ODS Capital LLC v. JA Solar Holdings Co. Ltd

Background

ODS Capital LLC and Altimeo Asset Management brought a securities action against JA Solar Holdings Co. Ltd, Boafang Jin, and Shaohua Jia. Plaintiffs alleged that the defendants used misleading statements and omissions to cause JA Solar shareholders to sell their securities, or accept consideration in a merger, at prices below fair value.

Plaintiffs described two groups: shareholders who sold JA Solar securities during the relevant period before the merger ended, and shareholders who held their securities through the merger and received $7.55 per American Depositary Share or $1.51 per common share. The alleged misstatements concerned JA Solar’s financial projections, the fairness of the merger, the defendants’ alleged plans to relist JA Solar in China, and whether shareholders would be updated about whether the merger would be terminated after dissenting shareholders objected.

Legal standards

The defendants moved to dismiss the amended complaint under Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim. Because the complaint alleged securities fraud, the court applied heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. Those rules required plaintiffs to identify the allegedly misleading statements, explain why they were misleading, and plead particular facts supporting a strong inference that the defendants acted with an intent to deceive, manipulate, or defraud.

To state a claim under Section 10(b) of the Securities Exchange Act and Rule 10b-5, plaintiffs had to plead a material misrepresentation or omission, fraudulent intent, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. The court did not address the purchase-or-sale and economic-loss elements because the defendants did not dispute them.

Analysis

Alleged plans to relist. Plaintiffs relied on statements by Jin, four confidential witnesses, and an expert’s description of the time generally needed to arrange a backdoor listing. The court did not credit the confidential-witness allegations because they were largely based on rumors or secondhand information, did not identify a concrete relisting plan, and did not show that the witnesses held positions giving them likely access to such a plan. Jin’s statement about hoping to return to Chinese capital markets in two or three years also did not establish a present plan; plaintiffs themselves had described it as nondefinitive. The court concluded that plaintiffs had not plausibly alleged that JA Solar had an actual, concrete relisting plan that it failed to disclose. The court also noted that the proxy materials disclosed the possibility of a future relisting.

Fairness and financial statements. The court held that plaintiffs adequately pleaded that statements describing the merger as fair, and statements about JA Solar’s financial position and projections, were misleading. The complaint alleged that the first three quarters of 2017 were already complete when the projections were provided, that actual results exceeded the projections, and that later restructuring materials reported higher operating income than the proxy materials and earlier filings. Taking those allegations as true at the motion-to-dismiss stage, the court found a plausible basis to allege that the defendants’ fairness statements were misleading.

Statement about updating shareholders. The court rejected the claim based on JA Solar’s failure to update shareholders about whether the buyer group would terminate the merger. It found that this alleged misstatement was not material because it was so obviously unimportant to a reasonable investor that reasonable minds could not differ about its importance.

Fraudulent intent. The court found that plaintiffs adequately alleged the required fraudulent intent for Jin and JA Solar. As to Jin, the complaint alleged that he held a significant stake, served on the board, was part of the buyer group, increased his ownership stake to 79.8 percent after the merger, and received $440 million following the merger. The court concluded that these allegations showed a concrete personal benefit and supported an inference that Jin had a motive and opportunity to commit fraud. The court imputed Jin’s alleged intent to JA Solar based on his seniority, ownership, board membership, and role in the buyer group.

The court reached the opposite conclusion for Jia. It found that plaintiffs relied mainly on Jia’s position as a director and chair of the two-person special committee and offered no specific facts showing that he knew the statements were false or misleading. The court therefore granted the defendants’ motion to dismiss the claims against Jia.

Reliance. The court accepted that the seller shareholders had adequately pleaded reliance for purposes of the motion. For the tenderer shareholders, plaintiffs sought to rely on the fraud-on-the-market presumption, which can allow reliance to be presumed when a security trades in an efficient market. The court held that plaintiffs had not shown that the tenderer shareholders’ merger transaction involved the open and developed market needed to support that presumption. It therefore granted the motion to dismiss the tenderer shareholders’ Section 10(b) and Rule 10b-5 claims for failure to plead reliance.

Loss causation. Loss causation means the required connection between the alleged misstatement and the plaintiff’s loss. The court held that the seller shareholders had not adequately pleaded that connection. Although plaintiffs alleged that the proxy materials kept JA Solar’s securities artificially low, the court observed that the American Depositary Share price rose when the merger was announced, rose after the preliminary proxy materials, stayed roughly level after the amended proxy materials, and rose again after the final proxy materials. The court found that plaintiffs’ assertion that the price would have risen more was speculation and did not adequately establish loss causation. It therefore granted the motion to dismiss the seller shareholders’ claims.

Sections 20(a) and 20A. The court dismissed plaintiffs’ claims under Sections 20(a) and 20A because both claims required an adequately pleaded underlying violation of the Exchange Act, and the court found that plaintiffs had not adequately pleaded the Section 10(b) and Rule 10b-5 claims.

Disposition

The court granted the defendants’ motion to dismiss the amended complaint for failure to state a claim under Section 10(b) of the Exchange Act and Rule 10b-5. The court also dismissed plaintiffs’ claims under Sections 20(a) and 20A. The opinion does not state that the dismissal was with or without prejudice.