A sign is visible on Wall Street near the New York Stock Exchange on June 15, 2012. REUTERS / Eric Thayer

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(Reuters) – In one of the biggest cash settlements in the history of the derivatives litigation between U.S. shareholders, investors who hold a minority stake in Renren Inc., formerly known as “Facebook of China.” , are expected to receive at least $ 300 million to resolve claims against controlling shareholders and other defendants, including financial technology firm Social Finance Inc. The proposed settlement, announced on Friday, has yet to be approved by the judge. New York State Supreme Court Andrew Borrok of Manhattan.

It was anything but a typical derivative costume – and I’m not just talking about the huge cover.

Lawyers for plaintiffs Reid Collins & Tsai, Grant & Eisenhofer, Gardy & Notis and Ganfer Shore Leeds & Zauderer have accused Renren insiders of an extremely complex fraud, executed through a spinoff ring, to siphon off hundreds of millions dollars to minority shareholders. But plaintiffs first had to show why a New York state court should even hear a lawsuit against a Cayman Islands company with major operations in China.

And that was just the initial procedural roadblock. They also had to persuade the New York court that Cayman Islands law allows minority shareholders to bring derivative action on behalf of the company.

“The jurisdiction was monumental,” said shareholder lawyer William Reid of Reid Collins.

The case stems from Renren’s 2011 IPO on the New York Stock Exchange. At the time, Renren seemed poised to dominate social media in China, with over 100 million users. Investors raised nearly $ 800 million to acquire US depository stocks in what was then known as “Facebook of China.” (This account comes from the May 2020 New York trial judge’s opinion dismissing the defendants’ motions to dismiss.)

Renren user engagement quickly fell off a cliff, plunging to 45 million in 2013. So did the profits. Bloomberg suggested in 2014 that the old Facebook comparison no longer seemed appropriate: Renren, he said, now looked more like “MySpace of China.”

But Renren’s majority shareholders, led by CEO and chairman of the board Joseph Chen, had other ideas for the millions they had raised when the company went public. Rather than investing investor money in a struggling company, they bought stakes elsewhere, mostly in startups. Their biggest bet was an investment of nearly $ 250 million in the peer-to-peer lending platform Social Finance, known as SoFi, which spanned student loan transactions to mortgages and loans. personal loans. At the end of 2015, Renren’s balance sheet reflected more than $ 810 million in long-term investments.

It was a problem, however. If Renren were now more of an investment fund than an operating company, it would be subject to an entirely different regulatory regime by the United States Securities and Exchange Commission. Citing the imminent prospect of regulation under the Investment Company Law, CEO Chen and another member of Renren’s board of directors proposed to privatize the company.

They valued Renren at $ 500 million, which reflected a small premium on the Renren ADS trading price. Other shareholders were convinced that the valuation was far too low. They suspected that Chen knew, based on non-public information, that the private companies Renren had invested in were worth far more than Renren’s share indicated.

In the face of the shareholders’ revolt, Chen turned to a new plan to turn Renren’s assets – those shares in private companies – into a new private company that he would control. (I’m dramatically simplifying this multi-step deal.) The spin-off would leave the old Renren with just a failing social media business and unprofitable car dealerships. In return for the assets from the spin-off, the company would also receive $ 25 million in cash and a promissory note of $ 90 million.

Minority shareholders have been offered their own exit ramp. They could either accept payment in cash for the value of the investments resulting from the split, or, if they were eligible, receive shares in the split private company, albeit with mitigated rights.

Somehow, the supposedly independent valuation of Renren’s investments turned out to be $ 500 million – the same valuation that shareholders had previously deemed insufficient. Nonetheless, a special committee of Renren’s board of directors approved the split agreement in 2018.

The shareholders quickly filed a lawsuit in New York State court, claiming they had been defrauded of hundreds of millions of dollars.

Defense attorneys for Skadden, Arps, Slate, Meagher & Flom; McDermott Will & Emery and Paul, Weiss, Rifkind, Wharton & Garrison insisted, as I mentioned, that shareholders did not have the right to sue in New York.

New York judge Borrok disagreed. On the one hand, he said, SoFi holds a banking license in New York, so Renren’s controlling shareholders could not have finalized the split without the approval of New York regulators. And the split agreement required minority shareholders to make their cash payments through New York bank accounts. New York’s banks, bankers, courts and lawyers were omnipresent in the deal, Borrok said.

Cayman Islands law, mirroring English common law, makes it very difficult for shareholders to sue on behalf of the company, as New York State courts have recognized. The only way is to prove deliberate fraud on minority shareholders. Defendants in the Renren case argued that there was no such fraud because the spin-off was approved by a special committee.

Shareholders, however, convinced Borrok that the committee was a sham. “We basically argued that the court could ignore the special committee’s approval because they were lackeys and rubber bumpers exercising no judgment,” said Reid, who noted that this discovery had revealed an internal report valuing Renren’s stake at over $ 1 billion.

The New York appeals court ruled in favor of the plaintiffs in a terse decision in March: “The plaintiffs have sufficiently argued that the defendant directors … have committed fraud, obtaining personal benefits at the expense of the company.”

Paul Weiss ‘defense attorney Gregory Laufer and Skadden Arps’ Chris Malloy did not respond to my questions via email.

The settlement money, Reid said, will go directly to minority shareholders. It’s also unusual in derivative litigation – but you wouldn’t expect less in a case that has been extraordinary all along.

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Alison frankel

Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A graduate of Dartmouth University, she worked as a reporter in New York covering the legal and law industry for more than three decades. Prior to joining Reuters, she was a writer and editor for The American Lawyer. Frankel is the author of Double Eagle: The Epic Tale of the World’s Most Valuable Coin. Contact her at [email protected]