Viewpoint... A brief analysis of the responsibility of law firms in the securities market -- take the "Five Foreign Bonds Case" as an example.
Published:
2021-12-08
1. Introduction In 2015, Wuyang Construction Group Co., Ltd. (hereinafter referred to as Wuyang Construction) issued a bond of 1.36 billion yuan to the public, which was materially defaulted due to its failure to pay the principal and interest as scheduled. After investigation by the CSRC, Wuyang Construction has false records in the issuance application documents. After the investor claims to the issuer and the intermediary to pursue its liability. In September 2021, the Zhejiang Provincial High Court made a final judgment on the case, rejecting the appeals of various intermediary agencies, and ruled that all intermediary agencies in this case were jointly and severally liable. Among them, the court held that Shanghai Jintiancheng Law Firm issued a legal opinion for the bond issue, did not work diligently and dutifully, there was a certain fault, and decided that Jintiancheng Law Institute should be responsible for 5% of the scope of joint and several liability. This case is the first case of the application of the representative litigation system in the field of securities in China, and it is also the first time that a law firm has been included in the scope of joint and several liability, thus causing a lot of waves in the industry. 2. case analysis 1. Inadequacy of the reasoning part of the court decision In the first instance judgment of this case, the Hangzhou Intermediate Court's reasoning part of the responsibility of Jintiancheng Law Firm is as follows: Under the circumstances that Dagong International's 2015 Corporate Bond Credit Rating Report has prompted Wuyang Construction Holding Subsidiary to sell investment real estate, Jintiancheng Law Firm has not paid attention to the verification of the major contract and the major asset changes involved, has not conducted due diligence on the ownership of real estate, and has not found the legal risks to Wuyang Construction's solvency caused by the relatively high reduction of major assets. Therefore, Jintiancheng Law Firm has not worked diligently and is at fault. It is not difficult to see that the court believes that the law firm's fault lies in the failure to find that Wuyang Construction has a relatively high proportion of significant asset reductions, but what is the basis for this fault? What is the scope of the law firm's due investigation? Is the law firm capable of having an obligation to investigate asset changes? Is there a causal relationship between the law firm's fault and the bond default? The court did not elaborate further. In fact, the law firm does not have much power to conduct a comprehensive investigation of the issuer in the process of issuing bonds. In other words, as an intermediary, the due diligence ability and authority of law firms are completely different from those of administrative agencies. It is undoubtedly a harsh criticism to impose requirements on intermediary agencies with the verification ability of administrative agencies and exchanges as a general standard. It would be far-fetched for the court to decide that the firm was liable on this point alone, especially since it is estimated that Jintiancheng's liability is about 500 times as much as the service fee it charges. 2. Intersection of commercial and legal risks The supervision of the securities market by law firms is mainly reflected in the control of legal risks, but the rating report in this case shows that the company sells investment properties. It is questionable whether this should be included in the scope of legal risk review. The sale of real estate in exchange for the purchase of a house is a price exchange, even if the final reduction of assets, is also a normal business risk faced by the company, such a decision may be based on the future development of the company's various considerations, if the regulatory authorities only engage in the results of the determination of violations, it is not a cause of suspicion. The law's regulation of commercial risk is more procedural than substantive, which also requires the law to focus on the static ownership of assets rather than dynamic asset changes in the reality of the investigation, in fact, lawyers do not have the ability to fully estimate and predict the risk of the commercial field. Of course, commercial risk and legal risk are by no means distinct, and the outcome of the case also suggests that legal practitioners should pay attention to the investigation of such two related situations. 3. Law Firm Liability Boundaries 1. The basis for the joint and several liability of the law firm. According to Article 163 of the Securities Law, if the documents produced or issued by a securities service institution contain false records, misleading statements or material omissions, causing losses to others, it shall be jointly and severally liable with the principal, except where it can prove that it is not at fault. It follows that this is a presumption of fault liability, the problem is how to determine the fault of the law firm, and the determination of whether there is fault involves the law's obligations in the securities market. The Securities Law does not clearly stipulate this. According to Article 14 of the "Administrative Measures for Law Firms Engaging in Securities Legal Business" (hereinafter referred to as the "Administrative Measures") issued by the Ministry of Justice and the China Securities Regulatory Commission, when lawyers issue legal opinions, they are related to the law. The business matters of China shall perform the special duty of care of legal professionals, and perform the general duty of care of ordinary people for other business matters. This provision distinguishes between two different types of duty of care. Article 15 of the Administrative Measures stipulates that documents directly obtained by lawyers from state agencies, organizations with the function of managing public affairs, accounting firms, asset appraisal agencies, credit rating agencies, and notary agencies may be used as the basis for issuing legal opinions, but Lawyers shall perform the duty of care stipulated in Article 14 of these Measures and explain them. The question about this article is to what extent of the duty of care does the law firm review the materials issued by other intermediaries? What is the difference between the special duty of care and the general duty of care? These are not clearly defined, which gives the court more room for discretion. 