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An Overview of Shareholder Litigation

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A Comparative Study of Funding Shareholder Litigation

Abstract

Shareholder litigation is traditionally perceived as being about compensating shareholders for infringements of their rights or for losses they suffered as a result of negligent behaviour by the company and its directors, or by third parties. For a long time now, an additional function of shareholder litigation has been put forward: to deter managerial misconduct. The term ‘shareholder litigation’ comprises all civil actions brought by shareholders against managerial wrongdoings within companies in order to recover economic losses caused by them.

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Notes

  1. 1.

    See Paul Weitzel, ‘The End of Shareholder Litigation? Allowing Shareholders to Customize Enforcement through Arbitration Provisions in Charters and Bylaws’, Brigham Young University Law Review (2013), Issue 1, 65, pp. 67–68; And see Federico Pastre, How Shareholder Litigations Deter Directors and Officers: U.S. and Italy, a Comparative Analysis (GRIN Verlag, 2013), pp. 3–4.

  2. 2.

    See Patrick M. Garry, Candice Spurlin, Debra A. Owen, William A. Williams and Lindsay J. Efting, ‘The Irrationality of Shareholder Class Action Lawsuits: A Proposal for Reform’, South Dakota Law Review, (2004), Volume 49(2), 275, pp. 276–277.

  3. 3.

    For example, in a shareholder derivative action, the nominal defendant is the company where the misconduct occurs. In a shareholder direct action, the defendants are generally the wrongdoers. In an unfair prejudice remedy, the defendants are the members of the company who commit wrongdoings (they can include majority shareholder, directors, or other members).

  4. 4.

    As for financial losses in shareholder litigation, they differ in different type of shareholder litigation. For example, in a shareholder derivative action, the cause of action must be that the company’s interests have been infringed by wrongdoings, and under this circumstance, shareholder plaintiffs may suffer ‘reflective losses’ (the term of ‘reflective loss’ is a concept use in the English company law, which means that reflective losses of an individual shareholder are inseparable from general losses of the company). In a direct action, the cause of action should be that the shareholder plaintiffs suffer a special injury which does not infringe the interests of other members of the company. It is also the main point distinguishing derivative actions from direct actions. And also in the U.S., shareholder class action is a sort of shareholder litigation, in which the shareholder plaintiffs are financially harmed because they pay the inflated prices for their stock. See Patrick M. Garry et al., ‘The Irrationality of Shareholder Class Action Lawsuits: A Proposal for Reform’, South Dakota Law Review, (2004), Volume 49(2), 275, p. 277.

  5. 5.

    Andreas Cahn and David C Donald, Comparative Company Law: text and cases on the laws governing corporations in German, the UK and the USA, (Cambridge University Press, 2010). pp. 602–603.

  6. 6.

    See American Law Institute (ALI), Principle of Corporate Governance: Analysis and Recommendations (American Law Institute Publisher, Minnesota, 1994), Volume 2, pp. 17–22.

  7. 7.

    Ibid.

  8. 8.

    Elster v. American Airlines, Inc., 34 Del. Ch. 94, 100A.2d 219, 222 (1953); 12b Fletchers Cyclopedia Corps., S 5912, p. 431 (Perm. Ed., Rev. Vol. 1984), see American Law Institute (ALI), Principle of Corporate Governance: Analysis and Recommendations (American Law Institute Publisher, Minnesota, 1994), Volume 2, p. 19.

  9. 9.

    See Joseph Bishop, The Law of Corporate Officers and Directors: Indemnification and Insurance, (Clark Boardman Callaghan, 1981), pp. 3–10.

  10. 10.

    Actually, there are overlaps of direct and derivative actions. In many cases, the line between a direct and a derivative action is hazy. For example, while it is generally agreed that actions for declared dividends are direct actions, there have been disagreements as to compelling dividends. In this case, the claim might be direct and individual since ‘the right to dividends is an incident of stock ownership, and shareholders were injured directly due to the failure of distribution of dividends’. On the other hand, a derivative action is also justified on the ground that the corporation also suffered losses due to ‘punitive excess retain-earnings taxes or the retained earnings will otherwise be used improvidently’. See James D. Cox and Thomas Lee Hazen, Corporations (Aspen Publishers, 2nd edition, 2002), p. 421.

