Will ByteDance Be Used Against Didi in Court?

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The fallout from Didi Global Inc.’s New York listing at the end of June have generated securities fraud class action suits. If the U.S. lawyers behind those cases are looking for fresh ammunition to use against China’s ride-hailing giant, could they find it in ByteDance Ltd., China’s other big unicorn?

On Monday, the Wall Street Journal reported that in March ByteDance, the owner of popular short-video app TikTok, put on indefinite hold its intentions to go public in Hong Kong or New York after government officials told the company to focus on addressing data security risks. This is awkward for Didi. The Cyberspace Administration of China requested multiple changes to Didi’s mapping function before its U.S. listing, fearing it could reveal sensitive government locations. It chose to go ahead with its initial public offering anyway.

Lawyers may ask: Why did Didi proceed while ByteDance paused?

Almost immediately after the Didi IPO that raised $4.4 billion, Chinese regulators told the company to remove its apps from mobile stores and to desist from racking up new users. The stock has been tanking since; and U.S. politicians and law firms representing shareholders are asking whether Didi was forthcoming about its contact with Chinese regulators prior to its listings. (Didi did not reply to a request for comment on the class actions suits filed against it.)

In Didi’s defense, it may have been given mixed signals. China’s various regulatory agencies had little legal recourse to prevent sensitive overseas listings (that has now changed), and the most they could do was offer suggestions. While some financial regulators may have expressed support for the IPO, others stressed the importance of protecting sensitive data.

Both ByteDance and Didi seem to have been given a yellow caution light to proceed. Today, ByteDance looks like the good kid who waited dutifully at the crosswalk. Didi, on the other hand, appears to be the brat who charged ahead. Now the company’s being taken to task for having violated an implicit stop light. But is that securities fraud or just impatience?

ByteDance can afford to wait. It is still expanding rapidly: Revenue last year more than doubled to $34.3 billion, while gross profit rose 93% to $19 billion. Popular with Generation Z, its Chinese app Douyin has grabbed e-commerce and gaming advertising market share from Alibaba Group Holding Ltd. and Tencent Holdings Ltd.

By comparison, Didi is an aging unicorn with stagnant sales growth and razor-thin profit margins. Its earnings before interest, taxes, depreciation and amortization for the relatively more profitable China ride-hailing business was only 3.1% of the gross transaction value. In other words, Didi was on the cusp of becoming a “dumb pipe” utility company that doesn’t provide much added value or profit. A further delay in listing might have meant no IPO at all — not a good look for venture capital funds anxious to cash in on their investment.

Didi might truly have been ignorant and unaware that governmental authorities could bring its China business to its knees. Big Tech in China is learning that lesson as each day goes by. Still, as much as lawyers may salivate at the possibilities, running a yellow light does not constitute fraud.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

©2021 Bloomberg L.P.

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