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Special Report: A Trip Back Bo
LI I spent a little more than three weeks back in China in November. It was my vacation time, but I did not rest. I taught. I gave lectures. I attended conferences. I saw my family. And I met a number of old and new friends. It was fruitful. The main purpose of my trip was to teach American securities law at the Law School of Renmin University of China (RUC) in Beijing and to conduct research on China's securities regulation. It was what I hoped to be the start of a cooperative project between the China Civil & Commercial Law Research Center (CCCLRC) at the RUC Law School and the Overseas Young Chinese Forum (OYCF). In fact, in October, we were jointly applying for financial support from the U.S.-China Legal Cooperation Fund, a foundation based in Washington D.C. If we receive funds, OYCF would send two attorneys each year to teach securities and corporate law at the RUC Law School. In the proposed cooperation, OYCF would also work with the CCCLRC to undertake a research project on reforming China's securities regulation, specifically in the area of civil liabilities and the protection of small investors. Before the trip, I spent two months preparing my teaching outline. Since the U.S.-China Legal Cooperation Fund would not make its funding decision until early December, the East Asian Legal Studies (EALS) program of Harvard Law School generously offered to sponsor the round trip airfare for my trip. Special thanks are due to Professor William Alford, Director of EALS at Harvard and an advisor to the proposed cooperation between OYCF and the RUC Law School. Thanks should also go to Professor Howell Jackson of Harvard Law School and Mr. Richard Drucker of Davis Polk & Wardwell, whose advice was indispensable in the process of planning and preparing for this trip. On November 1, I left New York for Beijing, arriving on the afternoon of November 2. I. Teaching Graduate Students My securities law class was offered to graduate (Master and Doctoral) students. More than fifty students indicated their interest in taking the class, but space limitations made it impossible to accommodate all of them. Eventually the school chose thirty-five students. The class was taught in Chinese, while all reading materials were in English. I prepared a set of teaching materials that ran about 1,600 pages. I did not expect the students to read all of the materials. Instead, I told the students to focus on important cases and written rules. The class was originally scheduled for eighteen hours (six hours a week). The students were eager to learn, and they requested to extend the length of the class. Eventually the class ran a full twenty-one hours, averaging seven hours a week (not including office hours each week, which lasted for two hours). The structure of the class is as follows: two hours on the history of securities regulation, two hours on the U.S. securities market and its regulatory framework, five hours on Section 5 of 33 Act, two and half hours on basic disclosure requirements (Regulation S-K, Form S-1, S-2, S-3, etc.), two and half hours on liabilities and due diligence under 33 Act, two and half hours on the definitions of "securities" and "exempted transactions," two and half hours on liabilities under 34 Act, and two and half hours on the Internet and securities law. Following American law professors, I used the Socratic (question and answer) method of teaching in class. I also used two problem sets as hypotheticals for class discussion. There was a student panel for each class. Students on the panel were supposed to spend more time to prepare for the class and answer the questions I raised in class. I found that panelists generally prepared well, and class discussion was lively and stimulating. After the class on each day, I would have lunch with the panelists of the day. We talked about securities regulation in China, students' life and career choices, and plans for studying abroad. I found a high interest among students to study abroad, although many of them did not have much clue in terms of where to start. The high point of the class was on the civil liabilities under American securities law. Students were interested in the public enforcement efforts by the Securities & Exchange Commission (SEC) and the Department of Justice (DOJ) in the United States. They were also very curious about private rights of action and the mechanics of class actions under American securities law. I encouraged students to compare the effectiveness of securities law enforcement in the United States with that in China, and analyze the historical and institutional reasons behind the differences. We found that there are few incentives for government agencies to enforce the securities laws in China. In fact, there are incentives not to enforce the laws, because a large number of the fraudulent or manipulating activities in securities transactions are conducted by state-owned securities firms, mutual funds and other enterprises. All Chinese securities firms and mutual funds are owned by the state and managed by people related or connected to the government regulators. This means that government's enforcement of securities laws is very weak in China, which presents a sharp contrast to the U.S. system of public enforcement of securities laws. In the U.S., the SEC and DOJ are a major force for the enforcement of securities laws because, first, none of the securities firms or mutual funds were owned by the government; second, there are strong incentives for officials at the SEC and DOJ to go after fraudulent or manipulating practices on the securities market. The incentives for public enforcement come from several ways. First, a free and active press in the U.S. constantly monitors the activities of the securities market and the government. Second, in a democracy, politicians care about public opinion as reflected and influenced by the press. Third, a large number of officials at the SEC and DOJ have long-term career goals in the government or in the private sector, which provide a strong incentive for these officials to perform well in their posts. At the same time, students were fascinated by the private rights of action and class action mechanisms in the enforcement of American securities laws. There are very few provisions for private rights of action in China's Securities Law, and there is almost no class action mechanism in China. This means that private enforcement of securities laws is also very weak in China, which is very different from the U.S. system of private enforcement of securities laws. In American securities laws, private rights of action for damages and injunctive relieves are a major source of the laws' effectiveness. The U.S. Congress was very generous in writing the securities laws to grant private rights of action to investors harmed by fraudulent or manipulative practices on the securities market. Where Congress is silent