A Comparative Study Into China Institutional Investors' Dilemma In Shareholder Activism

This paper, split into five chapters, is a comparative study into practice and defect of shareholder activism by institutional investors in China, from a law and economic perspective.Chapter I begins with an introduction of institutional investment background domestically and internationally, focusing on definition and general legal characteristics of institutional investment, notably the development of private funds. Chapter II continues with the emergence and maturity of shareholder activism by institutional shareholders in the U.S., going into in particular the mechanism of activism and also the linkage with regulation reform through LLSV paradigm methodology. Chapter III conducts the research into institutional shareholders' corporate governance role in listed as well as non-listed companies in China with field work and by individual cases, trying to reach a conclusion that, surprisingly, activism is not the rational choice for China institutional investors though activism has been proved to be an effective corporate governance tool. Chapter IV is the key part of this paper, focusing on analysis of incompatibleness of China capital market and legal environment against shareholder activism. Chapter V summarizes the essay and puts forward potential localized reform design from the perspective of law and the market.The author argues in this essay, that three factors constitute a depressing environment for the development of institutional shareholder activism. First, centralized equity as well as shares/equity structure of China listed and non-listed companies does not encourage institutional shareholders' participation in corporate governance, deteriorating the agency cost of dominating shareholder and institutional shareholder. Second, the incapacity of China corporate law in shareholder protection frame and voting proxy collection as well as deviated shareholder action in particular fails institutional investors in terms of the instruments through which shareholders exercise their rights and seek to legal remedies. Third, institutional investors have not yet developed itself into the value-creation-oriented phase, which cannot internally motivate the shareholder activism.This essay presents two reform paths from the legal perspective. The forward-looking reform of legal frame to lead the transmission of currently misshapen capital markets seems to be necessary. Microcosmic depth prevails other than strategic height, if we take a pragmatic approach, which indicates that China corporate law shall strike a balance between financial regulation and innovation, by making shareholder proposal right, voting proxy, and derivative action rules more practicable. In that way, signal effect will be released to trigger institutional shareholders' enthusiasm in corporate governance, which will optimize financial resources allocation and boost the economic development.