Study On Legal Issues Of Institutional Investors Participating In The Listed Corporate Governance

The phenomenon of institutional investors participating in the governance of listed companies is an eye-catching issue of the world capital market nowadays. During the development of institutional investors, the countries have gone through continuous exploration and perfection. Currently, institutional investors have turned to be the leading characters in capital market and played an important role in the mature European and American corporate governance. Practice has proved that the advantage of a sound legal regulatory framework and a mature securities market size is the internal basis for US institutional investors to participate in the governance of listed companies. In view of the state-owned enterprises reform, the Chinese government actively encourages institutional investors to participate in the enterprise administration and thus the gradual emergence of institutional investors in China. Unlike the ownership structure and state system of foreign countries, China’s institutional investors are faced with interior and exterior barriers when participating in corporate governance. So the legal system calls for an improvement. It’s an urgent issue to be solved in the current environment on how to rationally consider the legal issue of institutional investors participating in corporate governance and to establish a counterbalance and mutual supervision mechanism so that the rights and obligations for the parties are rationally distributed.This paper studies the above issues with a comprehensive application of theories in law, economics and management, together with historical analysis, comparative analysis, and economic analysis and other methods to explain the inner mechanism and problems of institutional investors participating in corporate governance from a legal perspective. Meanwhile, it applies the development and historical experience of American institutional investors to analyze the current situation in China and makes a legal suggestion on how to promote their participation in order to build a more complete legal environment for institutional investors to participate in corporate governance. This paper constitutes of six chapters.Chapter 1 is the introduction. It introduces the background and study significance of the subject, including literature review and the current research at home and abroad as well as the intended research methods and research category.Chapter 2 explains the essential issue of institutional investors participating in governance of listed companies. The chapter analyzes its origin, development and legal sources based on the account of the concept, characteristics and types of institutional investors. Institutional investors are impersonal financial institutions who invest various types of securities in the financial market for the benefit of maximum income with their own funds or the funds raised on the basis of trust. They include mutual funds, pension funds, insurance companies and commercial banks. The legal source of institutional investors is the transformation of Civil Trust to Commercial Trust while institutional investors participating in corporate governance generates from the principal-agent problem of separation of ownership from management in modern enterprise. The moral hazard due to information asymmetry of shareholders and managers can easily damage the interests of clients, which can be greatly alleviated by institutional investors to participate in corporate governance of listed companies with their own characteristics. The United States is the first to start shareholder activism. Before the 1980s, US institutional investors followed the "Wall Street Rule," or "vote with their feet" and were indifferent to the company’s business and governance. Later, due to the expansion of shares for institutional investors in the company, the rise in cost for "voting with their feet", the "passive shareholders" gradually turned to be "active" investors in company governance.Chapter 3 analyzes the legal status of institutional investors participating in governance of listed companies. From the perspective of institutional investors and individual investors, the institutional investors are trustees; while judging from the institutional investors and their holding companies, the institutional investors are shareholders. The dual identity of institutional investors is the main factor that prevents them from actively participating in corporate governance. This chapter analyzes the impact and problems in the governance of institutional investor both as the trustee and shareholder of listed companies and legally analyzes the resolutions.Chapter 4 discusses the fields and ways for institutional investors to participate in corporate governance. It mainly divides the field into four categories:the company’s internal governance, anti-takeover measures, business and public policies. The common ways for corporate governance include proxy vote solicitation and submission of shareholder proposals, public advice and shareholders litigation. Practically, the institutional investor shall first choose a target company and then consult with its management. If the problem remains unsolved, the institutional investor may exercise its right as a shareholder by means of soliciting vote proxy and submitting a shareholder proposal. The institutional investor may last resort to publicizing the governance advice of the target company and the shareholder litigation.Chapter 5 elaborates the legal issues and improvement measures for China’s institutional investors to participate in governance of listed companies. The institutional investors have great difficulty in the governance of listed companies due to the phenomenon "absolute ration share" and the absence of relevant legal system in China. This chapter analyzes the legal issues and a sound legal system for institutional investors to participate in corporate governance and presents sound recommendations on how to promote the listed company governance for institutional investors with legal means.Chapter 6 is the conclusion. It concludes the content of this paper and looks into the future about the subject.