Investing in china? beware, if you are a minority shareholder: how effective is the derivative action as a protection device for minority shareholders in China?
| Autor | Viroshan Poologasundram |
| Cargo | Associate in the Financial Services & Funds Division of Baker & McKenzie Services Pty. Ltd., Sydney, NSW, Australia |
| Páginas | 332-358 |
INVESTING IN CHINA? BEWARE, IF YOU ARE A MINORITY
SHAREHOLDER: HOW EFFECTIVE IS THE DERIVATIVE ACTION AS
A PROTECTION DEVICE FOR MINORITY SHAREHOLDERS IN
CHINA?
VIROSHAN POOLOGASUNDRAM*
ABSTRACT
China has developed economically at a rampant pace. However, its
corporate governance principles still lag behind the western world. Based upon
Hui Huang’s impressive empirical study of China’s derivative suits from 2006 to
2009, this article analyzes Chinese derivative actions from 2010 to 2013.
Disappointingly, it shows that the device introduced by the Chinese 2005
Company Law
to protect minority shareholders is actually being used by majority
shareholders. A number of reasons are looked at, including the difficulty for an
aggrieved shareholder to meet the
locus standi
standard, and the significant
expense to bring forward a derivative action. Also, the Chinese Judiciary’s mastery
of company law is addressed as directly proportional to the accurate adjudication
of derivative actions. Though one might think of the Chinese administrative
apparatus as the epitome of
big government
, the resources available to China’s
regulatory commission to hold controlling shareholders accountable for their
actions are approached as well. Regretfully, it can be said that, despite the
embracing of entrepreneurialism, corporate governance has not developed in
China to the same standard of western nations. This is attributed to the Chinese
government control of business activity by holding majority positions in state-
owned enterprises and listed companies, evidenced by the absence of recorded
derivative actions against such listed companies. After looking to common law
jurisdictions for a solution to the problem China faces, both foreign and domestic
investors are warned about the fact that, unlike the United States, minority
investors have very few rights in China.
I. Introduction ............................................................................................................ 332
A. Importance of Minority Shareholder Protection in China .......................... 334
B. Statutory Derivative Action (SDA) in China .................................................. 335
II. Background to Chinese Company Law ............................................................ 336
A. Chinese Law ............................................................................................................ 337
B. Explanation of Share Structure .......................................................................... 338
III. Empirical Evidence ................................................................................................ 339
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* Associate in the Financial Services & Funds Division of Baker & McKenzie Services Pty. Ltd.,
Sydney, NSW, Australia; LL.B., University of South Wales, 2014; B.A., University of Sydney, 2009.
University of Puerto Rico Business Law Journal
Vol. 7
332
A. Methodology ........................................................................................................... 339
B. Raw Data .................................................................................................................. 341
1.!Corporate Ownership of Shareholders in Australia Bringing Forward
Derivative Actions!........................................................................................!343!
2.!Remedies Granted to the Injured Party!....................................................!344!
3.!Types of Plaintiffs: 2010–2013!.....................................................................!345!
IV. Legal & Practical Assertions to Explain the Empirical Evidence ............. 346
A. Substantive Requirements Not Required for the Initiation of Derivative
Action Proceedings ................................................................................................ 346
B.
Locus Standi
............................................................................................................ 347
C. Judges in China: Are They in a Suitable Position to Assess Derivative
Actions? ..................................................................................................................... 351
D. Funding of Derivative Actions ............................................................................ 352
E. Inadequate Resources for the Chinese Securities Regulatory Commission
(CSRC) ..................................................................................................................... 355
F. Mandatory
Cumulative Voting
.......................................................................... 356
V. Conclusion ............................................................................................................... 357
I. INTRODUCTION
At the turn of the 21st century many economists made the compelling
prediction that this would be the “Asian Century,” with China at the helm. China
blossomed from an austere country with a closed economy to a nation where
investors have flooded to in the last decade. In order to maintain and foster this
investor confidence, China decided to import and embrace corporate governance.
This has been a reaction to the revival of individualism in China in the last twenty
years which has resulted in many investors being conscious of their private rights.1
Accordingly, China introduced the
2005 Company Law
which was implemented
at the start of 2006. Mabel Tsui argues that the legislation followed the OECD’s
(Organisation for Economic Co-Operation and Development) 'Principles of
Corporate Governance' as a general guide.2 Part of this corporate governance
reform, included the development of a statutory based shareholder derivative
action. This gave shareholders- particularly minority shareholders, an opportunity
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1 Judith Oliver, Wen Qu & Victoria Wise,
Corporate Governance: A Discussion on Minority
Shareholder Protection
, 6 INT’L J. OF ECON. & FIN., no. 3, 2014, at 111, 112.
2 Mabel Tsui,
Corporate Governance in China
, CORP. GOVERNANCE E-J., Oct. 1, 2010, at 1,
epublications.bond.edu.au/cgi/viewcontent.cgi?article=1019&context=cgej.
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