On 11 September 2025, the Zhejiang High People's Court published the Report on Financial Adjudication Work of Zhejiang Courts in 2024 together with its typical cases. The case of Trust Company B v. A Listed Company (Securities Misrepresentation Dispute), jointly represented by Liu He lawyers and Tiancai lawyers on behalf of the listed company, was selected as a typical case of Zhejiang courts' financial adjudication in 2024.
In this case, the Liu He and Tiancai legal team, acting as counsel for the listed company, systematically organised core evidence including the trust agreement, information disclosure reports, company registration records, and shareholders' meeting resolutions. The team presented a visualised depiction of the transaction structure and clearly reconstructed the facts of the case. The team argued, through a look-through analysis, that Trust Company B had provided a pass-through structure for Company A — which was actually controlled by the legal representative of the listed company, who was also the perpetrator of the misrepresentation — enabling Company A to use Trust Plan B as an investment conduit to purchase shares of the listed company. The investment decision to purchase those shares had been made by Trust Company B prior to the implementation of the misrepresentations, and the actual settlor of the two-tier nested trust structure, Company A, was aware of the misrepresentations. Accordingly, there was no causal link between Trust Company B's investment decision and the listed company's misrepresentations, and Trust Company B was not entitled to claim compensation for investment losses from the listed company. These submissions and the supporting evidence were accepted and adopted by the court, successfully shielding the listed company from substantial financial exposure, while also providing a case of significant reference value for the resolution of securities misrepresentation disputes.
Keywords: Two-tier nesting; Pass-through structure; Transaction causation
Court: Huzhou Intermediate People's Court
Liu He Legal Team: Senior Partner Zhang Yong; Associates Qi Yifei and Zhou Weiting
In December 2016, Company A (the subordinated settlor/subordinated beneficiary) and Trust Company A (the trustee) established Trust Plan A and entered into a Deficit Supplementation Agreement. In the same month, Trust Company A (as settlor) and Trust Company B (as trustee) established Trust Plan B, with Company A (as the margin call obligor) entering into a Trust Supplementation Agreement with Trust Company B. In July 2017, Trust Company B acquired a total of 377,200 shares of the listed company through Trust Plan B. In April 2018, the listed company published an announcement disclosing that it had received a notice of investigation from the China Securities Regulatory Commission. In 2020, a local securities regulator issued an administrative penalty decision, finding that after the listed company had consolidated its wholly-owned subsidiary, Company B, into its consolidated financial statements, the listed company's quarterly reports, semi-annual report, and third-quarterly report for 2017 contained false records involving inflated revenue and net profit. On this basis, Trust Company B brought a claim against the listed company for compensation on the grounds of securities misrepresentation.
The Huzhou Intermediate People's Court held as follows. From the perspective of the purposes for which the trust plans were established: Trust Plan A was a collective fund trust plan for administrative purposes with designated investment targets, and the scope of investment for the single trust included the circulating shares of the listed company, with an express notation that the administrative service was of a pass-through nature, meaning the trustee established the trust plan in accordance with the directions of all the settlors, serving as an investment conduit for trust property management on behalf of the settlors. The purpose of Trust Plan B was for the settlor to effectively deploy its funds by establishing a bilateral trust relationship through contract, under which the trustee, in its own name and for the benefit of the beneficiary, would invest trust funds in the circulating shares of the listed company through public market transactions and block-trade platforms. Both Trust Plans A and B were established at the direction of Company A, the settlor, to invest trust funds in the purchase of the listed company's circulating shares. The amount invested by Trust Company B in the listed company's shares corresponded to the scale of the trust, and the listed company had also published announcements disclosing that Company A had increased its shareholding through the trust plans, confirming that Trust Company B invested in the listed company's shares pursuant to the terms of the trust agreement. Accordingly, although Trust Company B purchased the shares after the date of implementation of the misrepresentations, the trust plans had already been established in December 2016, meaning the investment decision to purchase shares of the listed company had been made at that time, prior to the implementation of the misrepresentations.
From the perspective of the allocation of rights and obligations under the trust plans: both Trust Plans A and B expressly referred on multiple occasions to the trust plans being of a pass-through nature, under which the trustee merely provides a conduit service to facilitate the settlor's business development, with the settlor independently deciding matters such as the establishment of the trust, the objects for deployment of trust property, and the manner of management and disposition of trust property, whilst independently bearing responsibility for pre-investment due diligence and for trust property management during the subsistence of the trust, and voluntarily assuming the risks associated with trust investment and project due diligence. This makes clear that both trust plans served as investment conduits through which Trust Company A managed and deployed the property of Company A. Under the two-tier nesting arrangement, it was in fact Company A that bore the duty to conduct due diligence on the investment projects of Trust Plan B and that decided on the objects for deployment of trust property as well as the manner of management, deployment, and disposition of trust property, whilst bearing the corresponding risks and liabilities. Trust Company B did not bear any active management duties or risk responsibilities.
In this case, the listed company's securities misrepresentation consisted primarily of inflated revenue and net profit figures resulting from the consolidation of its wholly-owned subsidiary Company B's financial data into the listed company's financial statements, thereby causing the financial data to be false. At the relevant time, the legal representative and actual controller of Company A was also the legal representative, general manager, chairman of the board, and director of Company B, and therefore must have had knowledge of the listed company's misrepresentations. It is accordingly evident that when Company A was conducting due diligence in connection with its investment in the listed company's shares, it had knowledge of the misrepresentations that the listed company was about to implement or had already implemented. Although Trust Company B claimed to have been unaware of the listed company's misrepresentations, given that the trust plans in question were of a pass-through nature and the trustee invested pursuant to the settlor's directions rather than on the basis of its own due diligence or investment advisor recommendations, the fact that Company A, the actual settlor under the two-tier nested trust structure, had knowledge of the misrepresentations should also be attributed to Trust Company B. Taking into account that Trust Company B's investment decision had been made prior to the implementation of the misrepresentations by the listed company, and that the due diligence had been conducted by Company A, which ought to have had knowledge of the misrepresentations, the court held that there was no causal link between Trust Company B's investment decision and the listed company's misrepresentations, and accordingly dismissed Trust Company B's claims in their entirety.
In securities misrepresentation liability disputes, where a trust company acting as trustee purchases shares through a two-tier nested pass-through structure, the determination of whether a causal link exists between the trustee's share purchase and the misrepresentation should be made with reference to the allocation of rights and obligations between the settlor and the trustee under the trust plans. Where the trust plans provide that the actual settlor independently decides matters such as the establishment of the trust and the objects for deployment of trust property, and independently bears responsibility for pre-investment due diligence and trust property management during the subsistence of the trust, and the trustee purchases the shares pursuant to the trust plans, the actual settlor's knowledge of the misrepresentations should be attributed to the trustee, and the causal link between the trustee's investment decision and the misrepresentations should be deemed not to exist.