2. Understanding within the framework of existing rules The process of issuing legal opinions by law firms often involves the review of a large number of materials issued by other institutions, so when these materials are falsely recorded, is the law firm necessarily liable? The answer is no. The court in this case also did not point out that the law firm should bear full responsibility for the untruthfulness of the materials, but the key lies in whether the law firm is diligent and conscientious in the investigation process, that is, whether it has fulfilled the relevant duty of care. Therefore, according to Article 14 of the Administrative Measures, it is particularly important to distinguish between legal and non-legal matters. The author believes that in the absence of clear legal rules and guidelines, the "Rules for the Reporting of Information Disclosure of Publicly Issued Securities Companies" No. 12 issued by the China Securities Regulatory Commission has certain reference value. The specification makes more detailed provisions on the contents of legal opinions and lawyers' work reports, which is an important basis for clarifying lawyers' duty of care in the securities market. In practical work, it is worth noting that matters that meet the duty of special attention should be shown through a clear carrier, and in the process of making legal opinions, attention should be paid to the process of collecting and fixing relevant evidence. keep relevant examination records and working papers, in order to reduce the risk of liability. 3. A brief outlook for the future of the responsibility of intermediaries. Accurate data-based trial mode is the general trend of judicial reform in the future, and it is no exception in the highly digital securities market. The author thinks that the judicial organ can at least consider the responsibility determination in the following aspects: first, distinguish the size of the fault according to subjective factors, such as intentional, knowing that it should be known and laissez faire or gross negligence, general and minor negligence; second, it pays attention to the argument of causality, focusing on the extent to which the behavior of intermediary institutions leads to the final loss of investors; finally, the unity of power and responsibility, liability should be adapted to the fees charged by the intermediary. 4. epilogue After the implementation of the new "Securities Law", my country's protection of the rights of small and medium investors in the securities market has reached a new level, but judicial practice has also brought doubts about the excessive crackdown on intermediaries and "overcorrection. As legal workers, we should clearly understand the risks of the work of lawyers in the securities market, improve the level of understanding of relevant laws and regulations, and constantly promote the development and improvement of various systems in China's securities market.
1. Introduction
In 2015, Wuyang Construction Group Co., Ltd. (hereinafter referred to as Wuyang Construction) issued a bond of 1.36 billion yuan to the public, which was materially defaulted due to its failure to pay the principal and interest as scheduled. After investigation by the CSRC, Wuyang Construction has false records in the issuance application documents. After the investor claims to the issuer and the intermediary to pursue its liability.
In September 2021, the Zhejiang Provincial High Court made a final judgment on the case, rejecting the appeals of various intermediary agencies, and ruled that all intermediary agencies in this case were jointly and severally liable. Among them, the court held that Shanghai Jintiancheng Law Firm issued a legal opinion for the bond issue, did not work diligently and dutifully, there was a certain fault, and decided that Jintiancheng Law Institute should be responsible for 5% of the scope of joint and several liability.
This case is the first case of the application of the representative litigation system in the field of securities in China, and it is also the first time that a law firm has been included in the scope of joint and several liability, thus causing a lot of waves in the industry.
2. case analysis
1. Inadequacy of the reasoning part of the court decision
In the first instance judgment of this case, the Hangzhou Intermediate Court's reasoning part of the responsibility of Jintiancheng Law Firm is as follows:
Under the circumstances that Dagong International's 2015 Corporate Bond Credit Rating Report has prompted Wuyang Construction Holding Subsidiary to sell investment real estate, Jintiancheng Law Firm has not paid attention to the verification of the major contract and the major asset changes involved, has not conducted due diligence on the ownership of real estate, and has not found the legal risks to Wuyang Construction's solvency caused by the relatively high reduction of major assets. Therefore, Jintiancheng Law Firm has not worked diligently and is at fault.
It is not difficult to see that the court believes that the law firm's fault lies in the failure to find that Wuyang Construction has a relatively high proportion of significant asset reductions, but what is the basis for this fault? What is the scope of the law firm's due investigation? Is the law firm capable of having an obligation to investigate asset changes? Is there a causal relationship between the law firm's fault and the bond default? The court did not elaborate further. In fact, the law firm does not have much power to conduct a comprehensive investigation of the issuer in the process of issuing bonds. In other words, as an intermediary, the due diligence ability and authority of law firms are completely different from those of administrative agencies. It is undoubtedly a harsh criticism to impose requirements on intermediary agencies with the verification ability of administrative agencies and exchanges as a general standard. It would be far-fetched for the court to decide that the firm was liable on this point alone, especially since it is estimated that Jintiancheng's liability is about 500 times as much as the service fee it charges.
