In China, cases of collective redress arising from the same or similar facts occur frequently in various fields, and various litigation mechanisms have gradually been established under laws and regulations to resolve such disputes: mainly the joint action mechanism, the ordinary representative action mechanism and the special representative action mechanism.
In 1982, the first Civil Procedure Law (for Trial Implementation) of China was promulgated, which introduced the joint action mechanism. Where a party or both parties to a lawsuit comprise(s) two or more persons, and the subject matter of the litigation is the same or the subject matters of the litigation are of the same type, the court deems that the lawsuit may be tried as a joint action, upon consent by the litigants.
This mechanism has been in use until now, plays an important role in improving the efficiency of the courts and reduces the litigation burden on the parties. The joint action mechanism is currently the most widely used collective redress mechanism in China’s courts.
Ordinary Representative Action
With the “reform and opening up” and the gradual activation of the market economy in China, the number of collective redress cases arising from same or similar facts has been on the rise, and in some cases the number of parties has reached hundreds or even thousands. In the face of collective redress cases with a large number of parties, some courts in China first carried out an attempt at the representative litigation mechanism in practice. In 1986, the Primary People’s Court of Anyue County of Sichuan Province tried out the representative action mechanism in the trial of a purchase and sale contract case of 1,569 farmers from Yuanba Township and Nuli Township of Anyue County against the Anyue County Seed Company. In this case, some persons were selected as representatives of the 1,569 farmers to participate in the proceedings and express their opinions. Academically speaking, this case is generally regarded as the starting point of the representative action mechanism in China.
Given the positive effects of such practice, after years of proposals and discussions, the Civil Procedure Law (1991), for the first time, provided for the ordinary representative action mechanism, which covered representative actions with a certain number of persons and representative actions with an uncertain number of persons. In 1992, the Supreme People’s Court (SPC) issued the Opinions on Several Issues Concerning the Application of the Civil Procedure Law of the People’s Republic of China, which set out detailed provisions on the procedure of an ordinary representative action. This mechanism is also in use today.
Special Representative Action
After the Civil Procedure Law provided for the representative action mechanism in 1991, the SPC and relevant institutions encouraged China’s courts to apply the representative action mechanism in fields such as environmental protection, consumer rights protection and labour protection. However, for a long time, the mechanism was not widely applied.
In the field of securities litigation, in 2003, the SPC formulated the Several Provisions on Trying Cases of Civil Compensation Arising from Misrepresentation in the Securities Market (the “2003 Judicial Interpretation on Misrepresentation”), stipulating that the joint action mechanism and the representative action mechanism shall also apply to collective redress cases arising from misrepresentation in the securities market.
In the 20 years after the promulgation of the 2003 Judicial Interpretation on Misrepresentation, China’s courts have tried hundreds of civil claim cases arising from securities misrepresentation, and have gradually accumulated experience in handling such complicated cases. Meanwhile, China’s government has:
Against this background, the Securities Law, amended at the end of 2019 and effective as of 1 March 2020, provides for the special representative action mechanism similar to the “opt-out” class action mechanism under US law. On 31 July 2020, the SPC promulgated the Provisions of the Supreme People’s Court on Several Issues Concerning Representative Action in Securities Disputes, setting out detailed provisions on the special representative action mechanism, such as the implementation procedures, trial methods and validity of judgments.
It is particularly noteworthy that the special representative action mechanism (especially the opt-out mechanism) is set forth in the Securities Law rather than the Civil Procedure Law. As a result, this litigation mechanism is only applicable to cases of collective redress in the securities market governed by the Securities Law. Furthermore, China’s legislation does not name this mechanism a “class action”; but instead classifies this mechanism as a special category of the representative action mechanism.
The joint action mechanism is essentially a mechanism for the joint trial of several lawsuits arising from the same or similar subject matter, in a manner similar to that set in the civil procedure laws of many other countries.
Ordinary Representative Action
The ordinary representative action mechanism in China has some of its origins in the Japanese litigation mechanism of the “selected litigant”, the representative action mechanism in the UK and the class action mechanism in the USA, but it is also has distinct local characteristics. Experts involved in the formulation of the Civil Procedure Law (1991) point out that the ordinary representative action mechanism in China has the advantages of the class action mechanism and the selected litigant mechanism but is also innovative, ultimately forming a system with Chinese characteristics.
Generally, the Chinese ordinary representative action mechanism has three important similarities with the British representative action mechanism and the Japanese selected litigant mechanism. First, the litigants must actively choose to participate in the proceedings. Second, one or several parties with common interests must be selected to participate in the litigation as the representatives. Third, the validity of the judgment is to apply to all the represented litigants.
However, there are also obvious differences among the three mechanisms. For example, under the selected litigant mechanism in Japan, when the representative is selected, the other litigants withdraw from the proceedings and lose their status as litigants, and their legal interests only lie in the result of the proceedings. In China’s ordinary representative actions, after selecting the representative, the other litigants will not withdraw from the proceedings and will continue to have the status of litigants in the proceedings. Therefore, in China’s ordinary representative actions, the representative’s status is more similar to that of an agent of all the litigants, whose exercise of litigation rights needs to be authorised by those represented, and whose exercise of disposal is subject to the consent of all those represented.
Special Representative Action
The special representative action mechanism in China is mainly borrowed from the class action mechanism in the USA but also learns from the Verbandsklage mechanism, the model action mechanism in Germany and the securities class action mechanism in Taiwan. Like the class action mechanism in the USA, the special representative action mechanism in China also adopts the approach of opting out. Meanwhile, the special representative action mechanism in China limits the litigation representatives to statutory non-profit organisations, which is similar to the altruis-tische Verbandsklage mechanism in Germany and the securities class action mechanism in Taiwan.
Based on the experience of different countries and regions, China’s special representative action mechanism has strong localised characteristics in terms of its applicability, initiation conditions and representative selection.
There is no applicable information in this jurisdiction.
