Alibaba seeks to nix investors’ complaint about suspended IPO of Ant Group
Alibaba Group Holding Limited, Daniel Yong Zhang, and Maggie Wei Wu, are seeking the dismissal of a lawsuit concerning the suspended IPO of Ant Group.
The motion to dismiss and the memorandum in support were filed by the defendants in the New York Southern District Court on July 22, 2022.
The lawsuit brings two sets of claims against Alibaba, its CEO, and its former CFO. First, Plaintiffs claim that the Alibaba Defendants failed to disclose PRC regulatory risks that led to an abrupt suspension of the planned Shanghai and Hong Kong initial public offering (IPO) of Ant Group Co. Ltd, a non-party affiliate of Alibaba in FinTech sector.
Second, Plaintiffs allege that the Alibaba Defendants falsely claimed compliance with evolving PRC antitrust laws, including those regarding business practices commonly referred to as “choose one of two,” and that Alibaba’s failure to comply led it to be investigated and fined.
The Amended Consolidated Class Action Complaint alleges that these developments unfolded as Beijing sought to curtail the growing dominance of, and impose stricter controls over, technology companies.
Alibaba says that the Court need only review Alibaba’s detailed risk disclosures and the plethora of publicly known facts to conclude that Alibaba fairly apprised its investors of its evolving regulatory risks and did not act with scienter.
The Ant IPO Claim: On November 2, 2020, three days before Ant was supposed to launch its IPO, PRC regulators announced a new FinTech regulation, resulting in a last-minute suspension of Ant’s IPO. According to Alibaba, the Complaint speculates instead that the IPO was suspended because of certain Ant investors’ political affiliation, and claims that Alibaba’s investors were not adequately warned of the associated risk to the Ant IPO.
This claim is not well-pleaded, Alibaba says, adding that it is also particularly untenable against the Alibaba Defendants, who had no duty to disclose the identity of Ant’s investors. According to Alibaba, the plaintiffs also allege no fact showing that the Alibaba Defendants were at all aware of these purported Ant investors. Moreover, Alibaba sought to buy billions of dollars of additional Ant shares in the IPO, directly undercutting any inference of scienter.
The Antitrust Claim: On December 24, 2020, PRC antitrust regulators launched an investigation of Alibaba, and later imposed a significant fine. According to Alibaba, these facts do not give rise to a securities fraud claim—particularly where nearly every detail about the PRC regulatory tightening found in the Complaint is sourced from public information.
Indeed, Alibaba repeatedly warned its U.S. investors of both the general risks posed by increasing PRC antitrust scrutiny, and specific risks related to certain exclusivity practices prevalent in the Chinese e- commerce sector—known as “choose one of two.”
While Alibaba for years vigorously contended that its own practices—incentivizing merchants to sell exclusively on its e-commerce platforms by offering them improved visibility and promotional opportunities—were permissible, the Company also cautioned investors that “there can be no assurance that regulators will not initiate anti-monopoly investigations into [its] business practices.”
The defendants argue that the Antitrust Claim fails for multiple reasons. First, according to Alibaba, the plaintiffs fail to plead falsity. Although Plaintiffs challenge Alibaba’s statement of opinion that its business practices were lawful, they allege no fact showing Alibaba’s belief was not honestly held when that statement was made.
Plaintiffs also contend that Alibaba misleadingly downplayed its antitrust risk, but the Complaint demonstrates that investors were well aware of both Alibaba’s practices and the PRC regulators’ criticisms. Plaintiffs’ assertion that the regulators—in the midst of an industry-wide tightening—ultimately fined Alibaba is a non-actionable claim of “fraud by hindsight.”
Second, Alibaba argues that the plaintiffs fail to plead scienter. The Complaint cites no internal document, confidential witness, or other source that suggests Alibaba or its executives did not believe the Company’s public pronouncements or sought to mislead investors. Instead, Plaintiffs again rely on hindsight pleading and essentially ask the Court to draw the unjustifiable inference that Alibaba was reckless in not accurately predicting future regulatory developments. However, the Complaint can only lead to an inference that, faced with a sharp turn in the PRC regulatory environment, Alibaba acted transparently and without intent to defraud.
Finally, the defendants say that the plaintiffs cannot plead loss causation. The two stock price drops at issue were neither corrective disclosures nor materializations of previously undisclosed risks. Instead, the stock movement was caused by new events relating to risks that were disclosed and well-known.