Trial of Civil Damages Cases Arising from Misrepresentation in the Securities Market Several Provisions

(Promulgated by the Supreme People's Court on January 9 2003 and effective as of February 1 2003.)

These Provisions are formulated in accordance with such laws and regulations as the PRC Civil Law General Principles, the PRC Securities Law, the PRC Company Law and the PRC Civil Procedure Law (2nd Revision)and in the light of the actual circumstances of the securities market and practical adjudication experience in order to correctly try civil damages cases arising from misrepresentation in the securities market, regulate civil activities in the securities market and protect the legitimate rights and interests of investors.

1. GENERAL PROVISIONS

Article 1: For the purposes of these Provisions, the term "civil damages cases arising from misrepresentation in the securities market" (Securities Misrepresentation Civil Damages Cases) means civil damages cases where a securities market investor institutes proceedings with a people's court on the grounds that a party with a disclosure obligation violated law provisions by making misrepresentations and thereby caused him to incur loss.

Article 2: For the purposes of these Provisions, the term "investor" means a natural person or a legal person or other organization engaging in securities subscription or trading in a securities market.

For the purposes of these Provisions, the term "securities market" means the primary market, in which issuers offer shares to the public, the market in which securities are traded via the quotation systems of securities exchanges, the market in which securities companies handle share transfers on an agency basis and other securities markets whose establishment has been approved by the State.

Article 3: These Provisions shall not apply to civil actions arising from the following trading activities:

(1) share transactions occurring outside stock exchanges whose establishment was approved by the State; and

(2) transactions by method of transfer by agreement occurring in stock exchanges whose establishment was approved by the State.

Article 4: When hearing Securities Misrepresentation Civil Damages Cases, the people's court shall emphasize mediation and encourage conciliation by the parties.

Article 5: The statute of limitations for civil damages actions in respect of representations shall be governed by Article 135 of the Civil Law General Principles and, depending on the circumstances set forth below, commence to run on one of the following dates:

(1) the date on which the China Securities Regulatory Commission or its local agency publishes its decision to punish the misrepresenting party;

(2) the date on which the Ministry of Finance of the People's Republic of China, another administrative authority or an authority with the power to impose administrative penalties publishes its decision to punish the misrepresenting party; or

(3) the effective date of the criminal judgment in the case of a misrepresenting party that has not been subjected to administrative penalty, but has been found guilty by a people's court.

Where two or more administrative penalties are imposed on two or more misrepresenting parties for the same misrepresentation or where both administrative and criminal penalties are imposed, the statute of limitations for civil damages actions shall commence to run on the date of publication of the earliest administrative penalty decision or the effective date of the criminal judgment.

2. ACCEPTANCE AND JURISDICTION

Article 6: People's courts shall accept cases where investors, on the grounds of injury incurred by them as a result of misrepresentation, institute civil damages proceedings against the misrepresenting parties based on the relevant authority's administrative penalty decision or the people's court criminal judgment, provided the cases comply with Article 108 of the Civil Procedure Law.

Where an investor institutes securities misrepresentation civil damages proceedings in connection with misrepresentation, in addition to submitting the administrative penalty decision or public notice or the written criminal judgment of the people's court, the investor must also submit the following evidence:

(1) documentation proving the identity of the natural person, legal person or other organization; if the original cannot be provided, a notarized copy should be submitted; and

(2) evidentiary materials showing investment losses, such as proof of transactions, etc.

Article 7: The defendants in Securities Misrepresentation Civil Damages Cases shall be the misrepresenting parties, including:

(1) persons with actual control, such as sponsors and controlling shareholders;

(2) issuers or listed companies;

(3) securities distributors;

(4) securities listing sponsors;

(5) professional intermediary service institutions, such as accounting firms, law firms and asset appraisal organizations;

(6) the responsible directors, supervisors and senior management personnel such as managers, etc. of those of the units mentioned in the above Items (2), (3) and (4) which are involved in the case, and the directly responsible persons of the institutions mentioned in Item (5); and

(7) other organizations or natural persons that have made misrepresentations.

