Announcement of the Supreme People's Court of People's Republic of China
"Some Provisions of Supreme People's Court on Trying Cases Involving False Statements Related to Securities Market" had been approved by the 1261st meeting of the Supreme People's Court's Judicial Committee on 26th December 2002. The Provisions will be effective on 1st February 2003.
January 9, 2003
For the purpose of trying civil compensation cases involving false statements in relation to the securities market, regulating the civil acts in the securities market, protecting the legitimate rights and interests of investors, according to General Principles of Civil Law of People's Republic of China, Securities Law of the People's Republic of China, Company Law of People's Republic of China and Civil Procedure Law of People's Republic of China as well as other law regulations, according to the reality and practice of judgment, this law is enacted.
Chapter I General Provisions
The term "actions for civil compensation arising from false statements in the securities market" (hereinafter referred to as "civil compensation actions involving false statements in securities market") in these provisions refers to cases involving investors in the securities market commencing actions in the People's Court with regards to losses suffered from the dissemination of false statements.
The term "investor" in these provisions refers to a natural person, legal representative or other organization that is engaged in the trading and subscription for securities in the securities market.
The term "securities market" in these provisions refers to the market in which an issuer can issue shares to the public, the market in which trading of shares can take place through a brokerage company and any other markets approved and established by the government.
These provisions are not applicable for the following civil procedures in securities trading:
1. Securities trading in a securities market other than one approved by the government;
2. Trading in securities through an agreement in a securities market approved by the government.
The People's Court in trying civil compensation actions involving false statements in securities market shall mediate, and shall strongly encourage parties to resolve their disputes through mediation.
The statute of limitations period decided in Article 135 of the General Principles of Civil Law shall be applied when investor may institute a civil compensation action regarding false statements in the securities market:
(1) The date on which China Securities Regulatory Commission of the People's Republic of China (CSRC) or its representative organization issues penalties for parties involved in the dissemination of false statements.
(2) The date when the Ministry of Finance of the People's Republic of China (MOF), other
administrative organizations and other organizations which have the authority declare sentences upon parties involved in the dissemination of false statements.
(3) Where the party disseminating false statements has yet to receive its administrative punishment, but has been found guilty by the People's Court, the date on which the civil judgment is made.
Where two or more administrative sentences are made in relation to the dissemination of one false statement by different parties; or where there are both administrative as well as criminal sentences, the date of public declaration of the earliest administrative sentence or the effective date of the criminal judgment shall be the effective date for the commencement of civil action.
Chapter II Acceptance and Governance
The People's Court should accept actions brought by investors actions against the party disseminating false statements for losses incurred as a result of receiving false statements, which are in accordance with the administrative sentence of the relevant authority or the criminal sentence issued by the People's Court and in compliance with the Rule 108 of Civil Procedure Law.
Apart from submitting administrative sentences or public notices, or the criminal sentence issued by the People's Court, investors bringing actions for civil compensation involving the dissemination of false statements must also provide the following pieces of evidence:
(1) Identification documents of the natural person, legal representative or other organizations. If these documents cannot be provided, then notarized photocopies of the identification documents must be provided;
(2) Evidence of the transaction conducted and the losses incurred.
A defendant in a civil compensation action involving false statements in the securities market should be the person disseminating false statements, including:
(1) The actual controller of the initiator, shareholder or any other entity;
(2) Issuer or publicly listed company;
(5) Accounting firm, law firm, valuation organization or any other organizations providing agency services;
(6) Directors, supervisors, managers and other senior management personnel of the entities listed in items (2), (3) and (4) above and the person directly responsible for the entity listed in item (5);
(7) Other organizations or natural persons involved in the dissemination of false statements.
Actions involving false statements in the securities market is under the jurisdiction of the Intermediate People's courts of the city, where the government of province, municipality directly under the Central Government, autonomous region lies in, and the Intermediate People's courts of municipality with independent planning status, and special economic zone.
If there are multiple defendants in an action involving false statements in the securities market, the jurisdiction of this action can be determined according to the following principles:
(1) The Intermediate People's Courts of the city, where the issuer or the publicly listed company lies in, shall have the jurisdiction, with the exception of the situation as stipulated in section 2 of Article 10.
(2) Actions against a party disseminating false statements (apart from the issuer or publicly listed company) should be heard by the Intermediate People's Courts of the defendant's domicile.
(3) If the defendant is a natural person, the Intermediate People's Courts of the defendant's domicile shall have the jurisdiction.
