In a January 22, 2013 opinion (here),
Southern District of New York Judge J. Paul Oetken has
dismissed one of the many securities class action lawsuits that were filed
against U.S.-listed Chinese companies in 2011. Though the primary interest in
the case may be that it involves U.S. securities suit against a Chinese
company, Jinkosolar Holdings, the case is also interesting with respect to the
alleged misrepresentations on which the suit is based, which relate to the
environmental problems in one of the company's manufacturing facilities.
Jinkosolar is a manufacturer of solar technology products
with operations based in China. In May 2010, the company conducted an Initial
Public Offering of American Depositary Shares on the New York Stock Exchange.
In November 2010, the company completed a secondary offering.
In April and May 2011, the company had a series of
communications with the Chinese environmental authorities regarding hazardous
waste disposal issues at its Zhenjian plant. The company did not disclose these
communications to its shareholders. However, as the Court later put it, a "kerfuffle"
at the company's plant "forced Jinkosolar's hand." In August and September
2011, Residents living near the plant became concerned about a large scale
fish-kill near the plant. In mid-September, the media began reporting on
locals' demonstrations outside the company's plants. In two press releases in
late September, the company announced that it had suspended operations at the
plant and also revealed the earlier communications with the environmental
authorities. As the news came out, the price of the company's ADSs declined 41%
In October 2011, holders of the company's ADSs filed a
securities class action lawsuit in the Southern District of New York against
the company, eight directors and officers of the company; and the company's
offering underwriters. The plaintiffs' complain asserted claims under both the
'33 Act and the '33 Act. In support of their allegations, the plaintiffs relied
on three statements in the company's offering prospectus in which the company
explained its environmental compliance efforts and the consequences to the
company if it were found to be in violation of the applicable environmental
requirements. The defendants moved to dismiss.
In his January 21, 2013 order, Judge Oetken granted the
defendants' motions to dismiss. Judge Oetken found with respect to two of the
three statements from the prospectus on which the plaintiffs sought to rely
that he could "easily dispense" with the allegations. He noted with respect to
these two statements that:
These paragraphs do, of course, explain to shareholders
that Jinkosolar is obliged to follow certain regulations. But if anything, they
weigh the pluses and minuses of following such regulations with a disquieting
frankness. The first paragraph, for instance, explicitly balances the costs of
"compliance" with safety regulations with the "adverse publicity and
potentially significant monetary damages" stemming from "non-compliance."
Similarly, the second paragraph notes that Jinkosolar is "subject" to Chinese
regulations, but - particularly when read alongside the first paragraph - does
nothing to indicate any sort of commitment on the part of Jinkosolar to follow
those regulations.
The third Prospectus statement on which the plaintiffs
sought to rely presented, Judge Oetken found, "a more complicated
matter." The statement indicates, among other things, that the "we
generate and discharge chemical waste, waste water, gaseous waste, and other
industrial waste," reiterates the company's monitoring efforts and adds that
"we are required to comply with all PRC national and local environmental
protection laws and regulation."
With respect to these statements, the plaintiffs argued
that these statements "falsely imply that Jinkosolar had an effective pollution
treatment system and a good pollution record, suggesting that the company had
put the environmental issues "in play" and creating an obligation to keep
shareholders updated.
Judge Oetken said that was "a close call" whether the
statements on which the plaintiff's sought to rely are materially misleading.
In particular one sentence "does give the court pause": the sentence stated
that "We also maintain environmental teams at each of our manufacturing
facilities to monitor waste treatment and ensure that our waste emissions
comply with PRC environmental standards." Judge Oetkin said that one way the
sentence could be read is to signify that the company is able to "ensure that
our waste emissions comply with PR environmental standards. " But read another
way, the statement is merely saying that the environmental teams are
"maintained" with the purpose or function to "monitor and to ensure"
compliance.
The Court found that the second of these two alternative
readings is "the more sensible one." The Court went on to say that it "cannot
say that a reasonable investor would, or even could, read this one ambiguous
sentence as a pronouncement that Jinkosolar is 'ensuring' environmental
standards were met." This, the court said, is "all the more true given how
cautious Jinkosolar was in it Prospectus." The company "carefully laid out the
plusses and minuses" of abiding by the Chinese regulations and "underscored to
investors that fines due to pollution are a real possibility." These warnings,
"taken together with the overall weakness of the instances f material
misstatements and omissions proffered by Plaintiffs, indicate that no
reasonable investor could have believed that the Prospectuses ensured a
positive environmental record."
In granting the defendants' motions to dismiss, Judge
Oetken did not expressly indicated whether or not the dismissal was with
prejudice. However, in his final line of his opinion, he did direct to Clerk to
"close this case."
