The new U.S. “Holding Foreign Companies Accountable Act

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The new U.S. “Holding Foreign Companies Accountable Act"

National security development impact audits of U.S.-listed Chinese companies

On May 20, 2020, the “Holding Foreign Companies Accountable Act” passed the Senate and will now be subject to voting in the House of Representatives. Non-compliance with the new audit requirements of the PCAOB may result in delisting from U.S. stock exchange.

If and when adopted, proposed “Holding Foreign Companies Accountable Act” would introduce two essential elements.
First, it sets a trading prohibition which may cause the company to be delisted from the U.S. security exchange. In case the foreign company did not file the audit report with the SEC through an accounting firm for three consecutive years, the trading prohibition kicks in.
Secondly, if the SEC has no access to the audit report of the foreign issuer which is normally caused by foreign laws, any relationship of the issuer with foreign government entities must be disclosed. In such cases, the following information should be submitted to the SEC:

  • the percentage of shares owned by governmental entities where the issuer is incorporated, 
  • whether these governmental entities have a controlling financial interest, 
  • information related to any board members who are officials of the Chinese Communist Party, and 
  • whether the articles of incorporation of the issuer contain any charter of the Chinese Communist Party.

Triggering event: A Chinese Coffee Company

The aim of the “Holding Foreign Companies Accountable Act” is to protect American investors against foreign U.S.-listed stock exchange companies that do not comply with SEC oversight rules. This Chinese competitor to a large American coffee company, a Chinese coffee company, was such a foreign U.S.-listed company. This Chinese competitor looked very successful at first sight. On April 2, 2020, the Chinese coffee company admitted that many of its 2019 sales were fake (totaling RMB 2.2 billion = US $310 million), what caused an immediate drop of its stocks at the securities market. This was disclosed after an internal inspection, responding to inquiries from regulatory agencies in the U.S. and China. It was found that the Chinese coffee company sold vouchers redeemable for coffee to companies that had a connection to chairman and controlling shareholder. At the start of 2020, the company was worth approximately $12 billion, but its value was only $638 million on June 3. From the U.S. perspective, the “Holding Foreign Companies Accountable Act” was seen as an opportunity to introduce stricter controls of the SEC and PCAOB that impact foreign companies with governmental ties.

Conflicting foreign laws

Foreign countries do not always allow disclose certain information required by U.S. auditors. For instance, China’s Securities Law prohibits the disclosure of documents to overseas authorities. However, a Memorandum of Understanding was signed between PCAOB and the CSRC (China Securities Regulatory Commission) to exchange audit documents in case of investigations in 2013. Apparently, the exchange did not meet the American expectations.

Targeted companies

Although the “Holding Foreign Companies Accountable Act” will apply to all foreign U.S.-listed companies, its impacts in particular Chinese companies. Companies that will fall within the scope of the proposed act, should be aware of the new rules. Deloitte is keeping track of further developments in this field.

More information on Global Sanctions and Export Controls

Do you want to know more on Global Sanctions and Export Controls? Please contact Marie-José van der Heijden at +31 (0)6 8217-0711.

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