on latest US act: In China, some say Chinese companies should not tolerate discrimination in the US, and therefore those companies listed on US stock exchanges should “return” to China, while others say they should comply with US regulations and keep operating in the US. In the US, on the other hand, some argue that the delisting of Chinese companies can protect American investors, while others claim Chinese companies have already melted into the US market, so delisting them will cost small and medium-sized American investors dear and make them worse off in the face of the novel coronavirus pandemic. However, I think it is necessary to analyze the details of the HFCA Act and understand its advantages and disadvantages for both China and the US before deciding which of the augments is correct.
The information foreign companies are required to submit to the US authorities, according to the HFCA Act, can be divided into two parts. The first part is based on the professional considerations of securities regulation, while the second part mainly targets Chinese companies.
To begin with, the act requires auditors of foreign public companies to allow the Public Company Accounting Oversight Board to inspect their audit papers for audits of non-US operations as required by the Sarbanes-Oxley Act of 2002. It also requires foreign issuers of securities to disclose the percentage of shares owned by government entities where the issuers are based, and whether those government entities have a controlling financial interest in the company issuing those securities.
To me, this part of the requirements appears reasonable. Based on my previous experience working with regulatory agencies, US regulators have traditionally had strict disclosure rules on the share and degree of participation of foreign governments in foreign companies operating in the US.
Salient features of bill on foreign companies
If a government’s share in a foreign company exceeds a certain level and a claim of only passive interest is made, the company must provide detailed statements of equity information, including the type and structure of ownership, the control of voting rights, the setting of the right of approval and the right of veto, as well as the authority to dismiss managers, and the circumstances under which it can be done. And if a shareholder has approval and veto power, it is necessary to disclose whether and to what extent that shareholder is involved in decision-making, and who actually conducts the day-today operations and makes important decisions.
Some Western and East Asian countries (such as France, Spain, Belgium, Finland, and Japan) have a tradition of state capitalism, and their companies listed on US stock exchanges often have government shares. Without exceptions, all of them strictly comply with the SEC’s accounting and regulation requirements.
Clear politicization of securities regulation: As for the second part of the bill, it requires companies to disclose the names of their board members who are also members of the Communist Party of China and whether their articles of incorporation include text from the Party’s charter. This part clearly politicizes the securities regulation. China is governed by the CPC, and these requirements are aimed at both the country and the Party.
The implementation of the HFCA Act has advantages and disadvantages for both China and the US. On the plus side, the first part of the bill requires the Chinese companies listed on US exchanges to comply with the same regulations as US companies and other foreign companies, which is conducive to transparency and fair competition.
– The Daily Mail-
China Daily news
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