Arbitration As A Means Of Settling Shareholder Derivative Disputes In Sino-foreign Joint Ventures

In the legal practice of the foreign investment area in China, the controlling partyof the Sino-foreign joint venture may probably misuse its controlling power over theJV for the purpose of seeking for improper interests by refusing to raise claims in thename and for the benefit of the JV. In this circumstance, to provide adequate relievesfor the JV, the non-controlling party may subrogate the JV to exercise JV’s rights andcarry out shareholder derivative suits according to PRC Corporation Law. But inpractice, a difficult problem will appear if the relevant parties have entered intoeffective arbitration agreements, which is, whether the relevant shareholder derivativedisputes should be arbitrated. Due to the lack of legislative directions andcomprehensive theoretical researches in this field currently in China, this question hasled to many controversies in legal practice. Therefore, this paper will take intoconsideration some relevant legal theories and judicial cases and is aiming to analyzeand discuss the arbitration of shareholder derivative disputes in Sino-foreign jointventures on a comprehensive and detailed basis.For the purpose of analyzing the abovementioned issues, this paper will bedivided into the following four chapters:Chapter I will mainly focuses on the history and function of the shareholderderivative suits. To construct a reasonable and clear outline of this paper, this chapterwill first divide the shareholder derivative disputes into two parts–the external shareholder derivative disputes and internal shareholder derivative disputes.Additionally, according to the analysis in this chapter, it’s obvious that the shareholderderivative suits will make up the defects of “principle of decision by capital majority”and “separation of ownership and control” in modern corporate governance and willbring significant benefits for the protection of the non-controlling party in the JV.Chapter II will focus on the legal structure of the shareholder derivative disputes.In the aspect of substantive law, the shareholder derivative disputes essentially includetwo disputes:1) the external dispute between JV and the third party (infringing party)and2) the internal dispute regarding the corporate governance between the parties ofthe JV. In the aspect of procedural law, the shareholder (non-controlling party of JV)obtains an independent plaintiff status and the corporation (JV) generally participatesin the shareholder derivative suits as a third party in the legal practice of China.Chapter III mainly focuses on the arbitrability of the shareholder derivativedisputes. In this chapter, it’s analyzed in the first place that although this question hasbeen under intense argument in the past decade in US, but under the federal policy offavoring arbitration, arbitration has been significantly facilitated and promoted as aneffective settlement mechanism in solving many kinds of disputes and the arbitrabilityof the shareholder derivative disputes is eventually affirmed by most of the US courts.Secondly, under the analysis in this chapter, the shareholder derivative disputes shouldbe arbitrable under the conditions set out in the PRC Arbitration Law. Lastly, thischapter will conclude the several advantages of arbitration in resolving theshareholder derivative disputes in Sino-foreign JVs compared to litigation andindicate that it should be encouraged for the parties to select arbitration to resolve theshareholder derivative disputes.Chapter IV will analyze whether the external shareholder derivative disputes andinternal shareholder derivative disputes under some specific circumstances shall beresolved by arbitration. In external shareholder derivative disputes, this chapter willfocus on the situation that the JV has concluded an arbitration agreement with theexternal third party. According to the analysis in Chapter II, the plaintiff inshareholder derivative suits is the shareholder rather than the JV itself, whether the dispute shall be submitted to arbitration is decided by whether the shareholder isbound by the arbitration agreement between the JV and the third party. According tothe analysis of relative theories of the extension of the validity of arbitrationagreements, it’s found that several theories and reasons are adequate to support thepoint that the external shareholder derivative disputes in these cases shall be arbitrated.In internal shareholder derivative disputes, this chapter will respectively analyze thescope of validity of arbitration agreements in three different situations due to the factthat the arbitration clause may exists mainly in three kinds of agreements. When thearbitration agreement exist in the bylaws of the JV, because the parties to theshareholder derivative disputes are bound by the bylaws of JV, it’s obvious that theinternal shareholder derivative disputes shall be arbitrated. When the arbitrationagreement exist in the employment agreement between the JV and the managers,according to the reasons given in the analysis of the arbitration of external shareholderderivative disputes in Chapter III, relevant internal shareholder derivative disputesshall also be arbitrated. But when the arbitration agreement exist in the joint ventureagreement between the parties of the JV, a lot of controversies will be raisedaccording to the legal practice of US and China. But it should mentioned that in somecases, the courts and arbitration tribunals treat the shareholder derivative disputes as“disputes under the joint venture agreement” and thus should be subject to thearbitration clause contained therein. But in my point, due to the lack of a generalstandard in the recognition of “disputes under the joint venture agreement”, thesecases are still inadequate to support the arbitration of the shareholder derivativedisputes and more efforts should be taken to find other theories to support this point.It is likely that the theory of “piercing the corporate veil” and “third party beneficiary”can bring us some inspiration for the further analysis of this question. Lastly in thischapter, the arbitration of shareholder derivative disputes in the listed JVs will bediscussed and in consideration of the arbitration consensus of the parties and thefuture development of arbitration, it’s highly recommended to include the publicnonspecific shareholders of listed JVs into the scope the relevant arbitration disputesand resolve the relevant shareholder derivative disputes by arbitration.