After the People's Court accepts the action involving false statements in the securities market against the party disseminating false statements (apart from an issuer or a publicly listed company), on the application of the plaintiff or upon receiving the approval of all plaintiffs, the Court can add the issuer or the publicly listed company as a joint defendant, and transfer the case to the Intermediate People's courts where the issuer or the listed company lies in.
If the plaintiff does not apply or the plaintiffs do not agree to add the defendant, but the Court is of the opinion that it is necessary to add the defendant, the Court should inform the issuer or the publicly listed company that it has been added as a joint defendant in the action, but it should not transfer the action.
After the People's Court accepts the action involving false statements in the securities market, if the party against whom the administrative sentence is made refuses to accept the sentence, and applies for administrative review, or brings an administrative action, the court can suspend the proceedings.
After the People's Court accepts the action, if the administrative sentence is revoked, the court should terminate the proceedings.
Chapter III Methods of litigation
A plaintiff stipulated in these provisions can choose to bring actions individually or jointly.
If there are multiple plaintiffs bringing separate actions against the same defendant for the same disseminated false statement, including both individual litigants and joint litigants, the People's Court can inform the individual plaintiffs to join together in one action.
Where there are multiple plaintiffs bringing actions against the same defendant for the same disseminated false statement, the People's Court can combine them into one action.
The number of the joint plaintiffs should be ascertained before trial. If there are numerous joint plaintiffs, each joint plaintiff may elect two to five legal representatives, and each legal representative may elect up to two agents.
Legal representatives should ensure that they have obtained the plaintiffs' specific authorization to represent the plaintiffs in court hearings, to change or abandon the application, and also to conduct negotiations and enter into a conciliation agreement with the defendant.
The People's Court, when finding the defendant as being liable for the losses of multiple plaintiffs, may include the total amount of compensation payable in the main part of the judgment, and list the name and compensation amount applicable to each plaintiff in the appendix attached to the judgment.
Chapter IV. Definition of false statements
The term "false statements in the securities market" refers to the person, who has the obligation to disclose the information, violates the regulation of Securities Law, during the process of issuing and trading of securities, makes any falsehood, misleading statement or major omission of important issue, or any other illegal disclosure of information.
The term "important issue" should be defined according to Article 57, Article 60, Article 61, Article 62, and Article 72 of Securities Law and according to other related regulations.
The "false record" occurs when the person, who has the obligation to disclose the information, adds the inexistent fact in the information disclosure report.
The "misleading statement" is defined as: the statement made by the person who discloses the information or through the media, misleads the investors to make incorrect judgment, and seriously influential.
The "major omission" occurs when the person, who has the obligation to disclose the information, does not totally record, or only partially record the issue, which should be listed in the report.
The "illegal disclosure" occurs when the person, who has the obligation to disclose the information, does not disclose the information, which should be disclosed within an appropriate period or fails to disclose it in a legal way.
When the investor satisfies any of the following conditions, the People's court should make a judgment that there is causality between the false statement and the losses of investor.
(1) The securities, in which the investor invested, have a direct relationship with the false statement
(2) The investor purchased the securities on or after the date the false statement was disseminated and before the disclosure or correction date.
(3) The investor suffered losses because of selling or holding the securities after the disclosure or correction date.
If the defendant can present the evidence to prove that the plaintiff satisfy any of the following conditions, the People's Court should make a judgment that there is no causality between the false statement and the losses of investor.
(1) The investor sold the securities before the disclosure or correction date.
(2) The investor purchased the securities after the disclosure or correction date
(3) The investor purchased the securities knowing about the false statement.
(4) The losses or partial losses were caused by systematic risks related to the stock market.
(5)The investor acted in bad faith or intended to manipulate the prices of securities.
The date of the false statement dissemination is defined in these Provisions as the date when the false statement was made, or the date when the false statement occurred.
The disclosure date refers to the first day when the truth about false statement becomes publicly known or is broadcasted in the media such as newspapers, radio and television.
The correction date refers to the day when the person who disseminated the false statement n his own initiative in accordance with relevant procedure corrects the false information in the media assigned by China Securities Regulatory Commission
Chapter 5 -Matters relating to liability and waiver of liability
The initiator, issuer or publicly listed company is liable for losses of the investors caused as a result of dissemination of false statements.
The directors, supervisors, managers and other persons of senior level management are liable for civil compensation for the above-mentioned loss, except when there is evidence proving that no fault on the part of the respective senior level management personnel occurred.
