Directors, Supervisors and Senior Directors, violated their public promises and were sentenced to compensation!

On April 25, the Shanghai Financial Court publicly pronounced the case of a dispute over false statements between plaintiffs Liu and Zheng sued the defendants Shanghai Jinmoutai Chemical Co., Ltd. (hereinafter referred to as "Jinmoutai"), Yuan and Luo Securities.

A Securities Times reporter learned at the scene that the Shanghai Financial Court ordered the defendants Yuan and Luo to jointly compensate the plaintiff Liu for 506,100 yuan in investment losses and jointly compensate the plaintiff Zheng for 277,400 yuan in investment losses.

This case is the first securities infringement dispute in the country caused by the failure of directors, supervisors and senior management of listed companies (abbreviated as directors, supervisors and senior management of listed companies) to perform their commitments to publicly increase their holdings since the amendment of the Securities Law of the People's Republic of China in 2019. It is reported that this case is tried using a demonstration judgment mechanism.

Liu Bo, the lawyer acting in the defendant Zheng and full-time lawyer at Shanghai Bangxinyang Law Firm, said in an interview with the Securities Times reporter that this case is the first judicial application of Article 84 of the new Securities Law. "This judicial breaking and activating this clause will help boost investor confidence and promote the orderly operation of the capital market."

Article 84, Paragraph 2 of the New Securities Law stipulates that if the issuer and its controlling shareholder, actual controller, directors, supervisors, senior management personnel make public commitments, they shall disclose it; if the failure to fulfill the promise causes losses to investors, they shall bear the liability for compensation in accordance with the law. This article provides for the first time to clarify the civil liability for violating public commitments from a legal level.

Is there a subjective "false-style increase in holdings"?

On June 15, 2021, Jin Moutai issued an announcement stating that the company's director and president Yuan and Luo Mou, general manager of the holding subsidiary, plan to increase their holdings of Jin Moutai shares within 6 months, with a total increase of no less than 300 million yuan. Later Jin Moutai issued two announcements, saying that the implementation period for the above-mentioned increase in holdings by Yuan and Luo was extended to June 15 and September 30, 2022 respectively. After the market on September 30, 2022, Jin Moutai announced that Yuan and Luo Mou failed to complete the share increase plan during the extension period. On October 20 of the same year, the Shanghai Regulatory Bureau of the China Securities Regulatory Commission took administrative supervision measures to issue a warning letter to Yuan and Luo. On December 21 of the same year, the Shenzhen Stock Exchange made the "Decision on Public Condemnation of Yuan and Luo."

The plaintiffs Liu and Zheng claimed that they purchased Jin Moutai's shares due to the above-mentioned shareholding commitment, while Yuan and Luo failed to fulfill their commitment, which constituted false statements in securities. They asked Jin Moutai, Yuan Mou and Luo to jointly compensate for investment differences and commission losses, totaling more than 9 million yuan.

A Securities Times reporter learned on the spot that the focus of the dispute in this case is whether the public increase in holdings is infringed on securities false statements; if the false statement is established, is the act of significant; whether there is a transaction causal relationship and loss causal relationship between the false statements involved in the case and the investor's investment losses, how should the amount of compensation that investors can receive should be calculated; how should the liability of the three defendants be defined.

Cai Lianqin, the lawyer representing the plaintiff Liu and lawyer of Shanghai Rongli Tianwen Law Firm, said in an interview with the Securities Times that the two company executives publicly made huge commitments to increase their holdings. As investors, there is reason to believe that it will have a huge impact on the company's stock price. Investors also made investments based on this expectation, but the subsequent public commitments and the two extensions were inconsistent with the facts and none of them increased their holdings. "The contrast between the public commitments before and after is too large, resulting in huge losses from the plaintiff. We believe that the defendant's public commitment to increase their holdings has constituted a false statement and requires him to bear the losses of the investment difference, which is in line with the law."

The defendant Jin Moutai argued that he was not the subject of administrative supervision measures. Regarding the entire process of the defendants Yuan and Luo's increase in holdings, the company issued an announcement in a timely, truthful, accurate and complete manner. There are no illegal and irregular activities in information disclosure, and the board of directors, supervisory board and shareholders' meeting have been held in a timely manner on the extension of holdings. The procedures are legal and compliant.

The defendants Yuan and Luo jointly argued that the two defendants have promptly informed Jin Moutai of the willingness to increase their holdings, fund raising situations, and postponement due to difficulties in fund raising, and that due to insufficient objective performance, they were unable to fulfill their holdings commitments, and there was no intention or negligence of subjective "fraudulent increase". In this regard, the company also issued an announcement in a timely manner. The decline in stock prices is mainly due to other situations such as the overall market and the company's own operations, and it is not because the two defendants failed to fulfill their commitment to increase their holdings.

During the trial, all parties provided evidence, cross-examination and debated the main focus of disputes such as the legal nature of the act of public commitment to increase holdings, the components of responsibility, and the responsibility.

"Directors, Supervisors and Seniors" jointly compensate the company without liability

After trial, the Shanghai Financial Court held that public commitments include various types such as share restriction commitments, performance commitments, share increase (decrease) commitments, dividend commitments, share repurchase commitments, and legal obligation restoration commitments. The legal liability attributes of failure to fulfill public commitments cannot be summarized. They should be considered in combination with factors such as the promised subject and content, whether the counterparty determines or not, the reasons for the failure to fulfill the promise, and the fault of the promised subject. It may constitute typical securities infringement such as false statements and market manipulation, or it may not be included in the scope of special securities infringement, or it may constitute a breach of contract.

Regarding whether the public increase in holdings in this case constitutes false statements of securities, the Shanghai Financial Court held that it should be judged in combination with the characteristics of the behavior of increasing holdings in the securities market, the nature of the behavior of the public increase in holdings, as well as the performance preparations for the defendant when making the increase in holdings, the reasons for the two extensions, the reasons for the failure to fulfill the commitment, and whether there are any reasons for exemption.

In this case, the Shanghai Financial Court held that Yuan and Luo had no financial preparations when they made the first commitment to increase their holdings, and did not actively raise funds during the subsequent extension, and used bridge funds to produce "false" deposit certificates when facing exchange inquiries, so it is difficult to determine that they have the true intention to increase their holdings. From the perspective of the increase of holdings, the amount of the promised increase, the market influence, etc., the disclosure of Yuan and Luo's public commitment information on increasing holdings seriously misleads the securities market and investors' expectations. The reasons for the failure to fulfill the commitment to increase holdings as they claim are obviously unreasonable, so the false statement is valid and of great importance.

The Shanghai Financial Court also believes that the public promisers Yuan and Luo are the legal information disclosure obligors, not Jin Moutai. Judging from the entire process of information disclosure, Jin Moutai fulfilled his basic review obligations, and there is no evidence to prove that Jin Moutai knew or should have known that Yuan Mou and Luo had false statements, so he should not bear the civil liability for the false statements involved in the case.

In summary, after the loss verification of the entrusted third-party institutions, the Shanghai Financial Court ordered the defendants Yuan and Luo to jointly compensate the plaintiff Liu for 506,100 yuan in investment losses and jointly compensate the plaintiff Zheng for 277,400 yuan in investment losses.

Chen Wangshu, the lawyer representing the three defendants and partner of Hairun Tianrui Law Firm, said in an interview with the Securities Times reporter that Jin Moutai is exempted from liability and should not consider appeal. The two defendants should consider appealing, "The specific details must be returned to ask the parties' opinions."

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[Editor in charge: Xie Wei PF123]