Article 8: Securities Misrepresentation Civil Damages Cases shall be under the jurisdiction of the intermediate people's courts of special economic zones, cities with independent development plans and cities that are the seat of the people's government of a province, municipality directly under the central government, or autonomous region.

Article 9: Where an investor institutes securities misrepresentation civil damages proceedings against multiple defendants, jurisdiction shall be determined according to the following principles:

(1) the competent intermediate people's court of the place where the issuer or listed company is located shall have jurisdiction, except in circumstances as described in the second paragraph of Article 10 hereof;

(2) where proceedings are instituted against misrepresenting parties other than issuers or listed companies, the competent intermediate people's court of the place where the defendants are located shall have jurisdiction; or

(3) where all defendants are natural persons, the competent intermediate people's court of the place where the defendants are located shall have jurisdiction.

Article 10: After accepting proceedings instituted against a misrepresenting party other than the issuer or a listed company, the people's court may join the issuer or listed company as a co-defendant, either upon application by a party or after obtaining the consent of all plaintiffs. After effecting such joinder, the people's court shall transfer the case to the competent intermediate people's court of the place where the issuer or listed company is located.

If no party applies for, or the plaintiffs do not consent to, such joinder, but the people's court is of the opinion that the joinder is necessary, the people's court shall notify the issuer or listed company of its status as co-defendant in the proceedings, but may not transfer the case.

Article 11: If after accepting a Securities Misrepresentation Civil Damages Case, a people's court accepts an application for reconsideration of an administrative penalty filed, or administrative proceedings instituted, by a party subjected to an administrative penalty who is dissatisfied with such penalty, the people's court may decide to suspend the trial.

If, after the people's court has accepted the Securities Misrepresentation Civil Damages Case, the related administrative penalty is cancelled, the people's court shall rule to terminate the proceedings.

3. TYPES OF ACTION

Article 12: The plaintiffs in securities-related civil damages cases covered hereby may choose to institute either individual or joint actions.

Article 13: If multiple plaintiffs institute actions against the same defendant for the same misrepresentation and there are both individual actions and a joint action, the people's court may notify the plaintiffs of the individual actions to participate in the joint action.

If multiple plaintiffs simultaneously institute two or more joint actions against the same defendant for the same misrepresentation, the people's court may merge the proceedings actions into one joint action.

Article 14: The number of plaintiffs in a joint action shall be determined before the hearing is held. If there are a large number of plaintiffs, between two and five plaintiff representatives may be elected. Each plaintiff representative may appoint one to two agents ad litem.

Article 15: Upon special authorization by the plaintiffs they represent, plaintiff representatives shall participate in the hearings, modify or relinquish claims, and engage in mediation proceedings or reach settlement agreements with the defendant, on behalf of the plaintiffs.

Article 16: If the people's court finds that a defendant must bear civil liability for damages to a large number of plaintiffs, it may decide the total amount of damages in the main text of the judgment and attach a list of each plaintiff's name, amount of damages due, etc. to the end of the written civil judgment.

4. DETERMINATION OF MISREPRESENTATION

Article 17: The term "securities market-related misrepresentations" means acts where parties with a disclosure obligation violate securities laws by recording falsehoods or making misleading statements in respect of major matters in the course of the issue or trading of securities that are contrary to the facts, or by making disclosures with major omissions or making disclosures in an inappropriate manner.

Major events shall be identified in light of Articles 59, 60, 61, 62 and 72 of the Securities Law, and related provisions.

The term "recording falsehoods" means the act whereby, when disclosing information, a party with a disclosure obligation records non-existent facts in the disclosure document.

The term "misleading statements" means statements made by a misrepresenting party in a disclosure document or through the media that cause investors to misjudge their investments and that have a major impact.

The term "major omissions" means information that a party with a disclosure obligation is required to record in a disclosure document but that such party completely or partially fails to record therein.

