Melco Resorts and Entertainment could be delisted from NASDAQ as the US Securities and Exchange Commission (SEC) adopted new regulations concerning foreign companies back in January. Even though there’s still no immediate cause for concern, the news rocked the company as its shares fell 15% on Friday. The news comes just after its CEO applied for Macau license extension.
New Rules Connected to the Holding Foreign Companies Accountable Act Are the Main Issue
Back in January, SEC adopted rules in connection to the Holding Foreign Companies Accountable Act. These new rules stated that the audit report of a company must be issued by a public accounting firm, but not just any public account firm.
The audit report must be from a firm that the US Public Company Accounting Oversight Board can inspect. The main issue connected to Melco and this new rule is the fact that Melco’s auditor is Ernst & Young Hong Kong.
The PCAOB stated that it cannot complete an inspection in Hong Kong. The brokerage Bernstein outlined the problem on Monday and it stated that numerous Chinese American depositary receipts suffered as investors backed out of ADRs that face the risk of being delisted in the near future.
China and the US will be in discussions regarding this issue and the somewhat good news for companies such as Melco is the fact that the delisting will not be effective immediately. Instead, a three-year countdown has been launched and Melco has until 2024 to find a solution to the problem if the company doesn’t want to be delisted.
There Are a Couple of Solutions for Melco
Melco’s current situation is a bit tricky, but Bernstein expanded on the possible solutions for the company. The first solution is for Melco to merge with its parent company – Melco International Development Ltd.
Secondly, the company could reinstate its listing on the Hong Kong Stock Exchange. Back in 2015, Melco delisted its shares from the HKSE and it named investor preference for its ADR and lack of liquidity as the main reason.
According to Bernstein, the HKSE listing would come with some scrutiny and will take time, however, it has the potential to increase the exchange’s liquidity. As for the merge, Bernstein thinks that this solution is a bit more complex due to Lawrence Ho’s ownership and valuations in the companies. Lawrence Ho is the current CEO of Melco International.
The company is also facing problems in Australia as NSW’s Independent Liquor and Gaming Authority recently filed suit against Melco Resorts & Entertainment in which it seeks AU$3.7 million ($2.62 million) to recover some of the costs of the Bergin Inquiry. The Bergin Inquiry looked into the operations of Crown Resorts and deemed that Crown is not suitable to hold a license.