  11. 11.

    In most of countries in continental Europe, derivative actions are legally allowed (e.g. Germany, Spain, Sweden, Austria, Slovenia, Italy). But Dutch law does not permit derivative actions.

  12. 12.

    In fact, in the Foss rule, two main principles have been identified: one is the majority rule principle and the other one the proper plaintiff principle. The majority rule principle states that the alleged wrongdoing can be ratified by a simple majority of company’s members in a general meeting, then the court will not interfere. Foss v Harbottle (1843) 67 ER 189.

  13. 13.

    See Xiaoning Li, A Comparative Study of Shareholders’ Derivative Actions: England, the United States, Germany and China, (Kluwer, 2007), p. 1.

  14. 14.

    See Xiaoning Li, A Comparative Study of Shareholders’ Derivative Actions: England, the United States, Germany and China, (Kluwer, 2007), p. 2 and pp. 22–23.

  15. 15.

    Ibid.

  16. 16.

    For example, in the U.S., the shareholder plaintiff should demonstrate that the company is in the “wrongdoers’ control”, and the derivative action would have been commenced by directors in good faith. And in the UK, a derivative action could be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company (section 260(3) of UK Companies Act 2006).

  17. 17.

    For example, in the UK, since 1 October 2007, the procedures in respect of all derivative claims have been set out in the Civil Procedure Rules 1998 (CPR) Parts 19.9 to 19.9F, Practice Direction 19C and UK Companies Act 2006 Part 11. Generally, the permission to continue the claim is a two-stage procedure (At the first stage, the shareholder plaintiff should present evidence to demonstrate the case is a prima facie one, otherwise, the claim will be dismissed by the court. And at the second stage, the court carries out a comparatively high degree of judicial discretion). See A.M. Gray, ‘The statutory derivative claim, an outmoded superfluousness’, Company Lawyer, (2012), Volume 33(10), 295, p. 297.

  18. 18.

    See Flora Xiao Huang, ‘shareholder revolt? The statutory derivative action in China’, Comparative Research in Law & Political Economy. Research Paper No. 49/2009. pp. 4–5 http://digitalcommons.osgoode.yorku.ca/clpe/157 (accessed on 10 August 2016).

  19. 19.

    See Xudong Zhao, ‘The aim of the amending of the Company Law 1993’, (in Chinese), (公司法修改的价值取向), Legal Forum (法学论坛), 2004(6), 11; see Junhai Liu, ‘The amendment and interpretation of the Company Law 1993’, (in Chinese), (公司法的修改与解释), The Application of Law (法律适用), 2005(3), 2, p. 3; Min’an Zhang, The Balance of Interests in the Company Law 1993, (Peking University Press, 2003).

  20. 20.

    Those new techniques include the introduction of independent directors, the application of a cumulative voting system and the use of shareholder derivative actions.

  21. 21.

    See Peizhong Gan, ‘The Potential for Shareholder Derivative Actions in China’, (in Chinese), (论股东派生诉讼在中国的有效适用), The Journal of Peking University (Philosophy and Social Science), 2002, 39(5), 17, pp. 18–19; Yunqiu Yan, ‘The Theoretical and Statutory Aspects of Shareholder Derivative Actions’ (in Chinese) (公司利益相关者派生诉讼的理论逻辑与制度构建), Studies in Law and Business, 2006, 22(6), 24, pp. 26–27.

  22. 22.

    See Guojie Xu, ‘The first derivative lawsuit was refused by the court due to the absent of consent from all company’s shareholders’, (in Chinese), China Securities Journal (中国证券报), (April 22nd 2003).

  23. 23.

    Ibid.

  24. 24.

