7.1 What Is Representative Litigation

In China, representative litigation is a system in which some members of the plaintiff represent all members thereof (generally more than 10 in number) in a joint action. The litigation act of a representative shall have effect on all members he/she represents, but as to the change or waiver of the claim for relief, the admission of the claim for relief and reaching a settlement with the defendant, the representative must obtain the consent of the members being represented.

If the number of members of the plaintiff cannot be determined at the time of case filing, the court may issue an announcement to explain the circumstances of the case and the claims for relief, and notify other right holders to register with the court and join the representative litigation within a specified period of time. The time limit for announcement shall, while not less than 30 days, be subject to the specific circumstances of the case. The right holder applying for registration shall prove his legal relationship with the defendant and the damage he has suffered, otherwise the court may deny his application for registration.

For a long time, group action has been seldomly seen in China. The CPL (for Trial Implementation) promulgated in 1982 does not make special provisions on group action. In 1986, a group action occurred in Anyue County, Sichuan Province: 1569 rice seed operators sued Anyue County Seed Company, claiming that the seed company breached the rice seed production contract. At that time, the Primary People’s Court of Anyue County adapted the joint action system then legally in force, adopted the practice that several farmers filed a lawsuit on behalf of hundreds of other farmers as the plaintiff, and then rendered a judgment legally binding on all farmers with similar sales contract disputes with the seed company. This case is a trail blazer in terms of group action in China.

In 1991, China promulgated the CPL, which gave birth to China’s representative litigation system. The provisions of the latest version of the CPL (Revised in 2021) on representative litigation still remain consistent with those of the CPL effective in 1991. In addition, there are more detailed provisions on the representative litigation system in the relevant judicial interpretations of the CPL.

7.2 Who Will Be Bound by the Court Judgment in the Representative Litigation

For the representative litigation with a plaintiff consisting of a fixed number of members at the time of case filing, the court judgment will be binding on all members participating in the litigation.

For the representative litigation with a plaintiff consisting of uncertain number of members at the time of case filing, the court judgment will be binding on all registered members. For those right holders not registered, if they file a lawsuit within the limitation of action and the court considers that their claim for relief is tenable, then the judgment already in force will also be binding on them.

7.3 How to Determine the Representative

For the representative litigation with a plaintiff consisting of a fixed number of members at the time of case filing, the representatives are determined by the members themselves. The representatives may be jointly elected by all members, or each group of the members may elect their own representatives. Where the relevant groups fail to elect their own representatives, they may participate in the litigation themselves in case of a necessary joint action, or withdraw from the ongoing case and file a lawsuit separately in case of an ordinary joint action (for necessary joint action and ordinary joint action, see Sect. 6.4.3.4).

For the representative litigation with a plaintiff consisting of uncertain number of members at the time of case filing, the representatives shall be preferably elected by the registered members; if no representative is elected, the court may determine the representative through consultation with the registered members; If the consultation fails, the court may appoint a representative among the registered.

Regardless of the method adopted to determine the representatives, the number of representatives shall range from two to five. Like the parties in ordinary cases, each representative may entrust one or two persons as his agent ad litem.

7.4 China’s Representative Litigation in Practice

Although the representative litigation system was established as early as 1991, the provisions of Chinese law on this system are too simple with many fields still left to be ploughed. The number of representative litigation cases in China has been remaining very small for a long time.

In June 2011, an oil spill accident occurred in the Penglai 19-3 oilfield of ConocoPhillips in the Bohai Sea. Many farmers near the polluted sea area filed a lawsuit against ConocoPhillips and requested ConocoPhillips to compensate for the losses incurred thereby. Viewed from the facts of the case, though the application conditions of representative litigation were met, the case was finally tried on a case-by-case basis according to the filing of each farmer.

However, in 2019, China revised its Securities Law and made new provisions on the representative litigation in the securities field. Accordingly, in 2020, the SPC formulated a more specific judicial interpretation for the representative litigation of securities disputes. In this context, the number of representative litigation cases in China began to increase rapidly. For example, the Shanghai Financial Court accepted China's first representative litigation case in the securities field: the case of Feilo Acoustics; the Beijing Financial Court accepted the securities representative litigation case concerning LETV; the Guangzhou Intermediate People’s Court accepted the securities representative litigation case concerning Kangmei Pharmaceutical.

For more details about the representative litigation system in the securities field, please see following sections. We believe that the representative litigation system will play an increasingly important role in the protection of investors’ rights and interests and other cases involving group interests.

(Reference provisions and information for Sects. 7.1–7.4).Footnote 1

7.5 Representative Litigation for Securities Disputes

In 2019, China revised its Securities Law, clearly stipulating that the representative litigation system can be adopted for the securities civil compensation litigation and the dedicated investor protection institution may act as the representative of the plaintiff. In 2020, the SPC formulated a more specific judicial interpretation for the representative litigation of securities disputes.

