On December 31, 2020, the Trump administration announced in an executive order concerning the New York Stock Exchange (NYSE). The order states that the NYSE would be delisting three foreign companies that are Chinese telecom giants. This move came in the wake of ongoing tension between the U.S. and China over national security concerns. Just a month earlier, the Trump administration issued an executive order prohibiting Americans from investing in 35 Chinese companies. In January 2021, the Trump administration went even further by suggesting that they might prohibit Americans from investing in Alibaba and Tencent, China’s two largest publicly-listed companies.
The explanation provided for these decisions was that American investments in Chinese companies are strengthening China’s military, intelligence, and security services. The U.S. government says China Mobile Ltd., China Telecom Corp., and China Unicom Hong Kong Ltd. may no longer trade on the NYSE as of January 11, 2021.
This sparks the question of why foreign companies list their shares on U.S. stock exchanges in the first place. After all, most countries could list their shares on a stock exchange in their home country. All three telecom giants — China Mobile, China Telecom, and China Unicom — have dual listings of their shares on the Hong Kong Stock Exchange and the NYSE. Alibaba and Tencent similarly have dual listings on these exchanges. A number of other foreign companies list shares on both a domestic exchange as well as either the NYSE or NASDAQ. These foreign companies include Toyota, Ericsson, BlackBerry, and Nokia.
Reasons Foreign Issuers Are Attracted to Listing on U.S. Exchanges
Foreign companies that seek to list on U.S. financial markets are often looking for liquidity advantages. The also seek to raise additional capital. These companies can increase their liquidity by making their shares accessible to a wider group of global investors. Foreign issuer listings can also boost credibility because of the relatively stringent standards required to list on U.S. stock exchanges. On the flipside, some foreign exchanges may have even stricter standards than U.S. exchanges. Foreign companies might find thee stricter standards too burdensome. For example, Chinese exchanges impose overbearing regulations on public companies. This has motivated some Chinese companies to list on a U.S. exchange instead.
American Depositary Shares
As a result of legal requirements, foreign companies listing on U.S. exchanges must create American Depositary Shares (ADSs) for Americans to purchase. The ADSs represent securities in the foreign company that trade on U.S. exchanges. A U.S. custodian bank acts as an intermediary, holding the economic rights in the shares. For example, Wanda Sports Group, a Chinese global sports media platform, listed its ADSs on Nasdaq when it went public.
When a foreign company loses its listing, the exchange removes its American Depositary Shares from trading on the exchange. Luckily for investors, the ADSs will usually not become worthless in such a scenario. They still represent an economic interest in the company. Americans who hold ADSs in the three Chinese telecoms will be able to exchange their ADSs for shares of the respective company listed in Hong Kong.
SEC Regulatory Requirements for Foreign Issuers Listing in the U.S.
Form 6-K is the analogue of a Form 8-K for foreign private issuers. An issuer must file it with the SEC promptly after the issuer makes a material disclosure to shareholders. Many foreign private issuers also elect to disclose unaudited quarterly financial reports. U.S. issuers must report using Form 10-Q within 45 days of each quarter-end, by filing their quarterly results with the SEC on Form 6-K. Under the Securities Exchange Act of 1934, foreign private issuers need not submit quarterly financial results to the SEC.
Form 20-F is the analogue of a Form 10-K for foreign private issuers. U.S. public companies must file audited annual financials with the SEC within 90 days of the fiscal year-end on Form 10-K. The report submitted on Form 10-K must include, in addition to consolidated audited financial statements, an overview of the company’s business and discussion of key risk factors. Unlike U.S. issuers, foreign private issuers may take up to 4 months after the end of the fiscal year to a file a Form 20-F with the SEC containing similar content to the Form 10-K.
If a tender offer takes the form of an exchange offer, a foreign private issuer must file a Form F-4, which is the analogue of a Form S-4 for U.S. companies. A tender offer occurs when shareholders are actively solicited to sell their shares for a premium above the prevailing market price during a limited timeframe. In this context, the SEC requires submission of a registration statement for the offered securities on Form F-4.
Exemptions for Foreign Companies Listing in the U.S.
Unlike U.S.-based companies, foreign issuers are exempt from the requirement to have a board with a majority of independent directors. An audit committee is the only type of committee that foreign companies are required to have. U.S. companies listing on the NYSE or NASDAQ must have a compensation committee.
Additionally, for preparing financial reports, foreign issuers are allowed to choose between two accounting standards. They are the International Financing Reporting Standards (IFRS) and the U.S. Generally Accepted Accounting Principles (GAAP). U.S. companies must use U.S. GAAP.