Collective Redress & Class Actions 2021

Last Updated November 09, 2021

China

Law and Practice

Authors



Zhong Lun Law Firm was founded in 1993 and is one of the first law firms in China, and the only law firm in China, to have joined the World Law Group. As one of the largest full-service law firms in China, it has over 370 equity partners and more than 2,400 professionals working in 18 offices in Beijing, Shanghai, Shenzhen, Guangzhou, Wuhan, Chengdu, Chongqing, Qingdao, Hangzhou, Nanjing, Haikou, Tokyo, Hong Kong, London, New York, Los Angeles, San Francisco, and Almaty. Zhong Lun has a project team for securities litigation composed of multiple experienced partners and lawyers. It is the first and most experienced team engaged in securities litigation in China, having assisted dozens of listed companies, securities companies, asset management companies, fund companies, securities service institutions, etc in handling securities compliance and litigation business. Zhong Lun has represented many major securities class action cases, such as Wuyang Bond, LeTV, Ye Chiu Recycling, and Lanfeng Bio-chemical.

Joint Action 

In 1982, the first Civil Procedure Law (for trial implementation) of the People’s Republic of China (“China”) was promulgated, which, for the first time, introduced the mechanism of "joint action". This mechanism remains effective so far, and it is the earliest civil litigation mechanism in China to deal with group disputes, laying the institutional foundation for subsequent representative litigation and for the special representative litigation, the so-called Chinese-style "class action". 

Ordinary Representative Litigation 

With the development of China's society and economy, there have been more and more group disputes which are caused by the same or similar illegal damaging events and affect interests of many people. Both the mechanism of separate litigation and that of joint litigation require all interested parties to participate directly in civil litigation in their own name, which may incur high litigation costs; it is also difficult to resolve complex disputes involving the interests of multiple parties efficiently. 

To adapt to the status quo of civil disputes involving group interests, China promulgated the formal Civil Procedure Law in 1991, which further stipulated "representative litigation" on the basis of the previous joint litigation. Representative litigation is a special form of joint litigation, allowing parties who meet the requirements of joint litigation to elect their representatives to participate in the litigation. According to whether the number of persons is determined at the time of filing the case, the mechanism of representative litigation can be divided into "representative litigation with a certain number of persons" and "representative litigation with an uncertain number of persons". 

The Opinions of Supreme People's Court on Several Issues concerning the Application of the Civil Procedure Law of the People's Republic of China promulgated in 1992 further clarified the specific rules for the election of representatives, the limitation of the number of representatives, the procedures of announcement and registration in representative litigation with an uncertain number of persons, and the effectiveness of judgments. Since then, there has been no change in the provisions on joint litigation and ordinary representative litigation in Civil Procedure Law and related judicial interpretations. 

Special Representative Litigation 

Although the mechanism of ordinary representative litigation has long been stipulated in Civil Procedure Law and related judicial interpretations, and Several Provisions of the Supreme People's Court on Trying Cases of Civil Compensation Arising from False Statement in the Securities Market also mentions that the civil compensation lawsuits for securities false statements can be heard by way of representative litigation, the representative litigation mechanism is rarely applied in securities civil compensation cases with the exception of  the early case of Daqing Lianyi. 

With the vigorous development of the market economy, China’s capital market has become increasingly prosperous, and securities violations are much more frequent than before. As a consequence, there has been a gradual increase in the number of civil compensation lawsuits for false statement in the securities market raised by investors. The Chinese government has repeatedly emphasised “zero tolerance” for violations of laws and regulations in the capital market. Therefore, to uphold the policy of protecting the legal rights and interests of investors, punishing illegal behaviour in the capital market effectively, and strengthening the function of civil compensation lawsuits for securities violations, China has formulated special provisions for representative litigation in securities disputes, and introduced the mechanism of "Special Representative Litigation" for the first time. 

The Securities Law (revised in 2019), which entered into effect on 1 March 2020, has added new provisions on representative litigation for securities disputes, clarifying that the representative litigation mechanism can be adopted in securities civil compensation lawsuits pertaining to misrepresentation etc. It is particularly noteworthy that the Securities Law introduces the "special representative litigation” mechanism for the first time, which provides that investor protection agencies participate in litigation as litigation representatives, and establishes the rule of "explicit withdrawal and implied participation" to determine the scope of parties. These rules established the Chinese-style "class action" mechanism. 

On 31 July 2020, the Supreme People's Court promulgated the Provisions of the Supreme People's Court on Several Issues Regarding Representative Litigation in Securities Disputes, which provide detailed provisions on issues related to representative litigation in securities disputes. At this point, the mechanism of special representative litigation has officially come into effect, and there have been more practical and specific provisions for the ordinary representative litigation in securities disputes as well. 

Ordinary Representative Litigation 

The mechanism of ordinary representative litigation with a certain number of persons in China borrows from Japan’s litigation mechanism of selected litigant. Both mechanisms require the determination of the representatives from the common interest group, and the common interest group shall authorise legal rights to the representative clearly and explicitly, and the validity of the judgment only extends to the expressly authorised common interest group. The difference between the two mechanisms is that in Japan’s selected litigant mode, the parties are combined into independent small groups based on geographical proximity and other factors, and each small group selects their representatives to file a lawsuit, while the representative litigation in China tends to have all parties jointly elect representatives in litigation. Moreover, according to Japan’s mechanism of selected litigant, other parties with common interests but not selected as representatives are separated from the litigation and do not constitute parties to the case. Under the rule of representative litigation with a certain number of persons in China, all parties with common interests are parties to the case, and will not be separated from the litigation, but only entrust a representative to participate in the litigation. 