Representative securities litigation can be categorized into two kinds: ordinary and special. In terms of the ordinary representative securities litigation, the representatives are preferably selected by investors and then appointed by the court. In terms of the special representative securities litigation, the investor protection institution will act as the representative of all investors by default, and investors who disagree with this arrangement need to make an explicit statement to withdraw from the litigation. By default, the representative enjoys many special rights to dispose of the rights and interests of investors. However, the representative will be subject to supervision and examination of the court when exercising these rights. We are looking forward to China promoting the representative litigation to more fields in the future.

7.5.1 The Newly Revised Securities Law Introduces the Representative Litigation System for Securities Dispute Resolution

On 28 December 2019, China promulgated its revised Securities Law, with an aim, among others, to strengthen the protection of investors. According to Article 95 of the revised Securities Law, the representative litigation system can be applied when investors file civil securities compensation litigation on such grounds as false statements. This is seen by many as a signal that China is ready to widely promote the representative litigation in the securities field.

More importantly, Article 95 of the Securities Law also creatively stipulates that if entrusted by more than 50 investors, China's investor protection institutions can participate in the litigation as representatives. In a litigation in which an investor protection institution is the representative, the investor protection institution may register with the court to participate in the litigation on behalf of all investors (subject to the list confirmed by the securities registration and settlement institution) of a security. If investors are unwilling to participate in the litigation, they need to make an explicit statement, i.e., investors “participate in by default but withdraw from such litigation by explicit statement”.

The above litigation in which the investor protection institution participates as the representative is referred to as the special representative litigation. According to the regulations of China Securities Regulatory Commission, there are currently two investor protection institutions in China: one is China Securities Investor Service Center (中证中小投资者服务中心有限责任公司) based in Shanghai, and the other is China Securities Investor Protection Fund Corporation Limited (中国证券投资者保护基金有限责任公司) based in Beijing. Although these two organizations are for-profit legal persons, they are highly public interest-oriented when performing their duties of protecting the rights and interests of investors.

The ordinary representative litigation, a concept correlating with the special representative litigation, refers to the litigation in which the investor protection institution does not act as the representative. The representative of such litigation shall still be selected from the members of the plaintiff in accordance with the CPL.

Although the Securities Law introduces the representative litigation system, the relevant provisions are too generalized, while the provisions of the CPL and its judicial interpretation on representative litigation are not detailed enough either. In order to translate the brief provisions into operable rules, the SPC promulgated the Provisions of the Supreme People’s Court on Several Issues concerning Representative Litigation in Securities Disputes (最高人民法院关于证券纠纷代表人诉讼若干问题的规定) on 30 July 2020. So far, China has established a set of complete and operable representative litigation rules for securities disputes.

7.5.2 Basic Procedures for Starting the Representative Litigation for Securities Disputes

The basic procedures for starting the representative litigation for securities disputes include three steps:

  1. (1)

    Investors file a lawsuit according to laws;

  2. (2)

    Determine the scope of the plaintiff; and

  3. (3)

    Determine the representative(s).

For the representative litigation in which the number of the members of the plaintiff is certain at the time of case filing, the scope and representative(s) of the plaintiff are usually certain as well at the time of case filing. For the representative litigation in which the number of the members of the plaintiff remain uncertain at the time of case filing, the procedures for its starting are more complex. Therefore, we will mainly introduce the starting procedures of this type of litigation.

7.5.3 Special Requirements for Starting Representative Litigation for Securities Disputes

To start the representative litigation for securities disputes, the plaintiff shall, in the statement of claim, propose 2–5 candidates as its proposed representatives at the time of case filing, and state the qualifications of such representatives in performing their duties.

More importantly, the plaintiff should also submit prima facie evidence to prove the securities infringement, such as administrative punishment decisions for securities law violations, criminal judgments, documents on disciplinary measures or self-discipline management measures taken by the stock exchange against the defendant, and announcements or statements of the defendant’s self-admission on violations. Otherwise, the Chinese courts will not apply the representative litigation system for case hearing. This condition is set, on the one hand, to prevent the representative litigation system from being abused, and on the other hand, to prevent the process from stalling due to the lack of basic evidence, which will affect the trial efficiency and the interests of many investors.

7.5.4 How to Determine the Scope of the Plaintiff

If, after the plaintiff brings a lawsuit, the court considers that the number of members of the plaintiff cannot be determined, it shall first examine the nature and facts of the alleged securities infringement by means of files inspection and/or hearing. The time limit for examination is 30 days. The court shall, after the examination, make a ruling to determine the scope of right holders with the same claims for relief.

The court shall, within 5 days after making the above ruling, issue an announcement on right registration, notifying the right holders willing to file a lawsuit to register with the court within the specified time. The announcement period is 30 days.

The court shall, upon expiration of the registration period, complete the examination of the registered right holders within 10 days and include those qualified into the list of the plaintiff, which will then be issued by the court to all members of the plaintiff.

If any right holder fails to register with the court within the time specified by the announcement, he may apply to the court for supplementary registration before the first-instance court hearing. The litigation procedures completed before supplementary registration shall be binding on the said right holder.

