U.S. investors in foreign companies won a notable victory, when a New York court held that it had personal jurisdiction, and U.S. investors had standing, for Cayman Law derivative claims against a Chinese company traded on the New York Stock Exchange (NYSE). In Matter of Renren, Inc., an appellate court unanimously affirmed the lower court’s holding that there was personal jurisdiction and standing to pursue Cayman law derivative claims in New York court against the Chinese company Renren, Inc., and its directors, based on allegations of improperly diverting capital raised in an initial public offering (IPO) on the NYSE. 192 A.D.3d 539 (1st Dep’t 2021). Renren shows that American investors in publicly-traded foreign companies can hold these companies (and their directors/officers) accountable in American courts.
In Renren, shareholders brought a derivative action against Renren’s CEO, controlling stockholders and directors, alleging a scheme to defraud minority stockholders out of over $500 million in assets raised through Renren’s NYSE IPO, by spinning off the assets into a private company in exchange for a cash dividend using a valuation much lower than the assets’ value (the “Separation Transaction”). 2020 WL 2564684, at *2 (N.Y. Sup. Ct. May 20, 2020). The plaintiffs alleged that the defendants originally tried a lowball offer to acquire Renren in a cash-out transaction at a low valuation, which Renren’s board rejected in the face of shareholder backlash. Id. at *5. When that failed, the defendants forced the Separation Transaction, which achieved virtually the same result as the proposed cash-out transaction, by transferring Renren’s most valuable assets to a private company (that the defendants would control) in exchange for unfair consideration.
The New York State Supreme Court held that it had personal jurisdiction over the defendants and that the plaintiffs had standing to bring derivative claims under Cayman law. First, the court held that New York had jurisdiction, because the “claims relate to Renren's improper disposition of assets acquired with funds obtained in Renren’s IPO on the NYSE, and the IPO was conducted in New York using New York bankers and attorneys.” 2020 WL 2564684, at *11-12. The Separation Transaction also required New York State Department of Financial Services approval. And Renren had signed multiple agreements in which it agreed to be governed by New York law, including a Deposit Agreement for its shares traded on the NYSE, and the agreement for the Separation Transaction. Id. at *17. Thus, the court held that New York had jurisdiction because of all of the defendants’ “significant New York activities.” Id. at *23.
Second, the court held that the plaintiffs had standing to bring Cayman law derivative claims, because the claims asserted a “fraud on the minority” stockholders of Renren by Defendants who together controlled a majority of Renren’s stock. Id. at *24. The plaintiffs alleged in detail that the defendants defrauded U.S. investors in soliciting its NYSE IPO, by misrepresenting how Renren planned to use the IPO proceeds, and by seeking personal financial benefits in the Separation Transaction, at the expense of Renren and minority stockholders. As the court noted, the plaintiffs made detailed “allegations of deliberate and dishonest breaches of duty” that “leap off the page[.]” Id. at *28. The court further held that the use of a special committee to approve the Separation Transaction could not defeat a derivative claim, because the plaintiffs alleged that 5 of 7 members of the special committee had conflicts of interest, which rendered the committee a sham to rubber-stamp a predetermined outcome. Id. at *27. The court also found derivative standing to assert claims against Duff & Phelps, the special committee’s financial advisor for the Separation Transaction, for providing “knowing assistance” to the fraudulent scheme. Id. at *30.
On appeal, the Appellate Division First Department unanimously affirmed the lower court. It held that the lower court properly held that the defendants’ allegedly fraudulent scheme dating back to Renren’s New York IPO involved New York-based transactions supporting jurisdiction. 192 A.D.3d 539 (1st Dep’t 2021). Further, it held that the allegations of committing fraud to obtain personal benefits at the corporation’s expense were sufficient to give the plaintiffs standing to assert Cayman law derivative claims. See id. The First Department’s ruling confirms that U.S. investors can use New York courts to hold foreign companies accountable for wrongdoing.
The Renren case provides a roadmap for American investors in publicly-traded foreign companies to hold these companies (and officers and directors) accountable in American courts for fraud and breaches of fiduciary duties. Where a foreign company lists its stock on a U.S. stock exchange, it purposefully avails itself of U.S. law – particularly where it engages in wrongdoing related to its U.S. IPO or similar trading on a U.S. stock exchange. Similarly, where a foreign company affirmatively chooses U.S. law to govern its conduct, uses U.S. bankers and lawyers, or directs its misconduct through the U.S., then it is more likely that a U.S. court will exercise jurisdiction over that foreign company. The Renren case could begin a new trend of U.S. courts holding foreign companies accountable for corporate wrongdoing that harms U.S. investors.
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