Chinese Companies Listed on US Exchanges Must Disclose Potential Risk Associated with Potential Government Interference According to an SEC Official

On July 26, 2021, a senior U.S. Securities and Exchange Commission official, Allison Lee, advised that Chinese companies listed on U.S. stock exchanges must disclose the potential risks associated with the Chinese government interfering in their businesses, as part of their normal reporting requirements.

The genesis of SEC’s comment is believed to be the recent plummet of China-based Didi Global Inc.’s (NYSE: DIDI) stock price after Chinese regulators ordered Didi Global Inc.’s app to be taken down two days after the company’s $4.4 billion listing (the “IPO”) on the New York Stock Exchange.  The order to remove Didi Global’s ride-hailing from mobile app stores in China by the Cyberspace Administration of China (“CAC”), led to a 25% reduction in Didi Global’s stock price.  According to the SEC, this month, the CAC has announced cybersecurity investigations into other Chinese companies whose parent entities have listed in the United States, and those parent entities’ share prices likewise decreased.

On July 2, 2021, the CAC disclosed that it had launched an investigation into DiDi to protect national security and the public interest and that it had required DiDi to cease new user registrations during the course of the investigation. On this news, DiDi’s share price fell more than 5%.  On July 5, 2021, The Wall Street Journal reported that the CAC required DiDi, as early as three months prior to the IPO to postpone the offering because of national security concerns and to “conduct a thorough self-examination of its network security,” which caused DiDi’s stock price to decrease almost 20%, further harming investors.

A recently filed class action lawsuit charges DiDi Global Inc. (NYSE: DIDI), certain executives and directors, and its underwriters with violations of the Securities Act of 1933 and/or Securities Exchange Act of 1934, each as amended, and alleges, among other factors, that:

(i) DiDi’s app did not comply with applicable laws and regulations governing privacy protection and the collection of personal information and,

(ii) as a result, DiDi was reasonably likely to incur scrutiny from the CAC, and

(iii) the CAC had previously advised DiDi to delay its IPO to analyze its network security; and

(iv) the removal of DiDi’s app from the app store was foreseeable and that it would have an adverse effect on DiDi’s stock price and operations.

Ms. Lee, who served as acting head of the SEC from late January to mid-April 2021, told Reuters in an interview today, “Public companies must disclose significant risks which, for China-based issuers, may sometimes involve risks related to the regulatory environment and potential actions by the Chinese government.”