The phrase "making disclosures in an inappropriate manner" means the failure by a party with a disclosure obligation to publicly disclose within the appropriate time limit, or in the statutory manner, information that such party is required to disclose.

Article 18: The people's court shall determine that a causal relationship exists between a misrepresentation and the injurious result if:

(1) the securities in which the investor invested were directly connected to the misrepresentation;

(2) the investor purchased the securities on or after the date on which the misrepresentation was made and before the date on which the same was exposed or corrected; or

(3) on or after the date on which the misrepresentation was exposed or corrected, the investor incurred a loss as a result of the sale of the securities or is incurring loss as a result of his continuing to hold the securities.

Article 19: The people's court shall determine that no causal relationship exists between the misrepresentation and the injurious result, if the defendant produces evidence proving that:

(1) the plaintiff sold the securities before the date on which the misrepresentation was exposed or corrected;

(2) the plaintiff made the investment after the date on which the misrepresentation was exposed or corrected;

(3) the plaintiff made the investment with clear knowledge of the misrepresentation;

(4) the loss or part of the loss incurred by the plaintiff was due to the risk of the securities market system or other such factors; or

(5) the plaintiff made the investment in bad faith for purposes of manipulating the price of the security.

Article 20: For the purposes of these Provisions, the term "the date on which the misrepresentation was made" means the date on which the misrepresentation was made or occurred.

The term "the date on which the misrepresentation was exposed" means the date on which the misrepresentation was first publicly exposed by a national newspaper, periodical, radio station, television station or other such medium.

The term "the date on which the misrepresentation was corrected" means the date on which the misrepresenting party voluntarily announces a correction of the misrepresentation in a medium designated by the China Securities Regulatory Commission for the disclosure of securities market-related information and carried out the procedures to suspend trading of the securities in accordance with provisions.

5. FIXATION OF LIABILITY AND CAUSES FOR RELEASE

Article 21: Sponsors, issuers or listed companies shall bear civil liability for damages in respect of the loss incurred by investors as a result of the misrepresentations made by the former.

The responsible directors, supervisors and senior management personnel such as managers, etc. of the issuers and listed companies shall bear joint and several liability for the losses mentioned in the preceding paragraph. However, they shall be exempted if evidence proves them to be free of fault.

Article 22: If a person with actual control manipulates the issuer or listed company so as to cause it to violate the provisions of securities laws by making misrepresentations in the name of the issuer or listed company and causing investors to incur loss, the liability for damages may be borne by the issuer or the listed company. After the issuer or listed company has borne the liability for damages, it may seek compensation from the person with actual control.

If a person with actual control makes misrepresentations in violation of Article 4, 5 or 188 of the Securities Law, the liability for damages shall be borne by the person with actual control.

Article 23: Securities distributors and securities listing sponsors shall be liable for damages in respect of the loss caused to investors due to misrepresentation. However, they shall be released from such liability if evidence proves them to be free of fault.

The responsible directors, supervisors and senior management personnel such as managers, etc. shall jointly and severally bear the liability for damages that is borne by the securities distributors. The cause for release from liability set forth in the preceding paragraph shall likewise apply to their liability.

Article 24: If professional intermediary service institutions and the persons directly responsible therefor make misrepresentations in violation of Article 161 or 202 of the Securities Law and thereby cause investors to incur loss, they shall be liable for damages in respect of the portion for which they are responsible. However, they shall be released from such liability if evidence proves them to be free of fault.

Article 25: Other organizations and natural persons that have made misrepresentations, as referred to in Item (7) of Article 7 hereof, in violation of Article 5, 72, 188 or 189 of the Securities Law, thereby causing investors to incur loss, shall be liable for damages.

6. JOINT TORT LIABILITY

Article 26: If the sponsors provide a guarantee for the disclosure by the issuer, the sponsors and the issuer shall bear joint and several liability for the loss incurred by the investors.

Article 27: If securities distributors, securities listing sponsors or professional intermediary service institutions know or ought to know of the issuer's or listed company's misrepresentation but fail to make rectification or to issue a qualified opinion, such failure shall constitute a joint tort and such distributors, sponsors or institutions shall bear joint and several liability for the loss incurred by the investors.

