Shareholder Representative Action Plaintiffs System

Litigation by representatives of shareholders is a litigation system by which, when a company's interests are damaged but the company is idle or refuse to file a lawsuit, representatives of shareholders file the lawsuit on behalf of the company, yet the interests to be obtained belong to the company. On the surface, the purpose of this litigation system is to protect interests of the company; but in actuality, the purpose is to protect the interests of shareholders, especially the interests of small and medium shareholders. As actual owners of a company, shareholders are entitled to file a lawsuit when the company's interests are infringed upon, yet the company is idle to prosecute. This litigation system demonstrates the rights of shareholders as well as the necessity to bring benefits to balance. Of course, not all shareholders have legal entitlement to be plaintiffs. Considering a company's stability of operation and balance of interests, law definitely constrains the scope of shareholders who have entitlement to be plaintiffs. Currently, countries throughout the world do not have consistent legal provisions to constrain shareholders' entitlement to be plaintiffs. Major legal provisions regarding shareholders' entitlement to be plaintiffs relate to time span of holding shares, proportion of shares held, and subjective aspects, among other factors. These provisions work well both in preventing abuse of lawsuit by shareholders and in maintaining stability of a company's regular operation. When revising the Corporation Law in 2005, our country established a system of litigation by representatives of shareholders. This system has in reality enormous significance in protecting interests of shareholders. However, the law still has certain defects in the provisions on shareholders' entitlement to be plaintiffs. The law is divorced from reality with regard to proportion of shares held. The time span stipulated in the law to hold shares is too long. In addition, the law does not have provisions on subjective aspects. These defects will affect the effective implementation of the system of litigation by representatives of shareholders in China. Considering this effect and based on actual circumstances in our country, it is necessary to revise the provisions on shareholders' entitlement to be plaintiffs. Relevant revisions may include lowering proportion of shares held, shortening time span of holding shares, and enhancing the subjective requirements. These revisions will largely develop functions of the system of litigation by representatives of shareholders in our country.