China's tech pioneers get a wake-up call in Cayman

A winding-up petition is typically the nuclear option for an aggrieved creditor. But a little-noticed case filed in the Cayman Islands against one of China’s original internet pioneers suggests it could have a more novel use.

Three shareholders in Nasdaq-listed Sohu.com have asked a Cayman court to wind up the company: not because it cannot pay its debts, but because it has too much money and refuses to do anything meaningful with it.

Maso Capital, Blackwell Partners and Star V Partners filed a petition in late July seeking the appointment of liquidators. The writ says the Sohu board led by founder and chief executive Charles Zhang is sitting on a US$1.17 billion pile of cash with no apparent plans to invest it, acquire businesses or return it to shareholders.

The petitioners argue that Sohu directors have breached their fiduciary duties by persisting with a “no dividend” policy despite a radically enlarged cash pile and have failed to provide shareholders with a substantive explanation for keeping the money. Sohu is no cash shell: it continues to operate a sizeable media and online gaming business.

The result, the shareholders contend, amounts to serious mismanagement, a lack of probity and oppressive conduct sufficient to wind up the company on “just and equitable” grounds.

The case could have implications well beyond Sohu. If shareholders can use Cayman’s winding-up regime to put capital allocation decisions before a judge, it could offer frustrated investors an unusually powerful new way to demand answers.

Minority shareholders have often struggled to make themselves heard at China’s founder-led offshore companies, where a dominant shareholder can wield considerable influence over the board even without majority ownership.

By putting the ultimate sanction of liquidation on the table, Sohu could prove a test case for whether Cayman’s nuclear option can give minority investors something they have often lacked: leverage.

No dividend, no cry

Historically, Sohu was part of China’s first internet wave, listing on Nasdaq alongside Sina and NetEase in 2000, and redomiciling from Delaware to the Cayman Islands in 2018. From the outset, Sohu retained cash to operate and expand the business as a matter of policy.

This rationale was easier to understand when Sohu was still building an internet empire. But in 2020 it took its US$579m gaming subsidiary Changyou private, and in September 2021 sold its search business Sogou to a Tencent subsidiary for US$1.18 billion. It became a smaller, more mature group with a much bigger pile of cash.

Since receiving the Sogou proceeds, the company has returned around US$206m through buybacks, but there have been no dividends. By March 2026, it was still sitting on around US$1.17 billion.

The writ states that Maso Capital repeatedly wrote to the board for two years up to November 2023, and again in December that year. After a series of follow-up letters, Charles Zhang responded in April 2024 for the first time on behalf of Sohu.

Sohu had managed its cash reserves in good faith, he replied, and in a manner that was in the best interests of the company and its shareholders. But according to the petition, no supporting analysis was provided for that conclusion, and the board would not provide Maso with information that was not available to shareholders generally.

All’s fair in cash and war

“Good luck suing us in Cayman” for a long time summed up the practical difficulties facing minority investors in Chinese companies domiciled offshore. This changed as a wave of take-privates from 2010 onwards turned the islands into an increasingly well-trodden venue for shareholder litigation, as we have written previously.

Ironically, the relatively light-touch legal regime that has helped make Cayman an attractive domicile for offshore companies may also explain the severity of Maso’s response. Unlike the UK, Cayman has no standalone unfair prejudice remedy allowing minority shareholders to ask a court to intervene in a company’s affairs. Instead, investors seeking similar relief must first clear a much higher bar: showing that it would be “just and equitable” to wind the company up. Only then can the court consider less drastic alternatives, including a buyout or orders regulating the company’s affairs (which the petitioners have also requested in this case).

There appears to be no reported case in Cayman quite like this. Petitions based on just and equitable grounds have typically centred on misconduct, loss of confidence or breakdowns between shareholders, not on challenging capital allocation.

To date, Sohu has not publicly commented on the winding-up petition, even as it disclosed its second-quarter results on August 10, several weeks after the case was filed. As a foreign private issuer, Sohu is not subject to the same disclosure regime as a US domestic company and a Cayman winding-up petition does not necessarily trigger an immediate SEC announcement.

How it eventually responds will be closely watched. Soho could go on the defensive, arguing that its decision as to whether it retains cash, repurchases shares or pays dividends is a matter of business judgment, not something for a court to second-guess.

It could also point to hundreds of millions of dollars spent on share buybacks over the years and Zhang’s longstanding contention that Sohu needs a war chest to develop its products and rebuild its user base. The harder question may be whether the board can demonstrate that it has continued to revisit that judgment as Sohu’s circumstances, and cash pile, have changed.

Sohu could also simply change the facts surrounding the petition by announcing a larger buyback, special dividend or more concrete plan for deploying its cash. It might not get rid of the legal action, but it would blunt the argument that the board has shut its mind to returning capital.

Ultimately the petitioners may not have to win to make their point, if Sohu decides to do something before a Cayman judge ever has to decide it. If the threat of liquidation succeeds where ordinary shareholder engagement has failed, other minority investors in China’s offshore companies may take note. Cayman’s nuclear option could prove useful without a judge ever having to press the button.

jmoir@fireflyreads.com

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