How to determine the materiality of the information disclosed in the misrepresentation | securities and futures cases (16)?

【Dawang Lawyer】

The main points of contention in this case were:

1. Does the defendant's information disclosure act punished by the Ministry of Finance constitute a false statement?

2. Is there a causal relationship between the defendant's punished information disclosure behavior and the plaintiff's investment losses?

Judging from past precedents, when courts trying disputes over the liability for false statements, they often focus on the causal relationship between the defendant's misrepresentation of information disclosure and the plaintiff's losses, and leave the determination of the materiality of the disclosed information and the constituent elements of the false statements to the administrative supervision department, and directly cite the relevant administrative punishment decision in the judgment.

However, since the promulgation of the new accounting standards in 2007, the problems of listed companies in the implementation of the new accounting standards have been repeatedly investigated and punished by the Ministry of Finance, and because the penalties in individual cases are different and generally mild, is it enough to affect investors' investment decisions? This is not without doubt. Therefore, the judgment on the materiality of the information involved in the case has gradually become the focus of the trial of specific cases.

I. The legal basis for judging the materiality of information

Article 17 of the Several Provisions of the Supreme People's Court on the Trial of Civil Compensation Cases Arising from False Statements in the Securities Market stipulates: "Misrepresentation in the securities market refers to the act of the information disclosure obligor violating securities laws and regulations by making false records or misleading statements about major events contrary to the truth of the facts in the course of securities issuance or trading, or major omissions or improper disclosure of information when disclosing information." ”

It can be seen that the premise of constituting a misrepresentation is "a violation of securities laws" and specifically for "material events". What is a major event? Article 17 of the Several Provisions stipulates: "For major events, they shall be determined in conjunction with the contents of the Securities Law and relevant provisions. ”

Article 80 of the Securities Law stipulates: "When a major event occurs that may have a greater impact on the stock trading price of the listed company or its stock in other national securities trading venues approved by the State Council, and the investor has not yet learned of it, the company shall immediately submit an interim report on the situation related to the major event to the securities regulatory authority under the State Council and the securities trading venue, and make an announcement explaining the cause, current status and possible legal consequences of the incident."

The terms in the preceding paragraph include:

(1) Major changes in the company's business policy and business scope;

(2) The company's major investment behavior, the company's purchase or sale of major assets within one year exceeds 30% of the company's total assets, or the mortgage, pledge, sale or scrapping of the company's main assets for business purposes exceeds 30% of the assets at one time;

(3) The company concludes important contracts, provides major guarantees or engages in related party transactions, which may have a significant impact on the company's assets, liabilities, equity and operating results;

(4) The default of the company in incurring major debts and failing to pay off major debts as they become due;

(5) The company incurred major losses or major losses;

(6) Major changes in the external conditions of the company's production and operation;

(7) The company's directors, more than one-third of the supervisors or managers change, and the chairman or manager is unable to perform his duties;

(8) The shareholders or actual controllers who hold more than 5% of the shares of the company have undergone a major change in the circumstances in which they hold shares or control the company, and the actual controller of the company and other enterprises under its control engage in the same or similar business as the company;

(9) The company's plan to distribute dividends and increase capital, important changes in the company's equity structure, decisions on capital reduction, merger, division, dissolution and bankruptcy application, or enter bankruptcy proceedings in accordance with law and be ordered to close down;

(10) Major litigation involving the company, where the resolutions of the shareholders' general meeting and the board of directors are revoked or declared invalid in accordance with law;

(11) The company is suspected of committing a crime and is investigated by the judicial organs, and the company's controlling shareholders, actual controllers, directors, supervisors, and senior management personnel are suspected of committing crimes and are subject to compulsory measures taken by the judicial organs;

(12) Other matters prescribed by the securities regulatory authority under the State Council.

Where the controlling shareholder or actual controller of a company has a greater impact on the occurrence and progress of major events, it shall promptly inform the company in writing of the relevant circumstances it has learned of, and cooperate with the company in performing its information disclosure obligations. ”

2. The subject of defining the materiality of information

Who has the right to judge the materiality of information, the people's court or the securities regulator?

The first view is that. As Li Guoguang, former vice president of the Supreme People's Court, pointed out: "Before the people's court accepts a civil compensation case, the materiality of the information involved in the misrepresentation should have been resolved in the preliminary procedure, and it can be determined naturally without involvement in the trial of civil cases." ”

After all, the qualitative analysis of misrepresentation requires theoretical knowledge such as accounting, and if the preliminary procedure is first solved, it can adapt to the lack and inadequacy of the professional knowledge of court trial personnel.

