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GROWTH IN SECURITIES LITIGATION AGAINST CHINESE ISSUERS

02.22.11

According to some reports, there are over 200 Chinese companies currently listed on U.S. securities exchanges, and the number will continue to grow.  At the same time, the number of securities class action lawsuits filed against Chinese issuers listed in the United States has also increased.  While this increase is hardly surprising, a closer look at the trends affecting Chinese issuers reveals some unique factors that are fueling complaints against Chinese issuers.     

According to a report by Cornerstone Research in January 2011 (PDF), 12 securities class action complaints were instituted in 2010 against Chinese companies listed on U.S. stock exchanges.  This represents a whopping 42.9% of all class action filings against foreign issuers listed in the United States.

The disproportionately high number of class action complaints against Chinese issuers appears to be prompted by two factors.  First, Chinese companies listed both in the United States and China are subject to financial reporting requirements that vary significantly.  These differences often result in the same company reporting different earnings in China versus the United States and, in some cases, higher earnings in the United States than in China.  While these differences could more clearly be explained through appropriate footnote disclosure in their public filings, many Chinese issuers appear to be reticent to provide the additional disclosure.  While these differences are in most cases the result of differing reporting standards, they provide a natural attraction to plaintiffs’ attorneys.  The other factor that may explain this trend is the fact that many Chinese issuers are coming to market not through the traditional IPO, but rather through reverse mergers with already listed U.S. shell companies.  While this provides a significantly quicker and less expensive way to list in the United States, the lack of disclosure associated with this process in some cases leads to regulatory investigations and allegations from shareholders that material information was withheld prior to listing.

OUR TAKE:  Securities litigation against Chinese issuers is a natural byproduct of increasing numbers of Chinese companies choosing to list in the United States  As a result, Chinese issuers and their advisors must be cognizant of the important differences in disclosure regimes in the United States and China and fashion their public disclosure accordingly.

The publications contained in this site do not constitute legal advice. Legal advice can only be given with knowledge of the client's specific facts. By putting these publications on our website we do not intend to create a lawyer-client relationship with the user. Materials may not reflect the most current legal developments, verdicts or settlements. This information should in no way be taken as an indication of future results.

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