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I. Provisions on Representative Litigation

Articles 53 and 54 of the Civil Procedure Law of China stipulate the system of representative litigation. As provided for in the Civil Procedure Law, representative litigation may be defined as a litigation system under which, when one or both parties involve a large number of persons, the numerous parties elect representatives to conduct litigation on behalf of all parties of their own side to safeguard the interests of all such parties, and the litigation acts performed by the representatives shall take legal effect on all parties of the side they represent.

Representative actions are divided into "representative actions with a definite number of plaintiffs" and "representative actions with an indefinite number of plaintiffs" based on whether the number of plaintiffs is determined before the action is instituted. A representative action with a definite number of plaintiffs refers to a representative action where litigation representatives elected by co-litigants whose number has been confirmed at the time of filing the lawsuit participate in the proceedings on behalf of all co-litigants. A representative action with an indefinite number of plaintiffs refers to a representative action where there is a large number of parties on one side, whose number remains undetermined at the time of filing the lawsuit, and representatives elected by right holders who have registered with the people's court participate in the proceedings on behalf of all co-litigants. The similarities between the two are that one party has a large number of litigants and both are equipped with litigation representatives. The difference between the two is that the number of parties in a representative action with an indefinite number of plaintiffs is undetermined at the time of filing the lawsuit, while the number of parties in a representative action with a definite number of plaintiffs is fully confirmed at the time of filing the lawsuit. Article 53 of China's Civil Procedure Law and Paragraph 1 of Article 95 of the Securities Law provide for representative actions with a definite number of plaintiffs. Article 54 of the Civil Procedure Law and Paragraph 2 of Article 95 of the Securities Law provide for representative actions with an indefinite number of plaintiffs.

Representative actions are divided into ordinary representative actions and special representative actions according to the nature of the representative subject. An ordinary representative action is an action filed in accordance with the provisions of Articles 53 and 54 of the *Civil Procedure Law*. A special representative action is an action filed by an investor protection institution entrusted by investors pursuant to Paragraph 3 of Article 95 of the *Securities Law*. The ordinary representative action takes the "opt-in system" as its core element, while the special representative action takes the "opt-out system" as its core.

Whereas "the parties to a representative litigation with an indeterminate number of persons cannot be ascertained at the time of instituting legal proceedings", the procedure of such representative litigation has the following special features: First, when a people's court adopts such form of litigation, it shall issue a public notice to inform right holders to register with the people's court within a specified period. Second, within the term of the public notice, right holders shall register with the court that issues the public notice. Third, Effect of judgments and rulings: The rendered judgments and rulings have direct binding force on all registered right holders, and have preclusive effect on unregistered right holders. If an unregistered right holder files an action within the limitation of action period, and the people's court finds that his litigation claim is tenable, it shall rule to apply the already rendered judgments and rulings, and no separate adjudication is required.

II. Emergence of Litigation Mechanisms in the Field of Securities Civil Compensation and Representative Litigation Mechanisms

In recent years, China's securities market has witnessed rapid development. A large number of securities disputes have emerged and been brought to judicial adjudication, leaving judicial resources unable to meet relevant demands. At the initial stage, the model judgment mechanism was explored and established in the field of securities civil compensation.

1. Initial Litigation Mechanism in the Field of Civil Compensation for Securities

The model judgment mechanism refers to a dispute resolution mechanism pursuant to which, in the handling of group securities disputes, representative cases are selected for priority trial and judgment, and the guiding role of model cases is brought into play to duly resolve disputes over parallel cases. Once a model judgment becomes legally effective, parties to parallel cases are not required to adduce evidence anew for the common facts ascertained by such model judgment, i.e., the model judgment has expansive effect on parallel cases, and claim settlement matters may enter the fast track.

In accordance with the *Several Opinions of the Supreme People's Court on Further Promoting the Diversion of Complicated and Simple Cases and Optimizing the Allocation of Judicial Resources* and the *Opinions of the Supreme People's Court and the China Securities Regulatory Commission on Comprehensively Promoting the Construction of a Diversified Dispute Resolution Mechanism for Securities and Futures Disputes*, the Shanghai Financial Court issued the *Provisions on the Model Judgment Mechanism for Securities Disputes (for Trial Implementation)* (Hu Jin Rong Fa [2019] No. 2) in January 2019, officially launching the model judgment mechanism.