Article 55 of the Civil Procedure Law of the People’s Republic of China (amended in 2023, effective as of 1 January 2024) provides for the joint action mechanism, Article 56 provides for the representative action mechanism with a certain number of persons, and Article 57 provides for the representative action mechanism with an uncertain number of persons.
The Securities Law of the People’s Republic of China (amended in 2019) is the substantive legal basis for securities disputes. Paragraphs 1 and 2 of Article 95 of the Securities Law restate and specify the ordinary representative action mechanism, and paragraph 3 of Article 95 provides for the special representative action mechanism for the first time in China.
Judicial Interpretations and Judicial Opinions
Articles 73 and 74 of the Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China (amended in 2022) provide detailed provisions on the joint action mechanism; Articles 75 to 80 provide detailed provisions on the conditions for initiating an ordinary representative action and the method of determining the representative.
Articles 5 to 31 of the Supreme People’s Court on Several Issues concerning Representative Action in Securities Disputes (effective as of 31 July 2020) provide detailed provisions on the ordinary representative litigation in securities disputes; Articles 32 to 41 specify the implementation details of the specific representative action in securities disputes.
Several Provisions of the Supreme People’s Court on Trying Cases of Civil Compensation Arising from Misrepresentation in the Securities Market (effective as of 22 January 2022) (the “2022 Judicial Interpretation on Misrepresentation”) repeals the aforementioned 2003 Judicial Interpretation on Misrepresentation. The 2022 Judicial Interpretation on Misrepresentation amends the relevant substantive adjudication rules and introduces some new procedural rules (such as the rule of jurisdiction and the rule of interruption of the limitation of action in representative actions concerning securities disputes) for collective redress cases arising from securities misrepresentation.
Local Judicial Documents
Currently, the Shanghai Financial Court, Xiamen Intermediate People’s Court, Qingdao Intermediate People’s Court and other courts have promulgated local judicial documents concerning the representative action mechanism in securities disputes, providing specific rules on the representative action mechanism in securities disputes within their respective jurisdictions.
Other Relevant Rules
The China Securities Regulatory Commission (CSRC) has promulgated the Notice on Effectively Conducting the Work Relating to the Participation of Investor Protection Institutions in Special Representative Action in Securities Disputes – this provision further stipulates the investor protection institutions that have the right to initiate a special representative action.
The China Securities Investor Service Centre (ISC) has promulgated the Rules on Special Representative Action (for Trial Implementation) and the Administrative Measures for Evaluation of Securities Litigation Cases (for Trial Implementation) – these provisions clarify the rules for the ISC to initiate and participate in a special representative action.
Ordinary Representative Action
Since the ordinary representative action mechanism is directly provided for in the Civil Procedure Law (amended in 2023，effective as of 1 January 2024), this mechanism is applicable to all categories of disputes. Based on existing judicial practice in China, the ordinary representative action mechanism is mainly applied in the following fields:
It is particularly noteworthy that the ordinary representative action mechanism with an uncertain number of persons is predominantly employed in securities disputes, with a particular emphasis on cases involving securities misrepresentation.
Special Representative Action
Currently, the special representative action in China is only applicable to collective redress cases arising from misrepresentation, insider trading, market manipulation, etc, in the securities market. The Kangmei Pharmaceutical Case, which was the first case of China’s special representative action mechanism, was concluded in 2021, marking the successful implementation of a Chinese-style opt-out class action mechanism. It was not until 2023 that the second special representative action (ie, the Essence Case) was initiated in China. Further discussion of the case can be found in the China Trends & Developments chapter in this Guide.
The joint action mechanism may be divided into two types: the necessary joint action mechanism and the ordinary joint action mechanism. A necessary joint action refers to a lawsuit that must be tried concurrently. In this type of case, one or both parties comprise two or more persons and the parties must file or respond to a lawsuit jointly. The core feature of a necessary joint action is that the subject matter of the litigation is the same. An ordinary joint action refers to a lawsuit that the court can manage as a joint trial or as several separate trials. The core feature of an ordinary joint action is that the subject matter of the litigation is of the same type.
Ordinary Representative Action
An ordinary representative action refers to a joint action in which one or more litigants may file or respond to a lawsuit on behalf of all litigants with common interests. The litigation conduct of the representative litigant affects all the represented litigants, and the judgment made by the court shall be binding on all the represented litigants. According to the Civil Procedure Law (amended in 2023, effective as of 1 January 2024), ordinary representative actions include representative actions with a certain number of persons and representative actions with an uncertain number of persons. Both categories of litigation are essentially extensions of the joint action mechanism.
Special Representative Action
In a securities collective redress case, on the basis that the court initiates an ordinary representative action with an uncertain number of persons, an investor protection institution entrusted by more than 50 investors may, in accordance with the principle of opting out, participate in the litigation on behalf of the investors who have suffered damage due to the same illegal conduct.
Where one party or both parties comprise two or more persons, and their subject matter of the litigation is the same or of the same type, and the court considers that the case can be tried as a joint action, a joint action may be initiated upon the consent of the parties.
Ordinary Representative Action
In the case of a joint action where one party is comprised of numerous persons, such a party may elect representatives to participate in the proceedings, and the representative action mechanism with a certain number of persons shall be initiated. Where one party is comprised of numerous persons, but the number of persons is not determined when filing the lawsuit, the court may issue an announcement of rights registration, notifying the right-holders to register with the court within a certain period, and initiate the representative action procedure with an uncertain number of persons. Furthermore, right-holders registered within the registration period may elect litigation representatives to participate in the proceedings.
The China’s Civil Procedure Law (amended in 2023, effective as of 1 January 2024) contains no specific provisions on the jurisdiction of representative actions. The jurisdiction is usually determined by the type of the dispute and the domicile of the defendant.
Specific Representative Action
China’s special representative action mechanism adopts a “progressive mode” – only after the court has initiated a representative action with an uncertain number of persons and issued an announcement of rights registration, can an investor protection institution initiate the special representative action procedure in accordance with the law. During the period of the announcement, an investor protection institution specially authorised by more than 50 investors can act as the representative and initiate a special representative action in some cases.
