Legal Research On Judicial Intervention Into Corporate Governance

The result of modern corporate development is separation of ownership and management power. Due to the separation, the managers or the big shareholders (controlling shareholder) controlling the company has become a basic pattern of corporate operation. As the interests of the managers and the big shareholders are not necessarily consistent with those of the owners or small shareholders, the imbalance between the interests of the owners and managers and imbalance between those of the big shareholders (controlling shareholders) and small shareholders arise naturally. To realize the balance between the interests of the company members through reasonable corporate governance system is the core value for corporate governance. But not all corporate governance may achieve the expected results, in which case, external forces are required. Among the external forces, justice as the last resort of socialized remedy is irreplaceable for perfecting the corporate governance. Following the above lines, this dissertation analyzes the preconditions for the justice to access the corporate governance in order to find the appropriate degree of intervention of the juridical force and to establish the proper judicial procedures for corporate governance that are in line with China's specific conditions. This dissertation consists of the following six chapters.Chapter 1 analyzes the reasons why justice intervenes into corporate governance. By probing into the nature of corporate governance, this dissertation finds that the value of corporate governance lies in the check of ownership against management and the balance of interests between shareholders. The reasonable separation of powers between the directors and shareholders enhances the duty of directors, offers remedial options to the non-controlling shareholders, and ensures the normal operation of the company. Analysis finds that a company may frequently fall into an ill-governed situation caused by the intrinsic shortcomings of corporate governance, in which case, external forces are needed. External forces are a concept of varying definitions and may be legislative, administrative, intermediate, or judicial in nature. While pointing out the rationality of introducing the external forces into corporate governance, this dissertation also analyzes the defects of such intervention, and finds that the degree of intervention should be well set.Chapter 2 deals with the jurisprudence of judicial intervention into corporate governance:filling up the corporate contract"loopholes". The basic function of judicature is settlement of disputes. The judicial process is but the process of judges interpreting and applying laws. Therefore, judicature has its own features. By analyzing the nature and features of judicature, this dissertation finds there are pros and cons for judicial intervention into the corporate governance. Also, by looking back on the history of judicial intervention and by exploring its potentials, this dissertation finds judicial intervention has progressed step by step. From the very beginning, judicial intervention was for maintaining the liberty of the company without interfering the corporate governance, then it moved into the area of corporate governance to a limited degree. This dissertation believes the reasons for such a change include the development of the Foss v Harbottle rule, the related statutes and the development of company contract theory. The trend of judicial intervention into the corporate governance reveals that the judicial intervention is getting deeper and wider. To ensure that judicial intervention takes actual effect, this dissertation defines the scope of judicial intervention to avoid excessive judicial intervention and interference with the company liberty.Chapter 3 deals with the limits of judicial intervention into corporate governance. This dissertation analyzes the limits of judicial intervention from the perspective of balancing interests between the managers and the owners. An effective solution of protecting the owners'interests is to set forth the duty of the directors. When the shareholders and directors have difference or even disputes over whether the directors have breached that duty, the judicial organization may get in as an impartial third party for proper adjudication by examining whether the directors have adequately fulfilled duty of care as required by basic commercial rules. Judicial review of the directors'duty has ups and downs in the UK and US. This dissertation analyzes the causes for such ups and downs and their consequences. Another duty of the directors is loyalty, consequences of violation of which are also analyzed herein. Through analysis of the judicial review standard in the UK and US, this dissertation explores the standard for viewing the duty of directors in China.Although judicial intervention into corporate governance is not limited to derivative lawsuits, derivative lawsuits have always been the classical way of judicial intervention. Derivative lawsuits originate from the Foss v Harbottle case, but the Foss v Harbottle rule has many defects, and even the exception to the Foss v Harbottle rule cannot deal with the issue of directors'duty with a majority decision of the shareholders. This dissertation analyzes the judicial functions of the derivative lawsuits, the consequences of retroactive approval or denial by the shareholders'meeting, and the judicial review standard for controlling the violator. In analysis of derivative lawsuits, the Special Litigation Committee of the United States is worth considering. This dissertation examines how the US court reviews the decision made by the Special Litigation Committee and finds three kinds of reviews: formal review, substantive review and independence review. Such a review mechanism can be illustrative to us.Chapter 4 deals with intervention into the imbalance of shareholders'interests. There are many types of imbalance of shareholders'interests, and the controlling shareholders may control the company by way of controlling the shareholder or the board of directors. This dissertation sorts out several classical types of such imbalances. Firstly, this dissertation analyzes the judicial intervention into the