Since the implementation of the model judgment mechanism, it has alleviated the shortage of judicial resources for the trial of securities civil compensation cases to a certain extent. However, the whole process from the selection of model cases, the trial of such cases to their final entry into force is rather lengthy, leading to a long litigation period and greatly impairing the efficiency of investors' claims. To this end, judicial organs of China are exploring more effective solutions.

2. Advantages of the Representative Action Mechanism in Handling Collective Disputes

Representative actions are mainly applicable to group disputes such as securities civil compensation, which are characterized by a large and scattered number of parties as well as a small number of relatively clear and specific defendants. If a single litigation mode is adopted to resolve group disputes, the following problems will arise: (1) The number of cases increases sharply, leaving judges overstretched and crowding out the already tight judicial resources; (2) Different courts may have discrepancies in fact-finding and legal handling of the same cases, resulting in the situation of "different judgments for the same case"; (3) The parties safeguarding their legitimate rights are relatively scattered and possess limited social resources, putting them in a rather disadvantaged position compared with the defendants, and the imbalance of strength leads to unfairness.

The representative action system incorporates a large number of parties into the same proceeding, whereby a large volume of claims can be resolved through a single litigation process. In this way, duplicate trials of individual cases can be avoided, the uniform application of law is maintained, the status of the parties is equalized to the greatest extent, and judicial efficiency and judicial justice are achieved.

3. Emergence of the Representative Litigation Mechanism in the Field of Securities Civil Compensation

As mentioned above, the representative action system has advantages in resolving group disputes. Investors also expect an effective system to effectively reduce the difficulties for small and medium-sized investors in safeguarding their legitimate rights and interests, increase their participation in rights protection practices, and reverse their disadvantaged status. Against this background, the representative action mechanism came into being as required by the current situation.

In fact, as early as 2019, the *Minutes of the National Conference on Civil and Commercial Trial Work of the People's Courts of China* encouraged local people's courts where conditions permit to select individual cases for trial via the representative action method prescribed in Article 54 of the *Civil Procedure Law of the People's Republic of China*, and roll out pilot programs in a gradual manner.

Article 95 of the Securities Law of the People's Republic of China, which entered into force on March 1, 2020, explicitly establishes the representative action system, which reads: "Where investors institute civil compensation litigation for securities violations such as false representation, if the subject matter of the litigation is of the same category and one party to the litigation consists of a large number of persons, the parties may elect representatives in accordance with the law to conduct the litigation."

On March 13, 2020, the Hangzhou Intermediate People's Court issued the *Announcement on Serial Cases of Disputes over Liability for Securities Misrepresentation Brought by Natural Person Investors of "15 Wuyang Bond" and "15 Wuyang 02 Bond" against Wuyang Construction Group Co., Ltd. and Other Parties* (hereinafter referred to as the "Wuyang Construction Bond Misrepresentation Case"), announcing that it would hear the case through representative litigation with an unspecified number of litigants, and notifying relevant right holders to register with the court within the prescribed time limit. The Hangzhou Intermediate People's Court noted that the issuance of this announcement marks the official launch of the first representative litigation case for securities civil compensation in China. This case will be the first judicial practice of representative litigation with an unspecified number of litigants in the field of securities civil compensation litigation since the implementation of the *Civil Procedure Law of the People's Republic of China* and the newly revised *Securities Law of the People's Republic of China*.

On March 24, 2020, the Shanghai Financial Court issued the *Provisions of the Shanghai Financial Court on the Representative Litigation Mechanism for Securities Disputes (for Trial Implementation)*. This is the first specific provisions on the implementation of the representative litigation system for securities disputes issued by a court in China, and another important measure taken by the Shanghai Financial Court following the release of China's first provisions on the model judgment mechanism for securities disputes in January 2019, to actively explore a civil litigation mechanism that conforms to China's national conditions and the judicial demands of the securities market, and optimize the law-based business environment.

III. Key Points of the Litigation Representative System in Securities Civil Compensation Litigation

Whereas the *Provisions of the Shanghai Financial Court on the Representative Litigation Mechanism for Securities Disputes (for Trial Implementation)* are the first specific provisions on the implementation of the representative litigation system for securities disputes issued by courts in China, and the Hangzhou Intermediate People's Court is the first court to carry out pilot trials of the aforesaid system, we integrate the provisions of the Shanghai Financial Court and the actual conditions of the Hangzhou Intermediate People's Court, and take the "Wuyang Construction Bond Misrepresentation Case" as an example to demonstrate how the representative litigation system for securities civil compensation is implemented.