China's ordinary representative litigation with an uncertain number of persons learned from the class action system of the USA to some extent. The number of litigants in the two mechanism is uncertain, and both are applicable to large-scale and multi-field group disputes. The difference between the two is as follows: ordinary representative litigation mechanism in China is an "opt-in" mechanism, which requires explicit authorisation of litigants to the representatives; while class action in the United States is an “opt-out” system, which does not require a specific authorisation to the representatives. Moreover, under China's ordinary representative litigation system, the validity of judgments does not directly extend to the interested parties who have not registered to participate the litigation, while the judgment of class action in the USA can directly bind all members in the group, except for those applying to withdraw from the litigation. 

Special Representative Litigation  

China's special representative litigation combined both Verbandsklage system of Germany and class action system of the USA From the point of view of the parties’ joining methods, both China and the USA adopt the “implicit joining, express withdrawal” mechanism (“opt-out” mechanism), and investors who have not withdrawn from litigation are all parties to the special representative litigation. Judging from the validity the judgment, the relevant judgment, mediation agreements and reconciliation agreements could bind all parties who have not declared to withdraw from the litigation. 

However, there are the following differences between special representative litigation system in China and class action system in the USA. 

  • In terms of applicable fields, China's special representative litigation is limited to the field of civil compensation lawsuits caused by securities disputes, while the USA does not set this restriction. 
  • China’s special representative litigation mode borrowed from the Verbandsklage system of Germany, initiating the litigation by non-profit investor protection agencies. In contrast, class action in the USA does not require public welfare organisations as representatives but is mainly driven by lawyers. 
  • China’s special representative litigation system has set relatively strict initiation conditions and selection criteria, and at least the following conditions must be met:
        • relative administrative agencies have already issued administrative punishments or the courts have made criminal judgments;
        • the target case is typical, of great exemplary significance and severe social impact; and
        • the defendant has certain solvency. Investor protection agencies need to follow the pre-research, evaluation, and decision-making procedures when selecting cases to initiate special representative litigation, which reduces the possibility of abusive litigation. 

There is no applicable information in this jurisdiction.

Laws 

  • Civil Procedure Law of the People’s Republic of China (Amended in 2017) – Article 53 of the Law provides for representative litigation with a certain number of persons, and Article 54 provides for representative litigation with an uncertain number of persons.  
  • Securities Law (revised in 2019) – paragraphs 1 and 2 of Article 95 of the Law stipulate ordinary representative litigation in securities disputes. Paragraph 3 of Article 95 of the Law provides China's special representative litigation mechanism for the first time. 

Judicial Interpretation and Judicial Opinion 

  • Interpretation of the Supreme People's Court on Application of the Civil Procedure Law of the People's Republic of China – Articles 75-80 of the Judicial Interpretation provide detailed provisions on the conditions for initiating an ordinary representative litigation and the method for determining the representatives. 
  • Provisions of the Supreme People's Court on Several Issues Regarding Representative Litigation in Securities Disputes – Articles 5-31 of the Judicial Interpretation provide detailed provisions on ordinary representative litigation in securities disputes; Articles 32-41 of the Judicial Interpretation specify the implementation details of the special representative litigation system. 
  • Several Provisions of the Supreme People's Court on Trying Cases of Civil Compensation Arising from False Statement in the Securities Market – Articles 14 and 15 of the Judicial Interpretation provide for ordinary representative litigation in disputes over false statement in the securities market. 
  • Minutes of the National Court Work Conference for Civil and Commercial Trials – Articles 80-83 of the Minutes provide for ordinary representative litigation in disputes over false statement in the securities market. 

Local Judicial Documents 

  • Shanghai Financial Court, Shenzhen Intermediate People's Court, Nanjing Intermediate People's Court, Xiamen Intermediate People's Court, and other courts' promulgated provisions of representative litigation in securities disputes – such local judicial documents provide specific rules on representative litigation in securities disputes within their respective jurisdictions. 

Other Relevant Rules 

  • Notice of the China Securities Regulatory Commission on Effectively Conducting the Work Relating to the Participation of Investor Protection Institutions in Special Representative Litigation in Securities Disputes – this provision further stipulates the investor protection agencies that have the right to initiate special representative litigation. 
  • Special Representative Litigation Rules of China Securities Investor Service Centre Co, Ltd (for Trial Implementation) and Measures for the Administration of the Evaluation of Securities Litigation Cases of China Securities Investor Service Centre Co, Ltd (for Trial Implementation) – these provisions clarify the rules for China Securities Investor Service Centre to initiate and participate in special representative litigation.

Ordinary Representative Litigation 

Civil Procedure Law and judicial interpretations do not restrict the specific application areas of ordinary representative litigation. However, based on relevant judicial opinions and existing judicial practice, ordinary representative litigation is more suitable for the following areas: 

Civil compensation disputes caused by false statements, insider trading, manipulation of market, etc in the securities market: 

  • bond default disputes; 
  • compensation disputes over product liability; 
  • compensation disputes over environmental pollution; 
  • group disputes involving the interests of farmers caused by land contracts in rural areas or agricultural and side-line products purchase contracts; 
  • disputes caused by false advertising; and 
  • collective labour disputes involving a group of employees. 

