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On May 17, 2019, the listing of ST Zhonghe was terminated on the Shenzhen Stock Exchange, and it was delisted on July 9, 2019. After two years and two months of cost turmoil, ST and finally came to an end, leaving thousands of shareholders with only huge losses and a difficult road to safeguard their rights. The rights protection action against ST and false statements was carried out as early as February 8, 2018, when the Fujian Securities Regulatory Administration issued administrative penalties to Fujian Zhonghe Co., LTD. Many of the injured shareholders have hired lawyers and prepared ample evidence, but the road to defending their rights is difficult.

"For the determination of the amount of investor losses, as we all know, during the period from 2016 to 2018, China's securities market has undergone a large shock, and the broad market composite index has also fallen sharply, and the market system risk in this case objectively exists." However, when determining the losses of each investor, how to identify and deduct the losses caused by systematic risks, as well as the specific calculation methods of losses caused by false statements of stocks and shares, etc. are highly professional and non-legal issues, so it is appropriate for relevant professional institutions to first make the identification and actuarial calculation under the guidance and supervision of the securities regulatory department. In addition, the determination of loss and actuarial calculation shall be the preliminary procedure for the acceptance of this case. Therefore, under the present circumstances, the court rejects the plaintiff's suit. The plaintiff can wait for the relevant professional body to make a determination of the loss before proceeding with the lawsuit."

All of ST Zhonghe's misrepresentation rights claims were rejected on the grounds that the court could not judge the amount of losses caused by systemic risk, even though the Fuzhou Intermediate People's Court in Fujian Province had recognized that the defendant, Fujian Zhonghe Co., Ltd. should be liable for compensation.

As for the Fuzhou Intermediate Court's determination, "the calculation of losses caused by systemic risk should be made by a professional body and actuarial under the supervision of the securities supervision and administration department, and this actuarial calculation must be used as a preliminary procedure for case acceptance". However, through the ruling, the most intuitive conclusion we can draw is that the loss of systemic risk is inevitably a huge difficulty to be overcome on the way to protect the rights of shareholders, and it is also one of the core disputes between the original defendants. Therefore, this paper will make a relatively simple basic analysis of the focus of the coefficient of systemic risk.

First, the past life of systemic risk

1. What is systemic risk

Systemic risk, also known as market risk, that is, this risk affects the whole market, causes fluctuations to all stock holders in the market, and affects the operation of the vast majority of enterprises. Such risk cannot be eliminated by diversification of investment and asset portfolio. Common sources of systemic risk include policy factors (such as economic policy, fiscal policy), political factors (such as unrest, war, trade war), and economic factors (such as inflation, financial crisis, etc.). System risk may be caused by the above single factors, or may be affected by a number of factors. The control means for some systemic risks are scarce and unpredictable, so systemic risk can be said to be the most helpless risk faced by investors.

2. The correlation between system risk and misrepresentation of listed companies

According to Article 19 of the Provisions on the Trial of Civil Compensation Cases Arising from False Statements in the Securities Market issued by the Supreme People's Court (hereinafter referred to as the "Provisions"), "Where the defendant provides evidence to prove that the plaintiff has the following circumstances, the people's court shall determine that there is no causal relationship between the false statements and the result of damage: (4) The loss or part of the loss is caused by other factors such as the systemic risk of the securities market."

The role of system risk in the cases of misrepresentation claims of listed companies is to block the causal relationship between the misrepresentation behavior of listed companies and the losses incurred by investors. When implemented in practice, investors' losses may be caused by multiple causes and effects, that is, investors' losses may be caused by system risks. It also comes from the false statements of listed companies. Therefore, the system risk is more in the process of loss calculation, bear a reduction of the listed company's compensation amount function.

Systemic risk is a factor that works against investors, whether it is blocking causal links or reducing compensation.

