In January, the Supreme People’s Court (SPC) issued the Several Provisions on the Trial of Civil Tort Compensation Cases for Misrepresentation in the Securities Market, a set of adjudication rules improving on the previous judicial interpretations on misrepresentation that had been in effect since February 2003. This is seen as a significant move that bolsters the rule of law in China’s capital market.
Other than summing up past trial experience in securities misrepresentation, the provisions herald a new era in handling related disputes. Based on updates in the provisions, as well as the authors’ experience in such cases and observations of the market, this article explores the new development trends in the handling of securities misrepresentation cases.
Removal of premise makes disputes more confrontational, posing new challenges to all. The provisions removed the requirement for civil compensation to be preceded by a criminal judgment and administrative penalty. Instead, a lawsuit may be initiated by the plaintiff providing “relevant evidence that information disclosure obligors committed misrepresentation”.
Previously, constitutive elements such as misrepresented content, significance of the violation and the perpetrator’s faults were, for the most part, directly determined by the administrative penalty. Judicial authorities needed to decide little more than the calculation of loss and systematic risks to the securities market.
Since the provisions removed the premise, the courts have been landed with the responsibility of handling and judging whether there was a misrepresentation, its significance, subjective faults of the parties, causalities, and all other constitutive elements of infringement. This poses brand new challenges to the courts, parties to the case and their attorneys.
Multi-level liability becomes the new normal, with intermediaries subject to most accusations. In securities misrepresentation cases before 2018, for one reason or another, the listed companies were almost always the sole defendant. However, with delisting becoming more prominent in recent years, and after the emergence of a series of misrepresentation cases, “issuers” are no longer able to completely or independently assume misrepresentation liabilities, and the task of identifying new, more solvent accountable subjects has gained momentum.
A series of new adjudication rules, including the Minutes of the National Courts Symposium on the Trial of Bond Disputes and the Provisions, also provided a clear legal basis for investors to turn their crosshairs towards seeking recourse with the more solvent intermediaries.
As a result, intermediaries such as securities companies, accounting firms and law firms are listed as defendants in most ongoing stock misrepresentation, and all bond misrepresentation, cases. This trend is unlikely to change in the foreseeable future.
Without a clear structure for liability sharing and reimbursement between multiple liable parties, related disputes are expected to increase in the next few years. The provisions made a specific stipulation on claiming reimbursement from a fellow jointly and severally liable party, which is to be determined based on the gravity of liability of each party, consistent with article 178 of the Civil Code. A liable party may thus claim reimbursement from other liable parties if its assumed liability exceeds its rightful share.
However, a principle-based provision is a far cry from what’s needed to resolve the complicated liability sharing and reimbursement issues between liable parties of securities misrepresentation cases. In particular, such liable parties are not always deliberate infringers. Shareholders and the actual controller of the listed company may have willfully committed infringement; directors, supervisors, senior management and intermediaries may have infringed out of negligence; and professional or non-professional advice between corporate parties and intermediaries is not always heeded.
In practice, much is disputable in the manner of liability sharing, including full joint and several liability, proportional joint and several liability, and supplementary compensation liability. Meanwhile, with the recognition and enforcement of more misrepresentation judgments requiring intermediaries to bear compensation liabilities, reimbursement claims between liable parties are expected to grow at a steady pace.
Professional advice in the securities industry will be given more of a spotlight in trials. As suggested in the notice of the China Securities Regulatory Commission on applying the provisions, released at the same time as the provisions, courts should maintain communication with securities regulators, self-regulatory organisations and investor protection agencies for any professional matters in misrepresentation disputes. Professional agencies may be consulted for loss determination or systematic risk measurement. Where needed, courts may also explore expert consultation or setting up a panel of people’s assessors represented by professionals.
These measures embody the new directions of “resolving professional matters professionally” and “advancing the rule of law with market-based approaches”.
Improvement of the representative action mechanism and related practice. Since the 2019 amendments to the Securities Law made a specific provision on the representative action mechanism, courts in Shanghai, Shenzhen and Nanjing, among others, have issued related rules and begun their practice. In July 2020, the SPC issued the Provisions on Several Issues Concerning Representative Actions Arising from Securities Disputes, which set out detailed operative requirements.
Compared with conventional litigation, representative action often concerns a higher number of claimants and compensation amounts. In the milestone misrepresentation case against Kangmei Pharmaceutical, the first instance judgment called for Kangmei to pay RMB2.46 billion (USD360 million) to 52,000 investors, serving as a resounding deterrence to any securities violations or crimes.
Although in current securities representative actions, courts may have been granted excessive discretionary power in the determination of case selection criteria and the scope of defendants, the practice is expected to grow more balanced and rational as it becomes normalised, forming an integral part of the misrepresentation legal system.
He Chunyan is a partner at Han Kun Law Office. She can be contacted on+86 10 8525 4631 or by email at firstname.lastname@example.org
Deng Xiaoming is a counsel at Han Kun Law Office. He can be contacted on +86 10 8524 5860 or by email at email@example.com