According to the judicial interpretation of the SPC, special representative actions shall be subject to centralised jurisdictional rules and shall be under the jurisdiction of the intermediate people’s courts or the special people’s courts at the place of the stock exchanges where the securities involved in the litigation are located, or other national stock exchanges as approved by the State Council involved in the case. Accordingly, the courts that have jurisdiction over special representative actions of the first instance shall include the Shenzhen Intermediate People’s Court, Shanghai Financial Court and Beijing Financial Court. If the court that first accepts a separate action, a joint action or an ordinary representative action does not have jurisdiction over the special representative action, it shall transfer the case to the court that has jurisdiction over the special representative action.
If one party or both parties are composed of two or more persons, and the subject matter of the litigation is the same, a necessary joint action may be initiated. If one party or both parties are composed of two or more persons, the subject matter of the litigation is of the same type and the court considers that the cases can be tried as a joint action, then upon the consent of the parties, an ordinary joint action may be initiated.
Ordinary Representative Action with a Certain Number of Persons
In a joint action with a large number of litigants, such litigants shall have the right to elect representatives and apply to the court for a representative action.
Ordinary Representative Action with an Uncertain Number of Persons
The court may, after conducting preliminary examination, issue an announcement of registration of rights stating the facts of the case and the claims of the existing litigants, and notify the right-holders who have not participated in the existing litigation to register with the court within a certain period.
According to the SPC’s judicial interpretation, in an ordinary representative action with an uncertain number of persons, the main proceedings are as follows:
Special Representative Action
In addition to the proceedings for the representative action with an uncertain number of persons, the proceedings to initiate a special representative action also include the following:
As previously mentioned, if one party or both parties are composed of two or more persons, and the subject matter of the litigation is the same, a necessary joint action shall be initiated. If one party or both parties are composed of two or more persons, the subject matter of the litigation is of the same type and the people’s court considers that the cases can be tried as a joint action, then upon the consent of the parties, an ordinary joint action may be initiated. In such joint proceedings, each party shall directly participate in the litigation and express opinions.
Ordinary Representative Action
According to the Civil Procedure Law (amended in 2023, effective as of 1 January 2024), for a joint action in which one party is comprised of a large number of persons, such a party may elect two to five representatives to initiate an ordinary representative action. The Civil Procedure Law (amended in 2023, effective as of 1 January 2024) does not provide general provisions on the qualifications of the representatives.
According to the judicial interpretation formulated by the SPC, in cases of collective redress in the securities market, the initiation conditions for an ordinary representative action are that:
In a case of collective redress in the securities market, the representatives must:
In addition, where the plaintiff who applies to act as the representative has an association with the defendant or if there exist any other circumstances that may affect the plaintiff in the performance of their duties, the people’s court shall not approve the application.
Special Representative Action
Pursuant to Article 95 of the Securities Law (amended in 2019), only investor protection institutions are entitled to act as the representatives in the special representative actions concerning securities disputes. The investor protection institution is a professional social organisation whose duty is to protect investors. For the time being, it mainly refers to the ISC or the China Securities Investor Protection Fund Corporation Limited (SIPF).
Founded on 5 December 2014, the ISC is a non-profit financial institution and is under the direct administration of the CSRC. Its main responsibilities include:
It was the ISC that filed the special representative action on behalf of 55,326 investors in the Kangmei Pharmaceutical Case, which was the first special representative action case in China. In 2023, the second special representative action (ie, the Essence Case) was officially initiated in China. In the case, the ISC, authorised by 58 investors, applied for the initiation of a special representative action with the Shanghai Financial Court
Founded on 30 August 2005, the SIPF is a non-profit financial institution funded by the State Council, subject to the administration of the CSRC. The institution performs statutory duties such as raising and managing securities investor protection funds, monitoring the risks of securities companies, evaluating the protection of investors and responding to investors’ demands. It plays an important role in preventing and mitigating financial risks and safeguarding the legitimate rights and interests of investors. As of October 2023, the SIPF has yet to be authorised by investors to initiate special representative litigation proceedings, but is currently engaged in data analysis, loss calculation, and assistance in administrative reconciliation.
Joint Action and Ordinary Representative Action With a Certain Number of Persons
Joint actions and ordinary representative actions with a certain number of persons proceed on an opt-in basis. To be able to join the aforesaid actions, the plaintiffs must meet the requirement that the subject matter of the litigation of several plaintiffs is the same or of the same type.
Ordinary Representative Action With an Uncertain Number of Persons
The opt-in rule is also adopted for an ordinary representative action with an uncertain number of persons. After the court issues an announcement of registration of rights, the right-holders who meet the requirements may become members of the representative action after applying to join the action within a certain time and having been confirmed by the court.
Special Representative Action
Special representative actions adopt the opt-out principle. Once a special representative action is initiated by the investor protection institution, all investors who meet the requirements for registration of rights and do not opt out will automatically become members of the special representative action.
Limit on Size
There is no upper limit on the number of litigants in any of the aforesaid litigation mechanisms. However, there is a minimum requirement for the number of litigants. For example:
Except in special representative actions applying the opt-out principle, a plaintiff who has not yet joined the class action can only join by filing a lawsuit or by applying to join the representative action in other forms of class action. Additionally, in an ordinary representative action arising from securities torts, if the right-holder fails to register on time, the person may apply to the court for supplementary registration before the court hearing of the first instance commences, and the legal proceedings that have been conducted before the supplementary registration shall be binding on the right-holder.
A litigant may apply to the court to add a defendant, and the court shall decide whether to approve the application after examination.
Adding Third Parties
The Civil Procedure Law (amended in 2023, effective as of 1 January 2024) classifies third parties into third parties with independent claims and third parties without independent claims. A third party with independent claims refers to a party who has claims different from the plaintiff and the defendant with respect to the subject matter of the litigation and needs to join the action by initiating a lawsuit. A third party without independent claims refers to a party who has no independent claims with respect to the subject matter of the litigation but has interests in the result of the case, or whose participation in the action is conducive to finding out the facts of the case. Such a third party may join the action on its own or on the application of other parties, and the court may also notify such a third party to join the action if it deems necessary.
