chinaFor a brief period in the 2010-2012 time frame, U.S. securities lawsuits filings against U.S.-listed Chinese companies surged as investors filed a wave of lawsuits against Chinese companies that obtained U.S.-listings by way of a merging with a publicly traded shell. The Chinese reverse merger lawsuit filing wave eventually subsided – yet filings against U.S.-listed Chinese companies have continued even if in somewhat diminished numbers. For the last four years, U.S. securities suit filings against Chinese companies have represented the predominant part of all securities lawsuit filings against non-U.S. companies.


The latest securities class action lawsuit against a U.S.-listed Chinese company was filed on May 2, 2012 against Lihua International, Inc. a vertically integrated Chinese copper products manufacturing company. As described in the plaintiffs’ law firms’ May 2, 2014 press releases (here and here), shareholders have filed actions in the Central District of California against the company and certain of its directors and officers seeking damages for alleged violations of the U.S. securities laws.


The lawsuits followed quickly after NASDAQ halted trading in the company’s shares on April 30, 2014 after the company’s share price had dropped more than 50 percent from $4.35 a share to $2.08 a share following media reports that the company’s warehouses had been seized by a local court and that the company’s Chairman and CEO had attempted to hide inventory from creditors and was being investigated by local police allegedly for larceny. The same day the company issued a press release stating that


The Board of Directors of Lihua International is aware of a decline in the Company’s stock price and published allegations that Mr. Zhu Jianhua, the Company’s CEO and Chairman of the Company’s Board, may have diverted or attempted to divert Company assets and as a result may have been the subject of an action by local law enforcement. Although they have not yet been able to verify this information, the Board’s Audit Committee is taking steps to determine the facts and will take appropriate action. If the allegations prove true, the Company’s financial statements may contain material misstatements.


The new securities lawsuits involving Lihua may involve some potentially sensational allegations but in at least one respect they are consistent with many U.S. securities lawsuit filings in recent years, in that they involve a non-U.S. company defendant – and in particular, they involve a U.S.-listed Chinese company. For the last several years, lawsuit filings against U.S.-listed Chinese companies have represented the largest number of all U.S. securities lawsuit filings against non-U.S. companies.


According to NERA Economic Consulting (refer here, page 9), lawsuits against U.S.-listed Chinese companies have represented the largest segment of all U.S. securities lawsuits against non-U.S. companies in each of the last four years:

  • ·         in 2010, securities suits against Chinese companies represented 46.8%% of all U.S. securities suit filed against non-U.S. companies (15 suits against Chinese companies out of 32 lawsuits filed against non-U.S. companies that year);


  • ·         in 2011, the peak year for lawsuit filings against Chinese reverse merger companies, securities suits against Chinese companies represented 59.6% of securities suits against non-U.S. companies (37 out of 62);


  • ·          in 2012, securities  suits against Chinese companies represented 47% of all securities suits against non-U.S. companies (16 out of 34);


  • ·         in 2013, the securities suits against Chinese companies represented 45.7% of all securities suits filed against non-U.S. companies (16 out of 35).


In each of these four years, the suits filed against Chinese companies represented a larger percentage of the total number of suits filed against non-U.S. companies than did the lawsuits filed against companies from any other country outside the U.S.


It is interesting to note, however, that while lawsuit filings against Chinese companies have surged in recent years, overall lawsuit filings against non-U.S. companies have remained roughly proportionate to the percentage of U.S listings that the non-U.S. companies represent. The one exception to this generalization was during 2011, the peak year for Chinese reverse merger lawsuit fillings, when suits against non-U.S. companies represented 27.7% of all U.S. securities lawsuit filings, while at the same time non-U.S. companies represented only about 16.4% of all U.S. listings.


Other than that one exceptional year however, the filings against non-U.S. companies have been roughly proportionate to the percentage of non-U.S companies among all U.S.-listed companies; that it, both the percentage of lawsuits against non-U.S companies and the percentage of non-U.S. companies among U.S-listed companies have been around 15-16%.


Some readers may be interested to know how the U.S. Supreme Court’s 2010 decision in Morrison v. National Bank of Australia figures into all of this. Readers will recall that in Morrison, the U.S. Supreme Court held that the U.S. securities laws apply only to transactions in company shares listed on U.S. securities exchanges and to domestic transactions in other securities. The presumption at the time was that Morrison would result in fewer U.S. securities lawsuit filings against non-U.S. companies. Morrison may well have had some impact on securities lawsuit filings against non-U.S. companies whose shares are not listed on U.S. exchanges. However, the discussion above is focused on non-U.S. companies whose securities are listed on U.S. exchanges; with respect to transactions of those companies’ securities on U.S. exchanges, Morrison has no impact. The U.S. exchange transactions in those non-U.S. companies’ securities remain subject to the U.S. securities laws even after Morrison.


It is interesting to note that so far this year, there have been relatively fewer U.S. securities class action lawsuit filings against non-U.S. companies, even counting the recent lawsuit against Lihua. By my count, only about 10.9% of the securities lawsuit filings in 2014 (6 out of 55) have involved non-U.S. companies. (I am including the recent High Frequency Trading securities lawsuit in this tally as many – but not all – of the defendants in the lawsuit are domiciled outside the U.S.).  Of course we are only a third of the way through the year so far. Much could change before year end.


A Note of Gratitude for an Unexpected Anniversary Present: Almost exactly eight years ago, I launched The D&O Diary with no real plan and with absolutely no notion that it would take on the life that it has.  The great thing is that even after thousands of blog posts, I am still having fun with the site. Though I continue to do this for fun, it is always nice to find out every now and then that someone is actually reading my blog. For that reason, I was quite surprised and delighted to read Law 360’s May 1, 2014 article entitled “5 Law Blogs to Add to Your Daily Routine” (here, subscription required) and to see that The D&O Diary was listed among the five law blogs that the article describes as “must-read legal blogs.” 


The article specifically said “Corporate lawyers who are unfamiliar with the D&O Diary should consider bookmarking this site, as it contains in-depth analysis about legal issues involving directors and officers’ liability.”


In all honesty, I am astonished to find my blog included on this short list, particularly given the august company in which my site has been included. The other four blogs listed are truly indispensable legal websites – the other four are: How Appealing (here); the SCOTUSblog (here); the Harvard Law School Forum on Corporate Governance and Financial Regulation (here); and Instapundit (here). I am not indulging in false humility when I say I truly to not feel worthy of my blog’s inclusion among these other four. But while I do not feel worthy of the honor, it is nonetheless a terrific anniversary present for my blog to be recognized this way.


There is one other reason that I am grateful, and that is that the extent of the support I get from my readers. I could never keep this site going if it were not for the many helpful suggestions, questions and comments I get from the site’s readers on a daily basis. As the Law 360 article itself notes, The D&O Diary “benefits from an active readership that often sends LaCroix tips on litigation, memos and releases.” To all of you who have helped me over the past eight years, thank you. I could never keep this thing going without your contributions and suggestions.


Long time readers know that I have been fortunate to have had the opportunity over the last few years to travel to some very interesting places. One of the great things I have discovered on my many travels is how many readers this site has in many far-flung places. It never ceases to amaze me that my site has attracted readers from Beijing to Barcelona and from Singapore to Stockholm. It is truly remarkable that I sit here at my desk in Beachwood, Ohio and hit “Publish” and out my messages go to the whole wide world.  And through the miracle of the Internet, people around the world actually see and read what I have written.


I never imagined any of this when I started out eight years ago. It has been great, though. To all of my readers near and far, Cheers, It has been a great eight years. I look forward to many more.