We secured dismissal of the first U.S. securities class action arising from the PRC government’s ban on for-profit tutoring

On March 30, 2023, Judge Paul Oetken of the United States District Court for the Southern District of New York granted with prejudice Davis Polk’s motion to dismiss a putative securities class action filed against Davis Polk’s client Zhangmen Education Inc., which was a leading after-school tutoring service provider for students in China at the time of its IPO in June 2021. Less than two months after the IPO, the PRC government unveiled a sweeping overhaul of the after-school tutoring industry, which included barring for-profit tutoring businesses, such as Zhangmen’s.

In the wake of these developments, the plaintiff alleged Zhangmen’s IPO registration statement was materially misleading because Zhangmen failed to disclose that “impending policy changes” that had been foreshadowed by the PRC government at the time of the IPO would limit Zhangmen’s growth, and that Zhangmen itself was already in the “crosshairs” of regulators who issued a fine to Zhangmen weeks before the IPO. The complaint alleged claims under sections 11, 12(a) and 15 of the Securities Act of 1933 against Zhangmen, its directors and the underwriters of its IPO.

In granting the motion to dismiss, Judge Oetken adopted Davis Polk’s arguments and held that Zhangmen’s registration statement included extensive disclosures of regulatory risks, which “rendered any misleading statement it may have made immaterial”; that there was “no duty to disclose all details of regulatory fines”; and that the pre-IPO fine issued by the PRC government was immaterial as a matter of law.

The Davis Polk litigation team included partner Brian S. Weinstein, counsel Jonathan K. Chang and associates Esther C. Townes and Mark Qin. Members of the Davis Polk team are based in the New York and Hong Kong offices.

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