Announcement • May 12
Robbins Geller Rudman & Dowd LLP Files Class Action Lawsuit Against First High-School Education Group Co., Ltd
Robbins Geller Rudman & Dowd LLP announced that it has filed a class action lawsuit seeking to represent purchasers of First High-School Education Group Co., Ltd. American Depositary Shares (“ADSs”) in or traceable to First High-School Education’s March 2021 initial public offering (the “IPO”). Commenced on May 11, 2022, the First High-School Education class action lawsuit – captioned Dagan Investments LLC v. First High-School Education Group Co., Ltd., No. 22-cv-03831 (S.D.N.Y.) – charges First High-School Education, certain of its top executives and directors, as well as the IPO’s underwriters and others with violations of the Securities Act of 1933. CASE ALLEGATIONS: First High-School Education provides tutoring services and operates private high schools in Western China. In the week immediately prior to the IPO – from March 4, 2021 through March 11, 2021 – China held its annual “Two Sessions” parliamentary meetings, where the two main political bodies of China meet, discuss, and reveal plans for China’s policies involving the economy, military, trade, diplomacy, education, the environment, and other issues. Unbeknownst to investors until after the IPO, Chinese government leaders in attendance at the Two Sessions meetings had proposed – and ultimately adopted – stringent regulations governing the educational industry with material adverse repercussions for First High-School Education’s business, operations, and financial prospects. Specifically, the First High-School Education class action lawsuit alleges that the IPO’s Registration Statement made inaccurate statements of material fact because defendants failed to disclose the following adverse facts that existed at the time of the IPO: (i) that the new rules, regulations, and policies to be implemented by the Chinese government following the Two Sessions parliamentary meetings were far more severe than represented to investors and posed a material adverse threat to First High-School Education and its business; (ii) that contemplated Chinese regulations and rules regarding private education were leading to a slowdown of government approval to open new educational facilities which would have a negative effect on First High-School Education’s enrollment and growth; and (iii) that, as a result, the Registration Statement’s representations regarding First High-School Education’s historical financial and operational metrics and purported market opportunities did not accurately reflect the actual business, operations, and financial results and trajectory of First High-School Education at the time of the IPO, and were materially false and misleading and lacked a factual basis. Soon after the IPO, media reports stated that attendees of the Two Sessions conference had proposed stricter regulations to rein in the for-profit education industry, such as regulations aimed at enhancing teacher quality, limiting fee scams, reducing market abuse, and reducing the stress that for-profit educational companies had placed on students in the Chinese educational system. On May 12, 2021, news reports revealed that the impending government crackdown on for-profit educational companies in China would be much more drastic and far reaching than previously publicly known. Sources stated that anticipated rules would include measures such as banning on-campus tutoring classes, prohibiting tutoring services during weekend hours, and the imposition of industry-wide fee limitations. Then, on May 14, 2021, China’s state council announced rules that it would further tighten regulations on compulsory education and training institutions. According to an article on fitchratings.com titled “Legal Changes in Private Education in China: Rising Risks for K-12 Education Companies; Higher-Education Providers Benefit,” the new rules “aim to prohibit profit-making in compulsory education,” and “expose K-12 school operators to heightened regulatory risks and their revenue growth may slow until they obtain more clarity on how the changes will be implemented.” Thereafter, on July 23, 2021, China unveiled a sweeping overhaul of its education sector, banning companies that teach the school curriculum from making profits, raising capital, or going public. These drastic measures effectively ended any potential growth in the for-profit tutoring sector in China. Two months later, on September 28, 2021, First High-School Education revealed that its first half of 2021 revenue was RMB 231.9 million, a year-over-year increase of only 24.8%, a steep drop from the 30.5% year-over-year revenue increase for the first nine months of 2020, and the 32.5% year-over-year revenue increase for the full year 2020. The following month, on October 13, 2021, First High-School Education issued a release announcing that its CFO, defendant Lidong Zhu, had resigned as CFO. And on December 16, 2021, First High-School Education announced that it had dismissed its auditor KPMG Huazhen LLP. On April 5, 2022, First High-School Education announced that it had received a letter from the New York Stock Exchange stating that it was in non-compliance with the NYSE’s listing requirements because its total market capitalization and stockholders’ equity had fallen below compliance standards. The following week, on April 13, 2022, First High-School Education announced that its total revenues for 2021 were just RMB 400.2 million, representing a substantial deceleration in the second half of the year. The release also stated that First High-School Education’s total student enrollment had remained almost unchanged at 21,247 students at year’s end, representing a paltry 3% increase year-over-year, and that First High-School Education’s gross profit had declined 18.1% during the year. Finally, on May 3, 2022, First High-School Education filed a notice with the U.S. Securities and Exchange Commission that it would not be able to timely file its annual report on Form NT 20-F. By May 10, 2022, First High-School Education ADSs closed below $1 per ADS – more than 90% below the price at which First High-School Education ADSs were sold to the investing public a little more than one year previously. At the time of the filing of this complaint, the price of First High-School Education ADSs has remained significantly below the IPO price.