China’s courts have substantial power in administering the procedure of class actions. Taking a representative action arising from a securities dispute as an example, the court’s management power is reflected in many aspects, including:
According to the Civil Procedure Law (amended in 2023, effective as of 1 January 2024), the trial period of first-instance civil litigation cases is generally six months, which can be extended for six to nine months upon approval in the case of special circumstances. The trial period for appeals is usually three months, and in the case of special circumstances, it can also be extended for three months upon approval.
In an ordinary representative action with an uncertain number of persons arising from a securities dispute, the process of determining the scope of rights-holders, issuing a notice of rights registration, examining the list of rights-holders, and selecting and determining the representatives takes roughly four to five additional months.
In practice, given the complexity of issues in a representative action, the length of time required for a trial may exceed the above-mentioned periods. Therefore, it is difficult to accurately predict the duration of a representative action, and it will generally last for more than two years if it goes through both the first and second instance.
During a legal action, the court does not have mechanisms such as acceleration of claims, summary disposal or delaying of claims, but according to the Civil Procedure Law (amended in 2023, effective as of 1 January 2024) and other provisions, the following mechanisms may delay litigation proceedings:
In cases arising from misrepresentation, according to the judicial documents published by the SPC, the people’s court may seek opinions from the CSRC and its dispatched offices, stock exchanges, securities self-discipline management organisations, investor protection institutions and other entities with regard to professional issues. The time taken to solicit opinions shall not be included in the period of trial.
Litigation fees ordered by the courts include case acceptance fees, property preservation fees incurred when a party applies for property preservation, public announcement fees incurred when a party cannot be serviced, etc. Generally, case acceptance fees, property preservation fees and public announcement fees are paid in advance by the plaintiffs when the lawsuits are filed or when the parties apply for property preservation, and they are ultimately borne by the losing parties. As for the attorneys’ fees actually incurred by the parties, there are no clear rules on how to allocate such fees. The plaintiffs may request that the opposing party bear the attorneys’ fees when filing lawsuits, but the courts have wide discretion in this regard.
In an ordinary representative action with an uncertain number of persons, no case acceptance fees need to be paid in advance, and the losing party shall pay the case acceptance fees based on the value of the subject matter of the litigation after the case has been concluded. According to the SPC’s judicial interpretation, in representative actions arising from securities disputes, the representatives may request the losing defendants to compensate for reasonable announcement fees, notice fees, attorneys’ fees and other expenses.
In a special representative action, no case acceptance fees are to be paid by the plaintiffs in advance, and the losing parties shall pay the case acceptance fees based on the value of the subject matter of the litigation after the case has been concluded. 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 circumstances of the trial of the case. Where an investor protection institution, as a representative, applies for property preservation in the litigation, the court may waive the requirement of providing a guarantee.
There are no explicit evidence disclosure rule in Chinese civil procedure, and there is no obvious difference between the evidence rules applying to joint actions and representative actions and those applying to separate actions.
In a Chinese civil action, a court will prescribe a time period for the parties to submit evidence, and the court will organise the exchange, presentation and cross-examination of such evidence. This exchange of evidence may take place separately before the hearing or concurrently during the hearing. If the evidence is in the possession of the other party to the litigation or a third party, the main measures that may be taken by the court include:
In China, witnesses giving testimony is not commonly seen, and there is no rule of privilege for witnesses. In accordance with China’s law, citizens are obliged to testify truthfully to the court.
There is no difference between the remedies obtained through collective redress/class actions and separate actions. Collective redress/class actions in China are usually applicable to tort disputes or contract disputes, where the remedies mainly include cessation of infringement, compensation for damages, removal of obstruction, elimination of danger, and return of property.
In addition to litigation, the parties may settle their disputes through reconciliation, mediation or other alternative dispute resolution mechanisms.
For example, in the field of securities disputes, China is gradually building a diversified dispute resolution mechanism for securities disputes. In addition to judicial mechanisms such as separate actions, joint actions, supportive actions, model judgment and representative actions, there are also non-litigation resolution mechanisms such as reconciliation, industry mediation, professional mediation, and compensation in advance.
In practice, the dispute resolution mechanism of “model judgment + professional mediation” has been adopted in a number of cases. Under this mechanism, the court first selects typical cases with common factual and legal issues in dispute as model cases to be tried and judged first. The model judgment may be a separate action, a joint action or a representative action. After the model judgment takes effect, the court can guide the resolution of other parallel cases through mediation, reconciliation or a simplified trial based on the standards for the factual determination and legal application established in the model judgment.
In joint actions and ordinary representative actions with a certain number of persons, the judgment shall be binding on all parties concerned. In ordinary representative actions with an uncertain number of persons, the effective judgment shall be binding on all registered right-holders. Besides, if right-holders who have not been registered file a lawsuit within the limitation of actions, the people’s court may directly rule to apply the aforesaid effective judgment. In special representative actions, the judgment shall be binding on all right-holders who have not declared that they are opting out of the case and other parties concerned.
The time limit for performance of the losing party’s obligations will be specified by the court in the civil judgment in China. If the losing party fails to perform its obligations within the specified time limit, the entitled party may apply to the court for enforcement, and the obligations of the losing party shall be mandatorily enforced by the court.
Enhancing the Co-operation Between Securities Regulatory Authorities and Courts in Securities Class Actions
China’s collective redress mechanisms, especially the special representative action mechanism, are mainly applicable to securities dispute cases, and the securities regulatory authorities usually have stronger power to investigate securities torts and are likely to have a better understanding of the facts related to the cases due to their administrative enforcement procedures. In this context, it is China’s policy to encourage co-operation between the securities regulatory authorities and the courts. The securities regulatory authorities may provide more support for the courts’ fact-finding and advise the courts on professional issues in the securities field. The SPC has issued a special judicial document to regulate such co-operation. In some of the recent securities dispute cases, the courts asked the CSRC for inspection files to research the factual situation.
