Securities Class Actions under the New Securities Law in China
The New Securities Law (Securities Law 2019 Revision) in China represents a significant overhaul of previous legislation. AIG’s paper with Chinese law firm JunHe LLP discusses the new law’s implementation, potential changes to the risk exposure of listed companies and their directors, and suggested adjustments to the emerging risks.
Establishment of China-style Class Actions under the New Securities Law
Significantly, the New Securities Law, provides for specific provisions on securities class actions. Securities investors may elect a representative to proceed with a litigation if the following three conditions are met:
- the allegation is about misrepresentation, insider trading or market manipulation
- the subject matter of the litigation is of this same type, and
- the plaintiff comprises of a large number of individuals.
Impact on Listed Companies and Recommendations
The implementation of the New Securities Law together with the introduction of western-style securities class actions to China could mean that listed companies, as well as their directors, officers and supervisors, may have much greater exposure to litigation and investigations. The pressing question for directors and officers of listed companies is, “How can we best manage these risks?” The following are some suggestions:
- Strengthening of internal controls – listed companies should provide regular training to introduce the updates of regulations from the CSRC, stock exchanges, or any other regulatory authorities to senior executives and board members. Frequent testing and monitoring should be arranged
- Improving disclosure requirements – consulting professional counsel before making information disclosure and seeking guidance from public relations professionals, can mitigate the risk of disclosure breaches and violations
- Responding to regulatory inquiries – a listed company must be ready to provide all relevant documents supporting their case in a timely fashion. The listed company should also engage an experienced external law firm to assist them navigating inquiries or investigations, to avoid unnecessary escalation and penalties, which could lead to litigation
- Contractual indemnifications – Chinese listed companies should consider following common practice in other regions around the globe by ensuring indemnification provisions are written into the company’s articles of association – or have specific contractual indemnities for their directors and officers
- Arranging directors’ and officers’ liability insurance (“D&O insurance”) – Risk transfer through D&O insurance is a common practice with companies in developed capital markets. D&O insurance reduces the liability and financial and legal costs on listed companies and their directors & officers in shareholder or regulatory actions.
The New Securities Law represents a necessary evolution in the development of China’s capital markets and is a great leap forward for investor rights. It could, however, result in added risks for listed companies and their directors and officers. Management decisions particularly in this current environment can be challenging – add on to this the New Securities Law, and new challenges could mount. As the standards of care required by directors and officers for shareholders of listed companies become higher, it is important you understand the implications.