    Except for Sanjiu case, before 2006, there were several significant cases regarding the similar issue, which could also be regarded as milestones in the development of shareholder derivative actions. For example, Li Kai v. Lianhua Weijing (May 2004); Xie Guangxue, Yao Jun et al. v. Pan Shiyi (August 2004, and the disputed value of the case is amounted to 1.05 Billion RMB); Daqing Lianyi Case (2004). These casea are not officially published, but articles discussing them could be found. See, for example, (Li Kai v. Lianhua Weijing) http://finance.sina.com.cn/y/20040731/1844916842.shtml; (in Chinese, accessed on 16 July, 2016); http://www.cctv.com/news/financial/inland/20040729/101495.shtml (in Chinese, accessed on November 16th, 2014); For the case (Xie Guangxue, Yao Jun et al. v. Pan Shiyi), see, for example, http://www.china.com.cn/chinese/law/660372.htm (in Chinese, accessed on 16 July 2016); http://news.163.com/05/0519/02/1K35GSLN0001122D.html (in Chinese, accessed on 16 July 2016).

  25. 25.

    Article 5(1) of it states that the court cannot refuse a derivative claim on the ground that the plaintiffs are ineligible.

  26. 26.

    Article 17 of it provides that the court should accept derivative actions. And defendants in such claims are wrongdoers, while the company should be listed as ‘a third person’ in the litigation. PRC Civil Procedure Law (CCPL) indicated that ‘a third person’ is a party whose interests will be affected by the result of a case. See article 56 of the CCPL.

  27. 27.

    See Flora Xiao Huang, ‘shareholder revolt? The statutory derivative action in China’, Comparative Research in Law & Political Economy. Research Paper No. 49/2009. p. 9 http://digitalcommons.osgoode.yorku.ca/clpe/157 (accessed on 10 August 2016).

  28. 28.

    In addition, Zhejiang High People’s Court in 2002 (Understandings on Several Difficult Issues Regarding the Application of the Company Law) and Beijing People’s High Court in 2004 (The Guiding Opinions of Beijing High People’s Court on Several Issues on Adjudicating Corporate Disputes Cases) respectively issued similar judicial opinions concerning the use of shareholder derivative actions.

  29. 29.

    ‘Regulations on Some Issues Concerning Trials for Company Disputes’ (关于审理公司纠纷案件若干问题的规定), articles 43–47 (in Chinese).

  30. 30.

    Shareholder could launch a court proceeding if a director, supervisor or senior officer breaches his or her obligation of loyalty to the company, or if controlling shareholders abuse their position, which cause losses to the company.

  31. 31.

    The ‘contemporaneous ownership requirement’ means that qualified shareholder plaintiffs should hold continuously the company’s shares when the misconducts infringing the company’s interest occur. And the ‘threshold requirement’ means that a complaint shareholder should hold at least 10% of a limited liability company’s total shares or 1% of a joint stock limited company.

  32. 32.

    For example, the status of other shareholders who also file an action and the status of the injured company.

  33. 33.

    For example, if the derivative claim was suspected to be a strike suit, a financial deposit by the shareholder plaintiff would be necessary.

  34. 34.

    See Xiaoning Li, A comparative study of shareholders’ derivative actions: England, the United States, Germany and China, (Kluwer, 2007), p. 272.

  35. 35.

    There are three judicial interpretations on CL 2006 in total, which were issued in 2006, 2008, 2010.

  36. 36.

    Actually there are opinions supposing that the use of derivative actions in China was not a success because compared to the large amount of companies, derivative actions were rarely used. See Dan Wang, Theoretical analysis on shareholders’ derivative actions, (in Chinese), (公司派生诉讼论), China legal publishing house (中国法制出版社), (2012), p. 325; And it was also indicated that the unsuccessful function of shareholder derivative actions are due to the defects on Chinese judicial system and special social background. See Donald C. Clarke and Nicholas C. Howson, ‘Pathway to minority shareholder protection: derivative actions in the People’s Republic of China’, in Dan W. Puchniak, Harald Baum and Michael Ewing-Chow (eds), The derivative action in Asia: a comparative and functional approach, (Cambridge University Press, 2012), 243.

  37. 37.

