How the shareholders of Chinese companies that have gone dark to get back their investment.
Many Chinese companies listed in the US have gone dark while their businesses in China are doing well. Without updated financial information, the share prices of those companies have dropped to below 10% of the book values. Shareholders in the US often do not know what to do to get back their investment in these companies. Here I outline some actions the US shareholders should/can take to get back their investment.
Most of these Chinese companies have just a shell (a holding company registered in the US whose shares are traded) in the US. The US shell often own another shell in British Virgin Islands (BVI) or Hongkong or somewhere else outside of China and this off-shore shell owns the actual business entities in China. To get back the investments in these companies, the shareholders in the US need to be able to take control or sell the actual business in China.
The following shows how the AgFeed Industries Inc in Nevada own business in China:
AgFeed Industries Inc in Nevada (whose shares are traded in the US)
AgFeed BVI (100% own by AgFeed Industries Inc)
AgFeed businesses in China (100% own by AgFeed BVI)
Many other Chinese companies have a similar structure in which only a holding company is registered in the US. Below is the corporate structure for Deer Consumer Products, Inc. (DEER):
Deer Consumer Products, Inc. in Nevada whose shares are traded in the US)
Deer International Group Ltd. in BVI (100% own by DEER)
DEER businesses in China (100% own by DEER BVI)
The US holding company (the shell) is a legal business entity in the US where US law applies. The US shareholders can use the state corporation law to take control of the US holding company. In fact, shareholders of several companies are now taking action to take control of the holding company.
Taking control of the holding company in the US is not the final step of the action since all the assets are still in China. The business entities in China are governed by the Chinese law, the Chinese government, and the Chinese business environment. Fortunately, the current Chinese law and Chinese government recognize foreign ownership. This allows management of the US holding company to sell the businesses in China.
One example is AgFeed Industry Inc. in Nevada. The US CRO sold AgFeed BVI (that own all the AgFeed businesses in China) for about 70% of the book value on December 6, 2013. Please note that AgFeed BVI (a BVI company that own all the AgFeed businesses in China) was sold as a whole to a Chinese company and transaction was conducted outside of Mainland China and in US dollar. Since everything is done outside of China, Chinese government was not involved. AgFeed BVIwas sold to Ningbo Tech (002124:Shenzhen, a Chinese companies listed in Shenzhen stock exchange). Because the AgFeed holding company management wanted all the transaction outside of Mainland China, Ningbo Tech specifically created a new subsidiary in Hongkong to buy AgFeed BVI. After the transaction, AgFeed BVI is wholly own by Ningbo Tech (through the Hongkong subsidiary) and AgFeed businesses in China were not affected.
Situation for other companies will be similar. As in the case of DEER above, if the shareholders take control of the holding company in Nevada using the Nevada corporation law, the holding company management can sell the whole Deer International Group Ltd. in BVI. The transaction will be in US dollar and everything will be done outside of Mainland China such that the Mainland Chinese Government will not be involved.
Because the current Chinese government and the current Chinese law recognize foreign ownership, Many US corporations (such as GM and Walmart) actually own good business in China and their ownership cannot be erased.
Chinese law, Chinese political system, and Chinese business environment are different from that in the US. Current Chinese government does not recognize the US court order. Therefore, US shareholders should not try to take a US court order to the Chinese Government, as it will not be recognized. However, the management of US holding company can (go to China to) take control of the business entities in China based on the Chinese law. This ownership is very accepted by Chinese government and well recognized within the Chinese business environment.
In summary, the shareholders in the US should not take a US court order to China as the Chinese government will not accept the US court order. However, the US shareholders can use the state corporation law to take the control of the US holding company registered in the US and the new management of the US holding company can claim ownership of the businesses in China. Therefore, the shareholders in the US should take action in two steps:
Step 1: Use the state corporation law to take control of the holding company registered in the US and to change the management if necessary.
Step 2: The new management (the new CEO or the receiver appointed by the US court) of the US holding company claim ownership of the Chinese business entities based on the Chinese law.