Equal Treatment of Foreign Shareholders in Transnational Securities Class Action against a Foreign Issuer—a Chinese Example

摘要

As the world economy and financial markets become increasingly more integrated, cross-boarder securities transaction becomes a daily event. Because Unite States has the world’s largest and arguably most liquid capital markets, it has attracted a significant number of foreign companies to cross-list their stocks in a U.S. stock exchange. Unavoidably, such transactions will not only bring out fortune, but also disputes between transacting parties. Relying on the powerful federal securities law , U.S. investors who have bought or sold such stocks have routinely sued foreign stock issuers through class action when the stock prices went down, alleging their loss is caused by the issuer’s misdeeds, such as a failure to disclose material financial information. Although such misdeeds, if established, usually affect both U.S. investors and their foreign counterparts, the latter could easily be dismissed by federal courts on jurisdiction or legal standing grounds when they try to join the action.In order to show the existence of subject matter jurisdiction, foreign investors who have transacted in the stocks need to pass one or both of the two jurisdictional tests developed by federal courts. The “conduct” test is based on fraudulent conduct that took place within the United States, even though “the allegedly fraudulent transactions involved foreign investors, foreign sellers, or foreign securities.” The other is called “effects” test, which requires subject matter jurisdiction be based on an adverse effects on American investors despite the foreign involvement in the allegedly fraudulent transactions. The determination of subject matter jurisdiction is “a very fact-intensive exercise,” and foreign investors could be denied the access to a federal court due to factual variations. Moreover, if a class action is particularly brought under section 11 of the Securities Act or section 9(e) of the Exchange Act, foreign investors may be excluded for another reason—their shares may have been bought from a foreign exchange and therefore, they cannot satisfy the registration requirement under these two sections.Excluding foreign investors from securities class action while entertaining American investors’ actions is unfair because the foreign investors may not only be denied the same protection, but also be forced to pay for the loss of their American counterparts when the assets of their company are used to pay for the judgment rendered by federal courts. This discrepant treatment of shareholders based on residence arises because the federal substantive and procedural law may make it easier for investors to receive compensation in the U.S. than in the issuer’s home country, even when the underlying claim is the same. Such a prospect is especially possible if the level of investor protection in the issuer’s home country, such as China, is much less than that usually found in developed economies, such as United States. In 2002, the Supreme People’s Court of China issued Several Regulations Concerning the Adjudication of Civil Compensation of Securities Cases Based upon Misrepresentation (to be called Several Regulations, supra). Although this regulation would for the first time allow the Chinese courts to accept private law suits based on misrepresentation , it has laid down some substantial procedural limitations on a defrauded investor right to sue an issuer for misdeeds.The author believes that the current judicial interpretation of the extra-territorial application of the federal securities law is against the equal treatment principle of the traditional corporate law. Such unequal treatment is not justified because the affected foreign shareholders did not bargain for such an arrangement. Moreover, the unequal treatment will degrade the market integrity and will hurt the U.S. interests in the longer run. Therefore, the Court and the legislators should consider making adjustment to the current approach towards such litigations. Possible solutions may include extending subject matter jurisdiction to foreign investors, through a contractual arrangement where transacting parties could negotiate a dispute resolution regardless of the scope of the transaction, or through a reciprocal treaty arrangement so the applicable forum and law could be uniform for all investors involved.