Special Representative Litigation 

According to the current law, China's special representative litigation is only applicable to securities disputes, including civil compensation disputes caused by false statement, insider trading, manipulation of market etc in the securities market. Among them, disputes over false statement in the securities market is the main applicable area at this stage. The Kangmei Pharmaceutical case tried by Guangzhou Intermediate People's Court is the first case in China that applies special representative litigation mechanism, which is currently under trial.

Ordinary Representative Litigation 

According to Article 52 to Article 54 of the Civil Procedure Law, if a party or both parties to a lawsuit comprise(s) two or more persons and the subject matter of litigation is common, or the subject matters of litigation are the same type, the People's Court deemed that the lawsuit may be tried as a joint action, the Court may try the lawsuit as a joint action upon consent by the litigants. Where a party or both parties to a joint litigation comprise(s) over ten persons, the litigants may elect a representative to participate in the proceedings, which constitutes an ordinary representative litigation. 

Ordinary representative litigation includes representative litigation with a certain number of persons and representative litigation with an uncertain number of persons. Representative litigation with a certain number of persons refers to a joint litigation in which the party to the lawsuit comprises a large number of persons and the number of persons can be determined at the time of filing the lawsuit. Representative litigation with an uncertain number of persons refers to a joint lawsuit in which the party to the lawsuit comprises a large number of persons and the number of persons has not yet been determined at the time of filing the case. 

Special Representative Litigation 

According to Article 95, Paragraph 3 of Securities Law and Provisions of the Supreme People's Court on Several Issues Regarding Representative Litigation in Securities Disputes, Special representative litigation refers to a litigation in which the investor protection agency is specially authorised by more than 50 right holders to participate in the litigation as representatives during the period of the announcement on registration of rights in an ordinary representative litigation with an uncertain number of person. The right holder confirmed by the securities registration and settlement institution is registered to participate in the litigation, but the right holder who does not agree to join the special representative litigation may apply to withdraw. 

Ordinary Representative Litigation 

In a joint action with one party consisting of more than ten persons, a representative litigation with a certain number of persons can be initiated by the litigants selecting a certain representative. If the number of litigants is uncertain at the time of filing a lawsuit, the court shall issue a right registration announcement, and the right holders who have registered within the period of registration may elect representatives to participate in litigation. 

There are no special jurisdiction provisions for ordinary representative litigation, and the court of jurisdiction is generally determined by the type of dispute and the defendant’s domicile. 

Special Representative Litigation 

The initiation of a special representative lawsuit is based on the premise that the court has initiated a representative litigation with an uncertain number of persons and issued an announcement of rights registration. During the registration period, the investor protection agency that is specially authorised by more than 50 right holders shall initiate a special representative litigation as a representative to the litigants. 

Special representative litigation shall be subject to centralised jurisdiction rules and shall be under the jurisdiction of the intermediate people's courts or the special people's courts at the places of the stock exchanges for centralised trading of the securities concerned in the case and other national stock exchanges as approved by the State Council". Currently, the courts having jurisdiction over special representative litigation of first instance include: Shenzhen Intermediate People’s Court, Shanghai Financial Court, and Beijing Financial Court. 

Ordinary Representative Litigation with a Certain Number of Persons 

When one party consisting of more than ten persons initiates a joint action, a representative can be selected to participate in the litigation. After representatives are determined, there is no substantial difference between representative litigation and separate litigation in terms of procedures. 

Ordinary Representative Litigation with an Uncertain Number of Persons 

Taking securities disputes as an example, to file a representative litigation with an uncertain number of persons, the procedures are as follows. 

  • After the parties file a representative litigation, the court decides to start the procedure of representative litigation. 
  • The court conducts preliminary examination, decides on the scope of right holders, and issues an announcement of rights registration (a party concerned who objects to the scope of right holders may apply to the upper-level court for review). 
  • After the expiration of the registration period, the court will examine the registered right holders and confirm the list of claimants in the representative litigation. 
  • Right holders vote to select representatives. If no representative can be generated through the elections, the court will designate the representatives. 
  • After the representatives are determined, the court will issue an announcement introducing the representatives, and the claimant may apply to withdraw registration of rights and may separately file a lawsuit. 
  • The case brought by representatives shall in principle be heard first, and trial of the non-representative case brought on the basis of the same securities-related illegal act shall be suspended. 
  • The substantive trial procedure of a representative litigation is basically the same as that of a separate litigation case. 

Special Representative Litigation 

Except for the following differences in the initiation procedure and the scope of the plaintiff, other procedures of special representative litigation are the same as ordinary representative litigation with an uncertain number of persons. 

  • The court has initiated an ordinary representative litigation with an uncertain number of persons and issued an announcement on the registration of rights. 
  • During the registration period, the investor protection agency is specially authorised by more than 50 right holders to act as the representative to initiate a special representative litigation. 
  • The court issues a right registration announcement, which contains the basic information of the investor protection agency and the special authorisation to the investor protection agency. 
  • If the right holders within the scope of the rights announcement do not withdraw, the court shall register these right holders into the list of claimants in the representative litigation; investors who are unwilling to participate in a special representative litigation shall submit a withdrawal application. 

Ordinary Representative Litigation 

If parties consisting of more than ten persons have the same rights and obligations with respect to the subject matter of the lawsuit, or the subject matter of the lawsuit is of the same type, an ordinary representative lawsuit can be initiated. The representative shall be one of the parties and shall represent the legitimate rights and interests of the group of parties. 

