On December 26, the Shanghai Financial Court heard the case of investors suing Zeda Yisheng (Tianjin) Technology Co., Ltd. (hereinafter referred to as Zeda Yisheng Company), a company listed on the Science and Technology Innovation Board, and 12 defendants, including actual controllers, executives, and intermediaries, over liability for securities misrepresentation concluded through mediation. China Securities Small and Medium-sized Investor Service Center Co., Ltd. (hereinafter referred to as SME Investment Service) received full compensation of more than 280 million yuan on behalf of 7,195 qualified investors.
It is reported that this case is the first case in China involving a special representative lawsuit of a listed company on the Science and Technology Innovation Board, and it is also the first securities class action settlement case.
The scene of the objection hearing Image source: Courtesy of Shanghai Financial Court
Listed companies conceal important facts and fabricate material false content
In April 2023, Zeda Yisheng Company was made an administrative penalty decision by the China Securities Regulatory Commission for concealing important facts and fabricating material false content in the announced securities issuance documents, and there were false records and major omissions in the disclosed annual report. On April 28, 12 investors sued Zeda Yisheng Company, its actual controllers, executives, and relevant intermediaries to the Shanghai Financial Court, requesting that Zeda Yisheng Company be ordered to compensate investors for the loss of the difference, commission and stamp duty, and the other defendants bear joint and several liability for compensation. On July 21, SME Investment Service was specially authorized by some securities investors to apply to the Shanghai Financial Court to participate in the litigation as a representative. The Shanghai Financial Court decided to apply the special representative litigation procedure to hear the case. According to the rule of "implicit participation and express withdrawal" in the special representative lawsuit, the number of qualified investors in this case was 7,196 (hereinafter referred to as all plaintiff investors). It is estimated that the total loss of all plaintiff investors is more than RMB 280 million.
Considering that the determination of the facts involved in the case is relatively clear, and the defendant's civil liability for compensation is in line with the expectations of the parties, the actual controller, senior executives, In order to effectively reduce the cost of protecting investors' rights, protect the rights and interests of investors to the greatest extent, and at the same time give the defendants the opportunity to make up for their own faults, and reduce the negative impact of illegal events on the capital market, especially the STAR Market, the Shanghai Financial Court decided to organize all parties to carry out mediation to promote the substantive resolution of disputes.
The Shanghai Financial Court immediately launched a general pre-preservation mechanism for mass disputes, and preserved the property of Zeda Yisheng Company, which was on the verge of delisting, in accordance with its authority, laying a solid foundation and financial guarantee for the development of mediation. At the same time, it has actively expanded and upgraded the comprehensive platform for judicial protection of investors in the Shanghai Financial Court, improved the representative litigation system, and ensured that investors can log in in in real time to understand the litigation process and exercise their litigation rights such as withdrawal and objection.
Listed companies, actual controllers, intermediaries, etc. are liable
On December 5, after mediation presided over by the Shanghai Financial Court, SME signed a draft mediation agreement with the 12 defendants on behalf of all the plaintiff investors and submitted an application to the Shanghai Financial Court for the preparation of a civil mediation document.
The Shanghai Financial Court issued a notice to all plaintiff investors, convened a hearing on objections to the draft mediation agreement on December 12, organized dissenting investors and the original defendant to conduct full argumentation on the objections, and opened the right to observe the live broadcast of the trial open website to all qualified investors, so as to protect the right to know of investors in group litigation.
After the hearing, the collegial panel decided to draft a civil mediation document after comprehensively considering factors such as the investor's opinions, the legal and factual circumstances involved in the case, and the legality, appropriateness and feasibility of the draft mediation agreement. During this period, 1 investor applied to withdraw from the mediation, and the final number of investors participating in the mediation was 7,195.
According to the mediation agreement, each responsible entity will pay the full amount of compensation of more than 280 million yuan according to the approved compensation amount of the third-party loss, of which Zeda Yisheng Company, the actual controller Lin, and the directly responsible person in charge should bear the main liability for compensation, and other directly responsible personnel of Zeda Yisheng Company, the intermediary agency of the securities issuance and its directly responsible personnel shall bear the corresponding responsibility according to the degree of their respective faults. The principle of minimizing the negative impact on the capital market and forming a payment plan. In this case, 99.6% of the investors actually participated in the mediation represented by the insurance institution, which is highly representative and covers a wide range of investors. Among them, a single investor received a maximum compensation of more than 500 yuan, and an average of 38,900 yuan per person. After the mediation of the case, the compensation of all plaintiff investors will be automatically distributed to the securities fund accounts of all plaintiff investors through the full-cycle compensation distribution mechanism established between the Shanghai Financial Court and the Shanghai Branch of China Securities Depository and Clearing Co., Ltd., so as to ensure the safety, efficiency and convenience of legitimate rights and interests.
A model of financial judicial practice that can be replicated and promoted
"This case is the first attempt at a securities class action settlement. In mediation, the collegial panel adheres to the principle of 'punishing the first evil' and 'substantively resolving disputes', clarifies in the civil mediation document that the listed company and its actual controller bear the main responsibility, and resolutely implements the spirit and requirements of the CPC Central Committee and the State Council for 'zero tolerance' for illegal and criminal acts in the capital market; Lin Xiaoni, the presiding judge of the case and vice president of the Shanghai Financial Court, said.
According to the Shanghai Financial Court, the proper resolution of the case has provided a replicable and promotable model of financial judicial practice for maintaining the stability and orderliness of the securities trading market. In the next step, the Shanghai Financial Court will continue to thoroughly implement the requirements of the Central Financial Work Conference on giving better play to the hub function of the capital market, promoting the deepening and solidification of the registration-based stock issuance system, continuously optimizing the securities mass dispute resolution mechanism, effectively reducing the cost of investors' rights protection, further improving the level of rule of law in the capital market, instilling confidence in listed companies and investors, and escorting the steady and far-reaching implementation of the Science and Technology Innovation Board and the registration-based reform.
Professor Luo Peixin, Vice President of East China University of Political Science and Law, said: "This case is the first case involving a special representative lawsuit of a listed company on the Science and Technology Innovation Board. Through mediation, the Shanghai Financial Court reasonably allocates the responsibilities of all parties, which reflects the main responsibility of listed companies, the 'gatekeeper' responsibility of intermediaries, and the personal responsibility of actual controllers, and guides market entities to fulfill their responsibilities. At the same time, it gives full play to the advantages of the system of 'implicit participation and express withdrawal' in the litigation of securities special representatives, and resolves group disputes in a centralized and efficient manner, taking into account the interests of investors and the resolution of securities market risks. Through mediation, more than 7,000 investors were fully compensated, covering a wide range of investors, and the trial of the case was fair, appropriate and balanced, which is of important exemplary significance. ”
Xing Huiqiang, a professor at the Law School of the Central University of Finance and Economics, said that "settlement is better than judgment", and settlement in securities class actions is particularly worth advocating. The settlement reflects a win-win outcome, avoiding protracted appeals and enforcement later, and reducing the cost of investor rights protection. Settlements allow investors to obtain some compensation while avoiding bankruptcy and market exit of the defendants, and are a better solution for securities class actions. This case is a milestone in the history of securities civil litigation in mainland China.
Reviewer: Gao Gaifang Editor: Yu Hongbo Producer: Zhang Nan Signed: Peng Yong
