Funding Problems On Shareholders' Derivative Action

Shareholders'derivative action is regarded as a powerful supervision on corporate governance. And in 2006 the newly-amended company law of China introduced derivative action for the first time. It is a great progress in the proceeding of legislation of company law in China. However litigation is expensive and not all the shareholders can afford it. When commencing a derivative action, it means that the claimant shareholder should bear all litigation fees and risks especially when the litigation fails finally.This paper focuses on the issue that how to solve funding problem on shareholders'derivative actions, which kind of lawsuit is made for the benefit of the concerning company and the shareholders, especially the minority group. In the first part, the author briefly introduces the concept of derivative action and its features. The second part puts forward the issue:the funding problem, and explains why it is legally a controversial issue. In the following two parts US rules and UK rules on derivative action fees are introduced and analyzed. Then the author concentrates on the four possible resolutions:to put an obligatory requirement for the company to pay the cost of the action; to reward the plaintiff partial of the proceeds of litigation; to sign a Conditional Fee Agreement and to empower the Securities and Futures Commission to Initiate a Derivative Action on Behalf of a Company. In the conclusion the author finds that funding problem of derivative action is not simple to be resolved. It will continue to be a popular topic for its crucial position in corporate governance and the protection of shareholders.