A Study On The Alternative Applicability Of Shareholder Direct Action To Representative Action In Small Limited Liability Companies

In present practice of shareholder litigation in the company law of China,shareholders of corporations can not bring direct litigation if the harm was to the corporation and any shareholder harm was indirect.Thus,shareholders could pursue the claim only as a derivative action.In a small scale limited liability companies,however,rigid application of the traditional norm may lead to insufficient protection of minority shareholders' interests.The characteristics of limited liability companies,compared with joint-stock companies,are closeness and collaboration;meanwhile,another obvious feature in small scale limited liability companies,is the combination of ownership and administration,it may weaken the independence of corporate personality.In many small scale limited companies,shareholders participated in the corporate operation,and the controlling shareholders usually play the role of directors or executives.In such circumstance,when the controlling shareholders infringe on the corporate interests and cause indirect damage to the minority shareholders,only the corporation could gain the compensation through derivative litigation,which may cause compensation back to the control of the controlling shareholders again.The damaged minority shareholders cannot be effectively recovered.England and the United States are the pioneers of shareholder representative litigation.The practical experience of these two countries is worth to research.By research the legislation and practice of shareholder litigation in closely held corporations and private companies,we can acknowledge that,more flexible remedy approaches are provided to the minority shareholders who suffered indirect damage.This thesis is composed of four parts.They are as follows:Part ? researches the traditional distinction between shareholder direct litigation and representative litigation in China,and the basic functions of shareholder representative litigation.Additionally,in small scale limited liability companies,the separation of ownership and management rights is much less than that in large corporations.The compensation paid to the company probably back to the hands of the controlling shareholders,resulting in the weakening of the representative litigation's basic functions.Part ? researches the United States' flexible application of shareholder direct and representative litigation in closely held corporations.American Law Institute suggests,in Principles of Corporate Governance,the court could treat an derivative claims as a direct action within a closely held corporations in its discretion;the other approach,in many jurisdictions,is the special fiduciary duty imposed on the controlling shareholders of closely held corporations.The minority shareholders could allege a direct claim that the controlling shareholders,who infringed the corporation's assets,violated their fiduciary duty.Part ? studies the unfair prejudice remedies of England and its function in protecting the minority shareholders' rights in the private companies.Compared to the representative litigation,the unfair prejudice remedy provides extensive application range and diverse remedy measures.In the case of shareholder's rights are indirectly damaged,the unfair prejudice remedy can provide two relief approaches.Courts may require the defendant to buy out the plaintiff shareholders' shares with the share value before the damage occurred,or decide the defendant to compensate for the reflect loss of the plaintiff directly.Part ? provides feasible advises of the flexible application of shareholder litigation in China.First,the controlling shareholders should bear a special fiduciary duty to minority shareholders,and the minority shareholders can bring a direct suit as their interests are damaged by corporate lost due to controlling shareholders' breach of special fiduciary duty.Second,in a shareholder representative lawsuit,allow the plaintiff to be directly compensated with the proportion of share,confirming the interests of the corporation's creditors will not be infringed.Third,broaden the range of minority shareholders' right of claim for shares buy out,to establish a more reasonable shareholder secession mechanism.