Where the issuer or publicly listed company disseminating false statements acted under the control of a third party ("substantial controller") and caused a loss to the investors, the issuer or publicly listed company still remains liable for civil compensation. The issuer or publicly listed company may, after accepting liability for compensation, seek compensation from the substantial controller.
In the event that the substantial controller violates Articles 4, 5 and 188 of Securities Law by the provision of false statements, and as a result causes a loss to the investor, the substantial controller should bear the liability for the loss in question.
The underwriter and broker are liable for losses of the investor caused as a result of the dissemination of false statements, except where there is evidence proving no fault on the part of the underwriter and broker.
Those directors, supervisors, managers and other senior management personnel already liable may seek compensation from the underwriter and broker, subject to the exception as mentioned above.
Public intermediaries and other persons directly responsible for violating Articles 161 to 202 of the Securities Law and thereby causing investors to suffer loss shall be liable for compensation for that part of the loss caused by the violation, except where evidence exists showing no fault on the part of the public intermediaries and persons.
Clause (7) of Article 7 of these rules provides that organizations and natural persons violating Articles 5, 72, 188 and 189 of Securities Law, thereby causing investors to suffer loss, shall be liable for compensation.
Chapter 6 - Joint liability for Infringement of Rights
Where the initiator provides a guarantee to the issuer for the information disclosed, the initiator and the issuer shall be jointly liable for the loss suffered by the investors.
Where underwriters, brokerage companies and other public intermediaries, who know or should know about false statements of issuer or publicly listed company, do not correct or provide comment, they shall be jointly liable for the infringement of investor's rights, and the loss resulting thereof.
The involvement of directors, supervisors, managers and senior management personnel of issuers, listed companies, underwriters and brokerage companies in any of the following activities shall be jointly liable for giving of false statements:
(1) Providing false statements.
(2) Failing to object to the dissemination of statements known or should be known to be false.
(3) Other circumstances where liability should occur.
Chapter 7-Losses Calculation
Investors have the right to demand compensation from persons disseminating false statements in the securities market and thereby causing investors to suffer loss in accordance with Article 30 of these rules; where securities have ceased to be issued, investors have the right to demand for the refund and compensation of funds already deposited into the Savings account and interest earned on those funds.
The scope of liability of a person disseminating false statements in the securities market is determined by the actual loss suffered by the investors from relying on the false statements. Actual losses that can be suffered by investors include:
(1) Loss from caused by the difference in investment capital.
(2) Commission and duties caused by the difference in investment capital.
The interest referred to above shall be calculated from the date of purchase to the date of sale of the securities in accordance with the bank's savings account interest rate for the respective period in question.
The loss from the difference in investment capital suffered by investors as a result of selling shares on or before the base date shall be calculated by multiplying the difference between the share purchase price and sale price by the number of shares held by the investors.
The loss from the difference in investment capital suffered by investors as a result of selling shares or holding share certificates after the base date shall be calculated by multiplying the difference in the average closing share prices of each day either for the period from the share purchase date to the date the false statement was given, or for the period from the correction date to the base date by the number of shares held by the investors.
The term "base date" for the purpose of calculating the difference in capital refers to the deadline set down within a reasonable period of time after the false statement is disclosed or corrected, so as to calculate the scope of losses suffered by investors as a result of the false statements. The base date shall be determined according to the following:
(1) From the disclosure or correction date to the date when the volume of the shares affected by the false statement achieve 100%. However, the volume of shares transferred through major deals shall not be included in this calculation.
(2) If it is not possible to determine a base date in accordance with Clause (1) prior to the court hearing, then the base date shall be 30 transaction days after the disclosure or correction date.
(3) For shares already withdrawn from the securities market, the base date shall be one transaction day prior to the date the shares are withdrawn from the securities market.
(4) For shares which have already ceased trading in the securities market, the base date shall be one transaction day prior to the date the shares have ceased being traded in the securities market; where trading has resumed, the base date shall be determined in accordance with Clause (1).
Any benefits obtained by investors during the period they hold the shares, including cash dividends, bonus shares, shares obtained from the transfer of accumulation funds, any rights to purchase rationed shares, increase in or transfer allotted shares obtained by investors with their own funds during the period they hold the shares, cannot be credited against the compensation payable by the person giving the false statement.
The calculation of reduction loss of invalidated securities should be done using the price and volume of the securities when they were still valid.
Chapter 8 - Annexure
These rules take effect from 1 February 2002.
These rules will prevail where there are inconsistencies between the Notice regarding false statements in the securities market causing civil disputes promulgated on 15 January 2002 and these rules.