The CSRC'S crackdown on securities fraud have led to large numbers of ensuing disputes between listed companies and their shareholders, paving the way for rights defense lawyers and steering key judicial practices. Intensifying audits carried out by the China Securities Regulatory Commission (CSRC) in recent years have led to a surge in the number of listed companies that have been imposed administrative penalties for information disclosure violations, insider trading, and other acts of fraud.
Shareholders may take securities fraud actions demanding that the company compensates for the losses incurred. These legal actions have unique features that distinguish them from the other civil or commercial suits, and have contributed to the rise of a new profession: the rights defense lawyer. Increased support for litigation financing followed, as did the shaping of judicial practice.
Where there is a demand. there is a market. If a listed company has committed a fraudulent act, the affected shareholders can claim compensation according to relevant judicial interpretations of the Supreme People's Court (SPC). But the technically challenging nature of these rights defense cases calls for legal professionals with specific skills. These lawyers specialize in tracking the developments in administrative penalties on listed companies and, on this basis, recruit shareholders, establish an engagement relationship, and represent them in lodging claims against listed companies.
Dedicated recruitment platforms and channels are continuously being established A rights defense lawyer will usually charge on an all-contingent basis.
While most lawyers in other business have clients on a long-term basis or are limited by jurisdiction or industry in their practice. The shareholders of listed companies are scattered around the country and there are nearly no regular customers (unless they have traded in another penalized company). How, then, is a rights defense Lawyer to seek clients?
Once a defendant has been locked in, the rights defense lawyer must recruit shareholders of the listed company that have the standing to lodge claims.
Lastly, another key is to expose the trial progress through media reports.
While a listed company will be facing multiple grounds for damages from multiple shareholders, it only needs to submit one set of claims to the court.
Litigation financing is a business that combines funding/investment and legal procedures. A litigation finance fund will usually advance expenses arising from a legal action such as court costs and attorneys’ fees for the plaintiffs, and once the plaintiffs prevail, it will deduct the advanced amount and the defendant will pay a certain percentage from the received compensation. Litigation financing first emerged in the UK and U.S. but is being increasingly utilized in China, especially in securities lawsuits.
Moreover, since the odds of the plaintiffs prevailing in a securities fraud action—where judicial interpretations are strictly applied in determining the scope of claims and calculating damages—are relatively high, the fund is also more likely to recover its costs and reap a profit, making investing in these cases attractive.
The shareholders’ enhanced awareness of rights protection, the emerging market of rights defense lawyers, and the participation of litigation financing mean that a penalized listed company will often face paying hefty damages claimed by a large number of shareholders. The claim amounts in recent cases, such as those of Foshan Electrical and Lighting and DZH, have exceeded RMB 100 million, putting huge pressure on listed companies.
In contrast, while a listed company will be facing multiple grounds for damages from multiple shareholders, it only needs to submit one set of claims to the court. This allows the defendant companies to coordinate resources and research arguments of a single case in a concentrated fashion.
The intermediate people’s court of the capital of the province in which a listed company is located usually has first instance jurisdiction in securities fraud litigation cases.
As listed companies are able to wield superior resources and thus conduct thorough research, a relatively large number of their defense arguments have been broadly accepted by the courts and have set precedents.
Further, as listed companies are mostly located in first-tier cities, the intermediate people’s courts in jurisdictions such as Shanghai and Shenzhen have tried a large number of similar cases. In contrast, the intermediate people’s courts of remote provinces that have a smaller presence of these companies may lack experience in trying such cases. Add to that the fact that these cases are highly technical and call for expertise, making it inevitable that, when trying such a case for the first time, a court will need to refer to the criteria set in judgments rendered by courts with more experience.
In short, in the specialized legal field of securities litigation, the effect brought about by the professional division in the legal industry is amply manifested, e.g. the continuous optimization of the services for specific clients, the carrying out of targeted publicity and the bringing in the aid of other resources. Under such a professional division, both the offense and defense jointly promote the progress of judicial practice and drive the development of the industry.