On January 13, 2013, the “Wall Street Journal’s” online publication, “China Real Time Report” posted a report with the headline, “
Rare Victory for U.S. Investor in China Reverse Merger Company
”. The article points out just how difficult it can be for a foreign investor in a Chinese company to prevail against that company in the event it is necessary to undertake legal proceedings against it. Refer to:
In this particular case, the defendant was a Chinese reverse merger company. The Chinese company sued was China Media Express. As defined by the “China Real Time” report:
“Reverse mergers allow a company to obtain a stock market listing by taking over the shell of listed company that no longer has any operations. The process is a lot less transparent that a traditional initial public offering and most of the Chinese companies that have run into trouble used this method to list. China Media Express obtained a listing in the U.S. via reverse merger in late 2009.”
The plaintiff in this case was a private equity investor, Starr International which was run by Maurice Greenburg, former Chairman of AIG. According to the “China Real Time Report” article, “China Media Express – like many of the small Chinese firms that listed in the U.S. between 2007 and 2010 – looked like a good bet at the time of Starr’s investment. Starr launched legal proceedings again China Media Express in Delaware, and an arbitration process in Hong Kong
The company, which sells advertising on television screens installed in buses that travel between Chinese cities, had posted runaway revenue growth that was significantly faster than its peers’.”
However, there came a time when Starr International became aware of fraud and deceit within China Media Express and were eventually forced to take legal action against them. This is a course of action that faces an uphill battle to a successful recovery as the “China Real Time Report” article states:
“The problem for these investors is providing evidence that the company they invested in did, in fact, lie to them. But with all the relevant documents about most of these companies physically located in China and written in Chinese, and with U.S. courts unable to compel Chinese companies to hand over necessary documents, it’s no easy feat collecting the necessary proof. Many of these companies have completely shut down communication with investors and are not even engaged in the legal process launched against them.
In a late-September speech, Lewis Ferguson, a board member of the Public Company Accounting Oversight Board, the U.S.’s audit-industry regulator, said that 126 Chinese companies have either been delisted from U.S. exchanges, or “gone dark” — meaning that they are no longer filing current reports with the Securities & Exchange Commission.”
Nevertheless, reports the “China Real Time Report” article:
“According to a court filing, the committee of three judges found in Starr’s favor, and instructed China Media Express’s chairman and two main shareholders to pay Starr $77 million in damages and other relief.”
This success may be just an anomaly in the course of typical corporate activities in China. It remains to be seen if there will be any further such successful legal in the future.
Hawkeye in China
– Lex Smith