Dagan Investments LLC v. First High-School Education Group Co., Ltd.

Background

The case concerns American Depository Shares of First High-School Education Group Co. Ltd. (“FHS”) sold in the company’s March 10, 2021 initial public offering. Dagan Investments LLC brought claims on behalf of investors under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. The investors alleged that FHS’s registration statement and prospectus misleadingly failed to disclose that Chinese government officials were considering stringent regulations affecting private education and tutoring.

The offering sold 7.5 million American Depository Shares at $10 per share. Chinese news outlets reported possible regulatory changes between March 6 and March 9, 2021. The registration statement became effective on March 10, 2021, and FHS submitted its prospectus on March 11. On July 23, 2021, the Chinese government announced a broad education-sector overhaul. FHS later announced that it had fallen out of compliance with New York Stock Exchange listing requirements, and its shares eventually closed below $1.

Motion to Dismiss

The defendants moved to dismiss the second amended complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court accepted the complaint’s factual allegations as true for purposes of the motion and considered the registration statement because it was integral to the complaint and subject to judicial notice.

Sections 11 and 12(a)(2) impose liability for certain material misstatements or omissions in registration statements and prospectuses. Section 15 imposes control-person liability and depends in part on a primary violation under Section 11 or Section 12(a)(2).

Court’s Analysis

The court held that the complaint did not plausibly allege an actionable omission. At the time the registration statement was published, the adverse regulations had not yet been announced, so the defendants had no duty to predict with certainty what regulations Chinese lawmakers would later adopt. The registration statement also disclosed uncertainties involving new or proposed Chinese regulations concerning private education and warned that future laws or interpretations could materially harm FHS.

The court likewise rejected the alleged failure to disclose additional trend information or risk factors. It concluded that the Chinese government had not yet taken action when the registration statement was issued, so there were no existing trends or risks of the kind the plaintiffs claimed should have been disclosed. The court also rejected the allegation concerning FHS’s relationship with Hebei Hengshui High School, finding that the registration statement accurately described that relationship as a “cooperative relationship.”

The court further held that the alleged information was not material because it was readily available in the public domain. The complaint itself relied on widely accessible English-language news reports published before the offering. The court also concluded that the Sections 11 and 12(a)(2) claims were barred by the one-year statute of limitations because the cited reports and public comments should have alerted the plaintiffs to the alleged violations before or when the registration statement became effective. Because the complaint did not adequately plead a primary violation under Sections 11 or 12(a)(2), the Section 15 claim also failed.

Disposition

The court granted the defendants’ motion to dismiss. It denied the plaintiffs’ request to file a third amended complaint, while allowing them to file a motion explaining how a further amendment would cure the identified problems. That motion had to be filed by January 25, 2024. The Clerk was directed to close ECF No. 54.