In re Yatsen Holding Limited Securities Litigation

Background

Plaintiffs Hin Kit Eric Wong and Max Park sued Yatsen Holding Limited, along with associated individuals and entities and six firms that underwrote Yatsen’s initial public offering. The plaintiffs brought claims under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

The plaintiffs alleged that Yatsen’s offering documents and later financial reports misleadingly described its Perfect Diary and Little Ondine brands as “healthy,” “fast-growing,” and “steady.” They focused on declining sales for those brands on Tmall and Taobao, two direct-to-consumer online platforms. They also argued that Yatsen had to disclose sales figures for those platforms because of their importance to the company.

The court had previously dismissed the plaintiffs’ first amended complaint because it did not adequately plead a material misstatement or omission, an element required for the relevant Securities Act and Exchange Act claims. The court allowed the plaintiffs to seek permission to amend because it viewed the problems as potentially curable.

Proposed amendment

The plaintiffs’ proposed second amended complaint added data about Perfect Diary’s monthly and year-over-year sales volume and revenue on Tmall and Taobao from January through October 2020. It also alleged that sales on those platforms made up about half of Yatsen’s total revenue during the period leading up to the initial public offering and were the largest sales channels for Perfect Diary.

The proposed complaint, however, pursued only the theory involving sales on direct-to-consumer platforms. The plaintiffs narrowed their Little Ondine allegations to Exchange Act claims based on statements made after the initial public offering.

Court’s analysis

Under Rule 15(a), courts generally allow amendments when justice requires, but may deny permission when amendment would be futile. An amendment is futile if the proposed complaint still does not contain enough factual allegations to state a plausible claim under Rule 12(b)(6), which concerns whether a complaint adequately states a legal claim.

The court held that the new allegations did not cure the earlier deficiencies. It found that Perfect Diary could be Yatsen’s most important brand, account for about half of Yatsen’s revenue through Tmall and Taobao, and experience declining sales on those platforms while still being described as “healthy,” “fast-growing,” and “steady.” The court emphasized that Perfect Diary’s net revenue increased year over year during the first nine months of 2020 and that Yatsen reported revenue growth for nearly a year after the initial public offering.

The court also held that the proposed complaint did not adequately connect declining Tmall and Taobao sales to Yatsen’s overall financial health. The allegations did not state the proportion of Yatsen’s sales made on Taobao, and the court found it reasonable to infer that sales on other direct-to-consumer platforms offset the declines on Tmall and Taobao. As a result, the court concluded that the proposed complaint did not show that Yatsen’s descriptions of Perfect Diary were materially misleading or that Yatsen had a duty to disclose sales figures for those platforms specifically.

The same failure defeated the plaintiffs’ claims under Items 105 and 303 of Securities and Exchange Commission Regulation S-K. Those provisions concern disclosure of material investment risks and known trends or uncertainties likely to materially affect revenue or income. Because the proposed complaint did not sufficiently connect the platform-specific sales declines to Yatsen’s overall financial condition, it did not adequately plead the required material effect.

Disposition

The court held that the proposed amendments were futile, denied the plaintiffs’ Motion to Amend, and dismissed the case without prejudice. The Clerk of Court was directed to terminate the motion and the case. The court also stated that its ruling made moot an issue concerning service of process.