Securities Times reporter Fan Luyuan
Recently, *ST Zeda and *ST Zijing, which have been listed for less than three years, issued an announcement on the same day. Due to suspected fraudulent issuance and violation of information disclosure regulations, the company received an administrative penalty from the China Securities Regulatory Commission and a prior notice of market prohibition, and was fined 86 million yuan respectively. Yuan and 36.6852 million fines, becoming the first and second cases of punishment on the Science and Technology Innovation Board.
The two companies will also face the risk of civil claims and forced delisting.
In addition to the above two companies, since November this year, many listed companies such as ST Xingxing, Guidong Electric Power, and ST Xingyuan have received fines from the China Securities Regulatory Commission for violations of regulations.
Since the implementation of the new "Securities Law", the China Securities Regulatory Commission has implemented the principle of "zero tolerance" and imposed administrative penalties on more than 300 cases of information disclosure violations.
As regulatory authorities continue to intensify their efforts to investigate violations of information disclosure laws and regulations, civil litigation cases involving disputes over false statements in information disclosure have also increased sharply, and more and more investors have joined the ranks of securities rights protection.
A reporter from the Securities Times noticed that in less than half a month, the total number of rights defenders registered for the two companies *ST Zeda and *ST Zijing on the Sina shareholder rights protection channel alone exceeded 200.
In terms of rights protection methods, the representative litigation system created by the new "Securities Law" has opened a precedent for A-share securities class actions, which is a milestone.
Afterwards, the ST Kangmei case under the special representative litigation mode, the Feilo Acoustic case and the Huifeng share case under the general representative litigation mode received judgments successively.
However, the new law has been implemented for more than two and a half years, and the implementation of the securities class action system has been limited.
Behind the difficulties in initiating class actions, issues such as the positioning of class actions and system optimization are worth discussing.
Investor protection "overweight"
Securities claims surge
In the securities market, false statements include four situations: false records, misleading statements, major omissions, and improper disclosures, which are the hardest hit areas for violations of laws and regulations in information disclosure by listed companies.
Protection against false statements is the key content of investor rights protection in the securities market.
According to Wind statistics, in 2022, the number of civil lawsuits for false statements and the amount of claims will hit record highs.
In the first 11 months of 2022, there were 681 civil lawsuits involving securities misrepresentation disputes in the capital market, almost twice the amount of lawsuits in similar cases in the whole year of 2021, and the defendants covered 74 listed companies, 60% higher than in 2021 ( figure 1).
In addition, on the Sina shareholder rights protection platform, there are 255 listed companies that are publicly solicited by lawyers for false statements, of which 97 new companies will be added in 2022, which is 62% more than the number of new companies added in 2021.
Why will the number of false statement rights protection cases increase significantly in 2022?
A person close to the regulator told the Securities Times reporter that this change is mainly related to the cancellation of the civil litigation pre-procedure.
On January 21, 2022, the Supreme People's Court issued the "Several Provisions on the Trial of Civil Compensation Cases Concerning False Statement Infringement in the Securities Market" (hereinafter referred to as the "New Judicial Interpretation"), which formally canceled the original judicial interpretation regarding the court's acceptance of false statement dispute cases. The requirement of administrative punishment or criminal judgment as a pre-procedure guarantees the investor's right to sue.
“After the cancellation of pre-procedures, the results of administrative penalties for some companies have not yet come out, and investors can sue only at the filing stage, which has led to more such lawsuits in various places this year.” said the aforementioned person close to the regulator.
In fact, before the introduction of the new judicial interpretation of false statements this year, there have been many positive changes in the rights protection of investors in the securities market.
The new "Securities Law" implemented in March 2020 has set up a special chapter on investor protection. The improvement of information disclosure rules in the new law, the construction of a three-dimensional civil, administrative and criminal accountability system, and the increase in illegal costs have all directly or directly Indirectly strengthen investor protection.
