The last 12 months has seen a wave of US publicly traded companies with Chinese operations announce plans to privatize and delist.
For many, this decision has been reached due to the consistently low share trading volumes experienced since going public on foreign exchanges, with the majority trading well below their initial offer prices. Many have also struggled with the onerous reporting and governance compliance costs required by foreign exchanges.
As these conditions persist, the trend for foreign-listed Asian companies to flag their intentions to delist is expected to continue, with many choosing instead to return to private ownership or relist closer to home.
While taking a company private or delisting is not uncommon, the personal liability for directors and officers (including CFOs) is considerably heightened during such a transaction.
The key risks arise from dissenting shareholders, and it is becoming ever more common fore shareholder lawsuits to be brought against the directors of companies undergoing privatisations. Indeed, alleged wrongful acts associated with corporate restructuring, such as a privatization and delisting, are among the most common sources of directors’ and officers’ (D&O) liability insurance claims.
Shareholders frequently dispute the cash consideration offered through many privatizations in an effort to ‘bump up’ the price. To achieve this, shareholders are making claims, typically against the companies’ board of directors, for:
- alleged breach of fiduciary duty due to decreased liquidity and trading prices (note that it is common for a company’s share price to decline following its initial announcement of intent to delist)
- alleged insider trading by officers and directors on the basis of material non-public information
- allegations of treating one group of shareholders unfairly, self-dealing or misrepresentation in the privatization process
In addition to the personal liability which ensues, these claims often slow the privatization process, and throughout that period, a company must continue to comply with the rules of the exchange. This means continuing compliance costs and ongoing microscopic review of the company’s financial data, assets and transactions.
Directors and officers often adopt safeguards when approving a delisting or privatization plan, including:
- Establishing a special committee comprised of the independent directors of the board, which will evaluate and recommend acceptance or rejection of the transaction on its merits
- Documenting the directors’ consideration of the plan in the committee meeting minutes and demonstrating the plan is supported by adequate information, including independent research
- Ensuring the plan benefits all shareholders or addresses the rights of shareholders that may be disproportionately affected, and that no direct or indirect benefits flow to any director or officer
- Closely monitoring the veracity or the company’s public disclosures and communication with shareholders regarding the process