U.S.-Listed Chinese Companies: Bump-Up Claims Up Next?

One of the most distinctive recent securities litigation trends has been the surge of litigation involving U.S.-listed Chinese companies. As a result of the litigation threat, as well as beaten-down market valuations, many Chinese companies are now taking steps to de-list from the U.S. exchanges. However, this step could entail its own set of litigation risks. Indeed, litigation relating to the de-listing could, according to a recent commentary, "become the next big trend in U.S. securities litigation."

According to a July 11, 2012 memorandum from the Reynolds Porter Chamberlain law firm entitled "U.S.-Listed Chinese Companies: Bump-Up Claims" (here) there have been a total of 57 securities class action lawsuits involving U.S.-listed Chinese companies, 39 of which were filed in 2011. By my count, as of June 30, 2012, there only seven new securities class action lawsuits filed against U.S. listed companies during 2012. Nevertheless, these litigation developments and chronically lower market valuations have encouraged many U.S. listed Chinese companies to see to return to private ownership. 

Though these companies are de-listing as a risk mitigation step, the process, according to the memo, could "expose the companies, their directors and D&O insurers to bump-up claims by shareholders if it is not managed carefully." In the bump-up claim, the shareholders allege "that the consideration they received for their shares was inadequate." The possibility of these types of claims is exacerbated by the fact that share prices for U.S.-listed companies have fallen sharply. Although some of the going private transactions have involved well-known private equity firms, others have involved management buyouts, which may encourage claims that the consideration paid was inadequate.

According to the memo, at least 16 U.S-listed Chinese companies have de-listed in the last two years and "at least three further large U.S.-listed Chinese companies are known to be in buy-out discussions." And according to one source cited in the memo, as many as 50 additional companies are "presently considering, or actively seeking, de-listing."

These concerns obviously have implications for the way the buy-out process is managed. There are also implications for D&O insurers. According to the memo, insurers should "brace themselves for an increase in bump-up claims" involving U.S.-listed Chinese companies. The insurers will also want to update their underwriting routines by "seeking disclosure of any de-listing plans from their insureds" and "considering limiting their exposure by endorsing a bump-up exclusion onto their D&O policies."

The possibility of this type of litigation does indeed seem highly plausible. I note that though the memo refers to buy-out transactions involving U.S.-listed Chinese companies that have taken place in the last two years, it does not cite any actual examples of the referenced buy-outs resulting in litigation. Nevertheless, in an environment where virtually every M&A transaction results in litigation, it seems reasonable to assume that U.S.-listed Chinese companies going private transactions might also entail litigation. Whether this litigation is indeed the "next big trend in U.S. securities litigation" will remain to be seen.

For general background regarding bump-up claims and coverage for the claims under D&O insurance policies, refer here and here.

D&O Year in Review, 2011: Readers of this blog will be particularly interested in the July 17, 2012 publication from the Troutman Sanders law firm entitled "D&O and Professional Liability: Year in Review 2011" (here). The memorandum takes a comprehensive look at the key D&O and professional liability insurance coverage decisions during 2011. The memo is interesting and will be a great resource.  (In fact, several of the entries in the memo are relevant to items currently on my desk.) 

Dodd-Frank Rulemaking Far Behind Schedule: It may not be news exactly, but it is still worth noting that many rulemakings required by the Dodd-Frank Act, enacted nearly two years ago, are far behind schedule. As detailed in a July 2012 report from the Davis Polk law firm (here), "Of the 398 total rulemaking requirements, 119 (29.9%) have been met with finalized rules and rules have been proposed that would meet 137 (34.4%) more." Rules have not yet been proposed to meet 142 (35.7%) rulemaking requirements.

As of July 2, 2012, a total of 221 Dodd-Frank rulemaking requirement deadlines have passed. Of these 221 passed deadlines, "140 (63%) have been missed and 81 (37%) have been met with finalized rules. Regulators have not yet released proposals for 19 of the 140 missed rules."

Advisen's quarterly report on 2Q12 corporate and securities litigation can be found 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.

For more information about LexisNexis products and solutions connect with us through our corporate site.