Chinese Securities Class Actions

Securities Law 2019: Article 95

The legal framework for securities class actions in China is established by Article 95 of the Securities Law of the People’s Republic of China (Zhengguan Fa), as comprehensively revised in 2019 (effective 1 March 2020). Article 95 introduced the representative action for investor protection (touzi zhe baohu, 投资者保护) mechanism, authorising investor protection agencies to bring representative actions on behalf of investors who have suffered loss from securities violations.

Article 95(3) is the key provision: “Where securities-related torts cause damage to investors, a statutory investor protection agency may, on behalf of investors, bring a civil compensation lawsuit, file a lawsuit in the people’s court, or apply for a representative action.” The statutory investor protection agencies are the China Securities Investor Protection Fund Corporation (SIPF) (Zhongguo Zhengquan Touzizhe Baohu Jijin Youxian Zeren Gongsi) and the China Securities Small and Medium Investor Service Centre (ISC) (Zhongzheng Zhengtou Touzi Zhe Baohu Fu Wu Zhongxin), established by the CSRC.

The Securities Law also strengthened the substantive liability of issuers. Article 85 provides that issuers who make false statements in their offering documents are liable for damages to investors, and senior managers, directors, and supervisors bear presumptive joint and several liability unless they can prove they exercised due diligence.

Representative Action (Daibiao Ren Susong)

The representative action (daibiao ren susong, 代表人诉讼) in securities cases is a form of class action Chinese-style, adapted from the general representative action provisions of the Civil Procedure Law. The SPC’s Provisions on the Application of the Securities Representative Action Mechanism (2020) provides the procedural rules.

The ISC (Investor Service Centre) is the authorised representative agency. The ISC may bring a representative action where: (1) a securities violation has been established by an administrative penalty decision (CSRC or its local offices) or a criminal judgment; (2) the violation has caused loss to investors; and (3) at least 10 investors have authorised the ISC to act on their behalf.

The representative action uses an opt-in mechanism: investors must affirmatively opt in to the action by authorising the ISC to represent them. The ISC publishes notice of the action and invites investors to register their claims. The default is that investors who do not opt in are not bound by the judgment. The SPC’s 2020 Provisions also permit the court to adopt an opt-out mechanism for cases where the investor base is large and the common questions predominate — investors who do not opt out are included in the class.

Special Representative (Tebie Daibiao)

The special representative (tebie daibiao, 特别代表) is the SPC’s innovation for securities cases. Under the Provisions on the Application of the Securities Representative Action Mechanism, the ISC may apply to the court to be appointed as a special representative, with the authority to represent all investors who have suffered loss from the same securities violation.

The special representative’s powers include: filing the lawsuit; participating in evidentiary hearings; making legal arguments; negotiating settlement; and receiving distribution of the judgment proceeds. The special representative must consult with a representative investor committee for major decisions.

The special representative mechanism was first applied in the Kangmei Pharmaceutical case (2021). The ISC was appointed as the special representative for Kangmei investors, representing over 52,000 investors in a securities fraud action against Kangmei Pharmaceutical and its auditor, Zhongzhu Certified Public Accountants. The case became the largest securities class action in Chinese history.

Kangmei Pharmaceutical (2021)

Kangmei Pharmaceutical Co., Ltd. Securities Representative Action, decided by the Guangzhou Intermediate People’s Court in November 2021, is the landmark Chinese securities class action. Kangmei Pharmaceutical was found to have engaged in the largest financial fraud in Chinese capital market history — fabricating revenue of RMB 88.3 billion between 2016 and 2018 through falsified bank statements, inflated transactions, and fictitious inventory.

The CSRC imposed an administrative penalty on Kangmei in 2020, finding that the company had violated the Securities Law’s prohibitions on false statements. The ISC then brought a representative action on behalf of Kangmei investors. The court found that Kangmei had made false statements, that the false statements had induced investors to purchase Kangmei shares at inflated prices, and that the investors had suffered loss when Kangmei’s share price collapsed after the fraud was disclosed.

The court ordered Kangmei Pharmaceutical to pay RMB 2.459 billion (approximately USD 385 million) in compensation to 52,037 investors. The judgment also imposed joint and several liability on: Kangmei’s senior managers (including the former chairman, Ma Xingtian, and directors and supervisors); Malaysia-based Ma Laitou (a related party who participated in the fraud); and Zhongzhu Certified Public Accountants (Kangmei’s auditor, which issued unqualified audit opinions despite the fabricated financial statements). The auditor was held liable for RMB 1.2 billion of the total compensation.

The Kangmei decision established several significant precedents. The joint and several liability of auditors was affirmed, signalling that Chinese courts will hold gatekeepers — auditors, underwriters, and lawyers — accountable for securities fraud. The representative action mechanism was validated as an effective investor protection tool. The special representative model was demonstrated to be workable for mass investor litigation.

Subsequent Class Actions

Following Kangmei, the ISC has brought representative actions in other securities fraud cases. Yinxing Energy (2022): The ISC represented 130 investors in a case involving false statements in the company’s financial reports, settling for RMB 80 million. Donghai Securities (2023): The ISC represented 2,700 investors in a case involving the brokerage’s failure to disclose material related-party transactions. Jinzhou Port (2024): The ISC represented 3,400 investors in a case involving the port operator’s false statements about its debt levels and collateral.

The securities class action mechanism has also been used by law firms acting on behalf of investor groups, without the ISC’s involvement. The SPC has confirmed that private representative actions by law firms are permissible where the investors have agreed to joint representation, and the courts have approved several private representative actions in securities fraud cases.

Conclusion

China’s securities class action system, established by the 2019 Securities Law and implemented through the SPC’s 2020 Provisions, provides a mechanism for mass investor compensation in securities fraud cases. The Kangmei Pharmaceutical case demonstrated the system’s capacity — the RMB 2.459 billion judgment was the largest securities fraud award in Chinese history and among the largest globally. The ISC’s role as special representative provides a public-interest dimension to securities enforcement that is distinctive among class action regimes. The system’s development continues, with questions remaining about the scope of opt-out actions, the liability of gatekeepers, and the coordination between class actions and CSRC enforcement actions.