When I heard that moves by Chinese financial regulators had forced the Shangahi securities market to suspend Ant Group’s massive planned IPO, my first thought was that, if the offering had been planned for the U.S. the called halt to the offering might well give rise to a “failure to launch” claim. However, since Ant Group’s IPO was planned for the Shanghai and Hong Kong exchanges, the possibility of a claim seemed remote. As it has turned out, however, a failure to launch claim has been filed in the U.S. after all, with the added twist that the corporate defendant in the lawsuit is not Ant Group itself, but instead it is Alibaba, the U.S.-listed Chinese Internet commerce company that owns 33% of Ant Group’s equity interest. As discussed below, the new lawsuit against Alibaba has a number of interesting features.
Ant Group is a Chinese online payments and lending processing company offering a wide variety of services and financial products, including insurance, the sale of mutual fund investments, and utility bill payments. Ant grew out of an online escrow service called Alipay created in 2004 within Alibaba Group Holding Ltd. Jack Ma, Alibaba’s co-founder and then-Chief Executive, later carved out the business, and as it grew the business was renamed to Ant Group. Ma is considered China’s wealthiest individual.
On July 20, 2020, Ant Group announced that it has begun the process for a concurrent initial public offering on the Shanghai and Hong Kong stock exchanges. On October 26, 2020, Ant Group priced its IPO and was set to raise $34.5 billion. The target date for the IPO was November 5, 2020. A completed offering of that size would have made the Ant Group offering the largest IPO in history, larger even than Saudi Aramco’s December 2019 $29.4 offering, as well as Alibaba’s own September 2014 $25 billion offering in the U.S.
On Monday, November 2, 2020 Chinese regulators summoned various Ant company officials to a meeting, including Ma; Eric Jing, Ant’s executive chairman; and Ant’s Chief Executive Simon Hu. The meeting including representatives from four Chinese financial regulators, including the People’s Bank of China, the China Banking and Insurance Regulatory Commissions, the China Securities Regulatory Commission and the State Administration of Foreign Exchange. According to a November 2, 2020 Financial Times article about the meeting (here), “the Chinese word used to describe the interview – yuetan – generally indicates a dressing down by authorities.”
According to Ant, in the meeting, “views regarding the health and stability of the financial sector were exchanged.” The Ant executives were also apprised of new draft rules from China’s banking regular regarding microlending. If implemented the new rules could slow the expansion and profitability of Ant’s fast-growing consumer business and lending units.
On Tuesday, November 3, 2020, Ant Group disclosed that the Shanghai stock exchange suspended Ant’s debut, which had been planned for Thursday November 5, 2020. The Ant Group statement said that the exchange had suspended the offering because Ant Group “may not meet listing qualifications or disclosure requirements due to material matters related to” the November 2 meeting, and also because of “the recent changes in the Fintech regulatory environment.”
A November 12, 2020 Wall Street Journal article (here) said that Chinese President XI Jingping “personally made the decision to halt the initial public offering.” The Journal article suggests that statements Ma had made at an October 24, 2020 financial forum in Shanghai had “infuriated” Chinese government officials.
Ma took the stage at the October 24 event after a senior regulatory official had, in his own speech, said that China needed to safeguard its financial system from systemic risks. In his speech, Ma reportedly said that “we cannot regulate the future with yesterday’s means,” adding that “There’s no systemic financial risks in China because there’s no financial systems in China. The risks are a lack of systems.”
Chinese officials who read about Ma’s speech were, according to the Journal, “furious.” The Journal article says that as a result Xi ordered Chinese regulators to investigate and all but shut down Ant’s IPO.
On November 13, 2020, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Alibaba; Daniel Zhang, Alibaba’s CEO; and Maggie Wu, Alibaba’s CFO. The complaint purports to be filed on behalf of a class of investors who purchased Alibaba securities between October 21, 2020 (that date that the pricing of Ant Group’s IPO was announced) and November 3, 2020 (the date Ant Group’s IPO was suspended). The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class. A copy of the complaint can be found here.
The complaint refers to the facts and circumstances described above with respect to the Ant Group’s suspended IPO. The complaint alleges that Alibaba’s share price declined approximately 8% on the news that the Ant Group’s IPO had been suspended.
The complaint refers to only two statements made by the lawsuit defendant, Alibaba.