Second, the identification of system risk in practice

1. Identification of system risks in practice

System risk is the factor that blocks the causal connection and reliefs the compensation of listed companies. Generally speaking, the subject of the general claim is the defendant listed company. According to the distribution of the burden of proof in the civil procedure law, according to the principle of who claims who provides evidence, it is more reasonable for the defendant to provide evidence of systemic risk. According to Article 19 of the "Several Provisions" of the Supreme People's Court, the burden of proof of systemic risk is also clearly borne by the defendant.

However, in practice, in addition to the defendant listed company will advocate the system risk and provide relevant evidence to support it, the court will also investigate and study the securities market conditions of relevant industry sectors within the time involved according to its own needs. For example, in the case of (2018) Humin End 120, Shanghai Great Wisdom Co., LTD., Fong's CPA Firm and Sun Jin Securities liability dispute for false statements, under the premise that the Shanghai High Court regards the rise and fall of the broad market index provided by the defendant only as a reference factor to judge the systemic risk of the securities market, it still bases its own subjective judgment and research on the securities market. Identify the existence of systemic risk facts. In the (2019) Min 01 Minchu 595, Zhang Quansheng and Fujian Zhonghe Co., LTD., securities false statement liability dispute case, it is even on the basis of well-known reasons (that is, the system risk is listed as a proof free fact), to identify the existence of system risk.

From the above judgment, it is not difficult to find that the court's attitude towards the fact of systemic risk, that is, the situation of the securities market industry, is not solely based on the legal facts shown by the evidence provided by the defendant, but also considers the situation known by the collegiate panel itself, which includes not only the information learned from the defendant during the trial process, but also the information known by the court itself. Therefore, in terms of the burden of proof, the defendant's burden of proof is actually not strict.

2. Identification of the proportion of compensation reduction and remission by systematic risk in practice

The existence of system risk does not mean that the listed company can be completely exempted from the compensation liability that it should bear due to the false representation behavior. As mentioned above, investors' losses are often caused by the combined action of many factors. How to confirm the role of system risk in the loss process determines the proportion of relief in the amount of compensation. In practice, there are several different ways for the court to determine the proportion of systemic risk in loss.

(1) It shall be determined by the court itself according to the law of relative proportions

In the securities misrepresentation case of Wang Zhibin, Jinya Technology Co., LTD., and Lixin Accounting Firm, No. 355, Chuan 01 Minchu, (2019), since Jinya Technology Co., Ltd. is a listed company on the GEM, the court took the GEM index as a reference and compared the rise and fall of the reference index with the rise and fall of individual stocks of Jinya Technology Co., LTD. The system risk ratio is obtained. That is, (the decline of the reference index ÷ the decline of the individual stocks involved) ×100%.

(2) The court's discretion

In (2018) Humin End 120, Shanghai Great Wisdom Co., LTD., Fong's CPA Firm and Sun Jin Securities misrepresentation case, the court's determination of the proportion of systemic risk in loss is based on the court's discretion to determine the proportion. The court pointed out that "since the price of securities is a comprehensive reflection of many market factors, the extent to which a specific factor has an impact on the price of securities is difficult to determine through scientific and credible methods." As for how to calculate market system risk factors in civil compensation for securities misrepresentation, the law and judicial interpretation have not made clear provisions on this." Therefore, the court only refers to the rise and fall of the market, combined with the principle of investor protection, according to its own subjective judgment and discretion, to make a discretionary proportion determination. This identification method does not involve specific index reference, and there is no corresponding calculation method.

(3) According to the calculation results of third-party institutions such as investment service center and securities investment protection fund company

In (2019) No. 422 Lumin End, Shandong Molong Petroleum Machinery Co., Ltd. and Heyao Securities misrepresentation case, the court sent a letter to the Securities Investor Protection Fund Company for consultation on the calculation of the actual investment loss amount, and the securities Investor Protection Fund company produced a information note on this. It contains an investigation report on the proportion of systemic risk in losses and the corresponding conclusions. The Court adopted a blanket approach to this statement of information.

