Class Action: Practice in China Ruyin Hu Director,Research Center Shanghai Stock Exchange

Contents ：  Importance of Class Action  Shareholder Suits in China: Current State and Problems  Class Action in China:Prospects

Importance of Class Action  Empower shareholders to discipline management especially in emerging markets where the protection of minority shareholders is weak.  Provide legal remedy for victims and penalize infringers.

Importance of Class Action  Enhance private enforcement of law  The class action is the predominant vehicle for private actions  Aggregation of claims  Availability of attorneys fees for prevailing plaintiffs  Widespread injury to numerous shareholders creates threat of large liability and creates incentives to settle cases

Importance of Class Action  In the US, class action is moving from “Race to courthouse” model to “Most Adequate Plaintiff “ model to reduce frivolous lawsuits. With the emergence of institutional investors, efforts are made to shift control of litigation from plaintiffs lawyers to plaintiffs with real interest in the outcome. Class action cases are driven by clients.

Shareholder Suits in China  Current State  Shareholder Lawsuits Cases: none have succeeded  Hongguan Case : in 1998 a shareholder sued the company for false information.; the court overruled shareholder’s claim on the grounds that the disclosure of false information didn’t have a necessary cause-effect relationship with the losses of shareholders.

Shareholder Suits in China vYorkpoints Case: in shareholders filed a joint lawsuit against Yorkpoints for insider trading and market manipulation vYin GuangXia Case: in 2001 shareholders sued Yin GuangXia for inventing false information. vDaqing Lianyi Case: in shareholders filed a joint lawsuit against Daqing Lianyi. The filing documents weighted 3 tons.

 Court Response to Shareholder Litigations  On 24 Sept. 2001,the Supreme People’s Court issued a notice: Cases involving civil compensation due to insider trading, fraudulence and market manipulation on the securities market should not be accepted for the time being. Shareholder Suits in China

 According to Supreme People’s Court judicial interpretation, class action is not allowed.  Precedent Procedure: Courts accept securities litigation on condition that the China’s Securities Regulatory Commission has made administrative penalty decisions. Shareholder Suits in China

Problems  The Securities Law and Company Law provide very abstract stipulations on civil liabilities. Courts have difficulties applying them.  The precedent procedure of administrative penalty for shareholder suits has no legal basis, infringes and limits shareholder rights of action. Shareholder Suits in China

Problems  Supreme court’s ban of class action goes against the Civil Procedure Law and increases the cost of shareholder’s lawsuits. In practice, a court only accepts individual lawsuit.  In practice, civil compensation is behind administrative penalty.  Courts lack independent and capable judges.

Class Action in China: Prospects  Revision of laws and regulations to make class action operative. Law matters in details.  Courts should allow class action, eliminate precedent procedure and accept all types of shareholder suits.  Regarding burden of proof, the court should ask the accused to provide evidence that they are not guilty.  Introduction of contingency fee for lawyers.

Class Action in China: Prospects  Ensure that civil compensation precede administrative penalty in practice.  Courts should operate independently of political intervention.  Introduction of personal financial filing and personal bankruptcy system.

Thank you.