The first is the company’s October 21, 2020 filing with the SEC on Form 6-K (here), in which the company said, among other things, Ant Group, an “unconsolidated related party” of Alibaba, had announced the arrangements for its IPO, and that Alibaba had agreed to subscribe for 730 million A shares as part of the placement for strategic investors in the A Share Offering, adding that the “final structure, price and timing of the Offering will be contingent upon market conditions and other factors, and there can be no assurance as to if and when the Offering will be completed.”
The second Alibaba statement to which the complaint refers is Alibaba’s October 26, 2020 SEC filing on Form 6-K (here), in which the company reiterated that the Ant Group had announced its concurrent offering on the Shanghai and Hong Kong stock exchanges, and that Alibaba had entered a subscription agreement with respect to the offering. The October 26 filing added that consideration for the subscription agreement would be about RMB50.2 billion, and that after the offering Alibaba expects to hold about 31.8% of Ant Group’s equity interest. The October 26 filing also notes that the subscription agreement “is subject to receipt of required regulatory approvals and fulfillment of other customary conditions precedent.”
The complaint alleges with respect to these two Alibaba statements that the defendants breached the U.S. securities laws by failing to disclose to investors “(1) that Ant Group did not meet listing qualifications or disclosure requirements for certain material matters; (2) that certain impending changes in the Fintech regulatory environment would impact Ant Group’s business; (3) that, as a result of the foregoing, Ant Group’s IPO was reasonably likely to be suspended; and (4) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business operations, and prospects were materially misleading and/or lacked a reasonable basis.”
The clash-of-the-titans nature of this situation is absolutely fascinating to me. Ant Group was going to be the largest IPO ever! Alibaba is China’s largest company by market capitalization (and its market cap hit an all-time high of $858 million immediately after Ant Group priced its IPO)! Jack Ma is China’s wealthiest individual! Xi Jinping is President of the world’s largest country by population! This is all about as high-profile and high-stakes as you can get.
All of that said, none of this makes for a very convincing lawsuit against Alibaba. Indeed, the lawsuit against Alibaba feels like nothing so much as an attempt to bootstrap Ant Group’s connection to Alibaba into a lawsuit about the suspension of the Ant Group’s IPO. The only two statements of Alibaba referenced in the complaint are both about as non-descript as a statement by a public company could possibly be. There is nothing in the statements except a bare recitation that the IPO was planned, scheduled to take place, and that Alibaba would participate through a subscription agreement. The October 21 statement even contains an express warning to investors that the IPO might not take place as planned.
The complaint also has an unmistakable “fraud by hindsight” feel to it. The defendants’ supposed misstatements as alleged in the complaint amounts to an allegation that the defendants’ failed to tell investors that Chinese regulators were going to turn on Ma and Ant Group and impose significant new regulations.
The plaintiff is going to have an uphill battle, to say the least, in convincing a court that Alibaba’s statements on October 21 and 26, 2020 were misleading for failing to tell investors about things that did not happen until November 2, 2020.
By the same token, any court looking for scienter allegations in this complaint is also going to have a very hard time finding anything, much less allegations supporting a strong inference that the defendants acted with scienter.
The one thing this sequence of events does show is that there is a substantial component of political risk involved in doing business in, and investing in companies that do business in, China. The fact that political officials and financial regulators might intervene in markets out of anger against company executives or out of a desire to cut company officials down to size underscores the fact that the political dimension of China’s economy can never be disregarded. These events put a huge asterisk beside the market capitalization and business prospects of any company doing business in China.
Maybe that is an angle the plaintiffs might work in this case – as in, you didn’t tell us about the exposure Ant Group faced to China’s financial regulators and political elite. However, any investor unaware of this existential risk that every Chinese company faces has simply not been paying attention, for example, to recent events in Hong Kong and so on.
Despite all of the above, I can guess the reason that the plaintiffs’ lawyers were attracted to this case (beyond the obvious fact that they are trying to capitalize on one of the most significant adverse developments in global financial markets this year).
That is, the drop in Alibaba’s market capitalization on the news that Ant Group’s IPO had been suspended may have only been 8%, but given Alibaba’s massive size, the market cap drop, according to the Journal, amounted to nearly $80 billion. This is clearly enough that it might pique plaintiffs’ lawyers’ interest – as it apparently has done. Of course, whether the plaintiff’s lawyers’ effort to bootstrap the suspension of Ant Group’s IPO into a claim against Alibaba will succeed remains to be seen.