DealLawyers.com Blog

Given the “please disclose when you stopped beating your spouse” nature of Schedule 13E-3’s disclosure requirements, it’s no surprise that going private deals have been the source of a lot of securities fraud claims over the years. This Shearman blog describes one of the latest examples – the Second Circuit’s decision in  Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co. Ltd., (2d. Cir.; 11/21), which involved alleged misrepresentations & omissions concerning a China-based company’s intention to relist its shares in that country following a buyout of its public shareholders.

The Court overruled the federal district court’s decision to dismiss the case, holding that the plaintiffs adequately alleged facts from which an inference could be drawn that the company was planning to relist in China at the time of the shareholder vote on the deal, despite statements in the proxy materials that it did not have “any current plans” to engage in a transaction that would result in relisting.  This excerpt from the blog describes the Court’s ruling:

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. 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.”

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.” 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.

– John Jenkins