A Study On The Legislation Of The Incentive Mechanism Of Shareholders' Representation In China

In 2005, Article 152 of the Company Law has formally established the shareholder representative litigation system for the first time in China, which not only becomes an important means for the protection of minority shareholders, but also makes up for the deficiencies in the corporate governance structure.This paper intends to find out the existing issues concerning the incentive mechanism of legislation by analyzing all aspects of the shareholder representative litigation system.First of all, in case of the infringement of interests of the company, which shareholders are eligible to file a lawsuit on behalf of the company, i.e. the eligibility of the plaintiff, and whether the restrictions on the eligibility of the plaintiff are excessively strict.Secondly, before filing a lawsuit in the future with the eligibility, the rational people will usually consider the matter of litigation cost and outcome, so will.However, the initiative of the minority shareholders to file a lawsuit may be impaired by high litigation cost and expected unfavorable outcome.After into the litigation proceedings, the interests of controlling shareholders and that of minority shareholders may conflict, due to the low shareholding ratio of the latter, especially when it comes to listed companies, where "a shareholder alone is dominant". The abnormal equity structure leads to the impairment of the initiatives of minority shareholders to participate in corporate governance. In this case, minority shareholders are difficult to get hold of powerful evidence; therefore, the company’s position in the lawsuit has become a crucial matter.At the end of the procedure, all the litigants need to face the ascription matter of interests. China’s prevailing Company Law stipulates that the result of the court decision will be directly undertaken by the company, while shareholders are just the nominal plaintiff, is not entitled to any rights, rights and qualifications. Taking the monetary interests and the company’s benefit as the starting point, minority shareholders are bound to consider that it is no point filing a lawsuit to gain petty indirect interests.Because China does not have the common-law jurisdiction background to enable the shareholder representative litigation system to grow, so it is essential to be based on fundamental realities of China, draw lessons from relevant experience of incentivemechanism in common law system and other advanced civil law system in order to create a more favorable environment for the shareholder representative litigation.Therefore, suggestions on the incentive mechanism of shareholder representative litigation are proposed as follows:To relax the restrictions on the eligibility of shareholders as the plaintiff will encourage minority shareholders to file a lawsuit. Changes can be done in lowering the litigation cost and raising proceeds of litigation in order to encourage minority shareholders to sue. By increasing the application rate of the shareholder representative litigation, the legal value of the shareholder representative litigation will be fulfilled;If in the lawsuit, the company was regarded as the plaintiff, the inferior minority shareholders could get the assistance from the company in the aspect of collecting evidence, then this will be a a kind of incentive measures or systems for minority shareholders, boosting the initiatives of minority shareholders, improving the application rate of shareholders representative litigation and also the winning rate;As for the proceedings of vested interests, in the case of winning, higher returns may be given to shareholders other than non-litigant shareholder lawsuits; while in the case of losing, shareholders in good faith can be given certain compensation to settle worries after filing the litigation for the sake of encouraging minority shareholders to sue. As a result, the application of the shareholder representative litigation system can be promoted.To sum up, to start with every aspects of the shareholder representative litigation and establish the incentive mechanism and measures will combine incentives in each steps, form the incentive mechanism of shareholder representative litigation, fulfill the objective of encouraging the minority shareholders to sue. Therefore, the shareholder representative litigation can be made full use of, and the damages of the company can be restored, and the illegal acts of company directors, supervisors and senior management personnel can be controlled to some extent.