Key elements

1. Restriction of Chinese Investments in the US. The policy proposes additional scrutiny and restrictions on Chinese investments in the US in critical sectors such as infrastructure, healthcare, agriculture, energy, and raw materials.
2. Expansion of Restrictions on US Investments in China. The policy states that the administration will review and consider new or expanded restrictions on US outbound investment in China in such sectors as semiconductors, artificial intelligence, quantum computing, biotechnology, hypersonics, aerospace, advanced manufacturing, and directed energy. As part of the review, the Administration will consider restrictions on various investment types, including private equity, venture capital, greenfield investments, and investments in publicly traded securities.
3. Acceleration of Project Approvals for US Allies and Partners. The policy states that the US will create a "fast track" process for investments from allied and partner nations, in US businesses, particularly those involved in advanced technology and other strategic areas. Additionally, the policy calls for expedited environmental reviews for investments over USD 1 billion.

Implications for Chinese Companies listed on US exchanges

The America First Investment Policy also calls for several actions that have implications for companies listed on US exchanges from foreign adversary countries and could lead to the delisting of Chinese and other foreign adversary companies from the US exchanges.

1. Auditing Standards for Public Companies

The memorandum instructs the US Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) to determine if adequate financial auditing standards are upheld for companies covered by the Holding Foreign Companies Accountable Act of 2020 (HFCAA). The HFCAA requires companies listed on US stock exchanges to disclose certain specified information if they have retained an auditor who is in a foreign jurisdiction that prevents the PCAOB from conducting inspections on auditing firms. If the PCAOB is not able to perform inspections for two consecutive years, the issuer in question will be delisted. Historically, the Chinese government refused to allow US regulators access to auditing firms' books and records, citing national security concerns. An agreement was reached between Chinese authorities and the PCAOB to permit such inspections in 2022. The memorandum calls for further examination of that agreement to ensure compliance.

2. Variable Interest Entity and Subsidiary Structures

The policy calls for the Department of Justice and FBI to review the use of variable interest entities (VIEs) and subsidiary structures by foreign-adversary companies trading on US exchanges. VIEs are legal structures used to demonstrate control over a legal entity through means other than equity ownership, often employed by Chinese businesses to list in the US despite restrictions on foreign ownership. The Department of Justice and FBI are instructed to "provide a written recommendation on the risk posed to US investors, based on the auditability, corporate governance and evidence of criminal or civil fraudulent behavior for all foreign adversary companies currently listed on [US] exchanges."

3. Fiduciary Standards in Pension Plans

The policy instructs the Department of Labor to update fiduciary standards under the Employee Retirement Income Security Act of 1974 to ensure that foreign-adversary companies are ineligible for investments from US pension plans.

The America First Investment Policy is likely to have significant implications for Chinese companies listed on US stock exchanges. The increased scrutiny and restrictions on Chinese investments may lead to a higher likelihood of delisting for these companies.

US delisting and deregistration process

The policy could cause an increase in the delisting and deregistration of Chinese companies listed on US exchanges. The processes of delisting and deregistration, often referred to as "going dark," are necessary for a US-listed issuer to both terminate its exchange listing as well as suspend and terminate its SEC reporting and compliance obligations.

The processes of delisting and deregistration involves terminating or suspending the issuer's public-reporting obligations under the Exchange Act. Delisting ceases the listing of the class of securities from the applicable exchange. Delisting alone will not eliminate the issuer's ongoing Exchange Act reporting obligations.

An issuer may be subject to the Exchange Act reporting obligations pursuant to any of the three sections of the Exchange Act: under Section 12(b) as a result of listing on a US exchange; under Section 12(g) upon meeting certain shareholder and asset thresholds; or under Section 15(d) due to having conducted a registered public offering in the US. An issuer is not subject to Exchange Act reporting obligations under more than one section at a time. For example, an issuer's reporting obligations under Section 12(b) by virtue of being listed on the NYSE or Nasdaq suspend any other reporting obligations under another provision of the Exchange Act (e.g., Section 12(g)). However, if the Section 12(b) registration is terminated, reporting obligations under other Exchange Act provisions such as Section 12(g) may commence or be revived.