After the implementation of the new "Securities Law", the regulatory authorities have strengthened supervision and enforcement of information disclosure violations. In the first 11 months of 2022 alone, 56 listed companies have been investigated by the China Securities Regulatory Commission for suspected information disclosure violations. 65% higher than the same period last year, the highest in history.
At the same time, the new "Securities Law" has increased the intensity of administrative penalties for information disclosure violations, raising the upper limit of penalties for companies from 600,000 yuan to 10 million yuan, and the upper limit of penalties for directly responsible personnel from 300,000 yuan to 5 million yuan .
Moreover, the new "Securities Law" also strengthens the regulatory constraints on the "key minority", expands the scope of information disclosure obligors, and strengthens the trust disclosure obligations of directors, supervisors, controlling shareholders, and actual controllers.
According to statistics from the Securities Times reporter, as of November 2022, a total of 78 cases of violations of information disclosure by listed companies applicable to the punishment of the new "Securities Law" have been fined 555 million yuan, and the average penalty for a single case is 7.1174 million yuan.
Among them, the average penalty for listed companies was 2.2016 million yuan, which was 4.4 times the average penalty for listed companies that were punished by the original "Securities Law" in the same period; 6.45 times the average fine for cases punished by the Securities Law; the average fine for independent directors was 475,500 yuan, 8.94 times the average fine for cases where the original Securities Law was applied (Table 1).
The CSRC’s strengthening of penalties for securities violations is conducive to deterring violations of laws and regulations, maintaining the “three fairness” principles in the market, and protecting the interests of investors.
A-share class action lawsuit broke
Investor rights protection welcome mechanism
In most cases, in securities misrepresentation cases, small and medium-sized investors are widely distributed, the amount of loss varies, professional knowledge is limited, and personal proof is difficult, resulting in relatively weak power for individual investors to defend their rights.
On the other hand, for a long time, courts around the world have mostly adopted the "one case, one lawsuit" trial method for false statement claims cases, which not only reduces the efficiency of trials, but also increases the litigation costs of investors.
In order to effectively protect the civil claim rights of investors who have been damaged in the securities market, the new "Securities Law" has opened the practice of A-share securities class actions - the representative action system.
The system includes two types of litigation: ordinary representative litigation (which can be divided into two types: "number of people determined" and "number of people uncertain"), and special representative litigation.
Ordinary representative litigation refers to a system in which when one party has a large number of parties, the parties can select 2 to 5 persons as representatives to carry out the litigation.
Ordinary representative lawsuits with a certain number of people are mainly promoted with the assistance of attorneys. If the number of investors is uncertain, the court may issue an announcement to notify investors to register with the court within a certain period of time.
Ordinary representative litigation has the feature of "express participation", that is, the parties can become plaintiffs only after they register to join the litigation team.
The Feilo Acoustics case is the first general representative lawsuit in securities disputes after the implementation of the new Securities Law.
In August 2020, 34 individual investors jointly elected 4 proposed representatives to sue Feilo Audio in court.
After accepting the case, the Shanghai Financial Court made a civil ruling, determined the scope of obligees and issued a rights registration announcement.
After "express participation", a total of 315 investors became plaintiffs in this case, and 5 plaintiffs were elected as representatives, suing the defendant Feilo Acoustics for compensation of investment losses, legal fees, and notification fees totaling 146 million yuan.
In September 2021, the Shanghai High Court made a final judgment, and 315 shareholders received a total of 120 million yuan in compensation.
Feilo Audio has provided a demonstration for the full implementation of ordinary representative litigation.
In April 2022, the Jinan Intermediate People's Court accepted the "Longli Tui" ordinary representative lawsuit over the liability dispute for false statements in securities, with as many as 1,628 participants.
The Beijing Financial Court accepted the representative lawsuit of LeTV, Jia Yueting and other securities misrepresentation liability disputes. The number of claimants has exceeded 2,000, and the claim amount has reached as high as 4.6 billion yuan. It may become the largest investor claim in the history of Chinese securities.