Discussion
For many readers, the primary interest of this case will
be that it involves a U.S.-listed Chinese company. However, unlike many of the
U.S.-listed Chinese companies that have been hit with securities class action
lawsuits in recent years, this company did not obtain its listing by way of a
reverse merger transaction. This company completed a full-blown IPO, which may
have made a difference in the outcome of this case.
It was only as a result of the company's IPO that the
company completed a full and detailed Prospectus. (The company also completed a
full Prospectus in connection with its secondary offering.) The Prospectus
contained extensive and detailed precautionary statements. It was the detail
and extent of these statements that seemed to have made a difference to Judge
Oetken. Thus, in his opinion, Judge Oetkin refers to what he calls the
"disquieting frankness" of the company's disclosures regarding its
environmental compliance risks." He also noted "how cautious" the company was
in its environmental compliance risk factors in its Prospectuses.
Because of the depth of the disclosures in its offering
documents, Jinkosolar was able to make arguments and raise defenses in reliance
on the detailed Prospectus disclosures. Because so many of the U.S.-listed
Chinese companies did not complete a full-blown IPO, but rather obtained their
U.S. listings through reverse merger transactions, they likely did not create
offering documents with similarly precautionary disclosure. For that reason,
the outcome of this dismissal motion ruling may not be all that helpful to many
of the other U.S.-listed Chinese companies involved in U.S. securities suits.
Indeed, most of those other companies are unlikely to be able to raise the
kinds of arguments that Jinkosolar raised here, and certainly seem unlikely to
be able to cite disclosure statements that a court might describe as reflecting
"disquieting frankness."
For me, the most interesting thing about this case is not
that it involves a Chinese company defendant, but rather that it involves
alleged misrepresentations with respect to environmental liabilities and
exposures. As I have previously noted on this blog (refer, for example, here),
these kinds of cases, involving alleged misrepresentation of environmental
issues do arise periodically. The possibility of this kind of claim is often a
key concern at the time of D&O insurance policy placement, as the question
often arises whether the standard policy's pollution exclusion will preclude
coverage for a securities claim based on environmentally-related disclosures.
As this case demonstrates, it is critically important for
the standard pollution exclusion to be revised to carve back coverage for
securities claims and derivative claims based on environmental disclosures. (It
is worth noting that many of the modern Excess Side A DIC insurance policies
often have no environmental or pollution exclusion. In addition, some carrier's
primary D&O insurance forms omit the standard pollution exclusion and
simply provide that the policy's definition of "Loss" does not include costs of
environmental remediation. Unless the insured company's primary D&O
insurance policy omits the environmental exclusion in this way, it will be
indispensable for the standard environmental liability exclusion be revised in
order to preserve coverage for securities claims and derivative claims based on
alleged misrepresentations or misconduct relating to environmental issues.
These considerations are likely to become increasingly important as
environmental disclosure issues become of greater regulatory concern (about
which refer here).
The one final thing I will say about this case and the
fact that it does involve a U.S.-listed Chinese company is that it is yet
another case involving a Chinese company in which the plaintiffs have
struggled. Although some of the U.S. securities suits have managed to survive
motions to dismiss, others (like this one) have not. Even the cases that have
survived motions to dismiss have proved challenging for plaintiffs as they have
faced numerous procedural hurdles (refer for example here).
In addition, in other cases involving U.S.-listed Chinese companies that have
reached the settlement stage, the settlement amounts have proved
to be modest. (On the other hand, as noted here,
E&Y did recently agree to settle a Canadian securities case relating to
Sino-Forest, and a Hong Kong arbitration panel did just make a more than $70
million award based on its determination that China MediaExpress Holdings is a
"fraudulent enterprise." Notably, and arguably ironically, neither of these big
recoveries involved one the many U.S. court securities suits filed against
Chinese companies.)
Special thanks to a loyal reader for sending me a copy of
Judge Oetken's opinion in this case.
Upcoming Event: Readers
of this blog may be interested to know about a seminar that will be held at the
St. John's School of Risk Management in New York on February 5, 2013 entitled
"A Day at Lloyd's: An Introduction to the Lloyd's Market Structure
and the Use of ADR to Manage Disputes Involving Lloyd's." The event
will be moderated by my good friend Perry Granof and
includes a number of distinguished speakers, among them another good friend, Nilam Sharma of the Ince
& Co. law firm. The event, which will take place on the day prior to
the beginning of the PLUS D&O Symposium, runs from 12:30 to
5:00 pm. Further information about the event can be found here. You
can register for the event here.
Read
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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