Bump-up claims: the next wave of US shareholder litigation against US-listed Chinese companies?
A growing number of US-listed Chinese companies have had enough of being sued by their American shareholders.
Many Chinese companies listed on the New York Stock Exchange (NYSE) are looking at de-listing from the NYSE (and returning to private ownership) in order to reduce their exposure to costly claims by their American shareholders.
Sued when they list in the United States…
Around 400 Chinese companies have listed on the NYSE since 2002. Over the last three years, almost 60 of those companies (and their directors) have been named as defendants in US Federal Securities Class Actions alleging that they misled investors into purchasing their shares by including incomplete, or inaccurate, information in the documents accompanying the listing and in the company's SEC filings.
Such class actions can be very costly for the defendants (and their D&O and POSI insurers) to defend. They are also causing broader public-relations issues as Chinese companies struggle to maintain their share prices and to engage cynical American investors and analysts. It is hardly surprising that a growing wave of such companies are now looking to delist from the NYSE. However, de-listing will not guarantee them a "safe haven" from US Securities Litigation; on the contrary, it could expose those companies, their directors and D&O insurers to bump-up claims if it is not managed carefully.
… and sued when de-list from the NYSE too?
Returning to private ownership obviously involves the incoming private owners buying out the shares of the existing shareholders. The problem is that shareholders who have been bought out can subsequently commence bump-up claims against the company and its directors.
Those are claims whereby shareholders who have been bought out allege that the consideration they received for their shares was inadequate. Their claims are for additional consideration and their quantum is the difference between he consideration they actually received and that which they allegedly should have been paid. Current indications are that bump-up claims could be on the way:
- many US-listed Chinese companies share prices fell significantly after they obtained their US listing;
- about half of the 27 Chinese companies which have launched a deal to go private in the last 18 months have either faced litigation or been investigated by lawyers acting for the outgoing shareholders (click here to read...); and
- some are de-listing by unconventional means - only half involved well known and established private equity buyers and the balance were a mix of corporate takeovers or even the original owners using their own funds and bank loans to buy back their shares.
Chinese companies contemplating de-listing from the NYSE should consider very carefully with their professional advisors how best to minimise the risk of bump-up claims. Their D&O insurers should likewise flush out their potential exposure to bump-up claims by seeking disclosure of any de-listing plans during placement/renewal negotiations and consider adding a bump-up claims exclusion onto their D&O wordings, if appropriate.