Southern District Of New York Rules That Company Had No Duty To Disclose Administrative Guidance From Regulator
06/27/2016On June 21, 2016, Chief Judge Colleen McMahon of the United States District Court for the Southern District of New York dismissed with prejudice a consolidated securities fraud class action filed against Alibaba Group Holding Ltd. (“Alibaba” or the “Company”) and several of its officers and directors. See Christine Asia Co., Ltd. v. Alibaba Gr. Holding Ltd., No. 15 MDL 2631 (S.D.N.Y. June 21, 2016). The court ruled that Alibaba’s failure to disclose a meeting with a Chinese regulator and certain administrative guidance from that regulator was not material because the disclosure of such information would not have significantly altered the “total mix” of information available to investors.
Plaintiffs – purported purchasers of either Alibaba American Depository Shares (“ADSs”) or call options to purchase Alibaba ADSs – alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by failing to disclose in the registration statement for Alibaba’s initial public offering (“IPO”) a meeting between the Company and the State Administration for Industry and Commerce (“SAIC”) and administrative guidance provided by the SAIC regarding potential problems on Alibaba’s online market places. Plaintiffs alleged that defendants knowingly or recklessly concealed information regarding the meeting and the administrative guidance so as to artificially inflate the price of the Company’s ADSs sold in the IPO.
In rejecting the claims and granting defendants’ motion to dismiss, Judge McMahon found that Alibaba’s failure to disclose the SAIC meeting and administrative guidance was not misleading for two main reasons. First, the Company’s disclosures in its registration statement regarding the heightened regulatory scrutiny in China and the risk that the Company may not always be successful in monitoring compliance of third party activities carried out on its online market places were “more than sufficient to warn investors that Alibaba faced continuing risks related to the sale of counterfeit goods in its marketplaces,” including the risk that “it could face enforcement actions and substantial fines should it fail to properly police its market places for defective and illegal goods.” Second, the Company was not required to disclose non-binding administrative guidance, and plaintiffs had failed to allege any facts that “Alibaba actually faced a government inquiry or investigation that was likely to result in significant restrictions on [its] business operations.” (Emphasis in original).
Separately, Judge McMahon also ruled that Alibaba did not have a regulatory duty to disclose the meeting under Regulation S-K Items 303 and 503, again noting plaintiffs’ failure to show that the SAIC meeting was “reasonably likely to have material effects” on Alibaba’s financial conditions or results. Likewise, Judge McMahon found that plaintiffs failed to plead that Alibaba and its executives acted with scienter as required to state a claim under Section 10(b), remarking that a failure to disclose particular information can only constitute recklessness if it was obvious that such information needed to be disclosed.
Because plaintiffs’ claims suffered from substantive defects rather than inadequately pled allegations, Judge McMahon dismissed the action in its entirety and with prejudice, commenting that an amended complaint would not survive a motion to dismiss in light of the court’s finding that defendants were under no duty to disclose the meeting or the administrative guidance.