For representative litigation in securities disputes, in addition to the requirements above, the plaintiff shall also identify two to five proposed representatives in the complaint and submit prima facie evidence proving facts of the securities infringement, including relevant administrative sanction decisions, criminal judgment documents, confession materials of the defendants, disciplinary sanctions imposed or self-regulatory measures taken by stock exchanges or other national stock exchanges approved by the State Council, etc. 

A representative in a securities dispute litigation shall meet the following conditions: 

  • acting as representatives voluntarily; 
  • holding a considerable proportion of interests in the claim; 
  • he/she or his/her entrusted litigation representative has certain litigation capacity and professional experience; 
  • being able to faithfully and diligently perform the duties to protect the interests of all claimants; and 
  • he/she shall not be associated to the defendant or fall under any other circumstances which may affect his/her performance of duties. 

Special Representative Litigation 

At present, only investor protection agencies have the right to initiate special representative litigation in China, including the China Securities Investor Service Centre and China Securities Investor Protection Fund Corporation Limited. After the court issues an announcement on the registration of rights in a representative litigation with an uncertain number of persons, the investor protection agency may initiate a special representative litigation under the special authorisation of more than 50 right holders during the period of announcement. 

Ordinary Representative Litigation 

The ordinary representative litigation adopts the application for membership rule (“opt in”). In an ordinary representative litigation with a certain number of persons, the right holder has been determined at the time of filing the lawsuit; in a representative lawsuit with an uncertain number of persons, those who meet the requirements in the court's announcement of rights registration may become members of the class action after registering with the court, applying for membership within the specified period and being reviewed and confirmed by the court. 

Special Representative Litigation 

Special representative litigation adopts the application for withdrawal rule (“opt out”). After the investor protection agency initiates a special representative litigation, all investors who meet the requirements for registration of rights and do not withdraw will become members of the class action automatically. 

There is no limit on the number of persons in the ordinary representative litigation or the special representative litigation in China.

China does not specifically provide the procedures for adding other parties to representative litigation. Generally, in civil litigation procedures, if a party who must participate in the joint litigation do not join in, the court is required to list additional litigants to participate in the action pursuant to official powers; if the parties apply to list additional litigants, the court shall examine the application and decide whether to approve it. 

Usually if a representative applies for the adding of parties, it constitutes an amendment to claims and it must be agreed by the represented parties. The representative of a securities dispute shall also submit a written application to the court and notify all the plaintiffs. Upon receipt of an application, the court shall decide whether to approve the application based on the objections raised by the plaintiffs. 

In addition, with regards to the scope of the plaintiff, if the right holder of representative litigation in securities disputes fails to register on time within the court announcement period, that person may apply to the court for supplementary registration before the court hearing of the first instance commences, and the legal proceedings completed before such supplementary registration shall be binding on him/her after the supplementary registration is finalised. 

Chinese courts have a lot of power in the procedure of representative litigation. Taking representative litigation in securities disputes as an example, the court has power to manage the following matters. 

  • The court shall review and decide whether the case meets the requirements for filing a representative litigation and whether to initiate a representative litigation. The initiation of special representative litigation is based on the court's initiation of ordinary representative litigation with an uncertain number of persons. 
  • The court may conduct a preliminary examination of the nature of the alleged securities infringement, infringement facts, etc, to determine the scope of right holders. 
  • The court reviews the qualifications of representatives, and if a representative cannot be selected, the court shall designate one. 
  • The court always has the power to supervise and administer the litigation behaviour of the litigation representative. Where the representatives alter or waive claims, admit claims of counterparties, or decide to withdraw the case, the representatives shall submit a written application to the court. Upon receipt of an application, the court shall rule whether to approve the application. 
  • The court reviews the legality, appropriateness and feasibility of the draft mediation agreement and draft settlement agreement to decide whether to prepare a letter of mediation.

The trial period of first-instance civil litigation cases in China is generally six months, which can be extended for six to nine months upon approval in case of special circumstances. The trial period for appeals is usually three months. In case of special circumstances, it can also be extended for three months upon approval. 

In representative litigation in securities disputes, four additional months are required for procedures such as determining the scope of right holders, issuing the rights registration announcement, reviewing the list of right holders, and selecting and determining representatives. 

In judicial practice, the trial time of a case may exceed the above-mentioned period. Therefore, it is difficult to accurately predict the duration of a representative litigation case, and it will generally last for more than two years.

China does not have mechanisms such as acceleration of claims, summary disposal or delaying of claims, but Chinese law stipulates that the period of certain matters shall be excluded from the trial period, such as the period for announcement, examination by experts, hearing of any objection to jurisdiction raised by a party or dealing with a jurisdictional dispute raised between the courts dealing with the case, professional institutions entrusted by the court conducting audits and evaluations. 

In addition, the statutory suspension of litigation can also delay the judgment, such as: the death or termination of one party or loss of capacity for litigation; one party cannot participate in the litigation due to a force majeure event; or the outcome of the case is based on that of another case, but that case has not yet been concluded, meaning this one must be suspended. In a dispute over false statement in the securities market, if a listed company initiates an administrative lawsuit against an administrative penalty decision, the court may suspend the trial of civil compensation lawsuit. 

In an ordinary representative litigation with an uncertain number of persons, no case acceptance fee needs to be paid in advance, and the losing party shall pay the case acceptance fee based on the subject amount of litigation after the case has been settled. 

In the representative litigation in securities disputes, the representative may request the losing defendants to compensate for the reasonable announcement fee, notice fee, lawyer's fee and other expenses. 

