Beginning in 2010 and accelerating in 2011, plaintiffs’ lawyers filed a wave of securities class action lawsuits against U.S.-listed Chinese companies, many of which obtained their U.S. listings via reverse merger. These cases have been making their way through the courts, and some have now reached the settlement stage. The settlements seem to share more in common than the involvement of U.S.-listed Chinese companies – the settlements are also relatively modest.
The latest of these cases to settle is the lawsuit involving Orient Paper and certain of its directors and officers. According to the company’s June 21, 2012 press release, the parties to the suit have agreed to settle the case “in exchange for a $2 million payment from the Company’s insurer.” The settlement is subject to court approval.
As I discussed in a post at the time (refer here), the Orient Paper case was the first of the of the Chinese reverse merger company securities suits to survive a motion to dismiss. On July 20, 2012, Central District of California Judge Valerie Baker Fairbanks denied the defendants’ motion to dismiss.
The Orient Paper case is not the first of this group of securities suits filed against U.S.-listed Chinese companies to settle. For example, on March 15, 2012, the parties to the securities suit involving Tongxin International filed a settlement stipulation in the Central District of California indicating that they had settled the case for $3 million. The Tonxin settlement will be funded by the company’s insurer.
An earlier securities suit involving a U.S. listed Chinese company China Shenghguo Pharmaceutical Holdings, filed back in 2008, settled in 2010 for $800,000. According to the parties’ settlement stipulation (here), $600,000 of the settlement amount is to be funded by the company’s insurer, with the remainder to be funded by the company.
You probably noticed that these three settlements have something in common. They not only all three involve U.S.-listed Chinese companies, but all three of the settlements are relatively small. (By way of comparison, Cornerstone Research reports that the median of all securities class action settlements through 2010 was $8.1 million.)
The relatively small size of the settlements might be a reflection of the merits or of the companies’ relatively small size. I suspect a different factor. In my experience, U.S.-listed Chinese companies generally carry very low D&O insurance limits. The low limit levels mean that when these companies are sued, defense expenses alone could quickly deplete a significant percentage of the total amount of insurance, leaving little remaining with which to try to settle the case. The relatively low level of these settlements and the fact that all three settlements were settled in whole or in substantial part with insurance funds suggests to me that something like that may have happened here.
In 2010 and 2011, when the plaintiffs’ lawyers flooded the courts with these securities suits against U.S.-listed Chinese companies, I wondered at the time why the plaintiffs’ lawyers found these cases so attractive. Even though the factual allegations were in some cases quite sensational, they were always going to be difficult cases to pursue. Service of process on the individual defendants alone would in many cases pose significant challenges. Discovery will also pose substantial challenges, including not just the absence of reliable procedures to effect discovery in China, but also the problems associated with distances, language distances and cultural differences. The plaintiffs in these cases may also face barriers getting a class certified (about which refer here).
But even beyond these procedural difficulties, there was always this fundamental problem that in the end there might be very little insurance money out of which to try to collect any settlement or judgment. Given the modest size of these settlements, the attorneys’ fee awards are or will likely be small as well. Small enough to make you wonder how these cases could be worthwhile for the plaintiffs’ lawyers. Of course, going in, they almost certainly had no way of knowing about the lower insurance levels that the Chinese companies often carry.
I have made this point before –about the relative unattractiveness of these cases for the plaintiffs’ firms – to others in the insurance industry, which provoked the response that perhaps the real targets in these cases are the investment banks, lawyers and accountants who advised these companies and who helped them obtain their U.S. listings. It may be that these outside professionals may represent attractive targets, but with the limitations on the reach of the securities laws to those who are not primary violators, these cases against the outside professionals pose their own sets of issues.
There are many more of these cases against U.S.-listed Chinese companies yet to be resolved. Some of course will be dismissed but the ones that survive the motions to dismiss will likely move toward settlement. As these cases progress, perhaps there will be more sizable settlements and the smaller settlements discussed above will look like early outliers. However, my suspicion is that the relatively low levels of D&O insurance that many of these companies carry will mean that many of the settlements will be similarly diminutive.
Special thanks to the several readers who sent me copies of the Orient Paper settlement press release.
Every Now and Then I Read a Headline and Say—What?: Like this June 21, 2012 New Scientist article: “Tiny Human Liver Grows Inside Mouse’s Head” (here).
Matt is Back! And He’s Still Dancing!: My all-time favorite video is the classic Where the Hell is Matt Video (here). The simplicity of the concept is pure genius. The video consists of short clips of Matt, dancing. In places all over the world, with hundreds and hundreds of people. The background music is awesome too.
The great news is that Matt is still dancing. And even better, he has made a new video. It just came out on June 20, 2012. It is every bit as fun as his prior videos. You have to watch it. (Sorry about the commercial at the beginning, it is short). I would like to add a special shout out to my Cleveland friends, you look fine dancing around the “Free” Stamp.” I hope everyone enjoys this video as much as I did.