Newsletter
LITIGATION BY INVESTOR PROTECTION GROUPS
The Law for the Protection of Securities Inves-tors and Futures Customers (LPSIFC) was promulgated by the President on 17 July 2002. It provides an important legal basis for the protec-tion of securities and futures investors in Taiwan.
Previously, the release of a report by the finan-cial reform taskforce of the Ministry of Finance had signaled growing official interest in the protection of securities and futures investors. In around half of the 44 cases of "landmine shares" (shares in listed companies with hidden financial problems) that occurred in 1998 and 1999, the Investor Service and Protection Center (ISPC) of the Securities and Futures Institute worked closely with prosecutors to assist victims in filing criminal actions with supplementary civil actions or class actions. This was an important step to-ward protecting the investing public, but there was still a sense that more could be done.
To combine the forces of individual small in-vestors, the LPSIFC addresses the establishment and regulation of investor protection institutions, the sources and application of investor protection funds, dispute resolution procedures, and poten-tial conflicts of interest by securities firms. It also provides for a system of class actions and class arbitration, that marks a major departure from the existing procedural laws.
The 2003 amended Code of Civil Procedure (CCP) also introduced class actions, thus giving rise to the need to choose which law to proceed under. The following outlines the similarities and differences between class actions under the LPSIFC and those under the amended CCP:
I.Class actions/arbitration under the LPSIFC:
Articles 28 to 36 of the LPSIFC provide that in the event of a single securities- or futures-related incident that causes direct losses to multiple se-curities investors or futures customers, 20 or more victims may assign their rights to pursue litigation or arbitration to a protection institution established in accordance with the law. Within the scope of the public interest and the aims de-fined in its constituent articles, the protection institution may then institute legal or arbitration proceedings in its own name. This is what is referred to as "class action" or "class arbitration" in the LPSIFC.
If during a class action/arbitration the number of claimants falls below 20, the LPSIFC allows the protection institution to continue with the action on behalf of the remaining claimants. If the litigation or arbitration is successful, the protec-tion institution must pay out the compensation received to the participating claimants, after deducting necessary litigation or arbitration costs.
The source of funds of a protection institution is monies contributed by securities firms, futures firms, the Taiwan Stock Exchange, the Taiwan Futures Exchange, and the GreTai Securities Market or donations. Article 33 of the LPSIFC specifically provides that a protection institution may not collect remuneration for pursuing a class action/arbitration.
A. Combining forces of individual investors
The major benefit of class action/arbitration is that it can resolve disputes of multiple victims of a single incident at the same time, thus avoiding the financial unfeasibility of individual litigation or arbitration, and reducing the burden on the courts.
In litigation, the burden of proof lies with the plaintiff. But in Taiwan the majority of investors are individuals who lack easy access to informa-tion or evidence to support their cases. Fur-thermore civil damages actions attached to criminal prosecutions usually take around six-and-a-half years to reach a conclusion. If circumstances change or the defendant disposes of assets, investors who receive a favorable judgment may be left with only a paper victory without real compensation. This goes to show that for investors, both the cost and the risks of bringing an action for damages are excessively high. Thus individual litigation does not ade-quately protect the victims' interests, and may even leave them exposed to additional risk.
The LPSIFC empowers a protection institution to request issuers, securities firms, securities services enterprises, futures firms, and other or-ganizations connected with futures and securities markets to provide assistance or produce docu-ments for the purpose of a class action/arbitration. Therefore protection institutions are far better equipped than individual investors to pursuer a claim.
B. Reduced litigation fees
Under the LPSIFC, if the amount of damages sought in a class action/arbitration is greater than NT$100 million, court fees are not payable on the portion exceeding NT$100 million. In other words, the maximum amount of court fees to be paid to a district court is NT$1.1 million (and after the recent amendments to the CCP take effect, this maximum will be reduced to NT$700,000). Also, a protection institution does not have to provide a bond when it petitions the court for provisional injunction, provisional at-tachment, or provisional enforcement to prevent the defendant's disposal of assets to evade future enforcement of a judgment. In individual litiga-tion there is no such cap on court fees nor ex-emption from the bond requirement, so that the financial burden on individual litigants is greater.
II. Class actions under the amended CCP:
Broadly speaking, the amended CCP allows the following three categories of class action:
If a number of persons with a common interest are members of the same non-profit association, then the members may, within the purposes stated in its articles of association, appoint the association to institute litigation on their behalf. This provision is similar to the provisions of the Code of Administrative Procedure regarding litigation by an association on behalf of its members.
If multiple victims of a pollution incident, traffic accident, product defect, or other single cause have appointed a representative party to bring an action for damages on their behalf, then with the consent of the representative party the court may, by public announcement, allow other victims who are not yet involved in the litigation to join in the class action in order to assert their rights. The representative party may also on his own initiative petition the court to make such an an-nouncement, in the interests of resolving all the similar disputes at one time and encouraging potential victims to appear and seek damages, in order to enhance private law enforcement.
The harm caused by pollution, product defects or other similar causes is often continuous, hidden, and propagating, and often victims are unaware of the harm or do not have the capability to in-dependently bring litigation to deal with it. This allows the harm to the public interest to continue unchecked. To prevent such scenario, the CCP now allows a non-profit institution to bring liti-gation against perpetrators to end such harm, with the permission of its supervisory govern-ment authority and within the purposes stated in its articles.
The CCP also broaden the criterion for appoint-ing a representative party for a class action. It is no longer required that all the victims jointly select a representative party, and this simplifies the procedure for class actions. The court may also make a public announcement to invite other victims who are not yet engaged in litigation to join in the action and make their claims together. With regard to court fees, no fees need to be prepaid for the portion of a claim exceeding NT$600,000.
III. Comparative analysis:
Securities or futures investors may authorize a protection institution to bring a class ac-tion/arbitration on their behalf under the LPSIFC, or alternatively, may bring a class action for damages under the amended CCP. However, class arbitration can only be instituted under the LPSIFC. The differences between class actions under the two laws are as follows:
Thus from the point of view of legal fees, the provisions of the LPSIFC are more advanta-geous for claimants.
No bond is needed for asset protection meas-ures under LPSIFC, while the CCP makes no special concessions for asset protection in class actions. Thus from the point of view of asset protection measures, it is more advan-tageous to bring a class action under the LPSIFC than under the CCP.
IV. Conclusions:
The class action system introduced into the CCP makes class actions easier for victims in terms of the cost of litigation, the conditions for bringing a class action, or ease of obtaining information. However, comparing the new CCP with the ear-lier-enacted LPSIFC, perhaps because of a lack of coordination in the legislative process, each has its own advantages and disadvantages for litigants. Thus investors should consider their own needs and choose the most advantageous path by which to assert their rights.