On Director Primacy: A Reflection From Gome Case

This thesis starts from Gome case: Wong Kwong Yu voted against theappointment of3former directors from Bain Capital as executive directorsof Gome in2010. In the following days, however, a meeting of board ofdirectors is convened by Xiao Chen, which made a decision in contradictwith that of the shareholders’ meeting and reelected the3former directorsfrom Bain Capital as executive directors. Then, A heated discussion springup as to corporate governance, especially the Director Primacy Modelversus the Shareholder Primacy Model.My argument for Director Primacy starts from the explanation ofsome related fundamental theories about corporation: the nature of firmwhich is a mechanism for minimizing the transaction costs; TheContractarian theory which advocates that the directors are the agent of theshareholders; the Nexus of Contracts Model which suggests that thecorporation is a Nexus of Contracts or the corporation has a Nexus ofContracts, that the board’s power is “original and undelegated”; theprevalence of authority over consensus decision-making mechanism; thenature of the shareholders’ right. I then strongly advocate that DirectorPrimacy is desirable by demonstrating that the agency cost can be solvedusing the measures of market, direct regulation, fiduciary duty, etc andexplaining the phenomenon of indifferent investors, especially theinstitutional investors as well as the Wall Street Rule. Finally, I use Business Judgment Rule as a model of test, the standard by which adirector is liable evolved from “Reasonable Person”, then,“MinimalProcedural Standard of Attention” to “Disregard of Duty and Violation ofGood Faith”. The protection of shareholders’ right and board of directorsdecision-making power arrived at a balance, the development of BusinessJudgment Rule is just in line with Director Primacy Model. China has beenreforming the corporate governance structure for long, while little has beenachieved, Director Primacy Model can be direction of our reform.