Over the past quarter century, hundreds of Chinese companies have listed on major U.S. stock exchanges. These firms are commonly referred to as “red-chip” companies, a colloquial term referencing the color traditionally associated with China. Most red-chip firms entered U.S. capital markets through initial public offerings (IPOs), while a smaller number became public through reverse mergers with public shell companies. Companies that went public through IPOs are almost always incorporated offshore in the Cayman Islands. By contrast, firms that became public through reverse mergers frequently inherited the incorporation jurisdiction of the shell companies they acquired, which were often organized in Delaware.

In the past decade, waves of privatizations have swept through this population of U.S.-listed Chinese firms. Because red-chip firms are incorporated in different jurisdictions, the legal regimes governing these going-private transactions diverge accordingly. A minority of these firms are subject to Delaware corporate law, whereas the majority are governed by the corporate law of the Cayman Islands.

This jurisdictional divergence raises an important question: do differences in corporate law affect the outcomes of controller-initiated privatizations? In particular, does stronger legal protection for minority shareholders translate into more favorable deal terms for those shareholders?

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