On November 24, 2021, the United States Court of Appeals for the Second Circuit vacated the dismissal of a putative class action asserting claims under the Securities Exchange Act of 1934 against an internet company and one of its directors. Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co. Ltd., —F.4th—, 2021 WL 5499455 (2d Cir. 2021). Plaintiffs alleged that the company, which was headquartered in China and had previously had depository shares listed in the United States, made misrepresentations and omissions in connection with the shareholder buyout that took the company private by failing to disclose the company's alleged intent to relist in China. The district court dismissed the action but the Second Circuit vacated that dismissal, holding that plaintiffs adequately alleged facts from which an inference could be drawn that the company “must have been planning to relist [in China] at the time of the shareholder vote.” Id. at *1.
The crux of plaintiffs' allegations was that, in the company's proxy materials relating to the proposed shareholder buyout, the company had stated that the buyer group “does not have any current plans” to conduct a merger or reorganization but that, subsequent to the consummation of the shareholder buyout, the buyer group “may propose or develop plans and proposals … including the possibility of relisting the [s]urviving [c]ompany or a substantial part of its business on another internationally recognized stock exchange.” Id. at *2. After the shareholder buyout was completed in June 2016, the surviving company announced in November 2017 that it would be the subject of a reverse merger, which was completed in February 2018, so that the company effectively became relisted on the Shanghai stock exchange with a significantly higher market capitalization. Id. Plaintiffs alleged that the statements in the proxy materials were false and misleading based on confidential witness statements, news articles, and an expert opinion that “[i]t typically takes companies at least a full year on the quickest possible timeline, and usually longer” to complete a reverse merger and that the transaction involved here was “particularly complex.” Id. at *2.
The Second Circuit held that plaintiffs' allegations, taken together, were sufficient to allege material misstatements and omissions, emphasizing that “we must be careful not to mistake heightened pleading standards for impossible ones.” Id. at *4. The Court explained that the allegation, based on an “expert in Chinese and United States M&A and capital market transactions,” that it usually takes more than a year to complete the various steps for a reverse merger, together with alleged news reports reporting that a privatization plan had been provided to the buyer group involving relisting in China, created a “plausible inference that a concrete plan was in place at the time [the company] issued the Proxy Materials,” which would have rendered the statement that the buyer group did not have any “current plans” to relist in China, and the proxy statement's omission of such a plan, misleading. Id. The Court further held that the alleged misstatements and omissions were sufficiently alleged to be material because they were not “so obviously unimportant to a reasonable investor” so as to warrant dismissal at the pleading stage. Id. at *5.
Although this case concerned alleged misrepresentations made to shareholders in the specific context of a going-private transaction, it also falls within the recent, broader trend of Chinese companies de-listing from U.S. stock exchanges, which may affect the securities litigation landscape.
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