In one of the largest shareholder derivative lawsuit settlements ever, involving a very unusual derivative claim under Cayman Island law prosecuted in a U.S. court on behalf of a China-based Cayman Islands company, the parties to the Renren derivative litigation have agreed to settle the case for at least $300 million. The settlement is subject to a “true up” process that could increase the ultimate amount of the settlement payments. The settlement is also subject to court approval. The parties’ October 7, 2021 settlement stipulation can be found here. Renren’s October 8, 2021 press release about the settlement can be found here. An October 8, 2021 press release from the lead plaintiff’s counsel about the settlement can be found here.

 

Background

Renren was a social media company based in China and organized under the laws of the Cayman Islands. After Facebook was banned in China, Renren developed a plan to try to become the next Facebook in China. In support of this plan, Renren completed an IPO allowing its ADRs to trade on the NYSE. Renren raised over $700 million in the offering. The company’s social media plans did not succeed; however, the company used the offering proceeds and other funds to invest in a number of ventures, including most notably in the then-nascent financial services company Social Finance, Inc. (SoFi). The value of many of these investments, including, in particular, the company’s SoFi investment, appreciated significantly.

 

According to the shareholder derivative complaint filed in New York state court by minority investors of Renren, Renren’s CEO Joseph Chen, working in collaboration with controlling Renren shareholder David Chao, and advised by the financial advisory company Duff & Phelps, developed a plan to have Renren’s investment assets transferred to a privately held Cayman Islands company called OakPacific Investment (OPI).  The transaction was completed in June 2018.

 

Several Renren minority investors filed lawsuits in New York state court on behalf of nominal defendant Renren and against Chen, Chao, Duff & Phelps and other defendant asserting derivative claims under Cayman Islands law and New York law in connection with the OPI transaction. Essentially, the claimants alleged that the defendants caused Renren to transfer its investments to OPI at an undervalued price, benefiting certain of the defendants and harming Renren.

 

The various separate investor lawsuits were consolidated. The defendants then moved to dismiss the consolidated action, arguing that the plaintiffs lacked jurisdiction over many of the defendants and that the plaintiffs lacked standing to assert claims under Cayman Islands law in New York state court. On May 19, 2020, New York Supreme Court Justice Andrew Borrok denied the defendants’ dismissal motion, holding that it was appropriate for plaintiffs’ breach of fiduciary duty claims to go forward in New York, based, among other things, on the fact that the defendants had taken numerous steps to advance the alleged scheme in New York and had sought the approval of New York regulators in furtherance of the scheme (including with respect to the transfer of the shares of SoFi, which is regulated in New York).

 

In March 2021, in a brief three-page opinion (here), the appellate division of the New York Supreme Court affirmed the trial court’s denial of the motion to dismiss, holding that the lower court correctly concluded that the New York state court has jurisdiction over the defendants since the investors had established that the defendants had done business in New York.

 

Further proceedings followed the appellate court’s ruling. The parties also pursued mediation, which ultimately resulted in the agreement to settle the New York action. The settlement is subject to court approval.

 

The Settlement

On October 7, 2021, the parties entered into a stipulation of settlement pursuant to which a total of at least $300 million will be paid to the minority shareholders to resolve the claims. The actual payment amount will be the greater of $300 million or the amount determined as a result of a “true up” process to determine the number of shares and ADSs held by non-Defendants. The $300 million settlement fund is to consist of two payments: $288.5 million from Chen and OPI, and $11.5 million from Duff & Phelps. Chen and OPI, on the one hand, and Duff & Phelps, on the other hand, may have to pay more as a result of the “true up” process. The settlement stipulation makes no reference to any amount to be paid toward the settlement by D&O insurers. Unusually for a derivative settlement amount, the settlement proceeds (less fees and costs) will be paid directly to the minority investors, rather than to the company itself.

 

The stipulation provides that plaintiffs’ counsel may seek a fee award from the court out of the settlement fund, but the stipulation makes no reference to the amount of the fee award. In the stipulation, the defendants deny any wrongdoing in connection with the claims asserted in the litigation.

 

Discussion

The Renren settlement is one of the largest shareholder derivative settlements ever. However, exactly where it falls on the settlements table is hard to say. There is not just the fact that the Renren settlement amount could change as a result of the “true up” process. There is the further problem that it is hard to say what the actual present value is of the nominally largest settlement, the Alphabet/Google settlement with a stated value of $310 million. Since the funds in the Alphabet settlement are to be paid out over the course of ten years, the present value of the settlement is something less than the $310 million nominal value. So it is hard to say exactly where the Renren settlement falls on the list, but it can at least be said that it is one of the largest derivative settlements ever. My running list of the largest derivative settlements can be found here.

 

Both the lawsuit itself and the settlement are unusual and noteworthy in a number of other respects as well. In order even to be able to pursue their claims in New York state court, the claimants had to overcome numerous legal challenges to acquire U.S. jurisdiction over multiple foreign defendants and establish derivative standing under Cayman law.

 

The plaintiffs’ law firm’s press release about the settlement quotes one of the lead plaintiffs’ attorneys as saying that “What little New York law existed on establishing derivative standing under Cayman law was adverse, but the facts of this case and a thorough presentation of Cayman law nonetheless allowed us to establish that the minority were in fact entitled to pursue the company’s claim under the ‘fraud on the minority’ exception to the general rule against derivative standing.”

 

The October 8, 2021 Law360 article discussing the settlement (here) quotes another of the plaintiffs’ lawyers as saying of the settlement that “In addition to providing a rare direct payment to minority stockholders, the Renren settlement is unique because the team succeeded in prosecuting derivative claims on behalf of a Cayman Islands corporation, headquartered in China, that were governed by Cayman Islands law, in state court in New York. This is truly a landmark case and outcome in derivative litigation.”

 

It is important to note here that there were a number of factual details involved in these circumstances – and in particular a number of allegations of specific actions defendants allegedly undertook in New York in furtherance of their alleged scheme – that were critical to the court’s determination that the plaintiffs had adequately alleged both jurisdiction and standing. The New York courts’ rulings do not establish some uniform principle that claimants can assert jurisdiction and standing in New York state court in derivative claims under Cayman Island law.

 

Special thanks to a loyal reader for alerting me to the settlement and for providing me with a copy of the Stipulation of Settlement.