For special representative litigation, no case acceptance fee is to be paid in advance. If the losing or partially losing claimants apply for a reduction of or exemption from litigation costs, the court shall decide whether to approve the application based on the economic situation of the claimants and the hearing of the case. Where an investor protection agency, as a representative, applies for property preservation in the litigation, the court may waive the requirement of providing a guarantee.

There is no disclosure of evidence in China like that of the common law. Instead, the parties shall provide evidence centring on their respective claims in duration for presentation of evidence specified by the court, and the court organises the exchange of evidence. After the exchange of evidence, the court invites the parties to present evidence and cross-examine evidence in pre-trial meetings or in the trial proceedings. 

However, there are some provisions on the “quasi-disclosure of evidence” in China. For example, if a party refuses to submit the evidence that he/she controls without justified reasons, and the party who bears the burden of proof for the facts on which evidence is to be given argues that such evidence is unfavourable to the controller, the people's court may affirm such argument. Another example is that if the documentary evidence is under the control of the other party, the party who bears the burden of proof can apply to the court to order the other party to submit it. If the party who controls the documentary evidence does not submit it without justified reason, the court may determine that the content of the documentary evidence claimed by the applicant is true. 

In a representative litigation with an uncertain number of persons or special representative litigation, the court needs to determine the scope of the right holders before the trial and may review it through hearings and other methods. Therefore, the parties may initially exchange evidence and express cross-examination opinion on facts related to the scope of rights holders and exchange evidence on substantive issues before the trial. 

China does not have "rules of privilege" like those of the common law, but according to Law of the People's Republic of China on Lawyers, a lawyer shall keep the national secrets and trade secrets known in practicing law and shall not divulge the privacy of a client or relevant condition and information the client and other persons are reluctant to disclose. 

In the same type of dispute, there is no difference between the remedies obtained by class actions and separate actions. Class actions in China are usually applicable to tort disputes or contract disputes. Like separate actions of tort disputes or contract disputes, remedies of class actions mainly include cessation of infringement, compensation for losses, removal of obstruction, elimination of danger, and return of property, etc. 

In addition to litigation, the parties can choose to settle disputes by themselves, carry out mediation by the court, or through other dispute resolution mechanisms. Taking securities disputes as an example, China is building alternative dispute resolution methods for securities and futures disputes. In addition to judicial judgment mechanisms such as separate actions, joint actions, representative litigation, and model judgment, this also includes non-litigation dispute resolution mechanisms such as reconciliation, industry mediation, professional mediation, compensation in advance, etc. 

Ordinary Representative Litigation 

In an ordinary representative litigation with a certain number of persons, the judgment is binding on all plaintiffs that filed the representative litigation. 

In an ordinary representative litigation with an uncertain number of persons, the judgment is binding on all right holders who have registered with the court. 

In an ordinary representative litigation in securities disputes with an uncertain number of investors, where investors, who fall within the scope of right holders but have not registered within the registration period, file a case with the same facts and reasons as that of the representative litigation which have already been heard and decided, the court may, after examining the specific claims, rule to apply the judgments or rulings of the said representative litigation. 

Special Representative Litigation 

As for special representative litigation in securities disputes initiated by the investor protection agency, unless the investor withdraws from the case expressly, the judgment shall apply to all right holders. 

According to our observations, the current policy development of representative litigation includes the following aspects. 

  • China has further strengthened the punishment of illegal acts in the securities market. In the future, the mechanism of representative litigation, especially special representative litigation, will be applied more in the field of securities disputes. 
  • At present, Chinese law is still cautious on initiating the special representative litigation to avoid abuse of process. Therefore, it is still up to the investor protection agency to examine the illegality, solvency, social impact and other aspects comprehensively. Parties that have not been punished administratively will not be sued in the procedure of special representative litigation. 
  • At present, expert assistants are encouraged to intervene in representative litigation in securities disputes, and provide opinions on complex issues such as causation, loss compensation calculation methods, etc. 
  • Alternative dispute resolution methods are encouraged, and parties are encouraged to resolve disputes through reconciliation, mediation, and other alternative dispute resolution methods. 

The use of information technology is encouraged in representative litigation in securities disputes, including for case filing, serving of instruments, announcements and notices, registration of rights, allocation of enforced payment and other work.

Currently, the Supreme People's Court is revising the Several Provisions of the Supreme People's Court on Trying Cases of Civil Compensation Arising from False Statement in the Securities Market and soliciting opinions from local courts. It is expected to be promulgated by the end of 2021. Regarding the issue of representative litigation in securities disputes, the following amendments may be made. 

Limitation of Action 

  • The new provisions intend to specify that when some investors file an ordinary representative litigation with an uncertain number of persons, limitation of action of the other right holders with the same claims shall be interrupted because of the lawsuit. 
  • For investors who have not registered with the court, the limitation of action will be recounted from the expiration of the right registration period. 
  • If a registered investor applies to withdraw the registration of rights or withdraw from litigation, limitation of action shall be recounted from the date of court’s approval. 
  • Limitation of action shall be recounted from the date when the information disclosure obligor corrects the false statement by himself or the false statement is publicly disclosed. 

Jurisdiction 

The new provisions intend to centralise all cases of civil compensation disputes arising from false statement in the securities market under the jurisdiction of the Intermediate People's Court which is in the seat of provincial governments where the listed company is domiciled, while the current jurisdiction of the special representative litigation remains unchanged. 

Payment Sequence 

The new provisions intend to clarify that bond investors shall have priority in receiving compensation over stock investors, and the judgment of bond investors shall be executed prior to that of stock investors in the execution procedure. 