2. Intersection of commercial and legal risks
The supervision of the securities market by law firms is mainly reflected in the control of legal risks, but the rating report in this case shows that the company sells investment properties. It is questionable whether this should be included in the scope of legal risk review. The sale of real estate in exchange for the purchase of a house is a price exchange, even if the final reduction of assets, is also a normal business risk faced by the company, such a decision may be based on the future development of the company's various considerations, if the regulatory authorities only engage in the results of the determination of violations, it is not a cause of suspicion. The law's regulation of commercial risk is more procedural than substantive, which also requires the law to focus on the static ownership of assets rather than dynamic asset changes in the reality of the investigation, in fact, lawyers do not have the ability to fully estimate and predict the risk of the commercial field. Of course, commercial risk and legal risk are by no means distinct, and the outcome of the case also suggests that legal practitioners should pay attention to the investigation of such two related situations.
3. Law Firm Liability Boundaries
1. The basis for the joint and several liability of the law firm.
According to Article 163 of the Securities Law, if the documents produced or issued by a securities service institution contain false records, misleading statements or material omissions, causing losses to others, it shall be jointly and severally liable with the principal, except where it can prove that it is not at fault. It follows that this is a presumption of fault liability, the problem is how to determine the fault of the law firm, and the determination of whether there is fault involves the law's obligations in the securities market. The Securities Law does not clearly stipulate this. According to Article 14 of the "Administrative Measures for Law Firms Engaging in Securities Legal Business" (hereinafter referred to as the "Administrative Measures") issued by the Ministry of Justice and the China Securities Regulatory Commission, when lawyers issue legal opinions, they are related to the law. The business matters of China shall perform the special duty of care of legal professionals, and perform the general duty of care of ordinary people for other business matters. This provision distinguishes between two different types of duty of care.
Article 15 of the Administrative Measures stipulates that documents directly obtained by lawyers from state agencies, organizations with the function of managing public affairs, accounting firms, asset appraisal agencies, credit rating agencies, and notary agencies may be used as the basis for issuing legal opinions, but Lawyers shall perform the duty of care stipulated in Article 14 of these Measures and explain them. The question about this article is to what extent of the duty of care does the law firm review the materials issued by other intermediaries? What is the difference between the special duty of care and the general duty of care? These are not clearly defined, which gives the court more room for discretion.
2. Understanding within the framework of existing rules
The process of issuing legal opinions by law firms often involves the review of a large number of materials issued by other institutions, so when these materials are falsely recorded, is the law firm necessarily liable? The answer is no. The court in this case also did not point out that the law firm should bear full responsibility for the untruthfulness of the materials, but the key lies in whether the law firm is diligent and conscientious in the investigation process, that is, whether it has fulfilled the relevant duty of care. Therefore, according to Article 14 of the Administrative Measures, it is particularly important to distinguish between legal and non-legal matters. The author believes that in the absence of clear legal rules and guidelines, the "Rules for the Reporting of Information Disclosure of Publicly Issued Securities Companies" No. 12 issued by the China Securities Regulatory Commission has certain reference value. The specification makes more detailed provisions on the contents of legal opinions and lawyers' work reports, which is an important basis for clarifying lawyers' duty of care in the securities market.
In practical work, it is worth noting that matters that meet the duty of special attention should be shown through a clear carrier, and in the process of making legal opinions, attention should be paid to the process of collecting and fixing relevant evidence. keep relevant examination records and working papers, in order to reduce the risk of liability.
3. A brief outlook for the future of the responsibility of intermediaries.
Accurate data-based trial mode is the general trend of judicial reform in the future, and it is no exception in the highly digital securities market. The author thinks that the judicial organ can at least consider the responsibility determination in the following aspects: first, distinguish the size of the fault according to subjective factors, such as intentional, knowing that it should be known and laissez faire or gross negligence, general and minor negligence; second, it pays attention to the argument of causality, focusing on the extent to which the behavior of intermediary institutions leads to the final loss of investors; finally, the unity of power and responsibility, liability should be adapted to the fees charged by the intermediary.
4. epilogue
After the implementation of the new "Securities Law", my country's protection of the rights of small and medium investors in the securities market has reached a new level, but judicial practice has also brought doubts about the excessive crackdown on intermediaries and "overcorrection. As legal workers, we should clearly understand the risks of the work of lawyers in the securities market, improve the level of understanding of relevant laws and regulations, and constantly promote the development and improvement of various systems in China's securities market.
Key words:
Related News
Zhongcheng Qingtai Jinan Region
Address: Floor 55-57, Jinan China Resources Center, 11111 Jingshi Road, Lixia District, Jinan City, Shandong Province
