U.S. investors who own a minority stake in Chinese company Renren are poised to receive 300 million dollars in settlements to resolve claims against the firm’s controlling shareholders and other defendants. The company has been accused of corporate misconduct. This is one of the largest cash settlements in the history of American shareholder derivative litigation and now has to be approved by New York Supreme Court Justice Andrew Borrok.
“This is an extraordinary result by any measure. It is very rare to settle a case for more than the damages that we originally pleaded. Yet indeed, from the vantage point of minority shareholders, we have recovered more for them in this direct pay settlement than the damage claim we set forth in the complaint,” William Reid IV, an attorney for the plaintiffs, said in a statement. Reid had estimated Renren’s original liability to be around 240 million dollars.
The lawsuit originated from Renren’s 2011 initial public offering (IPO) on the New York Stock Exchange. The company was a major social media player in China at the time, and investors paid nearly 800 million dollars to acquire American Depositary Shares (ADS) in the company.
Over time, the company’s user engagement declined, as did its profits. Led by CEO and board chair Joseph Chen, the controlling shareholders of Renren had other plans for the millions raised through the IPO. The funds were mostly invested in startups rather than in Renren.
A gamble of nearly 250 million dollars was made on Social Finance, a peer-to-peer lending platform known as SoFi. The platform was diversifying from student loan deals to mortgages and personal lending. As a result of such bets, Renren’s balance sheet had over 810 million dollars in long-term investments by the end of 2015.
Chen eventually decided to spin off a new private firm, which would be under his control, and hold Renren’s shares in other companies. Renren itself would be left with a failing social media platform and a few car dealerships that were also not very profitable. In 2018, the Renren board’s special committee approved the spinoff proposal.
The decision immediately triggered a reaction from shareholders in the U.S., who filed a lawsuit in New York accusing the company of cheating them. Lawyers from the company argued that shareholders had no right to sue in New York.
However, Judge Borrok disagreed. He pointed out that SoFi had operations in New York, meaning that Renren’s business spinoff could not be completed without gaining the approval of regulators in the state. Moreover, minority shareholders were required to take their cash-out payments from the spinoff deal through bank accounts in New York.
U.S. shareholders succeeded in convincing Borrock about how the committee that approved the spinoff was a sham. An internal report had valued Renren’s investment holding at over 1 billion dollars rather than the 500 million dollar valuation proposed by the company’s board.
Renren finally decided to reach a settlement with its shareholders. The 300 million dollar settlement will be directly turned over to minority shareholders. Renren’s share value surged 45 percent on Oct. 8, with the company’s market capitalization reaching 576 million dollars.