When West China Cement (WCC) delisted from London’s Alternative Investment Market (AIM) in August this year, its chairman and chief executive officer Zhang Jimin told the press: “The British don’t really understand China; our stock has been severely undervalued.”

The Shaanxi-based cement producer blamed its delisting decision on British investors’ ignorance of the value of its stocks. Simultaneously, the company turned to Hong Kong, where Chinese companies are popular bets for investors, and launched a US$179m IPO on the HKSE instead.

Shortly after WCC's transfer, Shenzhen-based China Medical Systems Holdings also delisted from AIM and listed in Hong Kong (US$129m) simultaneously. China Medical, the fourth Chinese company to delist from AIM this year, was advised by Zhong Lun, Maples and Clader, Jackson Woo & Associates, Ashurst and its underwriters were advised by Commerce & Finance and Hogan Lovells.

Delisting advice
Prior to WCC and China Medical, China Biodiesel International, a Chinese renewable energy group, dropped its listing through a tender offer and China Eastsea Business Software also delisted from the AIM citing similar reasons – that the stock was valued poorly even when the company's profit growth was exceeding market expectations. Both companies were advised by DLA Piper in their AIM IPOs.

“Delisting shares is relatively straightforward. What is more important is to get rid of compliance and listed company obligations,” said Stephen Peepels, Hong Kong-based capital markets partner at DLA Piper.

“A lot of companies get confused in the delisting process; they think that taking their shares off the exchange is the whole solution. In fact, delisting does not do anything about the fact that you are still a company that has a public shareholder base in the US. Our duty is to educate clients on how to alleviate that burden,” he added.

The key question for legal advisors involved in delisting transactions is whether retaining the client after its bad experience would become difficult, but lawyers say this is unlikely. “A company that had originally thought that the AIM would be attractive and has thereafter changed its mind to think about other venues would most likely retain its initial advisors, assuming that they have a substantial practice in all potential regions. It is simply because the firm can utilise its knowledge of the company’s business and management and apply it to the new listing – it makes collaboration easier and much smoother,” explained Peepels.

Robin Li, managing partner of Hong Kong-based Li & Partners, agrees. “Companies understand that the venue of listing is ultimately their choice and are unlikely fault their legal advisors. They would, therefore, most likely retain their initial IPO advisor – that is, unless the firm does not have a presence in the jurisdiction of its new listing,” said Li.

Optimum venue
Lawyers say while it is inevitable that some clients may eventually deviate from their initial venue choice, advice in helping them choose the optimum location is extensive right from the start. “We advise on these types of issues (choosing the best venue for listings) all the time. The main consideration is where the company is most likely to have interest by investors and the best research coverage,” said Peepels. “For instance, the HKSE has all of the major Chinese financial institutions listed so a PRC bank that wants to keep up with its peer group would be advised to look to the HKSE,” he added.

However, recent delistings seem to indicate that while local companies are ambitious to list, many have only a vague idea of IPO market conditions. According to Wen Ye, capital markets partner at Beijing-based V&T Law firm, companies think that they can raise funds faster on UK and US bourses because their markets are more mature. “This is where we step in and advise clients that that is no longer the case: the Greater China market is just as strong, if not stronger, than the west,” said Wen.

Many PRC companies that listed on the AIM in boom times are indeed now finding it difficult to realise the benefits that they had expected. What is happening now, Peepels explains, is that sophisticated PRC companies are realising that while listing on foreign exchanges may appear more user-friendly, it may not quite provide the liquidity the company desires.

Undoubtedly, the strong interest and confidence of investors in the Greater China region – particularly Shanghai, Shenzhen and Hong Kong – have made their bourses an attractive medium in which to raise funds. WCC and China Medical Systems' recent issues transfer may trigger similar realisations. According to Edwin Luk, Orrick’s Asia corporate group leader and Hong Kong-based partner, Hong Kong currently offers good opportunities to companies which need capital markets funding to grow. “We anticipate seeing more Chinese companies delisting from AIM and going to Hong Kong,” he said. ALB

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• Orrick, Sidley clinch landmark issue transfer from LSE to HKSE (31 August 2010)