Academic

Chinese corporate law: where's the beef? (2)

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

In my first post, I mentioned that one question one must always ask about corporate governance rules in Chinese law is: do they matter? One reason the rules often don't matter is because there is no practical method of enforcing them. In this post I propose to look briefly at the obstacles to shareholder litigation against companies and their management.

As I mentioned in my first post, although the Company Law and the Securities Law provide that companies and their directors and officers have certain duties, the court system is not always willing to grant a private right of action if the duty is violated. Very often courts may take the view that the problem is one for administrative agencies to deal with. Sometimes the courts' reluctance to take cases is based not on a legal analysis of whether there exists a private right of action, but on a practical analysis of whether the court system has the capacity to handle such cases. Thus, from 2001 to 2003, the Supreme People's Court (SPC) issued three sets of rules instructing lower courts not to accept shareholder lawsuits under the Securities Law unless (a) the suit was for misleading disclosures, and (b) an administrative or criminal punishment had already been imposed on the defendant(s) for the act complained of. (The rules also provided a set of procedures for hearing such cases.) In effect, a disgruntled shareholder must get a key to the courthouse from a government body, and cannot sue at all for losses from insider trading or market manipulation, even though both are equally prohibited in the Securities Law.

The justification for the key-to-the-courthouse rule offered by the SPC was that this was favorable to plaintiffs: a previous finding against the defendants would reduce their evidentiary burden. I have discussed this rationale with a number of academics in China, and have never really gotten a satisfactory answer to my objection that that rationale justifies allowing plaintiffs to bring in a previous finding as evidence, but not requiring them to do so.

A few months ago I read an article in Caijing, a Chinese business magazine, stating that the "spirit'" of a recent SPC document meant that plaintiffs could now sue for insider trading and market manipulation, but the article did not mention the name or source of this document. I e-mailed the author requesting further details, but got no response. When I was in China in December, I questioned a securities litigator about it, and discovered that the article was referring to a speech by a particular SPC official in which he said that such lawsuits should now be allowed to go forward. Does a speech by an SPC official give standing where an official document says otherwise? I guess if local courts think it does, then it does.

More on barriers to litigation tomorrow.

Full post as published by Conglomerate on February 11, 2008 (boomark / email).