Encouraging the Application of Expert Opinions and Loss Assessment by Professional Third-Party Institutions in Securities Class Actions
The determination of loss in a securities dispute is a professional and complicated issue. Currently, China’s policy encourages parties/courts to apply for/appoint professional third-party institutions to provide expert opinions and calculate the investor’s loss.
Encouraging the Application of the Collective Action Mechanism in Other Fields Such as Consumer Protection
China’s policy also encourages the application of the collective action mechanism in other fields. For example, the General Office of the State Council issued the Opinions on Further Unleashing Consumption Potential and Promoting Consumption Recovery in April 2022, which explicitly proposes to explore the establishment of a consumer collective action mechanism. Currently, local consumer protection associations mainly support consumers in their collective claims by means of recommending agents, assisting consumers in investigation and evidence collection, seeking support from administrative departments, and other support. In the future, it will be possible to apply the ordinary representative action procedure with an uncertain number of persons and other mechanisms for the collective redress in the field of consumer protection.
As the collective action mechanisms continue to mature and evolve in securities disputes, Chinese courts may consider extending these mechanisms to wider areas.
On 21 January 2022, the SPC promulgated the 2022 Judicial Interpretation on Misrepresentation, repealing the 2003 Judicial Interpretation on Misrepresentation. For cases of collective redress in the field of securities misrepresentation, the 2022 Judicial Interpretation on Misrepresentation makes the following revisions and has been guiding courts’ judgments after its implementation.
Removal of the Pre-procedure for Class Redress Cases Arising From Securities Misrepresentation
The 2003 Judicial Interpretation on Misrepresentation clearly stipulates the pre-procedure for filing a lawsuit arising from securities misrepresentation, which means the plaintiff must submit the relevant administrative penalty decision or criminal judgment for the misrepresentation when filing a lawsuit. However, the 2022 Judicial Interpretation on Misrepresentation has removed this pre-procedure, and the plaintiff only needs to submit preliminary evidence to prove the existence of misrepresentation.
However, the pre-procedure for special representative actions still exists. According to the relevant provisions of the CSRC, when filing a special representative action, an investor protection institution shall choose a case in which the relevant authority has issued an administrative penalty decision or a criminal judgment. Such pre-procedure is conducive to the prudent initiation of special representative actions by the investor protection institution.
Amendment Made as to the Courts Having Jurisdiction for Class Redress Cases Arising From Securities Misrepresentation
According to the 2022 Judicial Interpretation on Misrepresentation, cases of collective redress for securities misrepresentation shall, in principle, be under the jurisdiction of the intermediate people’s court which is in the seat of the provincial government where the issuer is domiciled. Even if the plaintiff does not list the issuer as the defendant, the case arising from the issuer’s securities misrepresentation shall still be subject to the aforesaid jurisdiction rule. Meanwhile, the 2022 Judicial Interpretation on Misrepresentation stipulates that the higher people’s court of a province, autonomous region or municipality may, according to the actual situation in its jurisdiction, designate other intermediate people’s courts to have jurisdiction over first-instance cases arising from securities misrepresentation. However, the centralised jurisdiction rule shall still apply to special representative actions.
Clarifying the Rules on the Commencement and Interruption of the Limitation of Actions
The 2022 Judicial Interpretation on Misrepresentation provides that the limitation of actions for such cases shall commence from the date when the obliged person with regard to the information disclosure corrects the misrepresentation or the misrepresentation is first publicly exposed on the media.
In ordinary representative actions with an uncertain number of persons, the litigation conduct of some investors has the effect of interrupting the limitation of actions for all other right-holders with the same claims. For the investors who fail to register their rights with the people’s court, the limitation of actions shall commence anew upon the expiration of the period of rights registration. For the investors who apply to withdraw the registration of rights after registration with the people’s court, the limitation of actions shall commence anew on the day following the withdrawal of the registration of rights.
Improvement of the Substantive Adjudication Rules
The 2022 Judicial Interpretation on Misrepresentation also has provisions on many substantive issues involved in collective redress for securities misrepresentation, which provides the institutional basis for the detailed trial of such disputes.
The 2022 Judicial Interpretation on Misrepresentation specifies the standard for the materiality of securities misrepresentation, establishes the standard for transaction causation, improves the statutory exclusion of loss causation, clarifies the standard for determining the fault, and details the rules for calculating the loss. The procedural rules for representative litigation, on the other hand, continue to apply the Provisions of the Supreme People’s Court on Several Issues Concerning Representative Litigation in Securities Disputes, which came into effect on 31 July 2020.
Brexit has not yet had any notable impact on the implementation of China’s class action mechanisms.
In the securities market, according to Articles 95 and 96 of the CSRC’s Code of Corporate Governance of Listed Companies (Revised 2018), a listed company shall disclose information relevant to corporate governance, environmental and social information in accordance with laws, regulations, and the requirements of the relevant departments. In the Guidelines for Investor Relations Management of Listed Companies implemented by the CSRC in May 2022, the CSRC has further clarified that the listed company’s communication with investors shall include the company’s environmental, social and governance information. Generally, according to the regulatory requirements of the CSRC, some ESG information must be disclosed, while other ESG information is merely encouraged to be disclosed.
On 7 September 2023, the deputy director of the CSRC’s Listed Company Supervision Department, also made a public statement that the CSRC was leading the Shanghai and Shenzhen Stock Exchanges to draft guidelines for disclosure of listed companies’ sustainable development information. The CSRC will continue to guide listed companies to improve ESG information disclosure, to practise the concept of green development, and to fulfil their social responsibilities.
It is foreseeable that if listed companies disclose ESG information with any false record, misleading statement, or material omission, there will be potential for collective redress lawsuits.
In addition, ESG is fully reflected in other laws, regulations, and the requirements of the relevant departments, which may lead to collective claims in non-securities disputes.