Compared with ordinary representative lawsuits, the special representative lawsuit system is an important innovation of the new Securities Law, and is regarded as "a securities class action system with Chinese characteristics".
The system stipulates that an investor protection agency may be entrusted by more than 50 investors and may participate in the lawsuit as a special representative.
Different from ordinary representative lawsuits, special representative lawsuits are mainly initiated by investor protection agencies. Currently, only the Investment Service Center can initiate special representative lawsuits.
Another major feature of the special representative litigation system is the adoption of the principle of "implicit participation, express withdrawal".
That is to say, in the litigation procedure, except for those who expressly express to the court that they will not participate in the litigation, the rest of the damaged investors will default as the plaintiffs of the case and share the "fruits" of the litigation.
This mechanism helps to cover many small claims at low cost and maximizes the scope of investor protection.
ST Kangmei’s civil compensation case for false statements is the first in my country, and it is also the only lawsuit involving a securities special representative so far.
On November 12, 2021, the Guangzhou Intermediate People's Court issued the first-instance judgment of ST Kangmei's false statement civil compensation case. Investment Service Center represented 55,326 investors as plaintiffs and won the civil tort compensation lawsuit against ST Kangmei and related parties. 52,037 investors 17 directors, supervisors and executives were sentenced to bear high joint and several liability for compensation, including 5 independent directors.
The audit institution, its partners, and the signing accountants were all sentenced to bear joint and several liability for compensation.
Compared with individual lawsuits, collective lawsuits show obvious scale advantages and cost advantages, which can deter those who implement false statements and have a far-reaching impact on the development of investor rights protection in China's securities market.
For injured investors, class action not only saves attorney fees and obtains professional support, but also avoids litigation costs brought about by tedious trial process and improves litigation efficiency.
The insured institution initiating the special representative lawsuit is of a public welfare nature and does not charge any fees from investors. It follows the principle of "implicitly joining and expressly withdrawing". New parties do not even need to apply, just wait for the compensation to arrive.
For ordinary representative lawsuits with an uncertain number of people accepted by the court, investors can join the lawsuit through rights registration. In most cases, investors can complete the registration through the court’s online platform, which is convenient to operate.
The successful practice of class actions has enhanced investors' awareness of rights protection.
After the "first win"
Why is the special representative lawsuit still an isolated case?
ST Kangmei's special representative lawsuit is a milestone event in the history of China's securities.
After the successful judgment of the case, the relevant person in charge of the China Securities Regulatory Commission stated that in the next step, the China Securities Regulatory Commission will promote the normalization of representative litigation in accordance with the law.
However, it has been more than two and a half years since the implementation of the new "Securities Law", and the practice of special representative litigation still remains in the case of ST Kangmei.
Why is it difficult to start a special representative lawsuit?
Although the special representative lawsuit system draws lessons from the American class action system, there is a core difference between the two: in the United States, the lawyer is the lead plaintiff, while in China the special representative lawsuit is initiated by the Investment Service Center.
As a "semi-official" institution, the Investment Service Center inevitably has more non-market factors to consider when initiating a class action.
The aforementioned person close to the regulator told the reporter that the special representative litigation system is still in the nature of a trial so far. The huge amount of compensation will cause a lot of influence, so the investment service center will be more cautious in starting the litigation process.
Tang Xin, a professor at the Law School of Tsinghua University, said: "Taking ST Kangmei as an example, in the end more than 50,000 investors received a compensation of 2.459 billion yuan. The impact of this compensation amount is very large. Most listed companies or intermediaries who are defendants Under such an impact, the institution may not be able to escape the result of bankruptcy. ST Kangmei eventually went to bankruptcy and reorganization, but did not go into bankruptcy and liquidation. This situation is very special and difficult to replicate. Therefore, the special representative lawsuit is like a "nuclear weapon". It will be in a deterrent state of readiness and will not be used very often."