1. Case Filing and Rights Registration

For securities dispute cases involving an uncertain number of parties, where the People's Court finds upon examination that such cases meet the conditions for joint litigation, it shall conduct unified case filing and registration with the relevant right holders listed as co-plaintiffs, issue a public notice on right registration in advance, state the case details related to the litigation claims, and notify investors to register with the People's Court within a specified period.

As stipulated by the Shanghai Financial Court, where a large number of parties are determined at the time of litigation filing and meet the conditions for joint litigation upon examination, they shall be subject to unified case filing and registration as co-plaintiffs. Where the subject matter of the action is of the same category and the large number of parties are uncertain at the time of litigation filing, the Court may issue an announcement of right registration after accepting the case, to notify relevant investors to register with the Court within the publicity period. The publicity period shall be determined based on the specific circumstances of the case, but shall not be less than 30 days. Prior to issuing the announcement of right registration, examination shall be conducted on the nature of the alleged securities tort, the underlying tort facts supporting the claims and other relevant matters, so as to determine the scope of right registration. The content of the announcement of right registration shall include the underlying facts involved in the alleged securities tort, information on the sued defendants, the scope of right registration, the registration period and other relevant matters.

Regarding the Wuyang Construction Bond Misrepresentation Case, the Hangzhou Intermediate People's Court has issued an explanation to the public on the circumstances of the case since its acceptance in September 2018, and released a public notice requiring relevant natural person right holders (excluding institutional investors) to complete registration with the court within 30 days from the date of issuance of the notice.

Civil tort compensation litigation under the Securities Law usually involves a large number of persons on one party side, and there is no fixed organization or close connection among such parties. To facilitate registration for relevant right holders, the people's court adopts an online registration method, under which investors submit corresponding materials in accordance with the requirements of the court to complete registration. The Shanghai Financial Court provides that it shall retrieve the list of right holders from securities registration and clearing institutions pursuant to the right registration scope determined in the public notice, and examine the scope of investors applying for registration on this basis. Investors who do not fall within the registration scope shall not be registered by this Court, but they may file a separate action.

Hangzhou Intermediate People's Court conducts registration of right holders via the "Zhejiang Intelligent Resolution Platform for Securities and Futures Disputes". In addition to requiring the parties concerned to complete the online information filling and submission procedures, the Court also requires relevant investors to submit materials offline, which mainly include identity documents of natural persons, evidence materials proving investment losses such as transaction vouchers, specific litigation claims, as well as the valid correspondence address and contact number of the parties themselves. Where an agent is entrusted, the agency formalities shall be submitted concurrently.

2. Selection of Representatives

The selection of representatives has long been a difficult issue in the representative litigation mechanism. Leveraging the currently well-developed information technology, the representative selection mechanism can be implemented online.

The Shanghai Financial Court stipulates three methods for the selection of litigation representatives: First, election by voting. Investors may first vote to elect representatives within the scope of the full list of all plaintiffs. Second, court recommendation combined with consultation. Where the parties fail to elect representatives, the court shall recommend candidates, conduct consultation with the plaintiffs, and organize multi-candidate voting. Third, ex officio appointment. Where no consensus is reached through consultation, the court shall appoint representatives ex officio. The Court explicitly specifies the selection criterion that the votes obtained by a representative shall be no less than 50% of the number of voters participating in the voting, and also clarifies the conditions for the court to recommend and appoint representatives. For special representative actions, the Shanghai Financial Court stipulates that it may appoint investor protection institutions or the parties represented by the aforesaid institutions as litigation representatives.

The Hangzhou Intermediate People's Court has launched online representative elections. It uses the Zhejiang Intelligent Resolution Platform for Securities and Futures Disputes to adopt the method of online voting, under which registered investors elect and determine representatives through consultation, so as to advance the follow-up proceedings of the representative action.

3. Powers of the Representative

The Shanghai Financial Court has explicitly specified a unified special authorization regime concerning the authority of representatives, namely, when carrying out right registration, investors shall explicitly grant special authorization to the representatives; those who disagree with such special authorization may file a separate lawsuit. The opt-out right of the represented parties is explicitly defined: where a party disapproves of the settlement or mediation agreement reached by the representatives, it may submit a declaration to the court within the 10-day public notice period to withdraw from the relevant settlement or mediation agreement. The cost compensation mechanism for representatives is also explicitly stipulated: where a representative claims that the defendant shall compensate the reasonable expenses incurred by the representative during the litigation proceedings, the people's court shall support such claim in accordance with the law.

