In the age of nonstop globalization, every sector in the world’s economy is influenced by the erosion of borders. The financial sector is no exception; financial markets, now more than ever, are flooded with endless possibilities to invest and explore foreign markets with the click of a mouse or the tap of a finger. In this sense, the historic hegemony of stock exchanges has played a fundamental role in the fluidity of assets across borders.
Stock exchanges are still the main vehicle for companies seeking to position themselves in the international arena, especially by going public in one of the main financial centers. In order to tap into corporate capital, many companies seek to be listed in the New York Stock Exchange, and Chinese companies are no exception. In recent years, China has become the second-largest economy after the US, its financial markets, such as the Shanghai Stock Exchange, expanding rapidly. Still, Chinese companies aim for the New York Stock Exchange in order to make the big leap forward in their search for international recognition.
The presence of Chinese-based companies in US markets holds tremendous benefits for the global economy as a whole, but it has not been devoid of controversy. Many Chinese companies are utilizing a legal loophole (appropriately titled “The Chinese Loophole”) to maximize their profits at the expanse of minority investors, mostly in the US. Most of the companies that have exploited this loophole have followed the same strategy; after reaching into US capital through a public listing, the company's management backtracks and takes the company private at a significantly cheaper valuation. That same management then relists the same company back in China, at a much higher valuation, leaving executives with a big windfall and subsequently leaving average retail investors with the biggest losses.
Chinese companies can do this because, being foreign, they do not need to comply with corporate governance practices. The differences in the controlling share structure of foreign companies (as opposed to domestic ones) add another layer of complexity to the situation. These two factors combined allow founders and their majority co-investors to retain voting control, leaving minority investors without any leverage when it comes to the future of the company they are invested in and prone to being forced to take low-ball buyout offers.
This practice has been so lucrative for Chinese companies that dozens of Chinese-based companies have engaged in it over the last seven years, multiplying their value substantially when relisting back home. For instance, Wuxi PharmaTech was taken private in 2015 at a valuation of $3.3 billion and was later relisted in China for an astonishing valuation of $21.6 billion, a whopping 655% increase in valuation. While this practice might not be illegal within the US legal system per se, it has the potential to severely tarnish the reputation of Chinese companies in the US as well as in other western markets. Moreover, it could scare away potential investors who fear such companies are high-risk investments and slow the rapid growth and penetration of companies.
There is also a legal threat; if investors feel that they have been robbed of the real valuation of their shares by losing to the majority investors in a vote, they could (and in reality, they do) turn to the court and seek damages. Many companies, such as Qihoo 360, are already being sued for hundreds of millions of dollars for “scamming” investors. When a company goes private at $X and relists shortly after at 500*$X without adding assets, products, tech or properties (and sometimes even losing assets as companies are restructured), investors have strong legal basis for compensation lawsuits.