Provisions of the Supreme People’s Court on Issues Concerning Representative Litigation in Securities Disputes (Mainland China)

Karl Zhang

The Provisions of the Supreme People’s Court on Issues Concerning Representative Litigation in Securities Disputes (the “Provisions”) were adopted at the 1808th meeting of the Judicial Committee of the Supreme People’s Court on July 23, 2020, and has entered into force on July 31, 2020.

1. Definition and jurisdiction

The representative litigation in securities disputes as prescribed under the Provisions include ordinary and special representative litigation regarding misrepresentation, insider trading, market manipulation and other acts in the securities market.  Jurisdiction for such cases are designated to the intermediate people’s courts or the special people’s courts of the cities, cities under separate state planning, and special economic zones where the people’s governments of provinces, autonomous regions and municipalities directly under the central government are located.  For lawsuits against multiple defendants, the intermediate people’s court or special people’s court with jurisdiction over the issuer’s domicile shall have jurisdiction.  For lawsuits against entities other than the issuer, the intermediate people’s court or special people’s court with jurisdiction over the domicile of the defendants shall have jurisdiction.  In special representative litigation, the intermediate people’s court or special people’s court for the place of the exchange on which the securities are traded, or any other national securities trading venue approved by the State Council is located, shall have jurisdiction.

2. Ordinary representative litigation

If the following conditions are met, the people’s court shall adjudicate the matter as ordinary representative proceedings: (1) the plaintiffs consist of dozens of people and the lawsuit conforms to Article 119 of the Civil Procedure Law and the class action conditions; (2) the complaint identifies two to five proposed representatives who meet the criteria under Article 12 of the Provisions; and (3) the plaintiffs submit preliminary evidence showing the facts of a securities tort, such as relevant administrative sanction decisions, criminal decisions, admissions from the defendants, disciplinary actions taken by a stock exchange or any other nationwide securities exchange approved by the State Council, or self-disciplinary measures implemented.

Before issuing a rights registration announcement, the people’s court may examine the nature and the facts of the alleged case, among others by reviewing the case file, conducting investigation of evidence, and convening inquiries and hearings.  The court shall, within 30 days of accepting the case on its docket, issue an order on the scope of rights holders with the same claims, followed by the rights registration announcement within 5 days later to notify the relevant rights holders to register.  The rights holders shall register with the people’s court within such stated registration period; those that fail to do so may still apply for supplemental registration before the first instance trial begins, and the proceedings that are completed before the supplemental registration shall also be effective to those rights holders.

The representatives shall meet the following criteria: (1) they voluntarily agree to be representatives; (2) they share a considerable portion of the interests that are being claimed; (3) they themselves or their attorneys have certain litigation abilities and professional experience; and (4) they are able to faithfully and diligently safeguard the interests of all plaintiffs.

If the number of parties in a representative litigation case has already been determined at the time of the complaint, the representatives with special authorization powers must be determined prior to the filing of the complaint.  If the number of parties has not yet been fixed at the time of the complaint, then the complaint shall state representative candidates and their qualifications.  If the parties registering as right holders with the people’s court do not express any objection to the representative candidates, and none of the registered rights holders apply to be a representative, then the people’s court may chose two to five individuals among the candidates to serve as the representatives.  On the other hand, in the event of any objections regarding representative candidates during registration of rights holders, or a rights holder apply to serve as a representative, the people’s court shall, within ten days after the review of the scope of the plaintiff rights holders is completed, call for the plaintiffs who volunteered to serve as representatives to convene and appoint representatives among themselves; if no representative can be appointed, the court shall make the appointments.  If an investor protection agency participates in the litigation as a plaintiff or designates staff or retains attorneys to participate in the litigation on behalf of investors, the people’s court may designate that agency as a representative, or appoint representatives among the parties that are represented.

3. Special representative litigation

If the people’s court has issued a rights registration announcement in accordance with Article 54, Paragraph 1 of the Civil Procedure Law and Article 95, Paragraph 2 of the Securities Law, an investor protection agency who has received special authorization by more than 50 rights holders during the announcement period may participate in the litigation as a representative.  If the people’s court that first accepted the case does not have jurisdiction over the special representative litigation, it shall promptly transfer the case to the people’s court with jurisdiction.  A rights holder who does not agree to join the special representative litigation may submit a declaration of withdrawal and the original lawsuit shall continue.  In case of failure to declare withdrawal, the rights holders are deemed to have agreed to join the special representative litigation, and those that have declared their withdrawal will no longer be registered as plaintiffs in the special representative litigation, so they are free to sue in a separate action.

No advance payment of a case acceptance fee is required for special representative litigation.  If the unsuccessful or partially unsuccessful plaintiff applies to reduce or waive the payment of litigation fees, the people’s court shall decide in accordance with the Measures for Paying Litigation Fees, while taking into account of the plaintiff’s financial situation and the adjudication status.  If the representative investor protection agency applies for property preservation in litigation, the people’s court may waive the bond.

If the Provisions do not have specific rules for matters arising in the adjudication of a special representative litigation case by a people’s court, the relevant provisions concerning an ordinary representative litigation in which the number of parties was not determined at the time of the complaint will apply.

The Provisions have reduced the cost of safeguarding the rights of securities investors, improved the efficiency of litigation and facilitated the filing and participation of investors in litigation, all of which are conducive to protecting the rights and interests of investors and maintaining the healthy development of the capital market.