13 August 2020
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On Friday, 31 July 2020, the Supreme People's Court of China ("SPC") held a press conference and released the Provisions on Issues of Representative Securities Litigation (《最高人民法院关于证券纠纷代表人诉讼若干问题的规定》), effective immediately ("Provisions"), marking the launch of a class-action lawsuit system with "Chinese characteristics". The China Securities Regulatory Commission ("CSRC") also issued a Notice on Investor Protection Institutions Participating in Special Representative Securities litigation ("Notice") (《关于做好投资者保护机构参加证券纠纷特别代表人诉讼相关工作的通知》) on the same day.
Ordinary / Special Representative Litigation under the Provisions
Pursuant to the Provisions, subject to satisfaction of certain criteria, investors who have sustained losses due to misrepresentation on securities, insider trading and market manipulation may start "Ordinary Representative Litigation (普通代表人诉讼)" based on Article 95, paragraphs 1 and 2 of the PRC Securities Law or "Special Representative Litigation (特别代表人诉讼)" based on Article 95, paragraph 3 of the PRC Securities Law.
The key points of the ordinary / special representative litigation are as follows:
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Ordinary Representative Litigation |
Special Representative Litigation |
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Jurisdiction |
Competent Intermediate People's Court1 at the domicile of the issuer shall have jurisdiction; if the lawsuit is brought against individuals / entities other than the issuer, the competent Intermediate People's Court at the domicile of the Defendant shall have jurisdiction. |
The Intermediate People's Court or Special People's Court of the place where the stock exchange or other national securities trading places approved by the State Council are located shall have jurisdiction2. |
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Criteria |
(1) The subject matter of action is of the same category and the Claimant consists of more than 10 persons； (2) 2 – 5 representatives in line with Article 12 of the Provision3 are elected and ascertained in the Statement of Claim; (3) The Claimant has submitted Prima facie evidence (e.g. administrative punishment decision, criminal judgment, admission made by the Defendant, disciplinary punishment decision made by stock exchange and other national securities trading places approved by the State Council).
If the aforesaid criteria cannot be satisfied (e.g. less than 10 individual Claimants, lack of prima facie evidence etc), the Claimant can still start legal action but the representative litigation regime cannot be applied. |
An investor protection institution4 mandated by 50 or more qualified investors during the announced registration period can participate in legal actions as a representative. |
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Announcement for registration |
If the number of potential Claimants cannot be ascertained when legal action is started, the People's Court shall review the facts of the disputes in question and make an announcement for registration, which shall cover the following elements: (1) Background of the legal action and the relief sought; (2) General Information of the Defendant(s); (3) The scale of qualified investors and the time period (30 days) for registration; (4) General Information of the representatives; (5) Time limit for submitting application and supporting documents for acting as a representative; and (6) Other issues the People's Court may deem necessary;
If an investigation protection institution is involved, the announcement shall also include the general information of the investor protection institutions, special authorization for the investor protection institution, the investors' right to exercise its right to "opt-out" and the respective legal consequences and time limit (15 days after the registration period expires) for doing so.
Any qualified investors are allowed to register before the first instance trial, and any opted-out qualified investors are allowed to start a separate legal action. |
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Chinese Characteristics of the Securities Class Action System
On a review of the Provisions, and according to the Q&A session of the aforesaid press conference, China's securities class action system has the following characteristics:
1. Low-Cost
According to the Provisions, the system will be a low-cost claim channel for small and medium volume investors from the following perspectives:
(1) Refund of Court fees – if a qualified investor who has filed a lawsuit before the registration announcement wishes to withdraw the case and join in the representative lawsuit, the People's Court shall refund the Court fees already collected5;
(2) Allocation of legal costs – the People's Court shall support the representative's request for reimbursement from the losing Defendant for reasonable costs such as announcement fee, notice fee, lawyer's fee, etc.6;
(3) Arrangements for Court fees – subject to the People's Court's discretion, the Court fees may not need to be paid in advance under special representative litigation, and may be wholly or partially refunded even if the Claimant loses the case7;
(4) No security for property preservation (conditional) – under special representative litigation, if the investor protection institution applies for property preservation, the People's Court may decide not to require provision of security8.
2. Convenient
Pursuant to the Provisions, prior to issuing the announcement for registration, the People's Court should review the facts of the disputes and decide the scale of the investors who are qualified as the Claimant of the representative litigation. Meanwhile, the SPC also promulgated the Minutes of the 9th National Court's Civil and Commercial Trial Work Conference (the "Minutes") in November 2019, according to which the People's Court should also 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 corrected9. In other words, by the time such an announcement is issued, the People's Court would already have had a rough picture of the key issues, which will hopefully expedite the proceedings.
Further, the Provisions also provided detailed arrangements on how to elect the representatives and clear scope of rights and obligations of the representatives. If representatives cannot be ascertained after two rounds of election, the People's Court will appoint representatives10.
3. "Opt-Out" Regime under Special Representative Litigation.
China used to adopt the "opt-in" legal regime for securities class actions, i.e. only when a People's Court has issued an announcement and when a qualified investor 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, according to the PRC Securities Law and the Provisions, an investor protection institution mandated by 50 or more investors can register the qualified investors with the People's Court, unless any investor explicitly refuses to be registered, which, according to the SPC's statement in the press conference, forms as the "opt-out" legal regime for securities class actions in China.
Conclusion
Subsequent to the Luckin Coffee scandal, it can be seen that China has been speeding up its “zero tolerance” policy on capital markets misconduct. It is believed that China's newly launched securities class actions system will increase the risks and costs of committing financial misconduct, and safeguard the fairness, order and integrity of the capital market in China.
For further information, please contact:
Victor Yang, Clyde & Co
victor.yang@clydeco.com
1As per Article 2 of the Provisions, representative securities litigation shall be submitted to the jurisdiction of the Intermediate People's Court at the city where the people's government of the province, autonomous region, municipality directly under the Central Government is located, or at a city with separate planning or at a special economic zone.
2For instance, the Shanghai Financial Court shall have jurisdiction over special representative litigation in relation to Shanghai Stock Exchange, and the Shenzhen Intermediate People's Court shall have jurisdiction over special representative litigation in relation to Shenzhen Stock Exchange.
3Pursuant to Article 12 of the Provisions, a qualified representative:
(1) Should volunteer to act as a representative;
(2) Must have a "considerable proportion" of the losses;
(3) Himself or his agent ad litem must have sufficient litigation capability and professional experience;
(4) Must faithfully and diligently perform the duty of safeguarding the interests of all the Claimants.
4According to the Notice issued by the CSRC, investor protection institution in mainland China refers to China Securities Investor Service Center (ISC /中证中小投资者服务中心有限责任公司) and China Securities Investor Protection Fund Corporation Limited (SIPF /中国证券投资者保护基金有限责任公司).
5Article 10 of the Provisions.
6Article 25 of the Provisions
7Article 39 of the Provisions.
8Article 40 of the Provisions.
9Article 82 of the Minutes, adopted on 11 September 2019.
10As per Article 15 of the Provisions, the People's Court shall take voting results, litigation capacity, and the proportion of the losses etc. into consideration when appointing representatives, and shall obtain consent from the appointed representatives
