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As Chinese public companies migrate to the major U.S. stock exchanges from smaller trading venues, they’re seeking increasingly sophisticated legal counsel and generating opportunities for law firms beyond the Wall Street stalwarts.

Chinese companies that listed on the major U.S. exchanges, including the New York Stock Exchange (NYSE) and Nasdaq, through traditional initial public offerings typically stay with the law firm that advised the company on the IPO, lawyers say.

But numerous Chinese companies that went public through unconventional financing structures lack relationships with national or global U.S. law firms.

Companies that are mulling moving up from the Financial Industry Regulatory Authority’s OTC Bulletin Board, the so-called "over the counter" exchange for securities not listed on regulated exchanges, also rarely have ties to major U.S. law firms. Companies listed on the Bulletin Board have specific U.S. Securities and Exchange (SEC) filing requirements, but don’t have to meet regulated exchanges’ share price and valuation requirements.

Such companies increasingly need to hire large U.S. corporate law firms to help them cope with SEC filings and Sarbanes-Oxley Act of 2002 corporate-governance mandates.


The Chinese companies on U.S. exchanges most likely to need new law firms often went public through a so-called "backdoor" IPO or reverse merger involving a Chinese operating company merging into an investor-owned shell company listed on a U.S. exchange. Some of the shell companies are so-called special purpose acquisition corporations (SPACs), a type of public equity fund created to find acquisition targets in a specific industry or country.

According to a review by The National Law Journal of the SEC filings of 106 Chinese public companies listed on Nasdaq and NYSE, major Wall Street law firms have a significant share of those companies’ securities work, including Latham & Watkins and New York-based Simpson Thacher & Bartlett and Sullivan & Cromwell.

But firms like Buchanan Ingersoll & Rooney of Pittsburgh and Thelen Reid Brown Raysman & Steiner are also representing Chinese companies that are listed on the major exchanges through backdoor IPOs, or OTC Bulletin Board companies on their way up. Other major firms, including Jones Day and O’Melveny & Myers, are taking on select companies that used backdoor IPOs as clients.

In late July, Jones Day took on its first Chinese client that went public through a reverse merger, NYSE-listed dairy product producer and distributor American Dairy Inc. American Dairy announced on July 30 that Jones Day would be its "principal outside legal counsel" and advise it on U.S. securities and corporate-governance matters.

Companies like American Dairy are recognizing that they need to address a wide range of corporate-governance issues, including getting independent directors on their boards, said partner Mark Hanson, who heads the capital markets practice in the firm’s Atlanta office.

"They are looking to law firms that have the experience and the depth with a presence in China to help advise them on these complex or sophisticated legal issues," Hanson said.

Jones Day usually advises companies listed both on Hong Kong’s stock exchange and on the major U.S. exchanges with American depository receipts, which are foreign securities traded on a U.S. exchange, said Owen Nee Jr., of counsel to the firm’s New York office.

Thelen Reid, in contrast, hasn’t represented a Chinese public company in a conventional IPO, but it represents about 30 public Chinese companies on U.S. exchanges, including one NYSE-listed company, a half-dozen Nasdaq-listed companies and the rest OTC Bulletin Board companies, said Washington partner Joseph Tiano Jr.

The companies, at least 80 percent of which went public through reverse mergers, have revenues ranging from $15 million to $750 million, so they’ve realized they need sophisticated legal counsel, Tiano said.

The firm’s NYSE-listed client, China Security & Surveillance Technology Inc., for example, used a small law firm in Boulder, Colo., to make some SEC filings before hiring Thelen Reid in 2006, according to SEC documents.

"It’s tough for these companies to be represented by the smaller firms that don’t have Mandarin-speaking, U.S.-trained securities lawyers who are both bilingual and bicultural," Tiano said.

Buchanan Ingersoll is in the "sweet spot" for advising this category of Chinese public company because the firm has strong securities and corporate capabilities, but charges lower rates than the Wall Street firms, said William Uchimoto, a Philadelphia shareholder who chairs Buchanan’s China practice group.

Uchimoto also represents hog producer and feed maker AgFeed Industries Inc., which initially worked with lawyers at small firms before its August 2007 Nasdaq listing.

AgFeed went public using nontraditional financing — a share exchange between the U.S. public shell company owners and the Chinese operating company owners, Uchimoto said.

Many companies on the OTC Bulletin Board, or on the so-called Pink Sheets, a quotation service with no SEC filing requirements operated by privately run Pink OTC Markets Inc., would like to move to a larger exchange to attract institutional investors, but the smaller law firms don’t necessarily have the expertise to bring the companies to Nasdaq, Uchimoto said.

"Once they get through the [listing] process, it’s really the beginning," Uchimoto said. "We want to represent them forever in ensuring adequate and full disclosure." The firm currently has a pipeline of Bulletin Board clients exploring or applying for a Nasdaq listing, he said.

Chinese companies that go public through backdoor IPOs often inherit the attorneys who structured the deal for the shell company or SPAC, said Kurt Berney, the managing partner of O’Melveny & Myers’ Shanghai, China, office.

When it comes time for another stock offering to raise more cash, the legacy lawyers may not have the capabilities or platform in China to help, Berney said.

"It takes a special kind of skill set and resource capacity to represent public companies," Berney said. "Some of it is on the ground, and some is not. It’s really a question of skill sets."

The stalwart Wall Street firms often shy away from Chinese companies that used a reverse merger or other nontraditional financing structure to go public because such companies have "poor liquidity," which makes it difficult for them to raise money through new stock offerings, said Simpson Thacher Hong Kong partner Leiming Chen.

"Most sophisticated law firms wouldn’t take on those transactions because of concerns about the companies raising ongoing capital," Chen said.

O’Melveny typically represents Chinese companies that used traditional financing channels to go public, but it is now representing "a few quality companies" that used a reverse merger, Berney said.

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