Hong Kong shareholders unite for lawsuit over misleading IPO prospectus

ACGA Research Director Jane Moir reports on a very rare event 

The past two decades has seen a fair number of companies list in Hong Kong and quickly unravel as findings of fabricated invoices, bogus accounts and plundered assets come to light. The board vanishes, the firm de-lists, shareholders take a hit and the market moves on.

It is relatively unheard of for investors in Hong Kong to get lawyered up as a group and talk about compensation. That is why the case of the Trony 35 is so compelling—even if it does not have a happy ending.

Three sets of books and accounts

The last you probably read about a small China-based solar panel company, Trony Solar Holdings, back in 2014 was that a forensic probe had found three sets of books and accounts at its main operating subsidiary in Shenzhen.

Unable to reconcile the three sets of figures, and with uncooperative employees—including a chairman and CEO who claimed his company laptop was stolen in a coffee shop—the company was eventually booted off the bourse by Hong Kong Exchanges and Clearing (HKEX). This was amid concerns that materially false, incomplete, or misleading information had been included in the company’s IPO prospectus.

The story seems to end in August 2018 when Trony was finally de-listed. In all, it traded publicly for just 18 months. After an IPO in October 2010, the company had requested a suspension in June 2012 after a whistleblower wrote to Deloitte with a series of allegations.

Thirty-five shareholders

A group of 35 shareholders filed a lawsuit in Hong Kong in March 2019 seeking compensation against Trony sponsor JP Morgan Securities (Asia Pacific) and the issuer’s auditor, Deloitte for misleading statements made in the IPO prospectus.

They argued that their shares in Trony were rendered valueless by the loss of the company’s listing status. They sought damages representing the amount they paid for the shares including the value, and any other charges and fees.

A statutory private right of action

Back in the early 2000s, there was much talk of investors asserting their rights as guaranteed under the Securities and Futures Ordinance (SFO), which came into effect in 2003.

One of the major prongs of the legislation was to empower shareholders with a new right of action, rather than having to fashion the claim in traditional tort or contract terms: if you are injured by another person’s flouting of securities laws, you can apply to the court for remedies. 

It did not turn out to be a brave new world. Instead, the securities regulator, the Securities and Futures Commission (SFC), takes on the most egregious breaches of securities law on behalf of shareholders. The prohibitively high cost of going to court and a “loser pays” system is still a mighty deterrent to individual investors. A “no win, no fee” arrangement to ease the financial burden is also still firmly off the table in Hong Kong where lawyers are still prosecuted for champerty and maintenance.

Down but not out?

Unfortunately, the Trony 35 lost at the first hurdle. On 28 September a High Court judge said they were time-barred from pursuing their action.

The judge ruled that the shareholders suffered loss and damage when they bought shares of Trony back in 2010-2012—and not when the company was eventually de-listed in August 2018. By suing in March 2019, they missed a six-year deadline imposed under limitations law.

It is the only case we are aware of where shareholders have sued for compensation arising from a misleading prospectus. They have a few weeks to determine whether there are grounds to appeal—and the hope for CG in Hong Kong is that Trony goes down in history for being more than just a bad actor.