Legal Risk and Corporate Governance in the Chinese Solar Sector: Daqo New Energy's Ongoing Appeal and Investor Implications

The Chinese solar sector, a cornerstone of global clean energy transitions, is navigating a complex landscape of regulatory shifts, market volatility, and corporate governance challenges. At the forefront of these dynamics is Daqo New Energy, whose ongoing legal dispute involving its subsidiary, Xinjiang Daqo, has become a case study in how legal risk management and corporate governance practices shape investor confidence and operational stability.

The Legal Dispute: A Test of Contractual Resilience

In April 2024, Xinjiang Daqo faced a lawsuit from Xinjiang Xian'an New Materials Co., Ltd. and its affiliate, Xinjiang Dengbo New Energy Co., Ltd., over a contract dispute related to silicon core processing services. The plaintiffs initially sought RMB1,958.5 million, later reduced to RMB742.7 million, primarily for alleged consequential damages, according to a company update. While the first-instance court in July 2024 ruled in favor of the plaintiffs-ordering RMB3.16 million in compensation and rejecting consequential damages-this outcome was recorded in a Form 6-K filing, and the case was remanded for retrial. A March 2025 retrial reaffirmed the termination of the agreement and, per a retrial update, adjusted the compensation to RMB3.30 million, with consequential damages still dismissed. Despite these rulings, the plaintiffs have appealed again, seeking RMB744.9 million, according to a Yahoo Finance report.

This litigation highlights vulnerabilities in contractual risk management within the sector. For Daqo, the financial exposure remains limited compared to initial claims, but the repeated appeals signal systemic challenges in resolving disputes efficiently-a concern for investors evaluating operational stability, as noted in the company's ESG report.

Corporate Governance: ESG Commitments vs. Legal Realities

Daqo New Energy has positioned itself as a leader in corporate governance through its 2024 Environmental, Social, and Governance (ESG) Report, emphasizing R&D investment, carbon neutrality goals, and compliance frameworks. This positioning contrasts with broader industry trends identified in a Sunhub analysis. The company's strategy includes reducing waste emissions and optimizing energy consumption, aligning with China's broader renewable energy agenda as outlined in China's Energy Law 2025. However, the Xinjiang litigation reveals gaps in its governance practices.

While Daqo's ESG disclosures highlight proactive sustainability measures, the legal dispute underscores the need for robust contractual oversight and dispute resolution mechanisms. A GuruFocus report notes that the case reflects the company's exposure to operational risks, which could undermine long-term stability and reputation. For investors, this duality-strong ESG commitments juxtaposed with legal vulnerabilities-raises questions about the alignment of governance practices with operational realities, as discussed in a ChinaLegalExperts analysis.

Industry-Wide Pressures: Policy Shifts and Market Uncertainty

The Chinese solar sector is grappling with policy-driven headwinds. In 2025, regulatory changes such as restrictions on rooftop solar installations and the removal of fixed price protections for producers have intensified competition and eroded margins, according to a VIR report. Five of China's top solar firms reported combined losses exceeding 8 billion yuan ($1.1 billion) in Q1 2025, illustrating the sector's fragility.

Amid these challenges, the newly enacted China's Energy Law 2025 emphasizes renewable energy development while acknowledging the continued role of fossil fuels in energy security. This duality creates a regulatory environment where companies must balance innovation with compliance-a task that demands agile governance structures. For Daqo, the litigation and broader industry pressures test its ability to adapt to a rapidly shifting landscape.

Investor Confidence: Balancing Risks and Resilience

Investor sentiment toward Daqo New Energy remains cautiously optimistic, but the litigation and sector-wide financial strains have introduced volatility. Analysts have highlighted the company's declining revenue and negative operating margins, combined with legal uncertainties, as significant risks to long-term appeal. However, the consistent rejection of consequential damages in court rulings has mitigated immediate financial exposure, offering a partial buffer.

The resolution of the Xinjiang dispute will likely influence investor perceptions. A favorable outcome could reinforce confidence in Daqo's governance capabilities, while further appeals may signal systemic inefficiencies. Analysts note that transparency in legal proceedings and proactive risk communication will be critical for maintaining trust.

Conclusion: A Path Forward

Daqo New Energy's legal battle and the broader challenges facing the Chinese solar sector underscore the importance of integrating legal risk management into corporate governance frameworks. While the company's ESG initiatives and carbon neutrality goals align with global sustainability trends, the Xinjiang litigation highlights the need for stronger contractual safeguards and dispute resolution strategies. For investors, the key will be monitoring how Daqo navigates these dual pressures-legal and market-to determine whether its governance practices can sustain long-term confidence in an increasingly volatile industry.