Chinese Companies “Going Dark”: Finally Accountable to U.S. Hedge Funds and Other Shareholders

In the last two years, there has been a growing and insidious trend among valuable, operational and publicly listed Chinese companies in the U.S. to suddenly stop reporting and making requisite financial disclosures with the SEC.  After raising millions of dollars on the U.S. capital markets, these companies have either informally, or formally through the filing of a Form 15 with the SEC, “gone dark” – in some cases, with the manifest intention to depress the value of their stock to facilitate an insider-led privatization.  Once a company has gone dark, U.S. shareholders are left with little or no current financial information and are deprived of the most basic of shareholder rights: the ability to make reasoned investment decisions, and, if desired, exit their investment.  The problem is magnified in the case of thinly traded securities, for which the company’s decision to go dark creates an illiquid market.  Hedge funds that have invested in companies that have gone dark and subsequently seen their stock price collapse need not always accept such losses at face value.  In some circumstances, legal efforts to recoup investment value may pay rich dividends.  Moreover, funds that invested in companies that abruptly stopped reporting may be exposed not only to investment loss but also to investor litigation alleging failure of due diligence.  Taking legal action has the added benefit of demonstrating to investors that the fund is vigilant and aggressive in pursuit of its rights as an investor.  In a guest article, David Graff and Shveta Kakar, shareholder and attorney, respectively, at Anderson Kill P.C., describe how hedge funds can pursue recovery when companies in which they are invested go dark.

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