On January 21, the Supreme People's Court promulgated the Several Provisions of the Supreme People's Court on the Trial of Civil Compensation Cases for Infringement of Misrepresentation in the Securities Market (hereinafter referred to as the Provisions), which came into effect on January 22.
The Provisions consist of 35 articles, which are divided into eight chapters: General Provisions, Determination of False Statements, Materiality and Causation of Transactions, Determination of Fault, Subject of Liability, Determination of Losses, Limitation of Actions, and Supplementary Provisions. The key normative contents include: abolishing the pre-procedure, comprehensively protecting the right of investors to sue, providing a provider guarantee for the professional handling of civil compensation cases of misrepresentation infringement; refining the constituent elements and accountability mechanisms for civil compensation liability for securities misrepresentation, and solving the difficult problems of the application of law in the trial of cases; clarifying the fault determination standards and exemption defense reasons for various types of responsible entities, responding to market concerns and stabilizing market expectations; combining market development and trial practice, systematically improving the rules for determining losses. More scientific and reasonable determination of the scope of liability, etc. In addition, specific grounds for exemption from liability for independent directors are specifically stipulated.
Focus 1: Refers to the stubborn disease of financial fraud in the capital market
It is understood that in order to further protect the legitimate rights and interests of investors, smooth the channels for remedying investors' rights, and strictly crack down on financial fraud and other illegal activities in the securities market in accordance with the law, the Supreme People's Court revised and improved the judicial interpretation of the civil compensation litigation for false statements implemented on February 1, 2003, forming the Provisions.
The Provisions focus on the application of law in cases accepted and tried by the people's courts after the cancellation of the pre-procedures for the people's courts to accept false statements, and refine the constituent elements of civil compensation liability for securities misrepresentations, including subjective fault, misrepresentation, materiality, transaction causation, loss causation and loss calculation, and limitation of actions. In addition, the Provisions also clarify the civil compensation liability of relevant entities in the case of financial fraud instigated by the controlling shareholder and the actual controller organization, financial fraud by the counterparty in the merger and reorganization of listed companies, and financial fraud by the relevant parties to the business of listed companies, and the simultaneous use of "chasing the evil" and "cracking down on the accomplices", pointing to the stubborn and chronic disease of financial fraud in the capital market, and increasing the illegal costs of the violators of laws and regulations in accordance with the law.
According to reports, in view of the difficulties that investors may face in presenting evidence and certification after the abolition of the preliminary procedures, the Supreme People's Court and the China Securities Regulatory Commission will simultaneously issue a joint notice to make connecting arrangements for the trial of cases by the people's courts and the professional support and investigation of the CSRC, so as to better protect the legitimate rights and interests of investors.
Focus 2: Explicitly cancel the pre-process
The Provisions explicitly abolish the pre-procedure and promptly and comprehensively protect the right of action of the injured investor.
In the early stage of the development of the mainland securities market, in order to reduce the burden of evidence on investors, according to the legislation and judicial practice at that time, article 6 of the original judicial interpretation provided for a preliminary procedure, that is, the people's court accepted the case of a misrepresentation dispute, and the misrepresentation act had been administratively punished or a criminal judgment document was identified as a prerequisite.
Judging from the practical effect, the preliminary procedure has played an important role in reducing the plaintiff's burden of proof, preventing indiscriminate litigation, and unifying administrative penalties and judicial adjudication standards. However, at the same time, the preliminary procedures also have problems such as insufficient protection of investors' right to sue and an excessively long period of realization of rights, which need to be improved at the institutional level. With the increasing development and maturity of the mainland securities market, the continuous accumulation of experience in securities adjudication by courts, the continuous improvement of the judicial system and the capital market system, and the conditions for abolishing the preliminary procedures are gradually in place. On the basis of fully studying the opinions of all parties, Article 2 of the Provisions clarifies the arrangement for abolishing the pre-procedure from both positive and negative angles, effectively lowers the threshold for investors to sue, and timely and fully protects the right of litigation of injured investors. First, if the plaintiff initiates a civil compensation lawsuit for securities misrepresentation infringement, the people's court shall accept it as long as it complies with Article 122 of the Civil Procedure Law and submits corresponding evidence; Second, after accepting a case, the people's court must not rule that it is inadmissible solely on the grounds that the false statement has not been administratively punished by the regulatory department or the people's court's effective criminal judgment.
Priority 3: Add a "predictive information safe harbor" system
The Provisions add a "predictive information safe harbor" system.
In order to encourage and regulate issuers to voluntarily disclose forward-looking information such as profit forecasts and development plans, the Overseas Securities Law generally stipulates the "safe harbor system", "the principle of advance warning" and "the obligation to update forecast information in a timely manner".
The "safe harbor system" means that the predictive information discloser makes predictions based on the principle of good faith with a subjective mindset of good faith, and the basic assumptions on which they are based are reasonable, even if there is a discrepancy between the statements made and the actual situation in the future, the predictive information discloser is not liable for securities fraud.