However, if the determination of the administrative supervision department is directly relied upon without factual review, the following problems will exist:

1. The mere fact that the administrative punishment announcement automatically determines its seriousness is not conducive to the court's comprehensive analysis of the case facts, and severs the causal link between the punished act itself and the investor's decision-making;

2. After all, the administrative supervision organ cannot be equated with the court, and the court's independent review of the case can better ensure the fairness of the judgment result.

The second opinion holds that after the case is accepted, the court should review whether the misrepresentation is made in the administrative punishment decision. If it is found, the causal relationship between the misrepresentation and the plaintiff's losses will continue to be heard, and if not, the plaintiff's lawsuit will be dismissed.

However, the limitation of this view is that most of the administrative penalty decisions against false statements only list the company's improper disclosure behavior, but do not characterize the improper disclosure behavior, and it is impossible to directly conclude from the penalty decision whether it constitutes a false statement.

The third opinion held that the court should comprehensively review the extent to which the relevant information affects the investor's decision-making, and then independently make a determination as to whether it is a major event and meets the constituent elements of the misrepresentation.

III. Criteria for judging the materiality of information

The academic community mainly has the following views on this:

The first view is that the judgment of the materiality of information is based on the criteria of rational investors, that is, false information significantly changes the comprehensive information that rational investors originally rely on.

The second view is that the judgment of information materiality should be based on price sensitivity standards, and it is believed that the price is decided by investors after synthesizing various market information, and whether it constitutes a major event can be judged through the price changes before and after the implementation of the false disclosure.

This case adopts the first view, first considering whether the information involved in the case can induce investors to make wrong judgments, and then when analyzing the causal relationship, then arguing the influencing factors of stock price changes, which is also in line with the basic law of investment decision-making in the securities market. Because it is difficult to filter the impact of systemic risks through the analysis of the degree of price change; the general law of second-class securities investment is "the market looks at the trend, and the individual stocks look at the performance", and the impact of the information involved in the case on investors can be quantified through its impact on the company's performance, improving the certainty and operability of the application of the law.

Fourth, the way to define the materiality of information

The basic method is to judge whether the information involved in the case is sufficient to have a substantial impact on the decision-making of rational investors based on the corresponding proportion of the false disclosure.

By analyzing the proportion of the impact of the amount of violations involved in the Ministry of Finance's Announcement No. 18 on the defendant's total profits, total assets, liabilities and total owners' equity, income tax expenses, net profits and other statement items, the court found that it was not sufficient to induce investors to make mistakes, and therefore did not constitute a false statement.

Here's why:

1. False statements cannot be defined solely by the literal meaning and intrinsic logic of the provisions of the Securities Act.

Paragraph 2 of Article 17 of the Provisions on False Statements states: "For major events, they shall be determined in conjunction with the relevant provisions of the Securities Law. Taking Article 78 of the Securities Law as an example, this article stipulates: "The information disclosed by the information disclosure obligor shall be true, accurate, complete, concise and clear, easy to understand, and must not have false records, misleading statements or major omissions." ”

However, according to the semantics and internal logic of the Securities Law, it is impossible to judge whether the information disclosed complies with the law. The authenticity, accuracy and completeness of financial reports depend on the implementation of accounting standards by listed companies, which are also the direct basis for punishing false records and false disclosures.

In this case, the court did not determine the materiality of the information solely on the basis of the conduct of the subject of the administrative punishment, but characterized the relevant information by in-depth analysis of the overall impact of the accounting error on the report items.

2. Quantitative analysis of judgment criteria can achieve a balance of interests between investors and listed companies.

From the perspective of traditional tort law theory, civil liability should be compatible with fault, and the significance of the information involved in the case should be determined without considering the degree of fault, which does not conform to the principle of proportionality of tort liability.

The trade secrets of listed companies and the investors' right to know are also important legal interests of the Securities Law, and it is not easy to determine their materiality without considering the proportion of misstatements, which undoubtedly exaggerates the impact of disclosure on investment losses and is unfair to listed companies.

3. The impact of reviewing relevant information on investors' decision-making is in line with China's current auditing standards.

The goal of an audit is to evaluate the authenticity, accuracy and completeness of the company's information, and an independent audit should adhere to the principle of materiality. Article 2 of the Independent Auditing Standard No. 10 on the Importance of Auditing stipulates: "The significance referred to in this Standard refers to the degree to which this degree may affect the judgment or decision-making of users of accounting statements in the accounting statements of the audited entity in a specific environment".

Therefore, from an audit perspective, the determination of whether a misstatement or omission is a material event depends on the degree of influence it has on the decisions made by users of accounting statements. If the misstatement or omission is not serious, the audited entity does not need to adjust the accounting statements, that is, the disclosed information does not violate the truthfulness, accuracy and completeness of the overall report, and there will be no wrong guidance to investors.