    For example, the funding difficulties and the ambiguous procedures.

  38. 38.

    The latest version of PRC Company Law is CL 2014, but the rules concerning shareholder derivative actions are the same with those in CL 2006. So in this book, for convenience, when discussing derivative actions in China, the law usually refers to the CL 2014.

  39. 39.

    The CL 2014 provides that eligible shareholders in a derivative action only include (a) in a joint stock limited company, shareholders who separately or aggregately hold 1% or more of the total shares of the company; (b) in a limited liability company, all shareholders are eligible to commence a derivative action.

  40. 40.

    Article 150 provides when performing their duties, directors, supervisors and senior managers should comply with laws, administrative regulations and the company’s articles of association. If their illegal behaviors cause losses to the company, they should be held liable for such losses.

  41. 41.

    The emergency case refers to a circumstance that the failure to bring up a derivative action will cause unrecoverable damages to the company.

  42. 42.

    Companies must establish a board of supervisors (for small-scaled companies with a small number of shareholders, one or two supervisors without a ‘board’ form is also allowed under Chinese law). Supervisors must be selected representatives from shareholders and the staffs of the company. No directors and senior officers of the company could be selected as supervisors (article 117 of PRC company law 2014).

  43. 43.

    Article 151 of CL 2014 defines the scope of defendants in derivative actions.

  44. 44.

    The formation and operation of these two types of companies differ. Generally, requirements regarding the formation of a JSLC are more that those when a LLC is established. Issues concerning LLCs are provided in this chapter and Chap. 3 of CL 2014, and Chaps. 4 and 5 present statutory provisions regarding JSLCs.

  45. 45.

    Article 151 of CL 2014.

  46. 46.

    See Hui Huang, ‘The statutory Derivative Action in China: Critical Analysis and Recommendations for Reform’, Berkeley Business Law Journal (2007), Volume 4, 227, p. 236.

  47. 47.

    Limitations on stock transfer in a JSLC are only for directors and senior managers but not for general shareholders. But the stock transfer to an outside person in a LLC needs to get the consent of half of the shareholders (article 71 of CL 2014).

  48. 48.

    Article 71(2) of CL 2014.

  49. 49.

    See Hui Huang, ‘The statutory Derivative Action in China: Critical Analysis and Recommendations for Reform’, Berkeley Business Law Journal (2007), Volume 4, 227, p. 236.

  50. 50.

    See Hui Huang, ‘The statutory Derivative Action in China: Critical Analysis and Recommendations for Reform’, Berkeley Bus. LJ 4 (2007), 227, p. 236.

  51. 51.

    From 2006 to 2011, only two derivative actions sued directors of JSLCs. See Dan Wang, Theoretical analysis on shareholders’ derivative actions, (in Chinese) (公司派生诉讼论), (China legal publishing house, 2012), p. 325; It should be indicated that the argument that there is a greater need of derivative actions for LLCs that that for JSLCs could not be provided as the only reason to explain the disequilibrium. For other reasons, see infra 4.4.

  52. 52.

    Article 149 of CL 2014 provides that directors, supervisors and senior managers should make compensation where they violate laws, administrative regulations or the articles of association and the interests of the company are infringed because of violation.

  53. 53.

    Article 151 of CL 2014.

  54. 54.

    See Flora Xiao Huang, ‘shareholder revolt? The statutory derivative action in China’, Comparative Research in Law & Political Economy. Research Paper No. 49/2009. p. 9 http://digitalcommons.osgoode.yorku.ca/clpe/157 (accessed on 10 August 2016).

  55. 55.

    Ibid.

  56. 56.