Brexit has not yet had any impact on the legislation and practice of China's representative litigation.

COVID-19 has had some impact on Chinese lawsuits. On the one hand, China’s economy has recovered quickly, and as China has almost got rid of the impact of the epidemic, litigation activities have returned to normal. On the other hand, as a result of the epidemic, many courts in China have begun to carry out online litigation activities such as case filing, presentation of evidence and cross-examination, court trial, etc, after comprehensively considering the circumstances of the cases, the wishes of the parties, technical conditions, which shall have the same legal effect as offline litigation activities. This makes litigation more convenient, and also improves the efficiency of litigation.

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Zhong Lun Law Firm was founded in 1993 and is one of the first law firms in China, and the only law firm in China, to have joined the World Law Group. As one of the largest full-service law firms in China, it has over 370 equity partners and more than 2,400 professionals working in 18 offices in Beijing, Shanghai, Shenzhen, Guangzhou, Wuhan, Chengdu, Chongqing, Qingdao, Hangzhou, Nanjing, Haikou, Tokyo, Hong Kong, London, New York, Los Angeles, San Francisco, and Almaty. Zhong Lun has a project team for securities litigation composed of multiple experienced partners and lawyers. It is the first and most experienced team engaged in securities litigation in China, having assisted dozens of listed companies, securities companies, asset management companies, fund companies, securities service institutions, etc in handling securities compliance and litigation business. Zhong Lun has represented many major securities class action cases, such as Wuyang Bond, LeTV, Ye Chiu Recycling, and Lanfeng Bio-chemical.

The Rebirth of China's Representative Litigation System: Official Launch of Representative Litigation in Securities Disputes

The representative litigation system was less applicable in past judicial practice

China formally established a representative litigation system in the 1991 Civil Procedure Law, but this system has not been widely used and is even called the "zombie system." Even in securities disputes, which are the types of disputes most suited to representative litigation, this system has rarely been applied in the past 30 years. With the exception of the Daqing Lianyi securities misrepresentation case in 2002, the representative litigation system has rarely been used in the trial of securities disputes. Instead, the trial mode for these securities cases has been to file and accept the cases separately and hear the separate cases in one centralised trial.

With the increase in the number of securities disputes year on year, Shanghai Financial Court took the lead in hearing the Founder Technology securities misrepresentation case using the method of "model judgment + professional mediation + judicial confirmation" in 2019, but this method still differs from the representative litigation mechanism. In November 2019, the Supreme People’s Court pointed out in the Minutes of the National Court Work Conference for Civil and Commercial Trials that, where conditions allow, local people's courts may choose to hear a case by means of representative litigation,but before the introduction of specific rules, local courts still adopted the traditional trial mode of separate acceptance, separate trial and separate judgment.

Official promulgation of rules for representative litigation in securities disputes

In March 2020, the New Securities Law was formally implemented. In particular, it provided for the application of an ordinary representative litigation system in the field of securities disputes, creating the special representative litigation system of "implicit joining, express withdrawal". Since then, Shanghai Financial Court, Shenzhen Intermediate People's Court and Nanjing Intermediate People's Court have successively issued rules on representative litigation in securities disputes. On 13 March 2020, Hangzhou Intermediate People's Court announced the application of the representative litigation system in the trial of the Wuyang Bond, a bond misrepresentation suit, setting a precedent for Chinese courts to apply the representative litigation system to trials involving bond disputes.

On 31 July 2020, the Supreme People's Court officially issued the Provisions of the Supreme People's Court on Several Issues regarding Representative Litigation in Securities Disputes. On the same day, the China Securities Regulatory Commission (CSRC) and China Securities Investor Services Centre (ISC) successively issued relevant provisions on special representative litigation, marking the full commencement of securities class actions with Chinese characteristics.

To date, in addition to the Wuyang Bond case tried by Hangzhou Intermediate People’s Court, in judicial practice, there have been a number of securities dispute cases tried by representative litigation methods, such as the LeTV case tried by Beijing Financial Court, the Feilo Acoustics case tried by Shanghai Financial Court, the Huifeng Shares case and Chengxing Shares case tried by Nanjing Intermediate People's Court, the Zhongchuang Environmental case tried by Xiamen Intermediate People's Court, and the Huaze Cobalt and Nickel case tried by Chengdu Intermediate People's Court. The Kangmei Pharmaceutical case tried by Guangzhou Intermediate People's Court became the first case in China to apply the special representative litigation mechanism. It can therefore be said that the practice of representative litigation in securities disputes has been officially activated in China,  bringing new life to it.

The explosive growth of securities dispute cases: application of the representative litigation mechanism set to increase

In recent years, with the policy of severely cracking down on violations of laws and regulations in the capital market and the increase in investors’ awareness of rights protection, the number of securities lawsuits in China has been increasing year on year. Public information shows that in the 15 years from 2001 to 2016, there were more than 5,500 judgments for civil lawsuits involving securities misrepresentation. However, in the five years from 2017 to 2021, there were more than 43,000 relevant judgments, with an increase of 7,818 judgments in just one year.

It is foreseeable that with the explosive growth of securities disputes, representative litigation, as a litigation mechanism for efficiently handling group disputes, will be more widely used in future securities disputes, and likely to stimulate the application of  the representative litigation system for other disputes.