A Summary of the Past 12 Months
Joint action and representative action mechanisms are still mainly applied to securities disputes
The collective redress mechanisms in China mainly consist of the joint action mechanism, the ordinary representative action mechanism, and the special representative action mechanism. There are no limitations on the types of cases to which the joint action mechanism and the ordinary representative action mechanism may be applied. However, the special representative action mechanism, as defined in Paragraph 3, Article 95 of the Securities Law as amended in 2019 (the “Securities Law”), only applies to cases related to securities disputes. These disputes encompass situations arising from misrepresentation, market manipulation, insider trading, or any other violations of securities regulations.
Over the past 12 months, these collective redress mechanisms have continued to be predominantly employed in securities disputes, with a particular emphasis on cases involving securities misrepresentation. This pattern aligns with China’s historical judicial practice in this regard.
Collective redress cases arising from securities misrepresentation have significantly increased and a greater variety of securities are involved
On 21 January 2022, the Supreme People’s Court (SPC) issued the “Several Provisions on the Trial of Civil Compensation Cases Involving Torts of Misrepresentation in the Securities Market” (the “New Judicial Interpretation”), which introduced extensive amendments to the previous judicial interpretation promulgated in 2003 (the “Old Judicial Interpretation”). For the past 20 years, under the Old Judicial Interpretation, an investor could only initiate a misrepresentation action if the defendant, such as a securities issuer (a listed company or other securities issuer), had been subject to an administrative penalty or a criminal sentence. The New Judicial Interpretation expressly eliminates this pre-suit condition, thereby encouraging investors to seek compensation for potential securities torts that have not been discovered by securities regulatory authorities.
Since the implementation of the New Judicial Interpretation, collective redress cases stemming from securities misrepresentation have significantly increased. In many cases, investors have submitted evidence, such as administrative regulatory measures other than administrative penalties, public news reports, bankruptcy decisions, and other exhibits, to support their allegations that the securities issuers had engaged in misrepresentation. This trend has substantially raised the litigation risks for issuers, their directors, supervisors, senior executives, and intermediaries. Moreover, in the absence of administrative penalties or criminal sentences, the court must scrutinise all elements of torts, including the existence of misrepresentation, materiality of misrepresentation, the existence of fault, and causality. This introduces fresh complexities to the courts’ assessment of these cases and the defence strategies for the parties involved.
Furthermore, a broader range of securities, including stocks, corporate bonds, debt financing instruments in the interbank bond market, and asset-backed securities, can give rise to misrepresentation cases. In recent years, disputes related to bond misrepresentation and other forms of bond litigation have witnessed explosive growth. For example, on 30 December 2022, the Beijing Financial Court issued the first-instance judgment in the Dalian Machine Tool case, determining that the misrepresentation related to the “Super & Short-Term Commercial Paper” issued in the interbank bond market should fall under the purview of the Securities Law and the New Judicial Interpretation. Subsequently, the issuer’s related intermediaries were found liable in this case, marking the first instance of a securities misrepresentation case in China’s interbank bond market. Another example is the Brilliance Auto Bonds case, which concerned corporate bonds sanctioned by the National Development and Reform Commission and was decided in a first-instance judgment by the Shenyang Intermediate People’s Court in August 2023.
The representative action mechanism is further implemented in collective redress cases arising from securities misrepresentation
In the past 12 months, the representative action mechanism has seen further implementation in misrepresentation disputes. This practice has been proven valuable for the resolution of securities group claims and the protection of small and medium-sized investors.
The special representative action mechanism, which uses the opt-out principle, has been cautiously applied in China’s judicial practice. Up to this point, this mechanism has been used in only two cases. Following the effective date of the Securities Law on 1 March 2020, the Guangzhou Intermediate People’s Court rendered the first-instance judgment in the Kangmei case in late 2021, marking the first special representative action in China. In this case, the court ruled that the listed company Kangmei Pharmaceutical Co., Ltd. (“Kangmei”) must compensate 55,326 investors for losses totalling approximately CNY2.46 billion. The court also found the relevant directors, supervisors, senior executives, the pertinent accounting firm and accountants liable for the losses in varying proportions.
In 2023, China’s second special representative action was officially initiated. Essence Information Technology Co., Ltd. (“Essence”), a company listed on the Shanghai Stock Exchange Science and Technology Innovation Board (the “STAR Market”), faced an administrative penalty from the China Securities Regulatory Commission (CSRC) due to fraudulent issuance. Against this backdrop, the China Securities Investor Services Centre (ISC), authorised by 58 investors, applied for the initiation of a special representative action with the Shanghai Financial Court on 21 July 2023. On 22 September 2023, Essence’s sponsor announced its intention to jointly invest CNY340 million with other intermediaries to provide advance compensation to investors. Should the intermediaries compensate the investors in this way, the special representative litigation that has been initiated may not proceed.
The application of the special representative action mechanism to address collective claims by securities investors is significant in deterring violations and reshaping the capital market ecosystem. It also contributes to the normalisation of the special representative mechanism.
Simultaneously, the ordinary representative action mechanism is being applied in more cases. This mechanism was employed in the Longlive case before the Jinan Intermediate People’s Court in Shandong Province. Within the specified period, 1,628 investors registered with the court and initiated the ordinary representative action procedure with an uncertain number of persons. This signifies the first application of the ordinary representative action mechanism in a securities dispute in Shandong Province. Additionally, this mechanism was applied in the Anne Corp case before the Xiamen Intermediate People’s Court. In addition to the aforementioned two cases, judgments have been made in cases including the Feilo Acoustics case, the Wuyang Bond case, and the Huifeng case that were applicable to the ordinary representative action mechanism. The ordinary representative action mechanism has been used in a relatively limited number of misrepresentation cases, despite its significant role in such matters.
