On 15 May 2025, the Supreme People’s Court and the China Securities Regulatory Commission jointly issued the Guidelines on Strict and Impartial Law Enforcement to Serve High-Quality Development of Capital Markets, marking a significant step in refining judicial rules for securities misrepresentation cases. This article offers a brief analysis of the guidelines, drawing on relevant regulations, judicial practice and the author’s casework experience, for reference.
Partner
Commerce & Finance Law Offices
Tel: +86 150 0066 6860
E-mail: liamin@tongshang.com
The court will assess the causal link between investor trading and misrepresentation based on the standards of direct and proximate cause. Article 12 of the Supreme People’s Court’s Provisions on Several Issues Concerning the Trial of Civil Compensation Cases for Misrepresentation in the Securities Market states that significant events occurring after the false statement may break the chain of causation between the false statement and investor trading.
However, as the regulation does not specify the level of proof required from defendants to negate this causal relationship, its application remains a subject of considerable debate in judicial practice.
In a retrial case handled by the author involving an investor and a listed company over securities misrepresentation, the Supreme People’s Court clarified for the first time that courts should determine the causal relationship between investor trading and false statements based on the standards of direct and proximate cause. The court should also consider details of the investor’s trading activity to assess whether the misrepresentation was the direct or proximate cause of the purchase.
Article 6 of the guidelines further clarifies that courts should assess, according to the rational investor standard, whether the defendant has provided sufficient evidence to prove that the misrepresentation was not the direct or proximate cause of the investor’s decision.
In practice, listed companies and relevant intermediaries should focus on factors such as the timing of the investor’s purchase, changes in share price and trading volume following significant events, and fluctuations in shareholder numbers, to demonstrate that a rational investor would not have based their investment decision on the false statement.
Associate
Commerce & Finance Law Offices
Tel: +86 188 0154 8602
E-mail: shengweirong@tongshang.com
A standardised approach to loss assessment is poised for gradual implementation. In securities misrepresentation cases, most courts typically appoint specialist institutions to quantify systemic and non-systemic risks. Commonly engaged institutions include the Shanghai Advanced Institute of Finance, the China Securities Capital Market Legal Service Centre and the China Securities Investor Protection Fund.
However, material discrepancies emerge as these organisations employ divergent calculation methodologies, resulting in markedly different risk-adjusted loss assessments across cases.
Article 6 of the guidelines mandates the “establishment of unified fundamental rules for selecting calculation metrics for systemic and non-systemic risks … to enhance the scientific rigour and rationality of loss assessments”. It is anticipated that the Supreme People’s Court will gradually establish unified basic rules for loss assessment, ensuring that systemic and non-systemic risks are determined according to consistent standards in all cases.
Special representative litigation in securities disputes is set to become more prevalent. At present, courts including the Shanghai Financial Court, the Nanjing Intermediate Court and the Hangzhou Intermediate Court have adopted ordinary representative actions in securities misrepresentation cases, even applying them to follow-on civil claims after precedent judgments.
However, the special representative action mechanism remains underutilised, having been deployed in just four landmark cases to date, namely: the Kangmei Pharmaceutical case, the Essence case, the Jin Tong Ling case, and the Meishang Ecology case.
Article 9 of the guidelines mandates the “establishment of a regular mechanism for special representative litigation to ensure that representative actions in securities disputes are conducted lawfully, prudently and efficiently”. This indicates that courts are likely to apply special representative litigation in a greater number of cases in the future to provide a stronger deterrent against information disclosure violations by listed companies, and to reinforce the accountability of intermediaries.
Interaction between the courts and securities regulators is expected to be more frequent. In judicial practice, courts across various regions have begun to request administrative case files and related evidence from securities regulatory authorities to determine the degree of fault of defendants in misrepresentation cases.
For example, in a recent bond misrepresentation case handled by the author, the court obtained interview records of intermediary staff collected during a regulatory investigation, which were then used to help assess the intermediary’s liability.
Article 20 of the guidelines states: “Courts at all levels are encouraged to communicate fully with securities and futures regulatory authorities and their local offices and, in accordance with the law and proper procedures, to review and copy criminal and administrative case files and evidence materials relating to the same unlawful conduct, to enhance the efficiency of trials and enforcement.”
This suggests that to establish the facts and determine the degree of fault of intermediaries, courts may in the future take a more proactive approach in requesting administrative case files from securities regulators. Courts are likely to assess the conduct, negligence and liability of relevant parties based on the findings of regulatory investigations.
As a result, if intermediaries or directors, supervisors and senior executives of listed companies respond improperly during administrative investigations, they may face not only increased administrative penalties but also a greater risk of civil liability.
Li Amin is a partner at Commerce & Finance Law Offices. He can be contacted by phone at +86 150 0066 6860 and by mail at liamin@tongshang.com.
Sheng Weirong is an associate at Commerce & Finance Law Offices. He can be contacted by phone at +86 188 0154 8602 and by mail at shengweirong@tongshang.com.
