In January, the Supreme People’s Court (SPC) issued several provisions on the trial of tort compensation cases for misrepresentation in the securities market, a set of arbitration rules improving on previous judicial interpretations on misrepresentation that had been in effect since February 2003 . This is seen as an important step that strengthens the rule of law in China’s capital market.
In addition to summarizing the experience of previous lawsuits in securities misrepresentations, the provisions herald a new era in the handling of related litigation. Based on the updates to the provisions, as well as the authors’ experience in such cases and market observations, this article explores new development trends in dealing with securities misrepresentation cases.
Removing premises makes disputes more confrontational, posing new challenges for all. These provisions removed the requirement that civil compensation must be preceded by a criminal judgment and an administrative sanction. Instead, a lawsuit can be brought by the plaintiff providing “relevant evidence that the disclosure debtors made a misrepresentation.”
Previously, constituent elements such as distorted content, materiality of violation and faults of the author were, for the most part, directly determined by the administrative sanction. The judicial authorities had only to decide on the calculation of losses and systematic risks for the securities market.
Since the provisions removed the premise, courts have been tasked with dealing with and judging whether there has been a misrepresentation, its materiality, the subjective faults of the parties, causation, and all other constituent elements of infringement. This poses new challenges for the courts, the parties to the case and their lawyers.
Tiered liability is becoming the new norm, with intermediaries being the subject of most accusations. In securities misrepresentation cases before 2018, for one reason or another, listed companies were almost always sole defendants. However, with de-listing becoming increasingly important in recent years and after the emergence of a series of misrepresentation cases, “issuers” are no longer in a position to fully or independently assume responsibility for misrepresentations, and the task of identifying new, more solvent responsible subjects was imposed. momentum.
A series of new arbitration rules, including the minutes of the National Courts Symposium on the Trial of Bond Disputes and Provisions, have also provided a clear legal basis for investors to turn to seeking a remedy. with the most solvent intermediaries.
As a result, intermediaries such as securities firms, accounting firms, and law firms are listed as defendants in most pending stock misrepresentation cases and in all bond misrepresentation cases. . This trend is unlikely to change in the foreseeable future.
Without a clear structure for apportioning liability and reimbursement among multiple responsible parties, related litigation is expected to increase over the next few years. The provisions included a specific provision on the request for reimbursement to a jointly and severally responsible person, which must be determined according to the gravity of the responsibility of each party, in accordance with article 178 of the Civil Code. A manager can thus claim reimbursement from other managers if their assumed liability exceeds their fair share.
However, a principles-based provision falls far short of what is needed to resolve the complicated issues of apportionment of liability and reimbursement between responsible parties in securities misrepresentation cases. In particular, these officials are not always willful offenders. The shareholders and the effective controller of the listed company may have deliberately committed an infringement; directors, supervisors, senior management and intermediaries may have negligently breached; and professional or non-professional advice between companies and intermediaries is not always taken into account.
In practice, many things are debatable in the manner of apportionment of liability, including full joint and several liability, proportionate joint and several liability, and excess indemnification liability. Meanwhile, with the recognition and enforcement of more misrepresentation judgments forcing intermediaries to take on indemnification liabilities, claims for reimbursement between liable parties are expected to increase at a steady pace.
Professional advice in the securities industry will be given more prominence during trials. As suggested in the China Securities Regulatory Commission’s Notice on Enforcement of the Provisions, issued together with the Provisions, courts should maintain communication with securities regulators, self-regulatory organizations and investor protection agencies for any professional matters in misrepresentation litigation. Professional agencies can be consulted for the determination of losses or the systematic measurement of risks. Where appropriate, the courts may also consider consulting experts or setting up a panel of people’s assessors represented by professionals.
These measures embody the new directions of “solving business problems professionally” and “advancing the rule of law with market-based approaches”.
Improved representative action mechanism and associated practice. Since the 2019 amendments to the Securities Law introduced a specific provision on the representative action mechanism, courts in Shanghai, Shenzhen and Nanjing, among others, have issued related rules and started their practice. In July 2020, the SPC published the Provisions on Several Matters Concerning Representative Actions Arising from Securities Disputes, which set out detailed operational requirements.
Compared to traditional litigation, the representative action often concerns a number of claimants and a higher amount of compensation. In the landmark misrepresentation case against Kangmei Pharmaceutical, the lower court judgment ordered Kangmei to pay 2.46 billion RMB ($360 million) to 52,000 investors, serving as a resounding deterrent to any violation or crime in matters of securities.
Although in the current actions of securities representatives, the courts may have been granted excessive discretion in determining the criteria for selecting cases and the range of defendants, the practice should become more balanced and rational as that it normalizes, becoming an integral part of the legal misrepresentation system.
He Chunyan is a partner at the Han Kun law firm. She can be contacted at +86 10 8525 4631 or by email at firstname.lastname@example.org
Deng Xiaoming is an attorney at Han Kun Law Firm. He can be contacted at +86 10 8524 5860 or by email at email@example.com