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By Kevin M. LaCroix, Esq., Executive Vice President, OakBridge Insurance Services and Peter M. Gillon, Partner, Pillsbury Winthrop Shaw Pittman LLP
One of the most distinctive U.S. litigation trends over the last twelve months has been the surge of securities class action lawsuits filed against U.S.-listed Chinese companies. From July 1, 2010, to June 30, 2011, at least 32 different Chinese companies have been hit with U.S. securities suits (with one additional Chinese company sued in a similar lawsuit in Canada). In addition, the U.S. Securities and Exchange Commission (SEC) has launched a number of enforcement actions and other proceedings against U.S.-listed Chinese companies, issued a formal bulletin warning investors about the risks of investing in Chinese companies that have gone public through reverse merger transactions, and launched a task force to investigate U.S.-listed Chinese companies which have sold stock to investors in the U.S. The SEC is focusing on not only issuers, but also financial advisors who help entrepreneurs in China raise capital in the U.S.
This sudden onslaught of litigation and enforcement activity means that the exposure to liability for all U.S.-listed Chinese companies and their directors and officers has increased significantly. As a result of this increased exposure, the risk mitigation policies and D&O insurance program that these companies have in place and plan to employ are now more important than ever. Unfortunately, the risk assessment and insurance programs of many U.S.-listed Chinese companies are not well-calibrated to provide either the kind or amount of protection these companies and their directors and officers could require in the event of a U.S. securities lawsuit.
To the extent individual directors and officers have not done so already, they are well advised to seek an independent review of the insurance coverage available to them, and, if appropriate, consider purchasing supplemental coverage, such as Independent Director liability (IDL) coverage. IDL coverage and related insurance products are designed to protect outside directors and officers individually from the types of private securities class actions and SEC enforcement proceedings looming over so many Chinese companies.
This article briefly explores the developing U.S. litigation trend involving U.S.-listed Chinese companies, identifies the critical D&O insurance issues involved, and provides an overview of options available to for these companies.
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