System Construction Of Double Derivative Suit In China

In accordance with the current provisions of the Corporation Law, the subject who is entitled to subm it shareholder’s derivative su it is lim ited to the shareholder of its company. Where the holding shareholder or substantial shareholder of the parent company fully control the subsidiary company and recklessly infringe the interests of the subsidiary com pany, therefore the interest s of the parent com pany would be damaged, the interests of the minority shareholder would be urgent to be protected. To grant the parent company’s shareholder remedy approach, we need to i mitate the provisions of the Delaw are, Japan and Sout h Korea for reference and bring in the double shareholder derivative suit system to allow the parent com pany’s shareholder to submit suit on behalf of the subsidiary co mpany. This article is divided into five chapters to analyze the th eoretical basis and system construction of the double shareholder derivative suit system in China.Chapter 1 elaborates the nature of the double shareholder derivative suit system shall be the pass-though of the righ t to submit derivative suit between parent-subsidiary companies. Same as the shareholder derivative suit, the double shareholder derivative suit is the e xceptional application of proper plaintiff principle, i.e. the most proper plaintiff is under the fully control w ho can not and will not m ake fair suit decision, whereas the interests damages suffered by the company is urgent to be remedied, thus we have to f ind out the alte rnative plaintiff. Under the parent-s ubsidiary framework, the proper alternative plaintiff will be the pare nt company’s shareholder. Then this article analyzes and comm ents on the supporting theories, including piercing the corporate veil theory, common control theory, fiduciary obligation theory, compensation and deterrence function theo ry, power of a gency theory, specific performance theory and damages undertaking theory. From that we can know that we have not find out the proper reasons to ref use the application of the double shareholder derivative suit and the interests of the damaged company are urgent to be protected, thus we shall consider to grant the corresponding right of suit of the parent company’s shareholder to subm it the deriva tive suit to p rotect the in terests of the parent and subsidiary companies by law. Following the article criticizes the opposing theories. Critics hold the opi nion that there exists othe r remedy approaches with no need to establish the double shareholder derivative suit system. However, the author holds that remedy approach has many probl ems, including but without lim itation to the damages of parent company is hardly to be computed, may leading to abuse of the suit rights a nd avoiding the Deep Rock Do ctrine. And so me critics h old that the double shareholder derivative suit syst em violate the contem porary ownership principle, but the author holds that the contemporary ownership is not perfect and has suffered criticism and query.Chapter 2 points out that it is necessa ry to bring in and establish the double shareholder derivative suit system. The scope of the plaintiff has been severely limited under Chinese law environm ent, which results in the poor perform ance of shareholder derivative suit, therefore we need to expand the scope of proper plaintiff, whereas the double shareholder derivative suit system is in correspondence with that orientation. On the ot her hand, the law provisions in China of protecting the shareholder interests is still limited to the plane vision and neglect the shareholder interest protection under the stereoscopic company structure. Also, there is scarcity of protection measures regarding to the parent company’s shareholder. It is necessary to set up the pass-through shareholder derivative suit system under the Corporation Law to protect them against the infringement. Moreover, there exists strong current needs to establish the double derivative suit system, like related transa ctions damage the parent company’s minority shareholder’s interests, listed companies tunneling to its controlling parent company, the subsidiary company lacks the effective supervision from the s hareholder, cross-shareholding weakens the rights and interests of shareholders and so on.Chapter 3 analyze s the legal r elationship between the parent com pany and the subsidiary company. The author holds that we preferably adopt the fully controlled standard through the analysis of the wholly-owned stan dard, minority shareholding standard, controlled standard and fully cont rolled standard, i.e. the parent com pany shall hold sufficient s hares of the subs idiary company and fully controls the subsidiary company. In the practice, this standard may appears to be holding 100% shares of the subsidiary com pany or hol ding less than 100% shares but there is enough evidence to prove that the parent co mpany has in fact fully controls the subsidiary company. Besides, the subsid iary company shall be the im portant subsidiary company, i.e. the book value of the shares held by the parent com pany shall be more than 20% of the gross value of assets of itself. The date of calculating the percentage shall be the date of occurrence of the misconduct. The reason of setting up limitation to the subsidiary to apply doubl e shareholder derivative suit is that the damages suffered by the unim portant subsidiary has little inf luences to the par ent company, there is no need to let the parent company’s shareholder get involved to the supervision of subsidiary company. Besides, the position ranking of director or other senior managers of an unim portant company generally is relatively low a mong the group of enterprises, generally speaking, th e parent company should impose effective supervision on them.Chapter 4 elucidates the proper plaintiff elements under double shareholder derivative suit. The precondition of the proper plaintiff shall be the parent com pany’s shareholder. Secondly, the parent com pany’s shareholder shall m eet certain shareholding period and ratio conditions. This paper distinguishes the different shareholding requirements under general circumstance and special circumstances such as share exchange and share transfer. In order to be in correspondence with the Article 151 under Corporation Law, the author suggests to make the shareholding period and ratio conditions of the parent company to be “the parent company’s shareholder in the form of lim ited liability, or the parent company’s shareholder separately or aggregately holding 1% or m ore of the com pany’s shares in the form of joint stock company during consecutive 180 or m ore days”. Under special circumstances like share exchange and share tran sfer, the original company’s shareholder becomes the shareholder of the pa rent company and the original com pany turns to be the subsidiary company, in addition, the subsid iary company structure is wholly-owned by the parent com pany, thus the double shar eholder derivative suit in fact is the transformation of general shareholder de rivative suit under sp ecial circumstances. Therefore, the author suggests to adopt the opinion that the shareholding period shall be counted from the date of holding shar e of original com pany before special circumstance occurs, i.e. when such pe riod beyond 180 da ys, the plaintiff will meet the shareholding period requirements. Moreover, the already submitted derivative suit shall not be im properly terminated due to the special circumstances. If the special circumstances have happened, the shareholdi ng ratio requirements shall refer to the same under general shareholding ratio requi rements and be am ended accordingly to “there is no shareholding ratio requirem ents to parent com pany’s shareholder in limited liability company form, and the shareholder of parent company in joint stock company shall meet the shareholding ratio requirement of solely or wholly holds 1% or more share”. Following this article analyzes whose m isconduct may trigger the double shareholder derivative suit. The author holds that double shareholder derivative actually is to expand the plaintiff scope expansion to parent com pany’s shareholder, where the defendant of the same shall be gener ally same to the shareholder derivative suit, however, considering the applicable scope is special in the double shareholder derivative suit, the pr oper defendant shall be the director, supervisor, senior manager subject to the important subsidiary company and the third party may only include the pe rson who can actually contro ls the company other than the common third party who does not control the company.Chapter 5 specially designs the prepositive procedure of double shareholder derivative suit. The necessity of setting up the prepositive procedure in double shareholderderivative suit derives from the derivati on of derivative suit and “exhaustion of internal remedies” principle. There ar e two subjects under double shareholder derivative suit, i.e. parent and subsidiary companies, therefore there may exist four options of the prepositive procedure, i.e. fi rst parent then subsidiary, first subsidiary then parent, parent and subsidiary simultaneously and only the subsidiary but sending written notice to parent com pany. This Section lists out the pros and cons of each mode and the author holds the opinion of the fourth, i.e. only submit the request to subsidiary company. This m ode is in correspondence with the Article 151 of Company Law and is most beneficial to pr otect the interests of parent company and the subsidiary company. Therefore, the author suggests to adopt this mode to establish the double shareholder derivative suit.