Article:US Companies Uphill Struggle In Lawsuits vs China

This Reuters? article is well worth a read by all doing business in China

Here’s the introduction

You can link to the full article at ….? http://www.reuters.com/article/2011/02/14/china-lawsuits-idUSN1429211020110214

NEW YORK, Feb 14 (Reuters Legal) – As more Chinese companies trade on U.S. stock exchanges, investors are increasingly suing them for securities fraud in U.S. courts — and slamming into a host of legal and bureaucratic barriers.

In theory, investors should be having an easier go of it. These Chinese entities, after all, agreed to abide by U.S. securities laws when they went public and gained access to U.S. financial markets. In practice, though, the companies have been able to hide behind a thicket of Chinese laws to avoid significant liability — in large part because evidence in these matters often resides in China, where basic litigation tasks such as gathering evidence are exceedingly difficult. Depositions by private parties are not even allowed in China, and it is nearly impossible to subpoena third-party witnesses there.

The vast majority of all civil securities-fraud suits end in settlement; but with all the impediments to pursuing claims against Chinese companies, plaintiffs’ lawyers often don’t have much leverage, and as a result, cases either drag on or plaintiffs accept relatively small settlements.

To be sure, the hurdles in these cases aren’t exclusive to China — they frequently arise in civil litigation against companies based in non-Western countries with opaque legal systems. But China has emerged as a particularly tempting target. Twelve Chinese companies were sued in 2010, accounting for more than 40 percent of all shareholder suits filed against foreign companies listed on U.S. exchanges. That compares with 14 suits against Chinese companies in the prior three years combined, according to research by Stanford Law School and Cornerstone Research. The lawsuits allege that the companies misled shareholders by all sorts of underhanded means, from grossly inflating revenues reported in securities filings to reporting vastly different earnings to U.S. and Chinese regulatory authorities.

It’s too soon to say how the newest spate of litigation will play out, of course, but if the earlier crop of lawsuits are any indication, shareholders could end up disappointed.