Lawsuits against listed companies and stock market intermediaries have surged in recent years1 in China against the backdrop of intensified investigations into misconduct in the financial market (especially misstatements on securities) launched by the China Securities Regulatory Commission (CSRC). Individual investors who have become increasingly assertive of their rights have no doubt contributed to this surge. However, from our experience and based on cases we have observed, Chinese Courts would usually entertain such lawsuits only on a singular "one-case-one-file" basis. Such an approach, regularly pilloried by the press, not only serves to make already aggrieved individual investors feel further victimised but also saddles the Courts with additional (but arguably not entirely necessary) workload.
In view of the circumstances set out above, the draft revision to the PRC Securities Law was passed by China's top legislature on Saturday, 28 December 2019, and the legislation would kick into place from 1 March 2020. In addition to outlining detailed laws and guidance on securities issuance and trading, the takeover of listed companies, information disclosure and so on, it would appear that the revised Securities Law has introduced certain "aggressive" clauses under Chapter 6 – investor protection with a view to exploring "Quasi-Class Action litigation with Chinese characteristics" arising from misstatement on securities2.
Meanwhile, the Supreme People's Court also promulgated the Minutes of the 9th National Court's Civil and Commercial Trial Work Conference (the "Minutes") in November 2019, setting out detailed rules on cutting-edge legal issues in civil and commercial cases (including how to explore "Quasi-Class Action" in securities litigation).
The Minutes and the revised PRC Securities Law, when read in conjunction, bear the following key points:
"Joint action" is applicable to litigation arising from misstatements on securities.
Under the new regime, if "the subject matter of the action is of the same category and a party consists of multiple persons", the party may elect a representative to proceed with the lawsuits. Further, if "there are other potential investors having the same claims, the People's Court may issue an announcement stating the facts of the claim and notifying investors to register with the People's Court within a certain period. The judgments or rulings rendered by the same People's Court shall be valid and binding on the investors who have so registered"3.
The aforesaid litigation regime, usually dubbed as "joint litigation", has been on the list of statutes since the year 19914, although it is not often seen in action. Interestingly, the requirements for filing a joint litigation are actually easier to satisfy. In lawsuits arising out of misstatements on securities, the subject matter of the action usually falls into the same category (i.e. investment losses caused by misstatements) and the claimant is very likely to be more than one single person (i.e. various individual investors)5.
In view of the same, the Supreme People's Court has in the Minutes imposed more detailed requirements on how to make the joint litigation regime more readily applicable to lawsuits arising from misstatements on securities. Apart from the routines for case filing and election of representative etc, the Minutes specifically request that, prior to issuing the announcement for registration of joint litigation, the People's Court should review the facts of the disputes and decide as preliminary issues, (i) whether or not the defendants have committed misstatements, (ii) whether or not the misstatements had then led to the investigation, and (iii) the dates on which the misstatements were made, disclosed and corrected6. In other words, by the time such an announcement is issued, the People's Court should already have had a rough picture of the key issues, which will hopefully expedite the proceedings.
Investor protection institution will play a more significant role in China
There are differences between legal protection of investors in China and in the United States, for example, the number of claimants involved, the amount of damages sought and so on. It can be seen that China appears to have adopted an "opt-in" legal regime, i.e. only when a People's Court has issued an announcement and when a potential claimant has registered with the People's Court could the judgments or rulings rendered by the same People's Court be valid for and binding on the registered claimant.
However, the revised PRC Securities Law provides that an investor protection institution7 mandated by 50 or more investors can participate in legal actions as a representative, and can register the investors confirmed by the CSDC8 with the People's Court unless any investor explicitly refuses to be registered9. It is believed that China is testing the water to see if the "opt-out" regime under the U.S. Federal Law can work out locally.
As the Chinese securities market is now becoming one of the largest in the world, and upon the piloting of a registration-based (as opposed to the current approval-based) IPO system, it is reasonable to conclude that China will have more upcoming cases of joint securities litigation. Having said that, it must be said that the effectiveness of this new regime will largely depend on whether, and to what extent, the law will be robustly applied by the People's Court.
1According to the statistics generated from the Wolters Kluwer legal database, whilst there were only 680 cases arising out of misrepresentations on securities in 2015, there were 6,630 and 6,278 cases having the same cause of action in 2017and 2018 respectively.
2Peng Bing, Merits and shortcomings of revision to the PRC Securities Law (Peking University Finance Law Research Center WeChat Subscription, 2019).
3The PRC Securities Law, revised on 28 December 2019, effective from 1 March 2020, Article 95, paragraphs 1 and 2.
4The PRC Civil Procedural Law, adopted in 1991, amended in 2007, 2012 and 2017, Articles 94–95.
5According to page 443 of the Interpretation and Implementation of the Minutes of the 9th National Court's Civil and Commercial Trail Work Conference published by the Supreme People's Court, the People's Court should take the following elements into consideration in determining whether the requirements of joint litigation have been satisfied: (1) whether the claims are against the same Defendants; (2) whether the investment occurred during the time period of misrepresentation on securities; and (3) whether the claims are based on the same cause of action.
6The Minutes of the 9th National Court's Civil and Commercial Trail Work Conference, adopted on 11 September 2019, Article 82.
7The investor protection institution in China usually refers to the China Securities Investor Service Center (ISC), a non-profit financial institution founded on 5 December 2014 under direct administration of the CSRC.
8China Securities Depository and Clearing Corporation Limited (CSDC). The CSDC undertakes all the securities registration, clearing and settlement business that used to be handled by Shanghai and Shenzhen Stock Exchanges, which marked the establishment of a centralized national securities registration and settlement framework prescribed by the PRC Securities Law.
9The PRC Securities Law, revised on 28 December 2019, effective since 1 March 2020, Article 95, paragraph 3.