In this case, the defendant's accounting error had a small impact and was not required by the penalty authorities to adjust the relevant items in the annual statement, so the defendant's illegal information disclosure behavior was not "in violation of the securities laws and regulations, in the process of securities issuance or trading, making false records or misleading statements against the truth of major events, or major omissions or improper disclosure of information when disclosing information", as referred to in the Provisions on False Statements, which does not constitute false statements and will not play a role in falsely inducing investors.

V. This case defines major events by analyzing the extent to which the disclosure information involved in the case affects the relevant items of the financial statements, which provides a new way of thinking for the trial of misrepresentation dispute cases.

However, in practice, if the case is referred to, the following issues need to be noted:

1. The quantitative analysis of the importance of information should be different from each case, and should not form a rigid analysis standard.

The financial indicators that reflect the performance of enterprises include net assets, operating income, net profit, earnings per share, etc., and the importance of each indicator is not the same for different enterprises.

There should be no one-size-fits-all universal criteria for determining the materiality of information.

2. The experience of this case cannot be applied to the analysis of the materiality of off-balance sheet information.

For example, Article 67 of the Securities Law stipulates that "it may have a significant impact on the company's assets, liabilities, equity and operating results", as well as the company's sum, etc., cannot define its materiality by analyzing its impact on the report items.

【Basic Facts】

On November 11, 2010, the Ministry of Finance issued the Announcement of the Ministry of Finance of the People's Republic of China on The Quality Inspection of Accounting Information (No. 18), which pointed out that the Office of the Financial Ombudsman of the Ministry of Finance in Shenzhen conducted an inspection of the 2008 annual accounting information quality of the defendant, Shenzhen HeungKong Holdings Co., Ltd. In response to the problems found in the inspection, the Office of the Financial Ombudsman of the Ministry of Finance in Shenzhen has imposed a fine of 15,000 yuan on the defendant and asked the company to adjust the account and make up the tax.

The plaintiffs, Yang Zhigang and Wei, argued that the defendant's misrepresentation had caused the plaintiff to suffer heavy losses, and hereby filed a lawsuit requesting the court to order: 1. The defendant compensated the plaintiff for the loss of investment difference of RMB40,079.8, commission loss of RMB40.08, and stamp duty of RMB40.08 caused by the plaintiff's misrepresentation; the loss of interest on the funds involved was RMB144.57; and the total loss of the above was RMB40,304.53. 2. The litigation costs in this case shall be borne by the defendant.

The defendant, Shenzhen HeungKong Holdings Co., Ltd., argued:

The plaintiff's lawsuit has no legal basis or factual basis at all, and should be dismissed in accordance with law.

1. Judging from the Announcement No. 18 provided by the other party, the administrative penalties imposed by the Ministry of Finance on the defendants are applicable to the accounting law and relevant tax laws and regulations, rather than the securities law.

2. Judging from the 2008 data covered by Announcement No. 18 provided by the other party, the defendant's corporate financial data is very small, it is difficult to affect the stock market, and it does not meet the constituent conditions of major events stipulated in Articles 63, 65, 66, 67 and 78 of the Securities Law, and the defendant's conduct does not constitute a false statement in the securities market.

3. Judging from the "Announcement No. 18" provided by the plaintiff, the penalty is not the defendant's information disclosure, but the violation of the accounting law, and the amount of the penalty is also very small, only 15,000 yuan.

4. The plaintiff's factual grounds do not clarify which of the false statements the defendant constitutes.

5. From 2009 to the plaintiff's lawsuit, the information disclosure has always been very standardized, and there has been no administrative punishment from the relevant departments for the information disclosure.

6. In this case, there were no such acts as the date of false statement, the date of false implementation, or the date of correction of false statements claimed by the plaintiff.

7. There is no causal relationship between the plaintiff's request and the defendant's punished conduct.

After trial, the court ascertained:

The defendant was listed on the Shanghai Stock Exchange on June 9, 1998, with the stock code of 600162, and the securities abbreviation: HeungKong Holdings.

On March 31, 2009, the defendant released its 2008 annual financial report.

On November 11, 2010, the Ministry of Finance issued Announcement No. 18. The announcement said: In 2009, the Ministry of Finance organized the offices of financial ombudsmen in various localities to inspect the accounting information quality of 78 enterprises and the quality of practice of 43 accounting firms.

Highlights of the inspection include:

First, in order to ensure the effective implementation of the central government's macro policies such as expanding domestic demand and maintaining growth and the implementation of active fiscal policies, inspections are carried out for important industries and key enterprises of the national economy such as resources, energy, and transportation;

The second is to track the implementation of the new accounting standards, increase the supervision and inspection of the quality of accounting information of listed companies, and inspect 40 of the 78 enterprises including listed companies;

The third is to further increase the inspection of securities qualified accounting firms, involving 20 securities qualified accounting firms and 20 securities qualified accounting firms. The inspection shows that most enterprises have established an effective internal control system and have better implemented the accounting law and the accounting standards for business enterprises. The inspection also found that some enterprises still fail to implement the accounting law and accounting standards for enterprises, and there are problems of varying degrees in internal control, financial management and accounting.

