Construction Of Legal Status Of The Company In Shareholders’ Derivative Action

As an exception of the Principles of Proper Party and Majority-DecisionMechanism, Shareholders’ Derivative Action Regime has faced challenges in thejuridical practice and theoretical areas as of its establishment. As a company whoseright to file actions is exercised by its shareholders, the protection of the Company’srights and the perfection of the purpose of the “Shareholders’ Derivative ActionRegime” are highly depended on the issues “whether the Company should becompulsorily brought into the shareholders’ derivative action”,“what litigation statusshould the Company have in the actions”, and “how could the Company protect itsrights given that the Company doesn’t join into the actions”. The PRC Shareholders’Derivative Action Regime was established in the Year2005according to the PRCCompany Law and the PRC Securities Law. However, due to the lack ofnational-level rules with regard to the legal status of the Company in Shareholders’Derivative Action, the local courts failed to use definitive rules to judge the legalrelationship among the three parties (the plaintiff, the defendant, and the Company)and their respective legal status have not been clearly recognized for a long time. ThisDissertation puts forward three main standpoints of “the Company should be giventhe right to choose whether to enter into the actions”,“the Company should enter intothe actions as a third party without independent claim”, and “the Company should begiven rights to intervene into the actions given that the Company doesn’t join into theactions” based on researches of the theories and rules in relation to the Shareholders’Derivative Action Regime of the main jurisdictions, critical acceptance or rejectionsof the theories and standpoints of domestic scholars, and the Shareholders’ Derivative Action Regime practice and150judicial cases in China. The purpose of the author isto construct proper legal structure which is adapted to the economic practice and thetheories in relation to the PRC company laws and procedural laws.Subsequent to the introduction of issues related to the “Legal Status of theCompany in Shareholders’ Derivative Action” in the preamble, this Dissertation isdivided into three chapters to research the issues:Chapter I: International Rules and Domestic Researches with Regard to theCompany’s Legal Status. Firstly, the author will look into the development history andcurrent rules of Shareholders’ Derivative Action in United Kingdom, United States,Germany and Japan respectively, and conclude the relevant foreign rules and theoriesrelated to the theme of this Dissertation, including “the Rule in Foss v. Harbottle”,“the Special Litigation Committee System”,“the Court Permission Procedure”,“theStatus as a Nominal Defendant” and “the Status as a Joinder Litigant Participant”.Next, the author will analyze the current domestic researches related to “whether theCompany should be compulsorily brought into the shareholders’ derivative action”,“what litigation status should the Company have in the actions”, and “how could theCompany protect its rights given that the Company doesn’t join into the actions”. Atlast, the author will conclude the contributions and drawbacks of the current theories.Chapter II: Empirical Analysis on the Company’s Legal Status. In this chapter,the author will research into150judicial cases related to Shareholders’ DerivativeAction in China. The author will analyze the key issues such as “whether theCompany enters into the actions”,“the litigation status of the Company in the firsttrial and second trial”, and “the position of the Company in the action” through12sheets. Through the empirical analysis, the author finds that:(I) the Companies enterinto the action in more than70%of the cases, while among which certain Companiesare brought into proceeding compulsorily by the court in some cases. Furthermore, theauthor notes that the litigation position of the Company does not apparently affect thetrial result based on interaction analysis;(II) the Companies enter into the action as athird party in about90%of the cases, while as a plaintiff or defendant in some othercases. In the second trial, the Companies enter into the actions as the appellant orappellee in more than30%of the cases, while the Companies’ positions in the firsttrial cause the Companies to be appellees;(III) the number of cases which areterminated by reconciliation is less, and the Companies were not deeply participatedinto the actions. Chapter III: Construction of Legal Status of the Company in Shareholders’Derivative Action. Firstly, the author will analyze on the issues of “whether theCompany should be compulsorily brought into the shareholders’ derivative action”from the perspectives of procedural laws and company laws. The author is of theopinion that it is highly difficult to get support from procedural laws and companylaws to bring the Company into the action compulsorily, and suggests that theCompany should be given the right to choose whether to enter into the actions;secondly, in relation to the issue “what litigation status should the Company have inthe actions”, the author suggests that the standpoint “the Company should enter intothe action as a third party without independent claim”, which can meet realistic needof the Company. In relation to the drawbacks of the current rules in procedural laws,the author suggests it could be perfected by amending the current regime of the “thirdparty without independent claim” and absorbing other proper rules such as “theActions Filed by Third Party to Withdrawal the Original Verdict”,“the Rule ofNotification for Litigation” and “the Rights of the Company/Shareholders to File aRetrial”. To the theoretical contradictions in the circumstance that the Company actsas a third party in the first trial while acts as the appellant/appellee in the second trial,the author is of the opinion that it is necessary for the Company to act as the appellantin practice, while the wrongdoing that the Company acts as the appellee should becorrected. At last, in relation to the issue “how should the Company intervene into theactions given that it doesn’t join the actions as a party”, the author suggests that thereconciliation institution in related to the shareholders’ derivative action should beperfected, and introduces systems such as “Special Litigation Committee” intocorporate governance of listed companies.