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Working Paper
Naomi Li, March 2004

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Since January 2001, the Supreme People's Court has made considerable progress in terms of setting up a framework for private securities litigation to allow investors to sue listed companies for losses caused by their false financial disclosures. The SPC has developed procedural and substantive rules for the filing and adjudication of such suits, and over 1,000 suits have been filed nation-wide against some 14 companies. The paper supplies detailed information about the current status of these suits.

Although a number of these actions have been settled out of court, most remain in legal limbo with courts refusing to make judgement, and none have been settled by a court judgement in favour of the investors. This paper argues that there are two main problems. First, the framework creates some serious obstacles for investors wanting to pursue actions. The physical location of where the suit can be filed, the too narrowly defined causal link between false statements made by the company and losses made by investors, and the requirement that the CSRC or other relevant administrative organs previously find against the firm (or criminal verdict against the board directors) do not help. Moreover, the lack of a class action (jituan susong) framework, and the mechanics of the group suit (gongtong susong) that it allows creates considerable difficulties as hundreds of investors have to co-ordinate their actions across considerable distance.

Second, local courts simply appear unwilling to allow cases to be heard because of administrative protection of firms by local governments. The few actions that have reached conclusion in favour of the investors have been settled out of court. Though frustrated by the slow progress in PSL cases, lawyers remain cautiously hopeful that the courts will gradually recognise their role in protecting the rights of individual investors. However, it is unlikely that many of these cases will result in compensation being paid and the most important aspect of developments so far is the creation of a potential personal liability for directors which will discourage them from making false disclosures in the future.