Shareholders Derivative Action Research

A shareholder derivative action is a civil lawsuit filed by shareholdrs on behalf of corporation asserting rights of the corporation in the absence of corporate action to protect such rights. It is a suit by shareholders to enforce corporate rights against directors or other insiders. The standing of shareholders to sue is derived from the fights of the corporation, and thus actions of this kind are called "derivative actions". Originated in the equity of common law in the 19^th century, shareholder derivative action has evolved into a mature and effective system of its own, which affords adequate and sufficient remedy for companies and shareholders injured by wrongdoers' behaviors.Accoring to the traditional company theory of common law, as a separate legal entity, once established, a company will be separated from the shareholders' properties. The obligation of a sharedolder is limited to the shares he or she holds, while the right of management and operation is endowed to directors and managers. The directors and managers own the duty of care and fiduciary duty to the company, but they are not responsible directly to shareholders. During the day-to -day operation of the company, the shareholders' ability to challenge the decision of directors is hampered by "Business Judgment Rule".Common law provides several protections and remedies for the shareholders, whose rights and interests are injured by wrongdoing. Sharedolder personal action and shareholder derivative action are different in nature and in other aspects. If a sharedolder is injured directly by the company, directors or controlling shareholders, he may file a shareholder personal action in a common law court. But in some cases, the wrongdoers do not injure the shareholders directly, and the wrong is only done to the company, according to the traditional company law, shareholders cannot sue the wrongdoers in that there is no legal relationship between shareholders and wrongdoers. Shareholders may ask the company to sue the wrongdoers,of course. But the company will possibly decline the request if the company is controlled by the wrongdoers.By allowing shareholders to sue wrongdoers in a court of equity, shereholdr derivative action provides a sufficient remedy to the shareholders under such circumstance.This kind of action is an innovation to the traditonal attitude of common law court. In the past, equity courts of England had been sticking to the "Proper plaintiff Rule" and "Majority Rule" developed from Foss V Harbottle: only the company is deemed the proper plaintiff in the courts when a wrong is done to the company, and the will of majority shareholders prevails. Later, those rules became more flexible; several exceptions were created and corresponding procedures were introduced.The equity courts in America also take a cautious attitude towards shareholders' right to sue wrongdoers. Different from the English way, American courts did not create certain rules to limit shareholders ability to sue the wrongdoers but in fact, they respect the business judgments of directors more than English courts do. The limitation is reflected in the "Contemporary Ownership Rule" and "Rule of Exhausting Remedy in the Company". The procedures of action are different from those of English courts.Derived from the law of equity, shareholder derivative action is also adopted by several civil law countries and areas, including Germany, France, Japan and Chinese Taiwan. The basic structure of the action of civil law is almost the same as that of English and American law, but some of the details carry their own characteristics. For example, a shareholder must hold stipulated amount of shares to be a proper plaintiff. For another example, the company is treated as a third party without separate claim, which is different from the American and English way.Short of shareholder derivative action, Chinese company law and related laws are insufficient to provide remedies for shareholders, especially minority shareholdrs. As a powerfull weapon to allow shareholders to supervise the operation of companies, and sue the wrongdoers when thecompany declined to sue them, shareholder' derivative acttion cannot be replaced by any other actions. Lots of applied circumstances in Chinese business life have yearned for such an action. If we still hesitate to respond to the requirement, Chiese courts will still be embarrassed because there are no references to induct their trial. Shareholder derivative action must be Chinese future choice. This article articulates my points of view and suggestions regarding establishing Chinese shareholder derivatie action.