    Preconditions for the filing of a derivative lawsuit could also be found in other jurisdictions. For instance, the American law similarly provides that prior to the initiation of a derivative action, demand needs to be made on the company (Rule 23.1 of the Federal Rules of Civil Procedure); Normally, a company is allowed to make a decision within 90 days after receiving the shareholder’s demand. But if the shareholder can prove that the delay would generate unrecoverable damages to the company, the period could be shorter (Section 7.42 of Model Business Corporation Act. This act does not have mandatory effect but many states have adopted this rule, such as, Connecticut, Iowa, Michigan). The Australian law similarly provides that at least 14 days before an application of a derivative lawsuit is granted by the court, the shareholder applicant must give a written notice to the company of the intention and reasons why the application is made, in order to screen out vexatious or frivolous suits (Section 237(2) of Australian Corporation Act 2001), for the Australian case, see also Hui Huang, ‘The statutory Derivative Action in China: Critical Analysis and Recommendations for Reform’, Berkeley Bus. LJ 4 (2007), 227, p., p. 239. And see P.M. Choo, ‘The Statutory Derivative Action in Singapore: a Critical and Comparative Examination’ (2001) 13 Bond L. Rev. 64, pp. 72–73.

  57. 57.

    Hui Huang, ‘Shareholder Derivative Litigation in China: Empirical Findings and Comparative Analysis’, Banking and Finance Law Review, (2012), Volume 27, 619, p. 639.

  58. 58.

    According to the calculation method under Chinese civil procedure rule, litigation expenses are generally proportionate to the value of the dispute. See article 13 of the Measures on the Payment of Litigation Costs (2006).

  59. 59.

    Why litigation costs for a derivative action is high is explained in infra 3.1.1 (Costs arising).

  60. 60.

    See infra 3.1.1 (costs arising).

  61. 61.

    It could be understood as a partial cost-shifting rule. For further discussions, see infra Part II, Chapter I 2 (‘the cost-shifting rule’).

  62. 62.

    See Flora Xiao Huang, ‘shareholder revolt? The statutory derivative action in China’, Comparative Research in Law & Political Economy. Research Paper No. 49/2009. p. 9 http://digitalcommons.osgoode.yorku.ca/clpe/157 (accessed on 10 August 2016).

  63. 63.

    Article 10 of the Measures on the Payment of Litigation Costs (2006).

  64. 64.

    The shareholder plaintiffs just benefit from the recoveries through an indirect way. For example, the derivative suit may correct wrongdoings of the directors and promote the corporate governance, thus the probable rise of the share value in the stock market is beneficial to all shareholders of the company.

  65. 65.

    Wallersteiner v. Moir (No.2) [1975] QB 373, at 392.

  66. 66.

    Article 22 of CL 2014 is the same with article 22 of CL 2006 and article 111 of CL 1994. And article 152 of CL 2014 is the same as article 153 of CL 2006.

  67. 67.

    A void resolution refers that the content of the resolution violates mandatory rules (laws and administrative regulations). And this sort of resolution is invalid from its inception.

  68. 68.

    A voidable resolution means that the formation procedure of this resolution violates laws administrative regulations or the company’s articles of association.

  69. 69.

    See Xiaoning Li, A comparative study of shareholders’ derivative actions: England, the United States, Germany and China, (Kluwer, 2007), p. 279.

  70. 70.

    Ibid.

  71. 71.

    See Li Xiaoning, A comparative study of shareholders’ derivative actions: England, the United States, Germany and China, (Kluwer, 2007), p. 280.

  72. 72.

    Johnson v Gore Wood & Co [2002] 2 AC 1 at 19.

  73. 73.

    Under this condition, it is also not feasible for the harmed shareholder to commence a derivative action because his own interests instead of the company’s are infringed by the controlling shareholder.

  74. 74.

    Three judicial interpretations and one consultation paper on CL were issued in 2006 (available in http://vip.chinalawinfo.com/newlaw2002/slc/slc.asp?db=chl&gid=219133), 2008 (available in http://vip.chinalawinfo.com/newlaw2002/slc/slc.asp?db=chl&gid=219131), 2010 (available in http://vip.chinalawinfo.com/newlaw2002/slc/slc.asp?db=chl&gid=219132) and 2016 (consultation paper) (http://www.legaldaily.com.cn/index_article/content/2016-04/12/content_6583564.htm?node=5955) respectively (in Chinese, accessed on 16 August 2016).

  75. 75.

