Historically, non-U.S. companies listed on U.S. exchanges were sued in securities class action lawsuits less frequently than were listed U.S. companies. For several years now, according to NERA, non-U.S. firms have represented about 16% of all companies listed on the U.S. exchanges, but according to Cornerstone, for the period 1997-2013, the average percentage of securities class action lawsuits involving foreign firms was only about 11%.
While the longer term average suggests that foreign firms have a lower likelihood of being involved in a securities suit than listed U.S. firms, in several recent years this relationship reversed, particularly in 2011. While the percentage of lawsuits involving non-U.S. companies was roughly proportionate to their percentage of U.S. listing in 2012 and 2013, in 2014 the percentage of foreign firms hit with securities suits again was above the percentage of foreign firms listed on U.S. exchanges. This disproportionate involvement of non-U.S. companies in U.S. securities class action litigation has continued in 2015.
The more recent trend involving more frequent suits against foreign firms gained significant momentum in 2011, driven by a wave of lawsuits against U.S.-listed Chinese companies. Many of these Chinese companies had gained their U.S.-listing by way of a reverse merger, in which the Chinese company merged with a U.S. domiciled shell company that had a U.S. listing. According to my analysis, there were 55 securities class action lawsuits filed against non-U.S. companies in 2011, representing about 25% of all securities suits filed that year. Of those 55 suits involving foreign firms, 39 were directed against Chinese-based or Chinese-domiciled firms. Those 39 suits involving Chinese firms by themselves represented about 18% of all securities class action lawsuit filed in 2011.
The percentage of annual lawsuit filings involving non-U.S. companies has declined since 2011. In 2012 and 2013, respectively, 16.6% and 16.3% of securities lawsuit filings involved non-U.S. companies, a figure much closer to even with the percentage of non-U.S. companies listed on U.S. exchanges but still above longer term annual average of the percentage of securities suits involving foreign firms. In 2014, the percentage increased to 20%. This trend toward a disproportionate securities litigation involvement of foreign firms has continued again in 2015, at least so far.
According to my unofficial running tally of year-to-date securities lawsuit filings, there have been 82 securities class action lawsuit filed so far in 2015. Of those 82 lawsuits, 18 involve companies based or organized outside of the U.S., representing about 22% of year-to-date securities suit filings. Of those 18, nine involve companies based or organized in China, and additional suit involved a Hong Kong company. In other words, 12.2% of 2015 year-to-date securities suit filings involve companies based or organized in China or Hong Kong.
Four lawsuits filed just since May 19, 2015 are representative of these 2015 lawsuits involving foreign companies and involving Chinese companies.
First, on May 19, 2015, a securities class action lawsuit was filed in the Southern District of New York against Vipshop Holdings Limited, a Chinese online retailer, and certain of its directors and officers. The complaint, a copy of which can be found here, alleges that the defendants “made allegedly false and/or misleading statements and/or allegedly failed to disclose that Vipshop Holdings Ltd manipulated and overstated sales, receivables, profit, cash flows, and asset accounts including inventory and investments, that Vipshop Holdings Ltd’s financial statements contain GAAP violations by reporting revenue on a ‘gross’ basis, despite the fact that the vast majority of the company’s sales are under a consignment arrangement, that Vipshop Holdings Ltd’s internal controls over financial reporting were ineffective, and that as a result of the foregoing, Vipshop Holdings Ltd’s public statements were materially false and misleading at all relevant times.” A copy of the plaintiffs’ lawyers’ May 19, 2015 press release about the lawsuit can be found here.
Second, on May 28, 2015, a securities class action lawsuit was filed in the Central District of California against Yingli Green Energy Hold. Co. Limited and certain of its directors and officers. The complaint, a copy of which can be found here, alleges that the defendants “made allegedly false and/or misleading statements and/or allegedly failed to disclose that the Company was inappropriately recognizing revenue, that Yingli Green Energy Hold. Co. Ltd.had no reasonable prospects to collect on certain accounts receivable based on historical customer conduct, that Yingli Green Energy Hold. Co. Ltd. was no longer able to borrow from commercial banks to fund its operations, that the Company’s inability to raise additional capital or borrow funds from commercial banks threatened the Company’s ability to continue as a going concern, and that, as a result of the foregoing, Defendants’ statements about Yingli Green Energy’s business, operations, and prospects were false and misleading and/or lacked a reasonable basis.” A copy of the plaintiffs’ lawyers’ May 29, 2015 press release about the lawsuit can be found here.
The third of the four lawsuits is a securities class action lawsuit that was filed in the Central District of California on June 5, 2015 against China Finance Online Co. Limited and certain of its directors and officers. The complaint, a copy of which can be found here, alleges that on June 3, 2015, a report was published asserted among other things, that the most current SAIC records in China show that Chairman and CEO Zhiwei Zhao suddenly resigned from his positions at three key Chinese subsidiaries of China Finance Online Co. over the past few months; that Chinese media reports exposing the detention of China Finance Online Co. independent director Rongquan Leng prompted China Finance Online Co. to announce his resignation, without addressing his alleged detention; and that Ling Wang, a former long-time China Finance Online Co. director and associate of Zhao, fled China in 2014, leaving his company indebted to China Finance Online Co. for $25 million. The plaintiffs allege that following these reports, the company’s share price declined. The plaintiffs’ lawyers June 5, 2015 press release about the lawsuit can be found here.
The fourth is a securities class action lawsuit that was filed on June 8, 2015 in the Central District of California against Xunlei Limited and certain of its directors and offices, as well as the underwriters who managed the company’s June 24, 2014 IPO. The complaint, a copy of which can be found here, alleges the defendants “made false and/or misleading statements and failed to disclose the material risk that Xunlei’s strategic focus on Project Crystal and its mobility initiative would have a detrimental impact on the Company’s financial condition.” The complaint alleges that “when the truth emerged,” the company’s share price declined. A copy of the plaintiffs’ lawyers’ June 8, 2015 press release about the lawsuit can be found here.
It is significant that these four lawsuits involving Chinese companies have been filed just in the last few weeks. These filings represent something of a surge of suits against U.S.-listed Chinese companies in a short space of time, although at least so far nothing on the scale of the wave of suits filed against Chinese companies in 2011.
I selected these four lawsuits representative in that they involve Chinese companies. Just the same, however, it is a little difficult to generalize about the non-U.S. companies that have been sued so far this year and the reasons why these companies have been sued. For example, two of the companies sued – Petrobras (Brazil) and Sociedad Quimica y Minera de Chile, S.A. (SQM, of Chile) – were hit with securities suits after bribery allegations involving the companies surfaced. Others, like the suits against Xunlei (mentioned above) and CHC Group Limited (Cayman Islands) involve IPO companies.
But while it may be difficult to generalize, the point is that at least so far the 2015 securities lawsuits disproportionately have involved non-U.S. companies. This obviously is an important consideration for foreign companies that have or are considering a U.S. listing. It is also an important consideration for D&O underwriters outside of the U.S. that are underwriting non-U.S. companies that have U.S. listings. These underwriters are well aware of the heightened risk that these companies have as a result of their U.S. listings. The fact is, however, that these U.S.-listed non-U.S. companies not only have a heightened risk, but their U.S. securities litigation exposure may be even greater than that of publicly traded U.S.-domiciled companies.