The Hangzhou Intermediate People's Court has not yet promulgated specific provisions on the authority of litigation representatives.

IV. Suggestions on Improving the Representative Litigation System for Securities Civil Compensation Litigation

The securities civil litigation system established by the New Securities Law stipulates that investor protection institutions may serve as litigation representatives, expanding the scope of claimants eligible for compensation. The litigation principles of "explicit withdrawal" and "implied participation" also further facilitate victimized investors to file civil damage compensation lawsuits. The introduction of a representative litigation mechanism tailored to China's national conditions has, to a certain extent, reconciled the relationship between the full protection of securities investors' legitimate rights and interests and the efficient utilization of judicial resources. It is fair to say that this system has certain positive significance under the current circumstances. However, there are still many problems to be improved and resolved at present.

1. The boundaries between litigation representatives and the right of disposition over substantive rights shall be further clarified.

Pursuant to Articles 53 and 54 of the *Civil Procedure Law of the People's Republic of China*, where a litigation representative intends to dispose of substantive rights in the course of litigation, such as modifying or waiving claims, reaching a settlement and so on, the representative must obtain the authorization and consent of the represented group. Strict regulations on the exercise of substantive rights can effectively prevent damage to the rights and interests of the represented parties. However, given the wide differences in the specific conditions of each party in group litigation, it will inevitably cost enormous time and energy for the litigation representative to secure a fully unanimous will of all parties, which will lead to litigation delay. Furthermore, a litigation representative is also a party to the case. If such representative cannot exercise litigation rights independently, they will be reduced to a mere "tool", which runs completely counter to the original intent of the establishment of the system.

To realize the efficiency value of representative actions, it is an inherent requirement to grant litigation representatives substantive rights of disposition within a certain scope. Any alteration of rights shall be subject to the informed consent of investors. It is worthy of deliberation regarding how to obtain the consent of investors, and whether a litigation representative may effect a disposition after obtaining the consent of no less than a specified proportion of the represented parties with reference to the voting procedures of the shareholders' meeting under the Company Law.

2. The rationality of the representation exercised by litigation representatives shall be further standardized through relevant systems.

As a large number of group disputes often involve public interests and produce enormous social impacts, the handling of such cases is frequently subject to pressures from various parties such as the media, the general public and government authorities. Any slightest negligence may cause adverse effects on the impartiality of representation. Meanwhile, after representatives obtain corresponding rights, the scenario of abuse of rights cannot be ruled out. Reducing the risk that representatives improperly dispose of the legitimate rights and interests of the represented parties is an inherent requirement for improving the representative action system.

To prevent the occurrence of such situations, improvements are proposed from the following aspects: First, with regard to the selection of representatives, investigations shall be conducted based on the candidates' moral conduct, educational background and professional expertise, so as to ensure that each litigation representative can fully protect the interests of the represented parties and has no intention of seeking illegal gains in the litigation. Second, the conduct of representatives shall be supervised through such means as public announcement to keep them committed to their original aspiration. As mentioned above, representatives are also parties themselves. While their rights shall be granted to the greatest extent possible, supervision over them shall be maintained at all times, and notifications covering all links of the litigation process participated by the representatives shall be delivered in a manner accessible to the represented parties. Last, reasonable institutional arrangements are also indispensable. Corresponding institutional arrangements shall be put in place to regulate how representatives take a correct stance, remain rational and safeguard the legitimate rights and interests of investors in the face of interference from external factors. In conclusion, refining the operational provisions of the representative system is a key measure.

3. Improve the Incentive Mechanism for Investor Protection Institutions

Securities civil compensation litigation is marked by high professionalism, complex evidence collection and other attributes, which necessitates more competent litigation representatives. While the China Securities Investor Services Center is fully capable of duly performing the duties of a litigation representative and giving play to its investor protection function as a securities public welfare institution, given its public welfare positioning, matters including how to incentivize it to initiate litigation call for further improvement of relevant rules in the subsequent implementation of this provision.

V. Epilogue

With the sound development of China's securities market, civil compensation cases involving securities will become a normalized category of tort cases. Such cases will not decrease, but will continue to emerge continuously. It is expected that with the implementation of a series of measures including the practice of the representative litigation system for securities disputes, investors can safeguard their legitimate rights and interests at a faster, even much faster pace.