Enforcing U.S. Securities Judgments Against Chinese Companies
August 2, 2023
Robin Hui Huang and Weixia Gu have an interesting paper up on SSRN about enforcing foreign securities judgments in China. In China’s Recognition and Enforcement of Foreign Securities Judgments Against Overseas-Listed Chinese Companies, they note that private securities litigation against Chinese companies in U.S. courts is increasing. But most Chinese companies listed in the United States have most of their assets in China, making it necessary to go through Chinese courts to enforce a judgment for securities fraud. Here is the full abstract:
Over the past decades, a growing number of Chinese companies have been listed overseas, notably in the US and Hong Kong. They are subject to the securities regulation of listing places and can be sued thereunder against their securities misconduct. As overseas-listed Chinese companies usually have their main assets located in China, it is important that Chinese courts recognize and enforce foreign securities judgments. However, there are many difficulties in this area, which undermines the efficacy of the regulation of cross-border securities transactions. In quest of solutions, this article assesses the possibility of suing Chinese companies in the offshore financial centers where they are incorporated, finding that there would be similar issues with judgment enforcement in China. It also examines the viability of using arbitration as an alternative, arguing that arbitration may only supplement, rather than substitute court litigation for resolving securities disputes. China should consider signing a bilateral treaty with the US, clarifying the principle of reciprocity, and ratifying the 2005 Hague Choice of Court Convention and even the 2019 Hague Judgment Convention. Hong Kong is also advised to expand its current judgment recognition arrangement with Mainland China to cover securities judgments and join the relevant international conventions.
Private Securities Litigation Against Chinese Companies
Private securities litigation against Chinese companies in U.S. courts has been increasing. Huang and Gu note that, of the 64 class actions filed against non-U.S. issuers in 2019, 18 were against Chinese companies.
In 2020, the case of Luckin Coffee made headlines. Founded in 2017, Luckin grew quickly to rival Starbucks in China. In January 2020, a short seller accused Luckin of inflating its sales and other key metrics. The SEC filed charges against Luckin, which the company settled in December 2020 by paying a penalty of $180 million. A private securities class action settled the following year for $175 million.
But, as Huang and Gu write, securities litigation “against Chinese companies will be meaningful only if relevant judgments are effectively enforced.” “Many Chinese issuers,” they point out, “especially the smaller companies listed on Nasdaq, have almost all of their assets and business operations located within China.” Lower chances of enforcing securities judgments also lowers the settlement values of securities cases. All this makes the willingness of Chinese courts to enforce foreign securities law judgments critical.
Enforcing Foreign Judgments in China
China enforces foreign judgments based on reciprocity. Because there is no judgments treaty between China and the United States, Chinese courts will enforce U.S. judgments only if they believe that U.S. courts would enforce similar Chinese judgments. As Wenliang Zhang and I have explained, and as Huang and Gu recount as well, recent Chinese decisions like Liu v. Tao and Nalco v. Chen have found reciprocity to exist with respect to the United States.
Last year, China’s Supreme People’s Court adopted a more liberal approach to the enforcement of foreign judgments, explaining that reciprocity could be established by looking at foreign law (de jure reciprocity) even if the foreign legal system had not yet recognized a Chinese judgment, and articulating grounds on which the enforcement of foreign judgments will be refused.
Special Problems with Securities Judgments
So far, none of the U.S. judgments enforced by Chinese courts have involved claims under U.S. securities laws. Huang and Gu point out that such cases may raise special concerns.
First is the quasi-public aspect of securities fraud cases. During the 1970s and 80s, several foreign courts refused to enforce U.S. securities judgments on the ground that they involved public law. These decisions included Schemmer v. Property Resources Ltd. (England 1974), McIntyre Porcupine Mines Ltd. v. Hammond (Canada 1975), and Nanus Asia (Hong Kong 1988). More recent decisions, however, have gone the other way. In Evans v. European Bank Ltd. (Australia 2004) and U.S. Securities Exchange Commission v. Manterfield (England 2009), foreign courts were willing to enforce U.S. disgorgement judgments in actions brought by the U.S. government because the proceeds would go to persons who had been defrauded rather than to the government. It follows a fortiori that these courts would enforce U.S. securities judgments in cases brought by the defrauded parties themselves.
Huang and Gu mention a few other things that might also make Chinese courts pause. For one, the enforcement of securities judgments would flow in only one direction—U.S. judgments might be enforced in China, but Chinese judgments would not be enforced in the United States simply because China does not allow foreign companies to list on its securities exchanges. On the other hand, if one looks just at U.S. law on the enforcement of judgments to establish reciprocity, as the Supreme People’s Court has recently instructed, one finds no bar against enforcing Chinese securities judgments. The Uniform Acts that govern the enforcement of foreign country money judgments in most U.S. states have no exceptions for judgments based on public law in general or for judgments based on securities law in particular.
Finally, U.S. securities judgments are often large. They also tend to be paid by current shareholders for the benefit of former shareholders—the so-called “circularity problem.” Huang and Gu point out that the enforcement of U.S. securities judgments in China raise a “double circularity problem” because many of these companies are listed both in China and the United States. Although the money to pay a U.S. judgment would come from shareholders who own shares in both China and the United States, it is only former U.S. shareholders who would benefit from the judgment.
Time will tell whether Chinese courts will be willing to enforce U.S. securities judgments. If China’s Supreme People’s Court is serious about liberalizing the enforcement of foreign judgments, enforcing U.S. securities judgments would be a good way to show it. This is particularly true since, as mentioned above, the requirement of de jure reciprocity is met. But until a Chinese court actually enforces such a U.S. judgment, uncertainty will remain.
Addressing the Uncertainty
Huang and Gu discuss several ways to address this uncertainty. They suggest that “top courts in the US and China” could make a “joint judicial announcement” of willingness to enforce each other’s securities judgments. But this suggestion misunderstands the role of U.S. courts. Unlike China’s Supreme People’s Court, the U.S. Supreme Court does not issue policy guidance to lower courts outside the context of decided cases. Furthermore, the enforcement of foreign country judgments in the United States is governed by state, rather than federal law, so the U.S. Supreme Court has no authority in this area to begin with.
The authors also mention the possibility of using arbitration rather than litigation to resolve securities fraud cases, since the enforcement of arbitral awards is backed by the New York Convention, which both China and the United States have joined. But, they note, “there is little sign of arbitration gaining widespread acceptance and traction in resolving securities disputes in the US.”
More practically, they suggest that both China and the United States could join the Hague Judgments Convention. The United States has signed the Convention, though it has not submitted the Convention to the Senate for consent. China has not yet signed the Convention, though it has signed the related Hague Convention on Choice of Court Agreements.
The listing of Chinese companies on U.S. securities exchanges is an important aspect of the economic relationship between China and the United States, a relationship that is increasingly under siege. The United States has taken steps to make sure that these companies are properly audited, and China agreed last year to help facilitate such inspections. Huang and Gu point to the enforceability of U.S. securities judgments as another key factor in the protection of investors in Chinese companies listed abroad. For that reason alone, their paper is worth reading.