Article 28: If responsible directors, supervisors or senior management personnel such as managers, etc. of an issuer, listed company, distributor or securities listing sponsor are characterized by any of the following circumstances, they shall be determined to have carried out joint misrepresentation and shall bear joint and several liability with the issuer, listed company, distributor or securities listing sponsor for the loss incurred by the investors:

(1) they participated in the misrepresentation;

(2) they knew of or ought to have known of the misrepresentation and failed to clearly express objection thereto; or

(3) other circumstances for which they are required to assume responsibility

7. DETERMINATION OF LOSS

Article 29: If a misrepresentation made on the primary securities market causes loss to investors, the investors have the right to demand that the misrepresenting party pay damages in accordance with Article 30 hereof; if the misrepresentation causes the suspension of the issuance of said securities, the investors shall have the right to demand that the misrepresenting party refund the subscription monies plus compensation in the form of interest at the bank interest rate for current deposits over the same period.

Article 30: The scope of the liability for civil damages to be borne by the misrepresenting party on the securities trading market shall be limited to the loss actually incurred by the investors as a result of the misrepresentation. The actual loss incurred by investors includes:

(1) investment differential loss; and

(2) the commission and stamp tax for the investment differential.

The interest on the funds involved in the preceding paragraph shall be calculated at the bank interest rate for current deposits over the same period as that from the date of purchase to the date of sale of the securities or the reference date.

Article 31: If the investor sells the securities on or before the reference date, his investment differential loss shall be calculated based on the difference between the average purchase price of the securities and the average price the securities were actually sold at, multiplied by the quantity of the securities held by the investor.

Article 32: If the investor sells or retains the securities after the reference date, his investment differential loss shall be calculated based on the difference between the average purchase price of the securities and the average of the closing prices on each trading day during the period from the date on which the misrepresentation was exposed or corrected to the reference date, multiplied by the quantity of the securities held by the investor.

Article 33: The reference date for the calculation of investment differential loss is a cut-off date that occurs after the exposure or correction of the misrepresentation and that is stipulated in order to determine a reasonable time period for the calculation of the loss by limiting the damages due to the investors to the loss incurred as a result of the misrepresentation. The reference date shall be determined in accordance with the following circumstances:

(1) the date on which the cumulative trading volume of the securities influenced by the misrepresentation reaches 100% of the potential circulation of the securities as calculated from the date of exposure or correction; however, the trading volume of securities transferred by means of block-trade agreements shall not be included in the calculation;

(2) if determination based on the preceding rule is impossible prior to the court hearing, then the reference date shall be 30 trading days after the date of exposure or correction;

(3) if the securities have been already withdrawn from the market, the reference date shall be one trading day prior to the date on which the securities were delisted; or

(4) if trading in the securities has already been suspended, the reference date may be one trading day prior to the date of suspension; if trading in the securities has resumed, the reference date may be determined based on Item (1) of this article.

Article 34: The gains obtained by the investor based on his shareholder status may not be set off against the amount of damages owed by the misrepresenting party. Such gains include profit shares, bonus shares, shares obtained from share increases effected by means of conversion of funds in the provident fund, and the following shares purchased with the investor's own funds during the period in which the shares were held by the investor: shares that are the subject of rights issues, newly issued shares and those shares in a listed company's rights issue in respect of which the holders of State-owned or legal person shares have assigned their rights to other legal persons or members of the public.

Article 35: When calculating the investment differential loss, the price and quantity of securities that are trading ex-rights shall be calculated as if the rights had been restored.

8. SUPPLEMENTARY PROVISIONS

Article 36: These Provisions shall be implemented as of February 1 2003.

Article 37: In the event of any inconsistencies between the Questions Concerning the Acceptance of Civil Tort Dispute Cases Arising from Misrepresentation in the Securities Market Circular issued by this Court on January 15 2002 and these Provisions, these Provisions shall prevail.