The appointment of professional institutions to calculate losses has become mainstream in class claims arising from securities torts
Calculation of investors’ losses is a significant challenge in class claims arising from securities torts. Recent trends in Chinese court judgments indicate a growing inclination to enlist third-party professional institutions for this task. Courts now frequently designate third-party entities such as the China Securities Legal Services Centre, China Securities Investor Protection Fund Corporation Limited (SIPF), Shanghai Advanced Institute for Financial Research (SAIFR), or Shenzhen Value Online Information Technology Co., Ltd., among others, to assess the extent of losses incurred due to the relevant alleged tortious acts.
Securities violations can potentially result in hundreds or even thousands of claims. Handling the computation of all these losses solely within the court system would pose a substantial challenge. Consequently, delegating the responsibility for loss calculation to professional institutions can significantly alleviate the courts’ workload. Furthermore, these appointed third-party institutions employ specialised models to swiftly, conveniently, and accurately assess the investment losses suffered by plaintiffs. This approach enhances the precision of investor protection measures.
There is increasing judicial consensus that caution is warranted when assessing the liability of each party involved in securities misrepresentation cases
The surge in misrepresentation cases and the mounting volume of associated claims has had a profound impact on issuers, casting a “chilling effect” on their directors, supervisors, senior executives, and intermediaries. It is particularly noteworthy that following the elimination of the pre-suit condition, certain investors have brought frivolous securities lawsuits. In light of these developments, Chinese courts are increasingly cautious when assessing the legal liability of all parties involved.
Chinese courts are increasingly cautious when evaluating the liability of issuers who have disseminated false statements. Recent judicial rulings reflect a meticulous scrutiny of the elements of liability to determine whether the issuer should be held accountable.
In certain cases, some courts assess the materiality of misrepresentation by analysing the fluctuations in share prices or stock trading volumes of the listed companies. If the court determines that the misrepresentation is not significant in relation to these factors, it may dismiss the plaintiffs’ claims. When forward-looking information provided by the issuer (eg performance forecasts) deviates from the actual outcomes, some courts may reject investors’ claims by invoking the “safe harbour for forward-looking information”. Under the safe harbour, issuers are not liable for forward-looking statements unless certain exceptions apply. Some courts evaluate the causality between the alleged misrepresentation and the investors’ trading decisions as well as the corresponding investment losses. If they find that there is no direct link between the misrepresentation and the losses suffered by investors, they may dismiss the plaintiffs’ claims.
Such careful judicial assessment of issuer liability effectively deters frivolous lawsuits by investors.
Chinese courts are increasingly sophisticated in assessing the liability of intermediaries. According to the Securities Law, intermediaries, including sponsors, underwriters, accounting firms, and assessment institutions, can be jointly and severally liable if they are found to be at fault in misrepresentation cases, unless they can prove lack of culpability. In the earlier stages of judicial practice, an intermediary’s failure to demonstrate due diligence would result in joint and several liability for all of the issuer’s obligations. However, this approach has progressively waned in recent court decisions. In current judicial practice, courts are more likely to decide that an intermediary at fault should bear joint and several liability within a certain proportion (“proportional joint and several liability”) after taking into account various factors such as the intermediary’s responsibilities, degree of fault, and causal contribution. In many cases over the past 12 months, intermediaries have either been exempted from liability or only ordered to share proportional joint and several liability, as exemplified by the Kingenta case before the Qingdao Intermediate People’s Court, the Soling case before the Shenzhen Intermediate People’s Court, and the Yeah Info case before the Shanghai Financial Court.
Issuer personnel liability
Chinese courts are becoming increasingly nuanced in assessing the liability of an issuer’s directors, supervisors, and senior executives. The Securities Law stipulates that directors, supervisors, or senior executives found at fault in misrepresentation cases shall be jointly and severally liable, unless they can establish their lack of culpability. In contemporary judicial practice, courts primarily consider the relevant individual’s position, their role in information disclosures, the channels through which they acquired and comprehended pertinent information, and measures taken to verify such information in order to determine liability. Even when directors, supervisors, or senior executives are found at fault and held liable, courts tend to adopt the “proportional joint and several liability” approach to cautiously determine their liability. For instance, in the HGDHTED case, the Harbin Intermediate People’s Court found most of the defendant directors, supervisors, and senior executives not liable, holding only four of them liable for 5% of the issuer’s liability.
Securities investors may be compensated under the “the Advance Compensation System”
Article 93 of the Securities Law outlines the “Advance Compensation System”, under which an issuer’s controlling shareholder, actual controller, and relevant securities companies (such as the issuer’s sponsor) to negotiate compensation agreements with investors for any losses incurred due to alleged securities violations. This arrangement is facilitated by a designated investor protection organisation, and the agreed-upon compensation is disbursed in advance. The advance compensation system has been successfully adopted in a number of prior cases, and in another case (ie, the “Amethystum case”) after the promulgation of the Securities Law.
Amethystum Storage Technology Co., Ltd. (“Amethystum”), a company listed on the STAR Market, was penalised by the CSRC on 18 April 2023 for fraudulent share issuance. The sponsor, accounting firm, and other intermediaries involved with Amethystum also faced the risk of penalties. In this context , these intermediaries jointly contributed CNY1 billion and established a special fund for advance compensation on 26 May 2023, with SIPF serving as the fund manager. Eligible investors who suffered losses due to Amethystum’s fraudulent issuance could apply to SIPF for compensation, on the condition that they would not pursue misrepresentation lawsuits after receiving compensation. As of 30 June 2023, 16,986 eligible investors had submitted their claims. This approach streamlined the compensation process for affected investors, sparing them from protracted legal proceedings.
Outlook for the Future
Collective redress cases for securities torts will remain the most active class claims in China for some time to come
The Chinese government has been implementing a stringent regulatory policy to combat violations in the securities market, which incentivises small and medium-sized investors to protect their rights and interests. As such, it is likely that collective redress actions stemming from securities torts will continue to be seen frequently. Among these, cases related to securities misrepresentation will remain the most prevalent type of collective redress action. Additionally, tort cases resulting from market manipulation, insider trading, or other violations in the securities market are expected to gradually increase.
