The Shareholder Derivative Action and Good Corporate Governance in China: Why the Excitement is Actually for Nothing

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Despite high expectations that shareholder derivative actions would serve as an important tool for improving corporate governance in China, only one lawsuit has been brought against a publicly listed Chinese company since such actions were formally introduced in 2005. Among the various barriers to such suits, and perhaps the most difficult obstacle for plaintiffs to surmount, is holding the requisite minimum of 1 % of corporate shares. It is difficult to reduce the threshold figure to a more accessible level, in part because using the minimum shareholding requirement as a mechanism for screening out frivolous litigation is inherently flawed. Yet, attempting to screen frivolous litigation through a judicial determination on the merits of a suit rather than using a minimum shareholding requirement is unlikely to work properly in China. The judiciary is weak, unsophisticated, and riddled with corruption. When the judicial system is in such a condition, it is unrealistic to expect that a derivative action specifically, or indeed, the private enforcement of law in general, can play a significant role in corporate governance. This paper considers these points, and examines how to improve corporate governance in a country with a weak judiciary.