The year just completed was a banner year for IPOs in the U.S., with more companies completing their initial public offerings on U.S. exchanges in 2014 than in any year since 2000 (as detailed here). But as I have previously noted (here), with an increase in IPO activity comes the likelihood of IPO-related securities class action litigation. The largest IPO of them all during 2014 was the high-profile launch of Chinese e-commerce giant Alibaba, whose September 2014 initial public offering was the largest IPO ever. Given the size and high-profile nature of the Alibaba offering, it may have been inevitable that the company’s IPO might attract the attention of plaintiffs’ lawyers.
On January 30, 2014, an Alibaba shareholder launched a securities class action lawsuit against the company in the Southern District of New York. A copy of the shareholders’ complaint can be found here. The plaintiffs’ lawyers January 30 press release can be found here.
Alibaba completed its IPO listing its American Depositary Shares on the New York Stock Exchange on September 19, 2014. After the offering underwriters exercised their “greenshoe” option, the amount the company raised in the offering reached $25 billion, making it the largest IPO ever, and giving the company a market capitalization at the time of its IPO of $231 billion.
As reported in a front-page article in the January 29, 2015 Wall Street Journal (here), the prior day China’s State Administration for Industry and Commerce posted on its website a white paper accusing Alibaba of failing to crack down on the sale of fake goods, bribery and other illegal activity on its web sites. The Journal article reports that Alibaba has long grappled with allegations that Taobao, its biggest e-commerce platform, is rife with counterfeit goods. Though the white paper was not posted on the agency’s website until last week, the Journal article reports that it was based on discussions the agency has been having with the company since July, prior to the company’s IPO. In response, the company accused a senior official at a government agency of misconduct and threatened to file a formal complaint.
A January 30, 2015 Marketwatch article (here) reported that the SAIC said in a statement late Friday that it met with Alibaba’s executive chairman, Jack Ma, on Friday, resulting in an agreement to tackle fakes and boost consumer protection online. Alibaba agreed to “actively cooperate” with the SAIC to strengthen investment capital and technology and expand its anticounterfeit measures, the statement said. Alibaba also agreed to routine inspections of products sold on its site, the statement said. According to a January 30, 2015 Wall Street Journal article (here), the company claimed that this arrangement with the SAIC represented a “vindication” for the company.
Meanwhile, while these details regarding the company’s dispute with the government agency were circulating, the company released its financial results for the year. According to a January 29, 2015 Wall Street Journal article (here), “profit fell 28% from a year earlier for the quarter ended Dec. 31, a drop it largely attributed to expenses from giving shares to employees. But investors focused on its revenue growth, which—while sizable—disappointed analysts.”
On January 30, 2015, a holder of the Alibaba ADSs filed a securities class action lawsuit in the Southern District of New York against the company and four of its directors and officers, including Jack Ma, the company’s founder and Chairman. According to the plaintiff’s lawyers’ January 30, 2015 press release, the Complaint alleges “Alibaba failed to disclose that Company executives had met with China’s State Administration of Industry and Commerce (“SAIC”) in July 2014, just two months before Alibaba’s $25+ billion initial public offering in the United States (the “IPO”), and that regulators had then brought to Alibaba’s attention a variety of highly dubious – even illegal – business practices.” The complaint alleges, among other things, that in the offering Ma and Joseph Tsai, the company’s co-founders, sold millions of the personal holdings in the company’s stock in the offering.
The press release also states that the complaint alleges that:
On January 28, 2015, before the opening of trading, various members of the financial media reported that SAIC had released a white paper accusing Alibaba of engaging in the very illegal conduct disclosed to Alibaba executives in July 2014. On this news, the complaint alleges that the price of Alibaba ADSs declined unusually high trading volume. Then, the complaint alleges, on January 29, 2015, before the market opened, Alibaba issued a press release announcing its financial results for the quarter ended December 31, 2014. The complaint alleges that revenue growth missed the target defendants had led the investment community to expect and that profits declined 28% from Alibaba’s fourth quarter 2013 results.
The complaint alleges that as a result of these disclosures, the price of Alibaba ADSs plummeted further and collectively the two drops erased more than $11 billion in market capitalization from the ADSs Class Period high.
Interestingly, though the complaint makes numerous references to the company’s IPO, the complaint alleges violations only of Sections 10 and 20 of the ’34 Act. The complaint does not allege violations of Sections 11, 12, and 15 of the ’33 Act as would typically be expected in a complaint filed against a recent IPO company. Indeed, the class period that the complaint proposes does not even extend all the way back to the company’s September 19, 2014 IPO – the proposed class period commences on October 21, 2014. Although there is no way to know for sure, I am guessing that the complaint does not assert ’33 Act claims and does not propose a class period including the IPO date and immediately following period because, I suspect, the named plaintiff did not buy shares in the offering or immediately afterward, but only purchased shares on or about October 21, 2014, the beginning date of the purported class period. If that is the case, one would expect other claimants to come forward who did purchase shares in the IPO. NOTE: Several readers have suggested that even after the disclosures the company’s share price remained above the price at which the stock debuted, which would explain the absence of a ’33 Act claim.
This new lawsuit against Alibaba is merely the latest example of a securities litigation filing trend that was apparent during 2014, largely as a result of the uptick of IPO activity in 2013 and 2014, and that has been the increase in IPO-related securities class action litigation. During 2014, there were 17 securities lawsuit filed against IPO companies, representing 10% of all filings during the year.
Given the increase in the number of IPOs during 2013 and 2014 and in light of the usual lag time between the IPO date and the date of lawsuit filings, it seems probable that there will continue to be significant numbers of filings in the months ahead involving IPO companies. Alibaba may have been the largest of the recent IPOs – indeed the largest of all time – but it only one of the over 280 companies that completed initial offering on the U.S. exchanges in 2014, following 225 companies that completed U.S. IPOs in 2013. With over 500 newly listed companies just in that two-year period, it seems likely that there will be more IPO-related securities suits to follow. The Alibaba lawsuit may be the first of a host of IPO-related lawsuits to be filed this year.
Alibaba’s Fee-Shifting Provisions: The shareholder filed this lawsuit against Alibaba notwithstanding the fact that Alibaba has a fee-shifting provision in its Articles of Association. (Alibaba is organized under the laws of the Grand Caymans.) As discussed at length in a recent post on the Race to the Bottom blog (here), Alibaba’s charter has a provision requiring a shareholder who initiates a claim against the company who does not prevail in a judgment on the merits to reimburse the company for its fees and costs (including attorneys’ fees) incurred in connection with the claim. Whether or not this provision ultimately becomes relevant remains to be seen, but it would have to be expected that the company’s lawyers could attempt to rely on this provision, if, for example the defendants were to prevail on a motion to dismiss. The plaintiff and their attorneys would of course resist any such effort, and, among other things, would rely on the language of the provision that limits its effect “to the extent permitted by law” and undoubtedly would attempt to raise a number of arguments that the provisions cannot be enforced in connection with a claim under the federal securities laws. It will be interesting to see the extent to which these issues actually come into play in connection with or as a consequence of this lawsuit. NOTE: One alert reader has suggested that the term”shareholder” as used in the company’s charter provision does not include ADS holders.
Because Alibaba is organized under the laws of the Grand Caymans, the legislation pending in the Delaware legislature with respect to fee-shifting bylaws would be irrelevant, regardless of what the Delaware legislature may ultimately decide to do.