Following the creation of the Shanghai Financial Court in August 2018, China has further reformed its legislation aimed at protecting financial investors by introducing a class action regime.
On 31 July 2020, the Supreme People's Court of China ("SPC") held a press conference to announce the immediate entry into force of a new set of legal provisions establishing a class action regime (titled the “Provisions on Issues or Representative Securities Litigation”).
Under the new class action system, groups of investors may file class action lawsuits seeking compensation for losses suffered due to corporate misconduct. Investors can initiate such actions via “Ordinary Representative Litigation” or “Special Representative Litigation”.
The main difference between the two mechanisms is that the former requires a group with a minimum of only 10 investors who can litigate in their own capacity, whereas the latter is for groups of more than 50 investors that have appointed an “investor protection institution” to file the lawsuit on their behalf. There are two institutions in mainland China that are competent to file a Special Representative Litigation action: (i) the China Securities Investor Service Center and (ii) the China Securities Investor Protection Fund Corporation Limited.
Lawmakers have decided to adopt a so-called “opt-out” regime. When a lawsuit is filed under the Special Representative Litigation mechanism, the mandated institution may register investors of the same class within the relevant jurisdiction without their explicit consent. Thus, even investors that are not active participants in the litigation can benefit from the outcome of the litigation. Only investors that have explicitly chosen to “opt-out” of the litigation will be exempted from being registered as such.
The class action regime aims at offering a cost effective and expedited procedure for investors to pursue claims.
In a statement on 31 July 2020, the Supreme Court explained that the system will be a “convenient and low-cost claim channel for small and medium volume investors”.
The objective is to streamline the procedure for small investors to recover losses due to corporate misconduct. For example, pursuant to the new provisions, the competent court will review the merits of the case and decide which investors are qualified to be claimants at an early stage of the proceeding.
At that same time, the court will indicate its initial position on the possible commitment of misstatements by the defendant and the date such statement began to impact the markets. The new set of rules further details the competent court to review cases, special arrangements on court fees and legal costs, and how courts will select representatives of the class and their role in the litigation.
This important move towards a more robust and investor-friendly regime comes right on time. China currently faces substantial criticism over several public corporate scandals involving Chinese companies. The most recent one with international impact is Luckin Coffee, a Chinese competitor of Starbucks’.
In April 2020, it was revealed that Luckin had inflated its sales by 400% following its IPO in May 2019. As a result, investors in the US have filed class action lawsuits, and several regulatory investigations are ongoing. Chinese regulators investigating the company declared on 31 July 2020 - coincidently - that they were prepared to take punitive actions against Luckin and related third parties for their misconduct.
China is thus clearly sending the message that it will no longer tolerate corporate misconduct. And now the culprits of such misconduct also face class actions lawsuits filed by investors in China.
The Supreme Court is expected to release further details on the exact implementation of the new provisions shortly. We will update you in due course.
In the meantime, please do not hesitate to contact Olivia de Patoul.
Written on Aug 20, 2020 by
Deminor helps businesses and investors monetise legal claims.