Making Shareholder Derivative Actions Happen in China: How Should Lawsuits Be Funded?

Abstract

There has been a high expectation for the derivative action, which was introduced into China in 2005 when the Company Law 1993 was extensively amended, to play an important role in corporate governance in China. But this expectation may not be fulfilled, because, among other things, the Law does not provide for how derivative actions should be financed. By way of a comparative study, this article investigates what rules are appropriate for derivative action funding in China. The general conclusion is that the common law indemnity order is inherently defective, because it entails that judges impose financial obligations on a company before the merit of an underlying claim is ascertained. The American contingent fee is most favourable and the established rules could be reformed to make the arrangement neutral so as to discourage frivolous litigation. Lastly, the special barrier of filing fees in China has to be cleared in order for derivative actions to be actually taken.