The next wave of shareholder litigation?
Many of the 400 or so Chinese companies listed on the New York Stock Exchange (NYSE) are thinking twice about retaining their NYSE listing. This is partly because many have struggled to maintain their share price in challenging market conditions and partly due to the significant number of US Securities Class Actions filed against US-listed Chinese companies and their directors. In fact, a growing number of such companies are trying to avoid being dragged in to costly litigation with their shareholders by de-listing from the NYSE and returning to private ownership.
In this Legal Alert, Simon Goldring, Alison Clarke and Jez Hewitt summarise the historical claims trends concerning US-listed Chinese companies and explain that returning to private ownership will not necessarily guarantee these companies a “safe haven” from securities litigation. On the contrary, de-listing could expose the companies, their directors and D&O insurers to bump-up claims by shareholders if it is not managed carefully.
IPO/RTO claims: the first litigation trend
To date, 57 Class Action shareholder lawsuits have been filed against US-listed Chinese companies and/or their directors. The defendant companies had all listed on NYSE either via an IPO or a reverse take-over (RTO)1 and most of these claims were filed shortly after a decrease in the company’s share price. The shareholder plaintiffs typically seek to recover the depletion in their shares’ value by alleging that the company and its directors misled them into purchasing their shares by including incomplete, or inaccurate, information in the documents accompanying the listing, and in the company’s SEC filings.
Thirty-nine new IPO/RTO claims were filed in 2011, although only eight new lawsuits have been filed so far this year and there are no obvious reasons to expect a deluge of new IPO/RTO claims in future. We are therefore cautiously optimistic that most of the IPO/ RTO claims against Chinese companies and their directors have been filed (and presumably notified to D&O insurers) already. This is partly because the companies listed already are becoming more familiar with the US style of corporate governance and reporting and partly a product of timing; fewer Chinese companies are now listing on the NYSE.
Bump-up claims against de-listing companies: the second litigation trend?
A growing number of US-listed Chinese companies are reacting to the above developments by returning to private ownership. This could expose them and their directors to bump-up claims whereby shareholders who have been bought out allege that the consideration they received for their shares was inadequate. Their claims are for additional consideration and their quantum is the difference between the consideration they actually received and that which they allegedly should have been paid.
Furthermore, all the main ingredients currently exist for bump-up claims involving Chinese companies to become the next big trend in US securities litigation.
Share prices are low
The share prices of many Chinese companies has fallen significantly after they obtained their US listings. Most have struggled to engage cynical investors and analysts, and the Sino Forest and other corporate scandals involving Chinese companies have, rightly or wrongly, hit the shares of other Chinese companies hard.
US-listed Chinese companies are, or are considering, delisting…
In the past two years, at least 16 US-listed Chinese companies have de-listed and in so doing have collectively raised over US$4 billion in capital.
At least three further large US-listed Chinese companies are known to be in buy-out discussions. The combined consideration for those deals is rumoured to be approximately US$2 billion. Furthermore, Goldman Sachs’ head of M&A in Asia recently commented that the appetite for more US-listed Chinese companies to go private is “definitely there” and estimated that approximately 50 such companies are presently considering, or actively seeking, de-listing.
…and some of them are de-listing by unconventional means
Only half of the 16 de-listings referred to above involved well known and established private equity investor purchasers. The balance were a mix of corporate takeovers or even the original owners using their own funds or bank finance to buy back their shares.
More worryingly, publicly available trading data and SEC filings suggest that a number of Chinese companies have hired investment companies to build up holdings in the company’s shares while their price is low. The investment companies could ultimately obtain a majority holding, in which case the company will in practical terms be returned to private control and ownership without any of the selling shareholders necessarily knowing about it. Furthermore, these investment companies are currently outside the reach of the US antitrust regulators. They only have to request clearance from the regulators2 if they hold shares in the Chinese company worth more than US$68.2m3; none presently do.
Chinese companies contemplating de-listing from the NYSE should:
- consider carefully with their professional advisors how best to minimise the risk of provoking bump-up claims in returning to private ownership; and
- discuss their de-listing plans with their insurance brokers to ensure that appropriate disclosures are made to D&O insurers.
Likewise, D&O insurers should:
- brace themselves for an increase in bump-up claims against their US-listed policyholders and their directors;
- flush out their potential exposure to such claims by seeking disclosure of any de-listing plans from their insureds during placing/renewal negotiations; and
- consider limiting their exposure by endorsing a bump-up exclusion onto their D&O policies, if appropriate. These exclusions are still relatively rare in D&O policies issued in the London and Asian insurance markets but are more common in D&O policies issued by the American insurance market.