News

Recently, JAVY Law Firm partner Wei Wei, partner Tian Qiuying and Li Boyan represented a major dispute case involving investors in the New Third Board market suing a listed company for securities misrepresentation. This case is quite typical and representative, not only has a certain guiding effect on the regulation of the New Third Board market and investor protection, but also highlights the professional ability and unremitting efforts of JIA LAWYER in complex financial law cases.


Details of the case
The core of this case lies in the issue of misrepresentation in the process of directional issue in the New Third Board market, which is directly related to the protection of investors' rights and interests and the healthy development of the capital market. With profound professional knowledge and rich practical experience, the acting team of lawyers provided comprehensive and powerful legal support to the client, one of the investors in the directed issue.
According to the principal, the company was in good operating condition as shown in the recommendation report, audit report and other documents issued to the New Third Board company during the initial directed issue, but suddenly failed to disclose the annual report on time in 2019 until it was finally delisted. The client later found out when communicating with the management that the company had internal and external accounts, a lot of undisclosed liabilities, the company's official seal was casually added to the guarantee documents, and the shareholders also had absconded from their capital, which was a major reason for the failure to issue the annual report.
There are several major difficulties in this case: the first is whether the case constitutes a misrepresentation, whether the judicial interpretation of misrepresentation and the principle of presumption of reliance are applicable in the absence of administrative penalties beforehand; the second is whether there is a transactional causation and loss causation between the client and the misrepresentation; the third is whether the client has incurred losses as a result of the misrepresentation and the amount of the losses; and the fourth is whether the intermediary organization is liable. Failure to support any of these difficult issues will result in an unachievable recovery of damages.
The case involved more than ten defendants, with the issuer, its directors and supervisors, and the intermediaries all insisting that there was no misrepresentation; and the intermediaries arguing that the presumption of reliance did not apply in this case, that there was no causation, and that they had exercised due diligence. After three hearings, each of which lasted nearly half a day, and more than ten additional written submissions, the case finally came to a first-instance judgment at the end of 2023.
After careful sorting and in-depth argumentation by the attorneys, the first instance judgment supported the establishment of the misrepresentation without the preliminaries of administrative penalties, and held that the principle of presumption of reliance was applicable, which plays an important role in the establishment of misrepresentation in the targeted increase of NSSB. In the case of NSSB directional issuance, the effective judgment of Shandong High Court and the Supreme Court's ruling that the NSSB directional issuance can constitute a misrepresentation, but the Shanghai Financial Court's case on manipulation of the securities market created the concept of “face-to-face” transactions, which, to some extent, considered the directional issuance to be an agreed transaction, resulting in a lack of understanding of whether the directional issuance can constitute a securities misrepresentation, and whether it can constitute a misrepresentation of securities. However, the Shanghai Financial Court's case on securities market manipulation created the concept of “face-to-face” transactions, which in a way considered the directed issue to be an agreed transaction, leading to disputes in practice as to whether the directed issue could constitute a securities misrepresentation.
Influenced by the client's previous litigation and related transactions, the court in this case held that the transaction causality had not been established and failed to continue to argue the subsequent issues (the client was unable to continue to participate in the second trial for some reasons, and therefore did not file an appeal), but the conclusion of the first focal point issue is of typical significance in the determination of securities misrepresentation: the targeted increase of the NSSB is a kind of public offering, and if the disclosure is inaccurate, then it can constitute a misrepresentation. The NSSB market should not be excluded from the public market because of its limited scope, nor should it allow for lack of due diligence and truthful disclosure because of the lower requirements of the NSSB.
In this regard, JIA LAWYER investors that when subscribing for shares in the NSSB market, it is important to retain relevant evidence, with particular attention paid to proving the causal relationship between the subscribed shares and the public disclosure documents. In the event of misrepresentation, such evidence will become an important basis for investors to fully prove the relationship between their losses and the misrepresentation.