Voluntarily delisting from the NYSE or Nasdaq is itself not a difficult process, requiring written notice, issuing a press release and furnishing a related Form 6-K with the SEC, and filing a Form 25 with the SEC.

Once the Form 25 is filed with the SEC, delisting occurs automatically after 10 days. The issuer's Exchange Act reporting obligations pursuant to Section 12(b) will be suspended, but Section 13(d) reporting obligations for shareholders will continue for 90 days after the Form 25 is filed.

Upon deregistering under Section 12(b), the issuer may automatically become subject to reporting obligations under Section 12(g) or Section 15(d) if the issuer meets the requirements of either of those sections. Under Section 12(g), subject to a potential exemption under Rule 12g3-2(b), a foreign private issuer is required register a class of equity securities under the Exchange Act if the foreign private issuer has assets in excess of USD 10 million and the class is held of record by 2,000 persons (or 500 persons who are not accredited investors) and at least 300 holders are US residents. Under Section 15(d), an issuer who has issued securities in a registered public offering but is not listed on an exchange and does not meet the Section 12(g) thresholds must still comply with the Exchange Act reporting obligations.

Deregistration under Section 12(g) and Section 15(d) involves additional steps and conditions, including filing Form 15 with the SEC to terminate any reporting obligations. Rule 12h-6 of the Exchange Act allows foreign private issuers to terminate their reporting obligations under Section 15(d) or deregister a class of securities under Section 12(g) if they satisfy certain conditions:

• The US average daily trading volume (ADTV) of the class of securities over the recent 12-month period has been not more than 5% of the worldwide ADTV, provided the issuer has not (i) within the past 12 months, terminated an ADR facility where the US ADTV exceeded 5% of the issuer's worldwide ADTV at the time of termination or (ii) within the past 12 months, delisted the class of securities from a US exchanges where the US ADTV of the class exceeded 5% of the issuer's worldwide ADTV at the time of delisting

OR

• There are less than 300 record holders worldwide or record holders who are US residents on any date within 120 days before the deregistration filing date.

AND, in each case:

• The issuer has at least a 12-month Exchange Act reporting history, has filed at least one Exchange Act annual report and is current in its reports
• The issuer has not sold any of the securities of the class through a US registered public offering in the prior 12 months, subject to certain limited exceptions
• The class of securities has been listed on an exchange in the issuer's primary trading exchange for at least 12 months.

"Homecoming" listing on the Hong Kong Stock Exchange (HKSE)

Chinese companies listed in a US exchange are expected to pursue dual primary listings or secondary listings on international exchanges such as HKSE prior to their delisting from the US.

The HKSE has streamlined its listing regime to facilitate Chinese companies listed overseas to achieve dual primary listing or secondary listing on the HKSE. For instance, a Chinese issuer that was either (a) primary listed on the NYSE or Nasdaq on or before 15 December 2017, or (b) primary listed on the NYSE or Nasdaq and controlled by corporate weighted voting right (WVR) as on 30 October 2020, can apply for a dual primary listing or a secondary listing while retaining their existing WVR and/or VIE structures without full compliance with HKSE requirements, provided that they meet the minimum market capitalization, compliance record and innovative company requirements. Since these measures have been put in place, technology companies are at the forefront of US-listed Chinese companies that have completed dual-primary listings in Hong Kong.

A homecoming listing on the HKSE continues to be a popular option for Chinese issuers seeking to address the potential risk of delisting in the US under the America First Investment Policy.

Baker McKenzie is a global law firm and can assist with your delisting and deregistration in the United States and alternative listing in Hong Kong or other jurisdictions where we have offices.

1 The policy defines "foreign adversaries" to include People's Republic of China (PRC), Hong Kong, Macau, Cuba, Iran, North Korea, Russia and Venezuela (under the Maduro regime).