The Scope of Application of Securities Representative Litigation Is Further Expanded

Expanded definition of “securities”

Traditionally, the plaintiffs who filed lawsuits related to securities disputes were mainly stock and bond investors. However, with the wider scope of the definition of "securities" in legislation and the active trading of various investment products, the types of "securities" involved in securities dispute litigation have increased.

In terms of legislation, the 1998 Securities Law only included stocks and corporate bonds as the clearly specified types of securities; the Securities Law revised in 2005 included the listing and trading of government bonds and securities investment fund shares into its regulatory scope; the new Securities Law revised in 2019 clearly includes "depository receipts" in the definition of securities.

In practice, the CSRC has implemented cross-market supervision and enforcement of the interbank bond market, the asset-backed securities market and the corporate bond market; investors have also filed civil lawsuits for misrepresentation disputes of interbank bonds, asset-backed securities, and corporate bonds. The relevant courts have accepted the cases on the cause of action of securities misrepresentation disputes. In the future, the scope of securities to which representative litigation in securities disputes will apply will be further expanded.

Increase in the types of securities disputes

In past judicial practice, the securities disputes that were most frequently filed were civil compensation disputes about securities misrepresentation, and there were very few securities civil disputes caused by actions such as insider trading and market manipulation. The Provisions of the Supreme People's Court on Several Issues regarding Representative Litigation in Securities Disputes issued in 2020 clearly stipulate that the representative litigation in securities disputes applies not only to disputes over misrepresentation in the securities market, but also to civil disputes caused by insider trading and market manipulation.

In addition, Shanghai Financial Court and Shenzhen Intermediate People’s Court also pointed out in their provisions on representative litigation that other financial, civil and commercial mass disputes arising from the sale of products and services by banks, securities companies, futures companies, insurance companies, trusts and other types of financial institutions can refer to the provisions of representative litigation. Therefore, the types of disputes applicable to representative litigation in securities disputes will be more diverse in the future.

The New Securities Law clarifies extraterritorial effect

The 1998 and 2005 Securities Law in China did not clearly stipulate whether it had the effect of extraterritorial application. The New Securities Law includes a "long-arm jurisdiction" clause, which clearly stipulates that the offering and trading of securities outside the People's Republic of China which disrupt the domestic market order of the People's Republic of China and harm the legitimate rights and interests of domestic investors shall be dealt with pursuant to the relevant provisions of this Law and legal liability shall be pursued.

This provision has given the extraterritorial effect to China's Securities Law, and Shanghai Financial Court and Beijing Financial Court have successively issued detailed provisions in this regard. Recently, due to the false statements made by Luckin Coffee on the Nasdaq market in the USA, Chinese domestic investors have also filed securities misrepresentation lawsuits in Xiamen Intermediate People’s Court, Beijing Financial Court and Shanghai Financial Court. As yet, these courts have not formally accepted the case. The way this case is dealt with will provide an important reference for similar cases in the future. In any event, the provisions on extraterritorial effect contained in the Securities Law have further expanded the scope of application of representative litigation in securities disputes.

Gradual Relaxation of Pre-procedures for Ordinary Representative Litigation in Securities Disputes

Relaxation of pre-procedures

Several Provisions of the Supreme People's Court on Trying Cases of Civil Compensation Arising from False Statement in the Securities Market enforced in 2003 clearly stipulates the pre-procedures for filing lawsuits involving securities misrepresentation disputes, that is, the plaintiff must submit relevant administrative penalty decisions or criminal judgments when filing a lawsuit.

The Provisions of the Supreme People's Court on Several Issues Concerning Acceptance and Registration of Cases by People's Courts, which came into effect on 1 May 2015, changed the previous case filing review system to a case filing registration system. The person in charge of the Second Civil Division of the Supreme People's Court announced that the pre-procedures for lawsuits in securities misrepresentation disputes will be cancelled under the registration system. However, in subsequent judicial practice, most people’s courts will still rule to reject the lawsuit if the plaintiff cannot submit an administrative penalty decision or criminal judgment after accepting the case. In some cases, when the plaintiff did not submit the administrative penalty decision or the criminal judgment, but instead submitted the decision of administrative supervision measures or disciplinary action against the defendant, the court conducted a substantive trial of the case and judged the defendant to bear the civil compensation liability for securities misrepresentation.

The Provisions of the Supreme People's Court on Several Issues regarding Representative Litigation in Securities Disputes, promulgated in 2020, relaxed the pre-procedures of representative litigation in securities disputes, allowing the plaintiff to submit prima facie evidence proving the facts of the securities infringement, including confession materials from the defendants, disciplinary sanctions imposed or self-regulatory measures taken by stock exchanges, which lowered the threshold for the plaintiff to file a representative litigation in securities disputes.

The Minutes of National Courts Symposium on the Trial of Bond Disputes issued in 2020 also clarified that the court shall not reject or dismiss the lawsuit on the ground that the act of fraudulent issuance or misrepresentation, as claimed by the bondholders or investors, has not been ascertained by any administrative penalty or effective criminal judgment of the relevant authorities.

Pre-procedures for special representative litigation still exist

According to the relevant regulations of the CSRC and ISC, the investor protection agency shall select cases for which administrative penalties or criminal judgments have been imposed by relevant agencies when initiating special representative litigation. Therefore, although the pre-procedures for ordinary representative litigation in securities disputes have been relaxed or even cancelled, the pre-procedures still need to be met before initiating special representative litigation.

