Construction Of The Rule Of Qualified Plaintiff In Double Derivative Suit

In judicial practice,the right of the parent company’s shareholder to initiate litigation for the interest of the subsidiary is frequently denied by the courts,with only a few courts upholding the litigation right of the parent company’s shareholder.This phenomenon has aroused the judicial circle’s contemplation on the double derivative suit.On December 24,2021,the double derivative suit first appeared in the form of a legislative amendment in the PRC Company Law(Revised Draft),but nothing has been finalized before the issuance of a formal legal document.The controversy over the double derivative suit is still ongoing,and the draft does not specify how to apply the double derivative suit,nor does it clarify what statutory conditions the parent company’s shareholder shall meet to become qualified to initiate litigation for the interest of the subsidiary.The following part of the article also discusses from three aspects: the legitimacy of the system,the preconditions for the application of the system,and the specific construction of the plaintiff’s rules.The double derivative suit is necessary for the following reasons: firstly,in the structure of a parent company and its subsidiary,when the strong shareholder of the parent company who controls the management infringes upon the interest of the subsidiary,a single representative litigation cannot provide the parent shareholder with any relief.Therefore,the double derivative suit is necessary to solve this problem.Secondly,the system has been introduced in the form of a legislative draft for the first time,and a case in the Gazette of the Supreme People’s Court indirectly recognizes the double derivative suit.Thirdly,the parent company’s shareholder has the substantive and procedural sources of right to propose the double derivative suit.Fourthly,the goal of the double derivative suit is consistent with that of the single representative litigation,and both are compensatory and deterrent.Based on the infringement sued by the parent company’s shareholder in judicial cases and the infringement methods in practice,this article summarizes the ways infringers may harm the subsidiary’s interest in the following three ways: illegal appropriation of funds,transfer of benefits by taking advantage of the controlling relationship,and illegal provision of guarantee.Infringement shows that there is often a controlling relationship to a certain extent between a parent company and its subsidiary.Therefore,this article holds that the prerequisite for the application of the double derivative suit is that there is a controlling relationship between the parent company and its subsidiary,and such controlling relationship must be substantial.Substantive control determines the standard of a parent company’s control over its subsidiary.It is not an objective ratio to determine whether there is substantive control between a parent company and its subsidiary.Other facts that can strengthen or weaken the parent company’s control shall be considered.This article also provides the standard to determine whether there is substantive control between a parent company and its subsidiary.From the perspective of the construction of specific plaintiff rules for the double derivative suit,this article discusses the elements of the parent company’s shareholder from three aspects: shareholding ratio,shareholding period and the performance of preprocedural procedures.As to the shareholding ratio elements,this article holds the view that there is no logic of legal principle for determining the shareholding ratio in the single class action system,so the shareholding ratio shall be abolished with the abolishment of the single class action system.As to the shareholding period elements,compared with the typical American "point in time" regulation,this article holds the view that it is more reasonable to adopt a "time period" approach to regulate the shareholding period elements.Meanwhile,for some special circumstances,this opinion proposes a view of adjusting the regulation of "time period",such as adjustment and application of the rules governing a company less than 180 days after its incorporation,merger and acquisition of the company,succession due to the death of the original shareholder or other reasons.As to the implementation of pre-procedural procedures,we hold that when the interest of the subsidiary is infringed,the shareholder of the parent company shall request the subsidiary to investigate the liability of the infringer,and notify the parent company.Where the parent company does not file a lawsuit in the same way as the subsidiaries within five days after the subsidiaries refuse or delay to file the lawsuit without justified reasons,shareholders of the parent company have the right to file a representative action to the people’s court.