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Didi and Luckin's New York debacles shed light on corporate liability insurance as shield against class action lawsuits

·5 min read

Didi Global's New York listing debacle is shedding light on a little-known area of insurance that protects corporate directors and officers (D&O) from legal liability, as a number of law firms are soliciting shareholders to sign up for class-action lawsuits in US courts.

Class action suits related to the securities industry jumped to 334 cases in the United States last year, 49 per cent higher than the average between 1997 and 2019, according to data compiled by Cornerstone Research. Chinese defendants in federal courts increased to 24 last year, the most in at least seven years, and up from as few as four in 2016, keeping pace with the record number of China-domiciled companies that flocked to the US capital markets to raise funds.

The biggest known Chinese claimant of D&O insurance was Luckin Coffee, the Xiamen-based Starbucks pretender that was kicked off the Nasdaq in June 2020 after its chief operating officer and other senior executives admitted to committing accounting fraud.

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Luckin, fined US$180 million by US regulators last December, made a US$25 million D&O insurance claim eight months earlier on a consortium of Chinese insurers including Ping An Insurance Group, according to the China Banking and Insurance Regulatory Commission (CBIRC). Ping An, which faces a maximum payout of US$2 million under the syndicated coverage, said it was still reviewing the claim.

The trend is likely to pick up, as US-listed Chinese companies find themselves caught between tougher regulatory regimes like the Holding Foreign Companies Accountable Act of the US, and China's latest rule that adds cybersecurity oversight to the layers of approval for overseas listings. Didi, the dominant ride-hailing service in China, may be under particular pressure as it forced its way to a US$4.4 billion New York listing, an act now characterised by Chinese officials as a deliberate act of deceit, sources said.

"The Didi incident and the new regulation in China are likely to increase the awareness for the need for D&O insurance," said Eric Hui Kam-kwai, chief executive of Zurich Insurance (Hong Kong), which also offers D&O coverage. "The estimated take-up rate for the mainland listed companies may double to 40 per cent in the next two years."

Source: Refinitiv. SCMP Graphics alt=Source: Refinitiv. SCMP Graphics

D&O insurance is the fastest-growing insurance product in China, with as many as 150 publicly traded companies signing on for the corporate liability coverage in the first half alone. One such company was Minsheng Holdings, which disclosed in a January 23 filing to the Shenzhen Stock Exchange that it was paying no more than 150,000 yuan (US$23,170) in annual premium to provide its executives with up to 30 million yuan of coverage.

D&O insurance in the US costs 20 times more than in Hong Kong and in mainland China, because of the litigiousness and prevalence of class-action lawsuits in America, insurers said. Policy premium jumped 56 per cent in the first three months from last year, the 13th consecutive quarter of growth, according to data provided by AON the London-based insurer.

"From a shareholder's perspective, class actions are more commonly seen against companies that have US exposure (via share listings) and as a result of M&A transactions," AON said in a report.

Source: Refinitiv. SCMP Graphics alt=Source: Refinitiv. SCMP Graphics

Companies may pay about 10 per cent to 20 per cent, or US$1 million to US$2 million premium for every US$10 million of D&O coverage in the US, compared with US$100,000 for every US$10 million of coverage in Hong Kong or China.

"There is already an upwards price movement for D&O insurance [premium] in the past two years, and incidents like Didi may lead to further increases," said Edward Shen, Head of casualty product underwriting of Hong Kong-based reinsurer Peak Re, which does not count Didi as a client.

Didi counts Singapore's Temasek Holding, Tencent Holding, and this newspaper's owner Alibaba Group Holding as its financial backers. Tencent's president Martin Lau and Alibaba's executive chairman Daniel Zhang are directors on Didi's board. Since its listing, the ride-hailing service's smartphone apps had been ordered to be removed from app stores, and Didi has been investigated by a number of Chinese regulators, including the national security ministry.

The Beijing-based ride-hailing company, with 90 per cent of China's market, did not respond to queries by South China Morning Post about the size of its D&O insurance and when the policy was bought.

"Didi shall maintain directors' and officers' insurance in an amount determined in good faith by the board to be appropriate," the company said in its US listing prospectus, attaching a boilerplate indemnification agreement for its executives and officers.

"The increased regulation from the Chinese government and the new legislation being introduced in the US is likely to deter Chinese firms from wanting to list in the US in the future," said Antony Sassi, the Asia managing partner of the legal firm Reynolds Porter Chamberlain (RPC). "For those already listed, these developments may well result in them having to consider delisting in the next couple of years. This could well be a positive for the Hong Kong stock market."

"Chinese companies may well think twice before embarking on a US listing going forward," he said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.