The recent volatility of the U.S. stock market has triggered a wave of class-action lawsuits against Asian companies listed in the U.S.
Recent stock price declines and fluctuations, due partly to the war in Ukraine, have resulted in even more such suits, making some high-profile Asian companies big targets for securities class actions.
Grab Holdings, for example, the Singapore-based superapp technology company that listed in New York last year via a special purpose acquisition company (SPAC), has now been hit with investigations and lawsuits filed by no fewer than eight U.S. law firms, including Schall Law Firm, Robbins Geller Rudman & Dowd, Glancy Prongay & Murray, Rosen Law Firm, and Bragar Eagel & Squire. At its listing, the entity was valued at $40 billion but its stock price took a 37% nosedive earlier this month.
The charges against Grab include allegations of misleading statements in its public disclosure and other violations of the U.S. federal securities law.
But Grab is by no means alone.
“It comes with the territory,” said one general counsel at an Asian company that recently listed on Nasdaq. “Before we listed, I warned our stakeholders that class actions are to be expected. It’s purely opportunistic and we don’t have to worry because we haven’t done anything wrong,” he added.
Lawyers at large international law firms agree.
“More often than not, you’ll have situations where the stock price fluctuates a little bit and the plaintiff law firms take notice and rush to file a complaint without an actual smoking gun or a major event,” said Quinn Emanuel Urquhart & Sullivan’s head of China practice and Shanghai co-managing partner, Xiao Liu.
Securities class action lawsuits are common in the U.S. Most do not make it to trial and are dismissed or settled outside of court.
In fact, since 1996, almost 3,000 securities class actions have been dismissed, while about 2,700 settled out of court, according to Stanford Law School Securities Class Action Clearinghouse. In 2020, 319 securities class actions were filed in the U.S., and last year there were 211. Since January 1 of this year, 46 such suits have been filed.
Notably, China has taken the top spot among foreign issuers as the target of class action suits in the U.S.—ahead of U.K. and Canadian issuers. And lawyers expect more U.S.-listed Chinese companies will see such suits.
A New Wave
“I believe that there will be another wave coming targeted at Chinese companies that are listed in the U.S.,” said Tai Heng Cheng, Sidley Austin’s Singapore co-managing partner and global co-head of its international arbitration and trade practice.
Cheng added that the latest wave is triggered by an intensified level of attention on Chinese companies operating in the U.S., China’s own crackdown on foreign-listed Chinese companies, and the rise of xenophobic sentiment in the U.S. that was perpetuated by the Trump Administration and exacerbated by the COVID-19 pandemic.
“It’s very easy for short sellers to play on—even prey on—those features in the U.S., to paint Chinese companies as the bad guys,” said Cheng.
According to Quinn Emanuel’s Liu, the prior wave of securities class actions sometimes targeted Chinese companies that were able to get listed through backdoor listings in the U.S. and therefore avoided having to make regulatory filings or funding to go public. When challenged by short sellers, “these companies often crumble and get delisted,” he said.
But the dynamic of the latest wave is different, he added, explaining that the U.S.-listed Chinese companies are unlike those of the previous wave.
“These are solid companies that have hired top lawyers and are represented by highly regarded underwriters such as Citibank, Goldman Sachs and Morgan Stanley. They have also all been audited by audit firms before,” he explained.
But the 2020 scandal of China’s Luckin Coffee, which admitted that it had fabricated $310 million worth of sales in a bid to boost it share price on Nasdaq, has brought into question the general credibility of U.S.-listed Chinese companies. For its initial public offering, Luckin was advised by Davis Polk & Wardwell and its underwriters, including Credit Suisse and Morgan Stanley, were represented by Cleary Gottlieb, Steen & Hamilton.
Luckin has agreed to pay $175 million to investors to settle its accounting fraud.
Of recent high-profile securities class action lawsuits, China’s ride-hailing giant, Didi Chuxing, which listed on Nasdaq in the middle of last year and raised $4.4 billion, has also been sued by American shareholders after its shares plunged following an announcement by the Cyberspace Administration of China (CAC) that it was conducting a review of Didi’s data-collection policies on “national security” grounds. The Chinese government also ordered app stores to drop Didi from their platforms in China.
Didi delisted from the U.S. bourse in December.
Unlike Luckin, though, Didi’s predicament was circumstantial and not the result of fraud.
Didi’s IPO was advised by Skadden, Arps, Slate, Meagher & Flom and elite Chinese law firm Fangda Partners. According to court dockets, Quinn Emanuel is representing Didi on its class-action suits. Liu declined to comment on the firm’s representation of Didi, as the matter is ongoing.
Choice of Defense
Class action lawsuits have become so pronounced that prior to listing on Nasdaq, Didi purchased Directors and Officers (D&O) liability insurance to mitigate any potential financial risk caused by class-action lawsuits, according to the company’s general counsel.
D&O insurance will typically cover legal and settlement costs unless the case is dismissed, in which case issuers will be expected to cover the costs of their own counsel.
“Companies are less bothered by that,” said Liu. “They are happy to pay a little money to make the case go away.”
D&O insurance, however, does not cover wrongdoing.
Lawyers say companies sometimes fail to recognize how important it is to engage quality counsel to prepare motions to dismiss so they can avoid triggering a payout and a public trial. If a suit is not dismissed, there is still a risk, although rare, that they will have to pay out settlements that are higher than the amounts for which they are insured.
In 2019, Alibaba Group Holdings agreed to pay $250 million to resolve investors’ lawsuits that accused the company of not disclosing prior to its $25 billion initial public offering that officials had met with the Chinese government regarding alleged counterfeit products sold on its platforms.
“After that [Alibaba] settlement, I’ve seen insurance companies being much more careful and demanding a much larger premium and higher deductible requirements for these Chinese issuers. So, it’s actually getting harder and harder for the companies to fully take advantage of the insurance coverage,” said Liu.
On the flip side, the availability of D&O insurance also means that issuers on the wrong side of a class-action lawsuit often turn to the same firms that advised on their IPOs to handle their defense, especially if the firm already has an established securities litigation practice. The insurance means the issuers are less restricted by the high cost of a defense and their outside counsels’ hourly rates.
Skadden, Arps, Slate, Meagher & Flom, which declined to comment for this story, is the top legal advisor for Chinese companies making U.S. stock market debuts. The firm has also defended several of its issuer clients in U.S. securities class action lawsuits.
Last year, Skadden represented Chinese online recruitment servicer Kanzhun Ltd. on a securities class action concerning cybersecurity risks. The firm had advised Kanzhun on its $914 million IPO just weeks before the class action was filed.
In 2016, Skadden also advised e-commerce business China Dangdang Inc. on a $556 million going-private transaction, and then later secured the dismissal of a securities class action stemming from the same deal.
Using the same firm for both an IPO and a class action defense can present significant conflicts, however, said both Cheng and Liu.
“If there was any improper advice in the IPO, you want to be able to figure out what the law firm’s role was,” explained Liu. “If you use the same firm, then that firm has a natural incentive perhaps not to look too hard at that issue.”