China Securities Class Actions. Ain't No Beef Nowhere.
A couple of years back I got wind of a class action securities law suit being filed in the United States against a Chinese company (whose name I have completely forgotten) that had listed on NASDAQ. Curious, I called the plaintiff's firm and asked the lead lawyer how he intended to collect from the Chinese company should he prevail. His response (and I kid you not) was that he was going to "worry about that after winning." I have no idea if he won that case, but I can bet that unless that Chinese company had real assets outside China, this lawyer ended up collecting nothing.
I thought of that case today after reading a very good three part series written by Professor Donald Clarke (he of the Chinese Law Prof Blog) on how it is difficult, maybe impossible, for shareholders to sue and collect against Chinese companies in China also. That three part series, entitled, Chinese Corporate Law, Where's The Beef? can be found here, here, and here.
Comments
Aren't most of these Chinese companies listed on the NASDAQ essentially listing through a "special purpose vehicle" offshore? e.g. BVI, Cayman, etc. In which case, the assets would be effectively located outside the PRC. I realize that the Chinese government has been trying to clamp down on these with their M&A regulations, but aren't most older NASDAQ listed Chinese companies still structured this way? Would the plaintiffs be able to recover in this kind of situation?
Posted by: Peter | February 17, 2008 4:20 PM
Personally, based on US experience, I don't think that shareholder lawsuits are a particularly good way of enforcing good corporate governance. The problems with shareholder lawsuits is that:
1) the real fly-by-night companies have no money, so you can sue them all you want
2) no one sues unless they lose money, this means that they are a very poor way of dealing with questionable securities fraud *before* things go bad. The trouble is that if there is anything really fraudulent going on then when people do start suing, there's no money left.
The result of this is that most class action securities lawsuits I've seen on directed at decently run companies that have a sudden drop for reasons that are outside of the control of the company.
Also, one should point out that the current system of shareholder lawsuits took a few decades to develop. The major securities laws were passed in 1933 and 1934, but it wasn't until the 1960's that you started having major class action lawsuits. It took the US decades to put together a body of securities law. The reason that there are so many holes in Chinese law is because things have happened so fast.
Posted by: Twofish | February 20, 2008 6:32 AM