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GigaMedia Sued For $40 Million, According to DaCheng Law Offices Lawsuit

Its VIE structure claimed a Sham: Allegations against China Variable Interest Entity (VIE) operations

The complaint seeks $40 million in damages and a court declaration affirming that Gigamedia's business structure, operating in China as a Variable Interest Entity (VIE), and its attempted direct and indirect involvement in T2-E's online game activities, is invalid and illegal under the laws of People's Republic of China (PRC).

In this regard, the complaint also points out that, in its Annual Report to the SEC for the year ending Dec. 31, 2009, GigaMedia reported that the promulgation by Chinese government authorities of Notice 13 on Sept. 28, 2008, if enforced, would render ownership the [VIE] structure in the PRC invalid and illegal.

The complaint alleges the VIE structure was known to be unenforceable when GigaMedia made these representations and that they were misleading.

The dispute between the parties first arose in or around early January 2009 as a result of Gigamedia's attempt to influence business operation decisions of Wang Ji, the chief executive officer of Shanghai T2 Entertainment Company (T2-E). T2-E is licensed and authorized by the Chinese government to be a provider of online game activities. Its ownership by foreign entities is prohibited in China, and GigaMedia is alleged to have been fully aware of this illegality when it claimed and reported otherwise.

When T2-E's CEO informed Arthur Wang that GigaMedia demands for gambling promotions in China and foreign control in operation of [entertainment] games played online would violate China internal policy regulating online [entertainment] games, GigaMedia reacted by attempting to forcibly take direct control of T2-E's business operations. When this effort was met with resistance, Arthur Wang then authorized the filing of five separate lawsuits naming Wang Ji in various countries - the British Virgin Islands, the Republic of Singapore, Hong Kong, the U.S. and Shanghai, claiming Wang Ji's resistance was a breach of his fiduciary duty as a senior manager.

The complaint also alleges GigaMedia and Arthur Wang systematically used other means such as improper proxy votes and irregularly called directors' meetings to wrest managerial and executive control of T2-E and T2CN Holding Company Limited from Wang Ji. These included demands, among others, that Wang JI immediately terminate over 125 research and development employees; Wang Ji contends all actions were not only retaliatory acts but, more importantly, were actions taken to violate various labor laws enacted by the People's Republic of China as well as violate the British Virgin Islands Companies Act of 2004.

According to Court records, GigaMedia and T2CN Holding Company Limited have until July 18, 2011, to respond to the allegations pled in this verified complaint.

In a different action, Wang Ji filed a Motion to Intervene in an action by GigaMedia against a former employee and his wife, claiming they failed to file criminal charges of theft against Wang Ji with the Shanghai Economic Police. Wang Ji has filed a Motion to Intervene in that action, and he claims that any such police reports filed would have been false.

GigaMedia is seeking $9 million against its former employee.

The Court has ordered GigaMedia's lawyers to file a response to Wang Ji's Motion to Intervene by July 8, 2011.

For additional information or an interview, contact Leodis C. Matthews or Ling Xiao, Dacheng Law Offices, at +1 (310) 938-8300 or +1 (212) 380-8388, or e-mail Leodis.Matthews@Dachenglaw.com or Xiao.Ling@Dachenglaw.com.

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