U.S.-Listed Chinese Companies and Securities Litigation Risk

The Financial Times reports that the value of Chinese companies delisting from U.S. exchanges in 2011 exceeded the amount Chinese companies raised via initial public offerings in the U.S. amid fraud allegations and slowing growth.

There is an  interesting insurance angle behind this story.

Over at the D&O Diary, the tale of U.S.-listed Chinese companies hit with class action securities litigation made it to number two on the blog’s top ten D&O stories of 2011.

Kevin LaCroix writes:

Every year there seems to be one group or sector of companies that draws the unwanted attention of plaintiffs’ securities attorneys. During 2011, the hot sector was U.S.-listed Chinese companies.†

He goes on:

There were 39 different U.S.-listed Chinese companies hit with securities class action lawsuits during 2011, representing nearly one-fifth of all securities class action lawsuit filings during the year. Since January 1, 2010, there have been securities class action lawsuits filed against 49 different Chinese companies.†

D&O Diary says that the surge of litigation involving Chinese companies has arisen out of accounting scandals. It makes the point that not all of these cases are meritorious and indeed some have been dismissed:

Eventually the plaintiffs’ lawyers will simply run out of Chinese companies to sue, but for now the phenomenon shows no sign of letting up.†

According to recent commentary from Lockton, Chinese companies are named in nearly 25 percent of the securities class action suits filed so far in 2011, despite making up less than one percent of the total number of publicly traded companies in the U.S.:

The reasons for this, and the steps companies and their directors and officers must take to protect themselves, must be understood by companies that wish to avoid becoming part of this statistic.†

Lockton advises that a robust D&O insurance program is essential to transfer the financial risks that securities litigation and investigations create. However, it is also critical for companies to understand the terms of their D&OÂ  policies and anticipate insurers’ coverage positions:

The reality of being a public company in the U.S. is that a company faces the prospect of distracting and very expensive securities investigations and litigation. The risks associated with that can and must be managed well. The consequences of a failure to do so can be ruinous.†

D&O insurance protects the directors and officers of an organization against losses in case they are sued for their actions overseeing the organization.

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