Constrained by multiple factors
Ordinary representative lawsuits are also progressing slowly
Compared with special representative lawsuits, general representative lawsuits have relatively low barriers to initiation in theory, but progress is also slow in practice.
Since the implementation of the new "Securities Law", there have been less than 10 cases of ordinary representative lawsuits issued by the courts around the country. Except for Feilo Acoustics, only Huifeng has completed the first-instance judgment.
In some cases, it has been more than two years since the court issued the rights registration announcement, and there is still no substantial progress in the trial of the case (Table 2).
Xu Feng, a lawyer from Shanghai Jiucheng Law Firm, believes that some cases have not made much progress, which may be related to the large number of people and the amount of claims in the cases, or it may have something to do with the current economic situation.
First of all, judging from the current situation, ordinary representative lawsuits may first involve a large number of people. In some cases, a thousand or several thousand people have appeared, and the claim amount has also appeared in hundreds of millions or billions of yuan, or beyond the capacity of listed companies.
Secondly, if the ordinary representative lawsuit is advanced too quickly, the case may have a great demonstration effect after the judgment, which will prompt more investors to join in the claim, thereby forming a chain reaction.
Peng Bing, a professor at the Law School of Peking University, believes that the difficulty in carrying out ordinary representative litigation may also be limited by the lack of incentives from both the court and lawyers: From the perspective of the court, ordinary representative litigation procedures are complicated, heavy workload, and long cycle. The court may not have an advantage in performance appraisal.
Therefore, the courts in various places are not very active in promoting ordinary representative litigation, and most of them are "pilot" and "try new".
There are also influencing factors when lawyers initiate ordinary representative lawsuits.
On the one hand, it is because ordinary representative lawsuits may be transformed into special representative lawsuits by the Investment Service Center. After conversion, the Investment Service Center will use its own lawyers as litigation representatives; on the other hand, it is the determination and implementation of attorney fees. After the court accepts the ordinary representative lawsuit and issues a rights registration announcement, there is no legal service contract between the newly joined plaintiff and the attorney, and it is difficult for the attorney to collect incremental agency fees.
Return to traditional litigation mode
Increased decision uncertainty
Under the circumstances that the progress of the representative lawsuit is cautious and the progress is limited, the rights protection lawsuits of securities investors have returned to the traditional single lawsuit mode.
Although the number of civil lawsuits and the amount of claims for securities misrepresentation in the aforementioned 2022 have reached record highs, most of them have chosen the traditional individual litigation model.
According to the new judicial interpretation in 2022, administrative and criminal pre-procedures will be canceled. Although the threshold for prosecution will be lowered, if there is no administrative penalty decision as a basis, investors will have difficulty in determining the date of illegal implementation, calculating losses and other key issues. Increased risk of losing or dismissing the lawsuit.
A reporter from the Securities Times conducted a keyword analysis of nearly 5,800 judgments since 2018 involving disputes over liability for securities misrepresentation, and found that the courts mainly considered the following aspects when making decisions: about 44% of the judgments included causal relationships, About 43% include the date of illegal implementation and disclosure, about 24% include the calculation of losses, about 21% include materiality, and about 17% include systemic risks.
The new judicial interpretation has made adjustments to the identification of some of the key issues mentioned above. Compared with the past, the court has more free discretion, and the difficulty of adjudicating cases has also increased accordingly.
Faced with the uncertainty of the verdict, several lawyers told reporters that they are still conservative and prudent in their actual litigation practice representing investors in claiming claims.
"Although the restrictions on preconditions have been relaxed, the new judicial interpretation stipulates issues such as materiality. In fact, the requirements for prosecution are higher." Song Yixin, a lawyer from Shanghai Hanlian Law Firm, said, "Some investors I feel that anything can be sued, but our lawyers are relatively cautious, and most of the current case representations still follow the punishment decisions or regulatory measures documents, and then combine the major judgments.”