    This test provides if a shareholder alleges a ‘special injury’, he is entitled to state a direct action. A special injury was alleged if the wrong was inflicted only upon that shareholder or where the shareholder complained of a wrong affecting a particular right. See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Delaware 2004), 1038.

  76. 76.

    American Law Institute (ALI), Principles of Corporate Governance: Analysis and Recommendations, (American Law Institute Publishers, 1994), S6.11.

  77. 77.

    Ibid.

  78. 78.

    Stepben M. Bainbridge, Corporation Law and Economics, (Foundation Press, New York, 2002) p. 363.

  79. 79.

    Ibid.

  80. 80.

    Article 146–152 of the CL 2014.

  81. 81.

    For instance, article 148 provides that the directors and the senior managers are not allowed to misappropriate the company’s funds.

  82. 82.

    American Law Institute (ALI), Principles of Corporate Governance: Analysis and Recommendations, (American Law Institute Publishers, 1994), S7.01(c).

  83. 83.

    Ibid.

  84. 84.

    See Donald C. Clarke and Nicholas C. Howson, ‘Pathway to minority shareholder protection: derivative actions in the People’s Republic of China’, in Dan W. Puchniak, Harald Baum and Michael Ewing-Chow (eds), The derivative action in Asia: a comparative and functional approach, (Cambridge University Press, 2012), 243.

  85. 85.

    If a derivative action involved a highly profitable enterprise in a given region, the court might be reluctant to side with shareholder plaintiffs. Because the local government may attach much importance to the tax turned by this enterprise, and may interfere any negative decision on the enterprise by the court. See infra 4.4.3 (‘typical characteristics and deficiencies in Chinese judicial system’).

  86. 86.

    Supreme People’s court’s notice on temporarily not accepting securities cases involving civil suits for damages, (‘最高人民法院关于涉证券民事赔偿案件暂不予受理的通知’), issued on September 21st, 2001, available at www.law-lib.com/law/law_view.asp?id=16373 (accessed on 10 August 2016); Also see Supreme People’s court’s notice on issues relating to the acceptance of civil cases in tort arising out of false representations in securities markets, (‘最高人民法院关于受理证券市场因虚假陈述引发的民事纠纷案件有关问题的通知’), issued on January 15th, 2002, available at www.law-lib.com/law/law_view.asp?id=16956 (accessed on 10 August 2016); And see Supreme People’s court’s several provisions on the adjudication of civil suits for damages arising out of false representations in securities markets, (‘最高人民法院关于审理证券市场因虚假陈述引发的民事赔偿案件的若干规定’), issued on January 9th, 2003, available at www.law-lib.com/law/law_view.asp?id=42438 (accessed on 10 August 2016); One judicial document issued in May 2007 has to be mentioned is that it guided the courts internally to broaden the scope of permissible claims to include market manipulation and inside trading, however, other procedure hurdles established by the aforementioned documents still apply, see Peixin Luo, Difficulties over whether to eliminate or keep the precondition procedure, (‘前置程序去留困境’), Caijing (Finance), 19(2007), 28.

  87. 87.

    The concept of ‘harmonious society’ (和谐社会) is highly valued in Chinese society. Thus, a lawsuit with lots of participants is, normally, thought to have the potential for turmoil. See Supreme People’s Court, Notice of the Supreme People's Court on Issuing Some Opinions of the Supreme People's Court about Providing Judicial Protection for the Construction of Socialist Harmonious Society, (in Chinese), (最高人民法院关于为构建社会主义和谐社会提供司法保障的若干意见), (2007-01-15).

  88. 88.

    Donald C. Clarke and Nicholas C. Howson, ‘Pathway to minority shareholder protection: derivative actions in the People’s Republic of China’, in Dan W. Puchniak, Harald Baum and Michael Ewing-Chow (eds), The derivative action in Asia: a comparative and functional approach, (Cambridge University Press, 2012), 243, pp. 279–280.

  89. 89.

