Supreme Court to issue guidelines on shareholder lawsuits

China?s Supreme Court will release as early as next week a paper on the interpretation of how small investors may file lawsuits against domestically listed companies in order to seek compensation for losses due to corporate fraud. It will clarify a January announcement that allowed lower courts to accept lawsuits filed by investors who claim to have been misled by false information the company.

Hailed as a giant step in protecting small investors and improving corporate governance, the announcement on January 15 opened the floodgate of lawsuits from angry frustrated investors. Swamped by thousands of cases filed and some 900 cases accepted since then, the lower courts were at a loss on how to handle them. The interpretation by the Supreme People?s Court is expected to give them guidelines. It is also closely watched as a test of the government?s resolve of protecting small investors and punishing corporate fraud.

Debates and seminars among legal scholars and securities specialists focus on three main areas: how small investors may take legal action against a listed company, how the causality of the losses and the false information is determined and how the losses should be calculated.

Guo Feng, a Beijing based lawyer and crusader of corporate accountability, is representing 697 litigants against Daqing Lianyi Petrochemical, listed on the Shanghai Stock Exchange, which falsely reported surpluses twice although it actually suffered losses. He believed that the interpretation would allow small investors to file a ''class action'' suit, but other financial market and legal experts are sceptical. They say that the investors will likely be allowed to take ?joint action? but not ?class action? according to the China?s civil law code.

In a joint action lawsuit, individual investors must make a determined effort to file their cases in court, while in a class action a handful investors can represent the whole ?class? of other investors seeking redress in the same case, said Dong Ansheng, a professor of securities law at People?s University. The court, however, can process together related cases against a single company, he said.

The interpretation will stipulate that the lawsuits for corporate fraud can be filed only if the company has been censured by the regulators, and if within two years after the censure. The requirement upholds the authority of the Chinese Securities Regulatory Commission on the ground that small investors and their lawyers normally do not have the wherewithal to gather all the necessary evidence to sue a public company, he said.

The part on calculating investment losses due to corporate misrepresentation is likely to be disappointing to many aggrieved shareholders. Share prices fluctuate because of many factors; some are due to general market condition and some due to management. Moreover, there is a fear that over-compensating some investors will damage the interest of other shareholders, Professor Dong said.