7.5.5 How to Determine the Representative in Securities Disputes

7.5.5.1 Ordinary Representatives

In the ordinary representative litigation, the representative shall meet the following conditions:

  1. (1)

    The representative acts as a representative voluntarily;

  2. (2)

    The representative holds a certain proportion of interest in the litigation;

  3. (3)

    The representative or his agent ad litem is capable of responding to litigation and has relevant experience;

  4. (4)

    The representative is able to faithfully and diligently perform the duty of safeguarding the interests of all members of the plaintiff; and

  5. (5)

    The representative is not affiliated with the defendant or falls under other circumstances that may affect his duty performance.

The ordinary representative shall be determined according to the following procedures:

Firstly, when filing a lawsuit, the plaintiff shall, in the statement of claim, propose 2–5 candidates as its proposed representatives, and state the qualifications of such representatives in performing their duties. If other investors neither raise any objection during the registration of rights announced by the court nor apply for acting as a representative, the court may appoint the candidates proposed in the statement of claim as the representatives.

Secondly, if there are no representatives proposed in the statement of claim, the court shall organize an election by voting among members of the plaintiff who voluntarily choose to act as representatives within 10 days upon determination of the scope of the plaintiff. “One Person, One Vote” shall be adopted in the election, and the number of votes obtained by each representative shall not be less than 50% of the number of voters. Since 2–5 representatives are required, if 2 or more representatives are elected through the first vote, the election will be completed. If less than 2 representatives are elected in Round 1 election, the court shall immediately organize the plaintiff to conduct a Round 2 election among the top five candidates.

Thirdly, if the two elections fail to produce qualified representatives, the court shall designate the representatives with the consent of the designated representatives.

7.5.5.2 Special Representatives

If, during the validity period of the registration announcement issued by the court, an investor protection institution as entrusted by more than 50 investors, decides to participate in the litigation, the investor protection institution will automatically become the representative. If more than two investor protection institutions meet the requirements, they shall determine the representative institution through negotiation. If the negotiation fails, the court shall appoint one of them as the representative. At this point, the special representative litigation is started.

Upon starting of the special representative litigation, if a member of the plaintiff who has filed the lawsuit does not want to participate in the special representative litigation, he may submit a withdrawal statement to the court. For such a member, the original litigation shall proceed. As for the type of procedures (such as ordinary representative litigation, joint action, or litigation based on the filing of each individual investor) with which the original litigation shall proceed, it should be determined according to the number of remaining investors and other factors. Besides, the court should also announce the basic information, litigation rights and the like of investor protection institutions to investors. According to the rule “participate in by default but withdraw from such litigation by explicit statement”, if any investor does not agree to participate in the special representative litigation, he shall make a statement to the court within 15 days upon expiration of the announcement period, otherwise it shall be deemed to have agreed to participate in the litigation.

7.5.6 What Special Rights Does the Representative Enjoy in Securities Disputes

According to the CPL, the representative can change or waive the claim for relief, admit the claim of or reach a settlement agreement with the defendant only with the consent of the parties being represented.

However, in securities disputes, as long as an investor registers his right with the court, it is deemed that the investor grants the above litigation rights to the representative (be it an ordinary representative or an investor protection institution). In addition, the representative also has the right to, among others, file or waive an appeal, apply for the enforcement of effective judgments, and entrust agents ad litem.

It should be noted that although the representative enjoys the above-mentioned special authorizations, the exercise of these rights is subject to the supervision and examination of the court. For example, if the representative reaches a settlement agreement with the defendant, he needs to provide the settlement agreement and related matters to the court for examination. After examination by the court, the representative shall then notify the investors being represented to put forward opinions, and hold a hearing if the investors raise objections. Finally, the court shall decide whether to approve the settlement agreement. If the representative is prepared to change or waive some claims for relief (or even withdraw the lawsuit), or is going to admit the claim for relief of the defendant, he shall submit a written application to the court and notify all investors being represented of the same. The court shall have the final say to the application of the representative considering the objections raised by the investors.

Notwithstanding the foregoing, the investors being represented still have a say in terms of the foregoing rights. For example, if the court decides to approve the settlement agreement, the investor who once raised an objection may apply to withdraw from the mediation within 10 days after receiving the notice from the court; as to the representative’s decision on appeal, the investor may either accept or deny the same at his sole discretion.

7.5.7 Practice and Future Prospects

On 18 August 2020, the Shanghai Financial Court accepted a lawsuit jointly filed by 34 plaintiffs including Wei Feng (魏锋) against Shanghai Feilo Acoustics Co., Ltd. for the securities dispute arising from false statements. This is also the first securities representative litigation accepted by a Chinese court under the new judicial interpretation.

In fact, there is great development potential for the representative litigation in many other fields such as product quality and environmental pollution. In the future, China may, based on the representative litigation rules in the securities field, further promote the representative litigation to other fields with an aim of more efficient dispute resolution.

(Reference provisions and information for Sect. 7.5).Footnote 2