The principle of pre-warning requires prudent explanation and warning of forecasts, and even if it is difficult to achieve after the fact, it is not a false statement. "Obligation to keep forecast information up to date" means that if the facts on which the forecast is based change, as long as the relevant content is updated or supplemented, it does not constitute a false statement.
In order to avoid individual dishonest companies from using voluntary disclosure of forward-looking information to make false statements, and to clarify the boundaries between voluntary predictive information disclosure and false statements, the Provisions have established a "predictive information safe harbor" system in conjunction with Article 84 of the Securities Law and overseas system experience to further urge listed companies to improve the quality of information disclosure.
Focus 4: Optimize the "three days and one price" identification standard
The Provisions optimize the criteria for determining "three days and one price" and enhance the operability of judicial practice.
For the implementation date, the Provisions distinguish between positive false statements and negative false statements, the former refers to the existence of false records and misleading statements in the information voluntarily disclosed by the information disclosure obligor, and the disclosure date is the implementation date of the false statement; The latter is due to the failure to disclose relevant corrections in a timely manner, confirm that the information constitutes a misleading statement, or the failure to disclose major events or important matters in a timely manner constitutes a material omission, such as concealing major related party transactions, major illegal matters, etc., and the first trading day after the expiration of the period for disclosing relevant information shall be the implementation date.
With regard to the disclosure date, the Provisions focus on clarifying that market knowledge is taken as the basis for judgment, and the people's court shall judge whether investors are aware of false statements based on evidence such as the reaction of the public trading market to relevant information, and at the same time, in order to facilitate operation, they also cite the disclosure date of information such as the investigation of the relevant entities by the regulatory authorities and self-regulatory management organizations or the adoption of self-discipline management measures, unless the parties have contrary evidence sufficient to refute it.
For the base date and benchmark price, the Provisions optimize the relevant identification criteria, fully consider the liquidity factors of different stocks, distinguish different situations and list the specific methods for determining the base date and benchmark price, and also stipulate measures such as expert identification and reference to the usual valuation methods of the industry.
Focus 5: Add content related to short-selling misrepresentations
The Provisions add content related to short-induced misrepresentations. The original judicial interpretation mainly stipulated the relevant content of inducing multi-type false statements, and in practice, there are also false statements of the induced type. Short-induced misrepresentation mainly refers to the misrepresentation of false negative news, or concealing the substantial good news without publication or not announcing it in a timely manner, so that investors sell stocks when the stock price is running downward or relatively low, and the stock price rises after the misrepresentation is exposed or corrected and the investor suffers losses, such as in the case of a listed company significantly underreporting the amount of profit, the original holder may be affected and "vote with his feet" to sell the stock at a price lower than the fair market price.
Focus 6: Optimize the criteria for determining materiality
The Provisions optimize the criteria for determining materiality and clarify the causal relationship of transactions.
The 2015 "Several Specific Issues of the Supreme People's Court on the Current Commercial Trial Work" pointed out that in terms of substance, it is necessary to correctly understand the constituent elements of civil liability for securities tort, and to study the materiality of securities tortious acts and the particularity of transaction causality among the four constituent elements of traditional civil tort liability: tortious acts, faults, losses, and causation. In securities litigation in mature markets, materiality is the focus of the trial of misrepresentation dispute cases, and almost every case must be contested.
On the basis of absorbing the results of theoretical research and trial practice, the Provisions further optimize the criteria for determining materiality, and in addition to listing and clearly citing the relevant provisions of the Securities Law and the rules and normative documents of the regulatory authorities, they also make it clear that obvious changes in securities trading volume and transaction price can be used as criteria for determining the materiality of the content of false statements. In addition, combined with domestic judicial practice and overseas experience, the causal relationship of transactions is clearly stipulated in the constituent elements of civil liability for misrepresentation.
Focus 7: Specify specific grounds for exemption from liability for independent directors
Article 16 of the Provisions specifically stipulates the specific grounds for exemption of independent directors.
Where independent directors can prove any of the following circumstances, the people's court shall determine that they are not at fault:
Before signing the relevant information disclosure documents, the problems have not been discovered with the help of accounting, law and other specialized professions for specific issues that do not belong to their own professional fields;
Before the disclosure date or correction date, promptly raise objections to the issuer and supervise rectification after discovering the false statement, or report in writing to the securities trading venue or regulatory department;
Where a qualified opinion or objection is expressed in an independent opinion on the matter of misrepresentation, or where it is impossible to express an opinion and explain the specific reasons, except where a vote in favour is cast when deliberating or reviewing relevant documents;
Where the issuer refuses or obstructs its performance of its duties, making it impossible to make a judgment on whether there are false statements in the relevant information disclosure documents, and promptly reporting in writing to the securities trading venue or regulatory authorities;
Other circumstances in which diligence can be demonstrated.
Editor: Li Ruoyu Cao Shuai
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