shareholders'meeting. Whether the shareholders'meeting can be normally held directly concerns realization of the shareholders'interests. When a company is controlled by the major shareholders and controlling shareholders, they usually refuse to hold shareholders'meetings so as to ensure their interests, in which case, the effective remedy available for the minor shareholders is to seek judicial intervention. This dissertation further analyzes such cases as the shareholders'meeting being void or voidable and the judicial remedy for non-controlling shareholders in such cases. In addition to that, this dissertation analyzes the problems existing in China's judicial intervention into the shareholders'meetings and the solutions.Deprivation of the non-controlling shareholders'information right is another classical instance of imbalance of shareholders'rights, for which, this dissertation offers some analysis. By probing into the dilemma related to the shareholders'information right, this dissertation finds that, for the shareholders to have the information right, there is much work to do, including determining the subjective conditions in exercising the shareholders'information right, the precondition for exercising the information right, the scope of reading, etc. How the court, after allowing the case, can rule on such issues forms an important part of this chapter.The most severe measure that judicial intervention into corporate governance takes is dissolution of a company. The standard for dissolving a company is a pervasive headache for courts of all countries. This dissertation finds that, in western countries, a company is usually dissolved by a court in either of the following two cases: internal dispute and fraud of the controlling shareholders. For a court to dissolve a company in case of grave internal disputes, other conditions must be examined, including the profitability of the company, the value of dissolution for the shareholders, and the impact of dissolution on the general public. In earlier company dissolution cases, the court usually adopted the public interests as the standard for dissolving a company, which added to the difficulty of shareholders'application to the court for dissolution and was gradually discarded by the court. The profitability remains an important standard for dissolving a company. But the most important standard is the value of dissolution for the shareholders. If the dissolution is beneficial to the shareholders, the court will dissolve the company even if it still has profits. This dissertation also finds that, if the controlling shareholders have frauds, the court may also dissolve the company, which is common practice in the Anglo-American countries and continental countries.Except Article 183 of the Company Law, China has no other specific provisions for the court to dissolve a company, and it is very hard for the court to follow this article alone to decide whether to dissolve a company or not. Besides, China has not adopted the fraud and illegal operations as the standard for dissolution, which deprives the small shareholders an effective remedy. Therefore, this chapter proposes China'tests for judicial dissolution of a company.Chapter 5 deals with the procedure of judicial intervention into corporate governance:prudence and efficiency. Firstly, this chapter analyzes the judicial intervention procedures of western countries, highlighting their gains and losses in judicial intervention into corporate governance. As the US has many track records of successful judicial intervention, including, inter alia, the Delaware experience, this dissertation analyzes their causes and finds that success of judicial intervention is closely related to the construction of procedures. The procedure of derivative lawsuits is another topic intensely studied in science of law. By studying the reform proposal given by the UK Law Committee on derivative lawsuits, including the contents, requirements and judicial review standard of the new procedure, this dissertation believes the reform of the derivative lawsuits is necessary.With the foreign successful procedures of judicial intervention analyzed and compared with China's related procedures, this dissertation finds there exist obvious defects in China's judicial procedures, including conflicts between pursuit for efficacy and for formal justice in corporate governance, conflicts between limited judicial resources and judicial demand, conflicts between expectancy and the actual status, and lack of alternative procedures other than lawsuits in judicial intervention in corporate governance.Chapter 6 deals with the procedure reconstruction of China's judicial intervention into corporate governance : amend and conceive. This dissertation believes that, to ensure the best effect of judicial intervention, we must improve on China's lawsuit procedures concerning corporate governance and establish China's alternative procedures for corporate governance. Drawing on the foreign practice, this dissertation studies China's derivative lawsuit system and finds that, although Article 152 of Company Law of People's Republic of China sets forth the derivative lawsuit system, there is still much to be desired in areas such as the conditions for filing suits, scope of judicial review, standing and liberty of lawsuit.In improving on the existing litigation procedures concerning corporate governance, we must take into account the features of corporate governance disputes, including its collectivity, and borrow from the US group action system to enhance the operability of China's group action. What can be borrowed includes properly allocating the burden of proof, correcting China's right registration system in lawsuits, limiting reconciliation, etc. Although there are alternative procedures stipulated in China's civil procedure law, the existing procedures cannot live up to the basic requirements raised by corporate governance. In either the Anglo-American or continental countries, the alternative procedures are ready in the company law and satisfy the requirements for efficacy in handling the corporate governance disputes. Therefore, one of the preconditions for effective judicial intervention into the corporate governance is insertion of procedures for non-suit disputes.