We secured a complete dismissal for PwC China in a lawsuit by Gridsum Holding shareholders

On February 22, 2021, Davis Polk secured a complete dismissal on behalf of its client, PricewaterhouseCoopers Zhong Tian LLP (PwC China), in a putative shareholder class action lawsuit alleging claims under section 11 of the Securities Act and section 10(b) of the Securities Exchange Act.

PwC China served as the independent auditor for Gridsum Holding, Inc., a Chinese artificial intelligence startup company, prior to and after Gridsum’s IPO in September 2016. On April 23, 2018, Gridsum announced in a press release that the audit report accompanying Gridsum’s 2016 Form 20-F should not be relied upon anymore, based on guidance from PwC China. In January 2019, Gridsum restated its 2015 and 2016 financial statements after it changed its revenue recognition, expense cutoff and cost accrual procedures.

Following these events, plaintiffs filed a putative class action lawsuit against Gridsum, its officers and directors, PwC China and the underwriters of Gridsum’s IPO. Plaintiffs alleged that PwC China’s audit opinion of Gridsum’s 2015 financial statements, which was incorporated into Gridsum’s IPO registration statement, and PwC China’s audit opinion of Gridsum’s 2016 financial statements were materially false and misleading because PwC China’s audits did not comply with the relevant professional auditing standards and because Gridsum’s underlying financial statements were not prepared in compliance with GAAP.

In decisions on March 30, 2020, and February 22, 2021, the court largely adopted the arguments advanced by Davis Polk in our briefs. First, the court dismissed plaintiffs’ section 11 claims against all defendants, holding that the plaintiffs failed to allege a material misstatement in Gridsum’s registration statement because the purported misstatements in the 2015 financial statements constituted a small portion of Gridsum’s overall revenue and were not qualitatively significant enough to be deemed material to investors. Second, the court allowed plaintiffs’ section 10(b) claims to proceed against Gridsum itself and at least one of its directors, but found that plaintiffs failed to adequately allege that PwC China acted with the requisite intent.

The Davis Polk team included partner Michael S. Flynn and counsel Adam Mehes. All members of the Davis Polk team are based in the New York office.

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