(4) The proportion of system risk loss is not identified

In (2019) Min 01 Minchu 245, Meng Lei and Fujian Zhonghe Co., LTD. 's securities misrepresentation case, the Fuzhou Intermediate People's Court adopted a completely different approach from other courts, that is, it did not calculate the proportion of system risk losses by itself according to the relative proportion method; Nor does it determine the proportion of system risk loss according to its discretion; Nor did they take the initiative to consult third parties. Instead, it chose not to identify the proportion of system risk before the plaintiff did not calculate the proportion of system risk through the specialized agency, and rejected the investor's lawsuit on the grounds that the calculation of the proportion of system risk belongs to the pre-procedure for prosecution of cases involving false statements.

Third, how should investors respond to the defense of listed companies based on systemic risk

As mentioned above, systemic risk has the function of preventing the causal link between the misrepresentation behavior and the investor's loss results, or the function of deducting the amount of compensation required by the listed company to the investor according to a certain percentage. In practice, the listed companies in the position of defendant often adopt the system risk of the securities market as their defense against investor's loss compensation. If this defense is not adequately prepared in advance, it will often occur such as the lawsuit is rejected (see public and case), investors can claim losses greatly discounted (see Jinya Technology case), and even the lawsuit request is rejected.

In this situation, the investor can take the following measures:

(1) Collect the rise and fall rate of the individual stock index of the defendant's listed company after the disclosure date of the false statement, before the base date, and the rise and fall rate of the broad market index that is closely related to the defendant and more favorable to investors, and use the relative proportion method to calculate a system risk loss proportion. This measure has two effects, one is to give investors a psychological expectation that the court may use this way to calculate the system risk ratio; Second, when the listed company takes the system risk as the defense and provides other indexes as the reference index in the calculation process of relative proportion, it can question the calculation results of the listed company and provide its own calculation results. However, the result calculated by this method is only the unilateral view of the investor, and it is not authoritative, and it is doubtful whether the court will accept this view. Secondly, if the investor meets a court with the same view as the Fuzhou Intermediate Court, even if the investor personally calculates the proportion of systemic risk losses, the court is very likely to reject the investor's lawsuit.

(2) Entrust professional lawyers to apply to the court to entrust small and medium-sized investors service center or securities investment protection fund company and other specialized third-party institutions to conduct professional identification and calculation of the proportion of systemic risk losses involved in the case, and then submit the calculation results to the court during the trial. This measure not only has all the advantages of the previous measure, but also because the algorithm provided by the value online company and the service center for small and medium-sized investors not only has relevant theoretical basis, but also has been widely recognized in practice, so its calculated results are more authoritative and may be accepted by the collegiate panel. For example, Industrial Securities has adopted this algorithm in its advance payment scheme. At the same time, this measure can also deal with the Zhonghe case, Fuzhou Intermediate Court rejected the action of investors. In practice, the defense against the proportion of system risk loss is not only a more appropriate and perfect measure.

Iv. Summary

In the case of false statements, the awakening of the consciousness of shareholders' rights protection and the improvement of laws and regulations have laid the necessary foundation for the road of shareholders' rights protection. However, complicated legal relations and practical obstacles doomed the road to rights protection is still long, how to use legal weapons to more effectively defend their rights and interests, not only depends on the individual shareholders, but also depends on the entire community of rights protection, including victimized shareholders, professional lawyers, third-party institutions and other parties, to cooperate and work together. We believe that although the road to shareholder rights protection is difficult and long, the future is bound to shine.

Zhu Qin

Chief partner and lawyer of Shanghai Guohillhouse Law Firm

He has many years of legal service experience in the fields of corporate compliance, private equity investment and venture capital, finance and asset securitization, capital markets and mergers and acquisitions, engineering and real estate, dispute resolution, bankruptcy reorganization and liquidation.

leafiness

Assistant lawyer, Shanghai Guohillan Law Firm

His practice areas include capital markets, maritime commerce, and dispute resolution