The new judicial interpretation sets up a special article in the section "Materiality and Transaction Causation" to stipulate the materiality elements and its identification standards. The materiality needs to be reflected in the securities transaction price or transaction volume.
Prior to this, administrative penalties can be regarded as a basis for proving the importance of false statements.
Since the second half of this year, courts in Shanghai, Nanjing, Beijing, and Lhasa have successively issued precedents rejecting all the plaintiff's claims, many of which involve determinations of significance.
For example, the Shanghai Financial Court, in its August judgment on individual investors suing Huaxin International Securities over the dispute over the liability for false statements, comprehensively reviewed the impact of false statements on the securities market price or trading volume, and determined that the false statements did not have "significant" ” and dismissed all plaintiff’s claims accordingly.
Lawyer Xu Feng believes that the cancellation of pre-procedures has largely brought confusion to the calculation of the statute of limitations.
"In the past, the statute of limitations generally expired three years from the announcement date of the punishment issued by the China Securities Regulatory Commission, but the current new judicial interpretation starts from the date of disclosure of the violation. Before the court makes a judgment, or even before the judgment takes effect, the disclosure date is often the case of false statement claims. One of the most important disputes in China, the disclosure date is uncertain, which leads to great uncertainty when the statute of limitations for investors to file claims will expire. Especially during the transition period, due to the introduction of new judicial interpretations, many listed companies that violated the regulations have been sued The period of time is only a few months, which reflects to a certain extent that the protection of the statute of limitations rights of investors is not comprehensive enough."
A-share class action system
There is still room for optimization
Class actions play an important role in raising investors' awareness of rights protection and deterring the market. However, based on the current system design and market environment, representative actions in the nature of class actions still have a strong pilot nature and have not become normalized. advance.
Professor Tang Xin judged that the litigation structure in the future will not change much, and will still focus on individual litigation and some joint litigation.
Representative suits don't come up a lot, and special representative suits at the "nuclear weapons" level are even less likely to happen often.
Lawyer Xu Feng believes that based on the deterrent force and impact of representative litigation, and the current situation in China's capital market where the quality of some companies needs to be improved and economic development needs support, there is currently no soil for representative litigation to be launched in batches. Be able to select individual cases and move forward cautiously.
In the future, with the passage of time and the development of the market, some representative litigation cases will be selectively promoted, and the normalization of representative litigation will be gradually realized.
But on the other hand, small and medium-sized investors have been in a weak position for a long time in the rights protection in the stock market. The original purpose of setting up the class action system is to strengthen investor protection and help more investors join the ranks of rights protection.
If it is difficult to start a class action for a long time, it will weaken the original intention of the system design to a certain extent.
If the court does not promote the progress of litigation after the rights are registered, it will also reduce investors' trust in litigation rights protection.
In terms of system design and litigation trial, there is still room for optimization of the representative litigation system.
Professor Peng Bing believes that, as the initiator of the special representative lawsuit, insurance policyholders also need incentives and competition. At present, it is definitely not enough for only one institution, the Investment Service Center, and it is more appropriate for three or even four institutions to compete.
In addition, for the selection of cases, it should be stipulated that the insured institution can directly initiate a special representative lawsuit instead of relying on the ordinary representative lawsuit to start first.
The above-mentioned people close to the regulators said that the improvement of the representative litigation system can be further improved from several dimensions.
One is the calculation of the loss. So far there is no very clear algorithm, and the rationality of the algorithm needs further consensus.
The second is whether subjects other than the listed company among the defendants, such as independent directors and intermediary agencies, are likely to bear the limited liability.
The current Wuyang case and the ST Kangmei case impose heavy penalties on these subjects, with punitive implications, and the method and method of punishment are worthy of further discussion.
Third, whether the current directors' liability insurance system can play a role in offsetting or guaranteeing in practice is not very clear.