In the current judicial practice, the defendants in the Kangmei Pharmaceutical case, involving special representative litigation, were all subject to administrative penalties. However, in ordinary representative lawsuits such as the LeTV and Wuyang Bond cases, investors listed those who had not been administratively punished as co-defendants. It is foreseeable that in future representative litigation in securities disputes, the risk of those who have not been administratively punished to be served a suit will be further increased. The court will examine in more depth whether the defendant has committed securities infringements and whether the relevant acts are “significant” and other substantive issues.

Expanded Scope of the Defendant in Representative Litigation in Securities Disputes and Inconsistent Forms and Scopes of Liabilities

Expanded scope of the defendant

In previous securities misrepresentation disputes litigation, the listed company is usually the only defendant. However, since 2015, the scope of defendants in securities litigation been widening. As the CSRC put forward policy guidance such as "punishing the chief responsible" and "reinforcing responsibilities of intermediaries", investors and investor protection agencies increasingly list the following subjects as co-defendants and ask them to bear joint and several liability with the listed company: directors, supervisors, senior management personnel, controlling shareholders, actual controlling party, securities service institutions, and transaction counterparties that commit financial fraud in material assets restructuring, even those which help listed companies implement illegal misrepresentation acts, such as the bank. Moreover, a large number of defendants have not been administratively punished or had criminal judgments held against them.

As far as securities sponsors, securities underwriters and securities service institutions are concerned, the subjects being sued are also more diverse. The practice of mainly listing securities companies or accounting firms as co-defendants has gradually developed to include more securities service institutions such as asset valuation agencies, credit rating agencies and law firms as co-defendants. Therefore, the scope of defendants in representative litigation in securities disputes will be further expanded in the future. Regardless of whether the relevant entities have been administratively punished, whether they have deliberately committed illegal acts such as misrepresentation, and regardless of the degree of participation in related illegal acts, they may become co-defendants in civil compensation lawsuits for securities disputes, facing the risk of being served a securities misrepresentation lawsuit and the risk of assuming civil liability for securities misrepresentation lawsuits.

Inconsistent form of liability and scope of liability of securities companies

According to past judicial practice, the form and scope of liability of various liable entities are not uniform. Taking the liability of securities companies and securities service institutions as an example, in past judicial practice, for lawsuits against securities companies and securities service institutions that have not been administratively penalised, the courts usually ruled not to accept the suits or to reject the suits; for those securities companies and securities service institutions that have been administratively penalised, courts often rule that these securities companies and intermediary agencies bear joint and several liability for all losses that the listed company should compensate.

However, in recent judicial practice, some courts have directly determined securities companies and securities service institutions that have not been administratively penalised to bear compensation liability based on the evidence in the case. Further, some courts even determined different agencies to bear joint and several liabilities within a certain proportion based on the degree of fault and participation. For example, in the Wuyang Bond case, Hangzhou Intermediate People's Court ruled that the credit rating agency and the law firm should bear joint and several liability within the range of 10% and 5% respectively.

Some courts also ruled that securities companies and securities service institutions should bear "supplementary liability" within a certain proportion for the losses that the listed company should compensate, rather than "joint and several liability". For example, in the Baoqianli case tried by Shenzhen Intermediate People’s Court, the asset valuation agency was judged to bear 30% of the supplementary liability for compensation liability of the listed company.

It can be predicted that in future representative litigation in securities disputes, securities companies and securities service institutions will be increasingly listed as co-defendants, facing the risk of huge compensation claims; how to determine the form and scope of liability will continue to be of concern to all parties and give rise to difficult issues in trial. The specific criteria for judgment in these matters are still to be determined by the Supreme People’s Court’s judicial interpretations and guiding cases.

Zhong Lun Law Firm

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Law and Practice

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Zhong Lun Law Firm was founded in 1993 and is one of the first law firms in China, and the only law firm in China, to have joined the World Law Group. As one of the largest full-service law firms in China, it has over 370 equity partners and more than 2,400 professionals working in 18 offices in Beijing, Shanghai, Shenzhen, Guangzhou, Wuhan, Chengdu, Chongqing, Qingdao, Hangzhou, Nanjing, Haikou, Tokyo, Hong Kong, London, New York, Los Angeles, San Francisco, and Almaty. Zhong Lun has a project team for securities litigation composed of multiple experienced partners and lawyers. It is the first and most experienced team engaged in securities litigation in China, having assisted dozens of listed companies, securities companies, asset management companies, fund companies, securities service institutions, etc in handling securities compliance and litigation business. Zhong Lun has represented many major securities class action cases, such as Wuyang Bond, LeTV, Ye Chiu Recycling, and Lanfeng Bio-chemical.

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Authors



Zhong Lun Law Firm was founded in 1993 and is one of the first law firms in China, and the only law firm in China, to have joined the World Law Group. As one of the largest full-service law firms in China, it has over 370 equity partners and more than 2,400 professionals working in 18 offices in Beijing, Shanghai, Shenzhen, Guangzhou, Wuhan, Chengdu, Chongqing, Qingdao, Hangzhou, Nanjing, Haikou, Tokyo, Hong Kong, London, New York, Los Angeles, San Francisco, and Almaty. Zhong Lun has a project team for securities litigation composed of multiple experienced partners and lawyers. It is the first and most experienced team engaged in securities litigation in China, having assisted dozens of listed companies, securities companies, asset management companies, fund companies, securities service institutions, etc in handling securities compliance and litigation business. Zhong Lun has represented many major securities class action cases, such as Wuyang Bond, LeTV, Ye Chiu Recycling, and Lanfeng Bio-chemical.

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