The surge in securities tort claims presents an opportunity to enhance China’s protection mechanisms for small and medium-sized investors. However, it also places significant litigation pressure and liability risks on issuers, intermediaries, and other relevant parties. The challenge posed by this trend is how to strike an appropriate balance between safeguarding the legitimate rights and interests of investors and those of the issuers, intermediaries, and other parties involved. It is essential to resolve these disputes in a manner that is satisfactory to all relevant parties.
Continued prudent application of the special representative action mechanism
As of now, the special representative action mechanism has been invoked in only two cases: the aforementioned Kangmei and Essence cases. This limited use does not render the mechanism obsolete. Rather, it underscores its significant influence and emphasises the need for its prudent application.
Pursuant to Article 95 of the Securities Law, only investor protection institutions have the authority to act as representatives in special representative actions related to securities disputes. Currently, the ISC serves as the representative in such actions. The Rules for Special Representative Actions (for Trial Implementation) and the Administrative Measures for the Assessment of Securities Litigation Cases, issued by the ISC, outline the specific conditions that must be met to initiate a special representative action:
Considering the characteristics of the Kangmei and Essence cases, both the courts and the ISC strictly adhere to those conditions, exercising prudence when contemplating the initiation of special representative actions.
It is foreseeable that in the future, the special representative action mechanism will act as a deterrent for securities issuers, intermediaries, and other relevant entities, making them acutely aware of the potential costs associated with violations such as misrepresentations. However, it is crucial to highlight that Chinese courts and related institutions will continue to meticulously evaluate cases to prevent any abuse of this mechanism, thus safeguarding issuers, intermediaries, and other relevant entities from unreasonable liability.
Wider application of the ordinary representative action mechanism in securities disputes
The special representative action mechanism uses the opt-out principle, while the ordinary representative action mechanism follows the opt-in rule. In comparison, the latter option seems to be more acceptable and simpler to put into practice. Given the Chinese government’s ongoing commitment to curbing securities violations, it is likely that the ordinary representative action mechanism will see broader application in securities disputes. This approach has proven effective in protecting the rights of investors in the securities market and enabling them to pursue civil claims.
It is worth noting that when an ordinary representative action is initiated in a securities dispute, thousands of investors may choose to “opt in”, resulting in claims amounting to billions of Chinese yuan. This could necessitate a significant allocation of manpower and resources by the courts to co-ordinate the participation of multiple parties, placing considerable pressure on some judicial bodies. Therefore, it is foreseeable that, in the short term, there will be a gradual increase in the number of cases where the ordinary representative action mechanism is applied, rather than an abrupt surge.
More professional and sophisticated trials of collective redress cases stemming from securities misrepresentation
First, the calculation of securities investment losses is expected to become more sophisticated. Currently, numerous professional institutions are capable of calculating losses in misrepresentation cases, providing valuable opinions for courts to base their judgments on. Courts are likely to actively collaborate with these professional institutions to explore appropriate methods for calculating losses in various types of misrepresentation cases. For instance, in cases involving the National Equities Exchange and Quotations, where stock liquidity and market efficiency are lower, courts may need to develop new approaches to calculate investment losses resulting from misrepresentation. The calculation of losses in bond misrepresentation cases is another pressing issue that requires resolution. It can be believed that China’s academic and practitioner communities will work together to advance the professional, sophisticated and accurate calculation of losses in misrepresentation cases in the future, further safeguarding the legitimate rights and interests of securities investors.
Second, Chinese courts are likely to establish more specific standards for determining the liability of intermediaries, directors, supervisors, and senior executives. As mentioned earlier, it has become the prevailing view in judicial adjudication that intermediaries and individuals in these roles should fulfil their respective duties and be held accountable to the extent of their fault and causal contribution. Currently, Chinese courts exercise varying degrees of discretion in evaluating the fault and causal contribution of intermediaries, directors, supervisors, and senior executives, leading to inconsistencies in their judgments. For example, some courts may exempt from liability independent directors, who had no involvement in or knowledge of the misrepresentation, while others may hold a different perspective. As more misrepresentation cases are adjudicated, more specific standards for determining the liability of these parties are likely to emerge, potentially resulting in more precise trial guidelines. The establishment of unified, transparent, and clear liability standards in such cases will enable intermediaries, directors, supervisors, and senior executives to comprehend the essential measures they need to undertake to diligently fulfil their responsibilities. This development is expected to contribute to the establishment of a healthy and orderly capital market.
More collective claims will be resolved through alternative means as the diversified resolution mechanism continues to enhance its effectiveness
Building upon prior experimental experiences, the Securities Law has introduced the “Advance Compensation System” as an innovative approach to address securities disputes. This system has demonstrated its effectiveness in practice, enabling tens of thousands of investors to promptly receive compensation. In the future, it is possible that this system will be expanded and applied to a broader range of cases, offering securities investors an efficient and convenient avenue to seek compensation.
Additionally, the SPC and the CSRC have actively promoted the resolution of securities disputes through mediation and other alternative methods. Under the guidance of the SPC and the CSRC, a diverse range of mechanisms for resolving securities and futures disputes has gradually emerged. These mechanisms include negotiation, pre-litigation mediation, court-appointed mediation, arbitration, and civil litigation. As this framework continues to develop and mature, it will provide securities investors with alternative channels to pursue class claims and resolve disputes in the future.
Possible extension of collective redress system to other types of cases
As the ordinary representative action and other mechanisms within the collective redress system continue to mature and evolve in securities disputes, Chinese courts may consider extending these mechanisms to other areas such as consumer protection, environmental tort, and personal information protection. For example, in consumer protection, the same of similar contract breaches (or torts) can lead to losses for a substantial number of consumers. Furthermore, consumer claims frequently entail relatively modest individual compensation amounts and may be scattered in nature. Therefore, the ordinary representative action mechanism with an uncertain number of persons, once fully developed, has the potential to be applied in the area, offering a comprehensive avenue for addressing the grievances of numerous consumers. This could present an efficient and effective approach to safeguard the rights and interests of consumers in cases of widespread harm or extensive misconduct.