regarding private rights of action in certain cases, the U.S. courts were not reluctant to imply private rights of action from the general legislative intent of the securities laws. More powerful is the class action mechanism. For an individual investor, it is usually not worthwhile to sue a fraudulent or manipulative issuer, securities firm or mutual fund because the stake is too small for most individual investors and the monetary and time costs are too high. But the class action mechanism changes the landscape. With the class action mechanism, one single investor can sue a fraudulent company or person on behalf of all similarly situated investors. In the U.S., in contrast to China, it is much easier to start a class action suit that encompasses tens of thousands of plaintiffs. One of the most facilitating features of the U.S. law is the presumption in the Federal Rules of Civil Procedure that a similarly situated plaintiff who fails to respond to a reasonable notice (such as a letter or a newspaper announcement) is automatically included in the class. As such, it is relatively easy to start a large class action in the United States. In contrast, China does not have a well-specified procedure for class action suits. Many courts throw out class petitions for jurisdictional reasons or for lack of law or legal precedents. For the very few class action suits in China, judges all required that each plaintiff to join the class affirmatively to become a class member, which prevented the formation of any large class. I then led students to discuss ways to improve the enforcement of China's securities laws. Many solutions were proposed, such as privatization of securities firms and mutual funds, more incentives for officials to enforce the laws, more freedom for press and media, more private rights of action, legislation on class action mechanisms, a non-government foundation designed to help small investors to institute suits against fraudulent corporations and persons. The only inadequate part of the class was that the students' English levels were not as high as I hoped. Were the students more proficient in English, I could have taught more, and the class discussion could have been more productive. At the end of the class, I offered a short exam to test the students' grasp of the basic concepts and structure of the American securities regulation. I was quite pleased with the results of the exam. Overall, students told me that they have learned a great deal from this class. II. Attending Conferences During my stay in Beijing, I also attended a couple of conferences. One conference is on China's soon-to-open second Board (stock market), called something like Growth Enterprise Board, which will have lower listing standards than the first Board based in Shanghai. At the conference, I learned a good deal about this new stock market in China. I was also invited to speak at the conference, introducing the Nasdaq Stock Market and comparing it with China's second Board. Apart from the technical differences in trading mechanisms, I observed that one of the major differences between Nasdaq and China's second Board is that China's stock market is suffering from a lack of effective law enforcement efforts (as discussed above). If this situation does not change, China's second Board could be much less efficient and much more plagued with frauds and manipulations than Nasdaq. I also attended a symposium regarding the first bankruptcy case of a listed company in China. It is the case of Zhengzhou Baiwen Co., a listed company based in Zhengzhou, Henan Province. At the symposium, I learned China's bankruptcy procedures and the specific case of Zhengzhou Baiwen. I was also invited to speak on the American bankruptcy procedure, and to point out the inadequacies of China's bankruptcy laws. As a starting point, I said in my speech, there are several harmful confusions among academics, government officials and general public. For example, people confuse liquidation with bankruptcy, mix delisting and bankruptcy together, and commingle civil and criminal liabilities. I tried to clarify these concepts during my speech. I then went on to point out China's legal and institutional inadequacies as reflected in the case of Zhengzhou Baiwen. First, China's bankruptcy laws do not have a procedure for reorganization. Any actual reorganization is conducted on an ad hoc and unregulated basis. Second, China's securities exchanges do not have delisting standards yet, which makes the discussion of delisting confusing and any actual delisting unlikely. Third, China's Company Law does not have clear provisions regarding civil liabilities for officers', directors' or large shareholders' breach of fiduciary duties. Fourth, judicial local protectionism, an acute problem in recent years, was manifest when a local court in Zhengzhou refused to accept creditors' petition for freezing Zhengzhou Baiwen's assets earlier this year. And finally, Chinese judges are still poorly trained for undertaking large and complex bankruptcy cases. On November 20, I was interviewed by China Central Television Station's (CCTV) "China Economic and Financial Report" program. The subject of the interview was on the bankruptcy of Zhengzhou Baiwen Co. A summary of the interview was aired nationally on the same day. [Note: Please see Wall Street Journal, December 4, 2000, for a report on the case of Zhengzhou Baiwen. Please also see China Securities Daily, December 8, 2000, for an article that I wrote on Zhengzhou Baiwen, which tries to clarify several concepts for Chinese readers. The web address of my article is http://202.84.17.6/csnews/articles/130_52756.htm. You can also find the article at http://finance.sina.com.cn/t/27163.html.] III. Other Activities While I was in China, I also traveled to several other universities to give lectures. I gave two lectures at Beijing (Peking) University. One lecture was titled "The Rule of Law, Individual Freedom and Economic Efficiency," and the other was titled "My Experience of American Education." I also traveled to Guangzhou to give a lecture on my experience of American education at Zhongshan University. Finally, I gave two lectures on the rule of law and my experience of American education at Renmin University of China (in addition to my regular teaching). [For the transcript of one of my lectures, please visit http://www.civillaw.com.cn/lawfore/lawfore-16.asp.] During my stay in China, I also visited a number of old friends, including Professor Wu Jinglian and Professor Wang Yuanhua. These friends were impressed by the activities of OYCF and expressed support to our endeavor. On November 26, I flew back to New York, with a much larger luggage bag. V. Epilogue On December 10, I received a call from Mr. Herbert J. Hansell at the U.S.-China Legal Cooperation Fund. The OYCF and the CCCLRC have been awarded a grant for the teaching and research project that we proposed to the Fund in October. Our project will continue as proposed. |