Make or buy – a new look for derivative action costs in Chinese law for a more enabling environment

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Zhao, J. ORCID: 0000-0001-6430-2356, Ou, J., Liu, Y. and Lin, W., 2020. Make or buy – a new look for derivative action costs in Chinese law for a more enabling environment. Texas International Law Journal, 55 (2), pp. 297-326. ISSN 0163-7479

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Abstract

Derivative actions in modern company law play a crucial role in protecting shareholders and promoting the soundness of corporate governance. However, since China's inauguration of derivative action there have been complications surrounding cost-related issues, especially for joint stock limited liability companies. This article focuses on a key element of the derivative action mechanism in China, namely the litigation fee. Despite the fact that fee related issues have been addressed in the recent Provisions of the Supreme People’s Court on Some Issues about the Application of the Company Law of the People's Republic of China (IV), the provisions failed to address some important aspects in detail, especially in relation to a more effective system for the filing and attorneys' fees. In order to maximize the effectiveness of derivative action and help the mechanism reach its full potential, it is crucial to make sure that litigation costs are tailored to a level that does not discourage shareholders from bringing these actions. This article aims to address the following related questions: are current fee-oriented stipulations in China hindering the effectiveness of derivative action? If so, could Chinese Company Law learn from legislative experiences from the UK, the US, and Japan to address the problem of insufficient incentives for shareholders to bring derivative actions? Through doctrinal and comparative analysis, we will explore the possibilities of establishing a more effective approach unique to China, considering its shareholding structure, corporate law, juridical system, culture, history, legal profession, and professional ethics. A fixed filing fee approach and a contingency fee arrangement supported by a common fund and substantial tests are proposed.

Item Type:

Journal article

Publication Title:

Texas International Law Journal

Creators:

Zhao, J., Ou, J., Liu, Y. and Lin, W.

Publisher:

University of Texas School of Law

Date:

1 August 2020

Volume:

Number: