Although the US capital markets are the first choice for many Chinese firms raising capital, there are increasingly more US-listed Chinese companies being sued in American courts for allegedly supplying prospectuses and statements that contain incorrect or misleading information.
So far this year, there have been more than a dozen Chinese companies involved in class actions and the number is growing, according to O’Melveny & Myers, a US law firm.
The lawsuits are alleging a variety of complaints ranging from overstatements in companies' financial results and earnings prospects, to failure to reveal historic revenue and companies' operating assets to not giving clear warnings on their exposure to business risks. As a result of this lack of disclosure, investors are claiming share prices have dropped and they've lost money as a result.
“There has been some volatility in stock prices and those stock price increases and decreases are what attracts the plaintiff lawyers,” said Matthew Close, a partner in O’Melveny's Los Angeles office.
“Once you get momentum, you see a lot more of the same types of lawsuits. We see this in securities litigation all of the time. Unfortunately Chinese companies are the target right now,” he said.
Indeed some lawyers say the reason more Chinese companies are embroiled in litigation now is simply because they represent such a big volume of global IPOs; Chinese firms accounted for 45% of the world's IPO market last year.
The most recent shareholder lawsuit was filed against China MediaExpress, a television advertising operator in China. Starr Investment, an investment firm, said it was fraudulently induced to purchase $13.5 million worth of shares in the company.
MediaExpress is alleged to have “significantly overstated the company's financial results in the period leading up to the purchase of shares”, Starr said in a court filing. Trading of shares in the Chinese firm has been suspended since March 11.
Close cautions investors to read the prospectuses and think closely about the specific and general risks and uncertainties that are disclosed.
“There are always uncertainties in business and markets. Companies cannot predict the future. Companies cannot give clear answers to issues that are a matter of debate and judgment by economists, policymakers, and business leaders. Investors can also read the prospectus issued by other companies in the industry to gain more understanding,” he said.
Chinese IPOs were massively popular in the US capital markets last year. Youku.com, China’s largest online video company, soared 160% in its trading debut on the New York Stock Exchange (NYSE) after it raised $202.9 million in an IPO in December last year. In the same month, shares in China Dangdang, the country’s largest online book retailer, rose more than 92% on the company’s first trading day in New York after an IPO that raised $272 million.
Renren, known as the Chinese Facebook, is expected to receive strong demand in its planned $500 million US IPO this year.
Statistics show that the NYSE saw a record 22 listings by Chinese companies with Nasdaq taking on another 12 in 2010. By comparison, there were only 10 Chinese companies listed on each exchange in 2009.
Share prices in Youku dropped early this month when the company disappointed investors with its worse-than-expected first results announcement after the IPO. But the stock stood at $47 yesterday, nearly four times its IPO price of $12.80, suggesting continued investor confidence in China's internet market, which has 457 million users.
Despite the law suits, Chinese companies will continue to favour the US as a listing destination, O’Melveny said. “The pipeline of proposed offerings appears very strong for 2011. Bankers, lawyers, and others who work in this are quite busy. The valuations that certain companies can achieve in the US makes it very attractive for them to list in the US,” said David Roberts, a partner in the firm's Beijing office.