According to the above-mentioned inspection results, the Ministry of Finance and the relevant commissioner's office imposed administrative penalties on 16 enterprises, including HeungKong Holdings, in accordance with the Accounting Law and the Certified Public Accountants Law, and ordered 60 enterprises to adjust their finances and pay back taxes. Relevant enterprises and accounting firms have carried out rectification as required.

The plaintiff was a securities investor and opened a securities account on the Shanghai Stock Exchange. From November 24, 2009 to July 29, 2010, the plaintiff bought and sold the shares of the defendant company, and still held 10,000 shares of the defendant company on December 31, 2010.

From November 11, 2010 to February 11, 2011, the cumulative turnover rate of the defendant company's stock transactions reached 100.92% of its tradable portion.

During the trial, the plaintiff confirmed that the defendant belonged to the real estate sector of the listed company.

On November 11, 2010, the defendant's stock opened at $5.88 and closed at $5.90, up or down -0.51%. On November 12, 2010, the defendant's stock opened at $5.86 and closed at $5.54, up or down -6.1 percent. On February 11, 2011, the defendant's stock opened at $4.99 and closed at $4.99, representing a 0% increase or decrease. On February 11, 2011, compared with November 11, 2010, the defendant's stock fell by 0.91 yuan, or -15.423%.

On November 11, 2010, the Shanghai Stock Exchange opened at 3108.51 and closed at 3147.74, up or down 1.04%. On November 12, 2010, the Shanghai Securities Open Index was 3121.92 yuan, and the closing index was 3147.74, up or down -5.16%. On February 11, 2011, the Shanghai Securities Open Index was 2815.12 and the closing index was 2827.33. On February 11, 2011, compared with November 11, 2010, the Shanghai Composite Index fell by 281.18, or -10.179%.

It was also found that according to the situation in China's securities market, Shenzhen Vanke (000002) also belongs to the real estate sector of listed companies. On November 11, 2010, Vanke opened at 9.19 yuan and closed at 9.18 yuan, up or down 0.33%. On November 12, 2010, Vanke opened at 9.15 yuan and closed at 8.53 yuan, up or down -7.08%. On February 11, 2011, Vanke opened at 8.15 yuan and closed at 8.26 yuan, an increase or decrease of 0.98%. February 11, 2011 compared to November 11, 2010, down 0.92 yuan, up -10.02%.

The defendant's 2008 annual report stated that the company's annual operating income in 2008 was 1969979329.5 yuan, the total profit was 499778463.67 yuan, the total assets were 5337195262.08 yuan, the income tax expense was 146410407.84 yuan, and the net profit was 353368055.83 yuan.

The defendant claimed that the amount involved in the Ministry of Finance's Announcement No. 18 had a small impact on the defendant's 2008 annual report, and it was difficult to affect the stock price.

Specifically, the operating income is 2.36 million yuan, the financial expenses are overstated by 3.74 million yuan, and the two items should increase profits, and the depreciation of investment real estate (original value of 9.65 million yuan) and fixed assets (7.34 million yuan) is 5.66 million yuan (one-third of the sum of 965+ 734). 1. The impact of total assets was 5.66 million yuan, accounting for 0.11% of the 2008 consolidated financial statements (5.66 million/537719 million). 2. The total liabilities and owners' equity are 5.66 million yuan, accounting for 0.11% (5.66 million/ 537719 million) in the 2008 consolidated financial statements. 3. The total profit impact amounted to 430,000 yuan (2.36 million + 3.74 million to 5.66 million yuan), accounting for 0.12% (430,000 / 499.77 million yuan) in the 2008 consolidated financial statements. 4. The impact of income tax expense is 100,000 yuan (430,000 yuan× 0.25), accounting for 0.03% of the 2008 consolidated financial statements (100,000 yuan / 146.41 million yuan). 5. The impact of net profit was 320,000 yuan (430,000 yuan to 100,000 yuan), accounting for 0.09% of the 2008 consolidated financial statements (320,000 yuan / 353.36 million). Because the impact was so small, the company did not have to make adjustments in the annual statements, and the company did not make an announcement adjustment until the plaintiff sued.

The Court held that the focus of the dispute in this case was:

1. Does the defendant's information disclosure act punished by the Ministry of Finance constitute a false statement?

2. Is there a causal relationship between the defendant's information disclosure behavior punished by the Ministry of Finance and the plaintiff's investment loss in the defendant's shares?