-
Southern District Of New York Permits Putative Class Action Against Ride Hailing Company To Proceed
03/26/2024On March 14, 2024, Judge Lewis Kaplan of the United States District Court for the Southern District of New York denied defendants’ motions to dismiss a putative class action against a China-based ride hailing company, certain of its officers and directors, and the underwriters of the company’s IPO, asserting claims under the Securities Act of 1933 and the Securities Exchange Act of 1934. In re Didi Global Inc. Sec. Litig., 2024 WL 1119483 (S.D.N.Y. Mar. 14, 2024). Plaintiffs alleged that the company omitted from its filings in connection with its New York Stock Exchange (“NYSE”) IPO that the Chinese government had directed it to postpone its IPO, with the Chinese government imposing penalties after the company allegedly disregarded this directive. The Court held that plaintiffs’ allegations were adequate to state a claim with respect to nearly all of their asserted claims.
Plaintiffs alleged that the Chinese government directed the company to postpone its IPO, purportedly until the company resolved various cybersecurity policies and privacy issues, and that when the company chose to go ahead with the IPO despite receiving these directives, the Chinese government prohibited the company from signing up new customers and was ultimately forced to delist its shares from the NYSE. Id. at *2. The announcement of the Chinese government’s actions allegedly caused the company’s stock price to fall to approximately 14% of the IPO price. Id. at *2–3.
The Court first held that plaintiffs’ Securities Act claims against the company largely sounded in fraud and therefore needed to be assessed pursuant to the same heightened pleading standard applicable to the Exchange Act claims. Id. at *5–6. The Court observed that the Securities Act claims against the company were nearly identical to the Exchange Act claims and that, despite plaintiffs’ attempt to disclaim allegations of fraud in pleading the Securities Act claims, the underlying conduct at issue was still the same with respect to both sets of claims. Id. With respect to plaintiffs’ Securities Act claims against the company’s officers, directors, and underwriters, however, the Court concluded that these allegations did not sound in fraud and would be assessed under the more lenient notice pleading standard, because plaintiffs did not allege as a basis for their Securities Act claims against those defendants that they had actual knowledge of the Chinese government’s directive in advance of the IPO. Id. at *6.
The Court then explained that plaintiffs met the heightened pleading standard with respect to their Securities Act claims against the company. Id. at *6–7. The Court held that plaintiffs specifically and adequately alleged the company was directed to postpone its IPO, alleging that Chinese government officials met in person with the company and directed the company to postpone the IPO until the company had completed a cybersecurity review. Id. at *6. The Court noted that plaintiffs cited news articles reporting these details and credited plaintiffs’ contention that the speed at which the company was sanctioned following the IPO also supported the allegation that the company had been told to postpone the IPO but failed to disclose this in the offering materials for the IPO. Id. at *7.
The Court held that this omission was material. The Court rejected defendants’ argument that the company had no obligation to disclose the specific directive at issue because it generally disclosed that there was a risk of government penalties if the company failed to comply with laws or regulations. Id. at *8. The Court explained that this general risk disclosure was inadequate because it failed to warn about the specific risks the company could face if it disregarded the Chinese government’s specific directive regarding the IPO. Id.
The Court further held that plaintiffs adequately alleged an actionable omission under Regulation S-K Items 303 and 105. With respect to Item 303, the Court emphasized that it requires disclosure of known trends and uncertainties, that it specifically requires foreign private issuers to disclose “pertinent governmental economic, fiscal, monetary, or political policies or factors that have materially affected or could materially affect, directly or indirectly, its operations,” and that disclosure is required unless the company determines that the trend or uncertainty “is not reasonably likely to occur.” Id. at *9. The Court held that disclosure was required under Item 303 because plaintiffs plausibly alleged that the company was reasonably likely to be sanctioned by the Chinese government and that such sanctions were reasonably likely to have a material effect on the company. Id. at *10. For the same reasons, the Court concluded that plaintiffs’ allegations were sufficient to allege an omission under Item 105, which requires the disclosure of “the material factors that make an investment in the registrant or offering speculative or risky.” Id. Moreover, the Court concluded that this omission was also actionable because it rendered misleading the company’s more general risk disclosures about potential regulatory risks, including disclosure of other contacts with Chinese regulators. Id.
In addition, the Court held that alleged contractual misrepresentations the company made to the underwriters in the underwriting agreement for the IPO could support a claim under Section 11 of the Securities Act because the underwriting agreement was filed as an attachment to the registration statement. Id. at *11. The Court explained that, if statements in such documents attached to a registration statement were non-actionable, that could allow a company to include statements in its public filings “with an eye toward influencing investors without incurring Section 11 liability.” Id. at *13. Thus, the Court held that the representations made in the underwriting agreement that the registration statement would not “omit to state a material fact,” that the company had no undisclosed “governmental actions,” and that the company was “in material compliance with all applicable laws,” were actionable based on the same underlying factual allegations supporting plaintiffs’ other claims. Id. at *13–14. Moreover, while the Court held that statements in the underwriting agreement did not support a claim under Section 12 of the Securities Act—because Section 12 relates to misrepresentations in a prospectus and the underwriting agreement was not filed with the prospectus—the Court declined to dismiss the Section 12 claim in light of similar allegations of material omission in the prospectus itself. Id. at *14.
Turning to the Exchange Act claims, the Court held plaintiffs adequately pleaded scienter and loss causation. As to scienter, the Court concluded that the company and the officer and director defendants were plausibly alleged to have known about the Chinese government’s directives and were also plausibly alleged to have the requisite motive and opportunity because they stood to make billions from the IPO. Id. at *16. While the Court noted that a generalized motive to earn a profit is not sufficient to allege scienter, the allegations here were sufficient to allege a concrete and personal benefit because the alleged omission related to the company’s ability to go forward with an IPO at all and that, absent the IPO, it was possible that the Chinese government would not permit the company to raise capital. Id. The Court further held that, in the alternative, plaintiffs adequately alleged scienter on a theory of recklessness because the company defendants allegedly knew that proceeding with the IPO in disregard of the Chinese government’s directive could be devastating to the company. Id. at *17–18.
The Court further determined that plaintiffs adequately alleged loss causation based on (i) news reports regarding the Chinese government’s pre-IPO communications with the company, which amounted to a corrective disclosure, and (ii) the Chinese government’s regulatory actions and penalties, which were a materialization of an allegedly concealed risk and therefore amounted to a “constructive” disclosure. Id. at *18. The Court explained that, although this information was allegedly revealed over the course of several months, loss causation may be based on both “corrective and constructive disclosures, particularly where, as here, the full contours of the allegedly fraudulent omission emerged in dribs and drabs.” Id. at *19.