    See Xin Tang, ‘Protecting Minority Shareholders in China: A Task for Both Legislation and Enforcement’, in Hideki Kanda, Kon-sik Kim, and Curtis Milhaupt (eds.), Transforming Corporate Governance in East Asia (New York: Routledge, 2008), pp. 141–167.

  90. 90.

    Arad Reisberg, Derivative Actions and Corporate Governance: Theory and Operation, (Oxford University Press, 2007), pp. 222–223.

  91. 91.

    For example, the ‘wrong control’ exception, which allows the shareholder to commence a derivative action in the event that the company was controlled by the wrongdoers. For more exceptions to the Foss rule, see Xiaoning Li, A comparative study of shareholders’ derivative actions: England, the United States, Germany and China, (Kluwer, 2007), pp. 23–27.

  92. 92.

    See Gower & Davies, Principles of Modern Company Law, (Sweet&Maxwell, 2012), pp. 647–648.

  93. 93.

    Ibid.

  94. 94.

    Section 260(3) of CA 2006.

  95. 95.

    Section 260(4) of CA 2006.

  96. 96.

    See Law Commission, Shareholder Remedies (LC 246), para. 6.15.

  97. 97.

    The Foss rule is not used in practice. See Gower & Davies, Principles of Modern Company Law, (Sweet&Maxwell, 2012), p. 654.

  98. 98.

    Section 260 (3) of CA 2006.

  99. 99.

    See Saleem Sheikh, A guide to the Companies Act 2006, (Routledge-Cavendish publisher, 2007), p. 1043.

  100. 100.

    For instance, the director controls the decision-making procedure. Ibid.

  101. 101.

    Section 260 of the CA 2006.

  102. 102.

    Ibid.

  103. 103.

    See Gower & Davies, Principles of Modern Company Law, (Sweet&Maxwell, 2012), p. 655.

  104. 104.

    Section 260(5)(c) of the CA 2006.

  105. 105.

    Section 260(4) of the CA 2006.

  106. 106.

    See Zhong Zhang, The derivative action and good corporate governance in China: Economic theories and legal rules, (Lambert Academic Publishing, 2011), p. 114.

  107. 107.

    Ibid.

  108. 108.

    Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No.2) (the Court of Appeal), [1982] Ch. 204, at 210F-211B.

  109. 109.

    See Xiaoning Li, A comparative study of shareholders’ derivative actions: England, the United States, Germany and China, (Kluwer, 2007), p. 19.

  110. 110.

    See Law Commission, Shareholder Remedies (LC 246), para. 6.75–6.92.

  111. 111.

    See DTI, Modern company law for a competitive economy: completing the structure, (London, DTI, 2000), para. 7.46.

  112. 112.

    Section 260(1) of the CA 2006.

  113. 113.

    Section 263 of the CA 2006.

  114. 114.

    Section 263 (2) of the CA 2006.

  115. 115.

    Section 239 (3) & 239(4) of the CA 2006.

  116. 116.

    See Victor Joffe, David Drake, Giles Richardson and Daniel Lightman, Minority shareholders, law, practice and procedure, (Oxford University Press, 2011), p. 46.

  117. 117.

    Section 261(2) of the CA 2006.

  118. 118.

    See A.M. Gray, ‘The statutory derivative claim, an outmoded superfluousness’, Company Lawyer, (2012), Volume 33(10), 295, p. 297.

  119. 119.

    Section 172 of CA 2006 explains what constitutes duty to promote the success of the company.

  120. 120.

    Section 263(2)(a) of the CA 2006.

  121. 121.

    Section 239(3) & 239(4) of the CA 2006.

  122. 122.

    Section 263(2)(b) of CA 2006.

  123. 123.

    Section 263(3) of CA 2006. The six consideration factors include: (a) whether the member is acting in good faith in seeking to continue the claim; (b) the importance that a person acting in accordance with section 172 (duty to promote the success of the company) would attach to continuing it; (c) where the cause of action results from an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be—(i) authorized by the company before it occurs, or (ii) ratified by the company after it occurs; (d) where the cause of action arises from an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company; (e) whether the company has decided not to pursue the claim; (f) whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company.

  124. 124.

    Wishart v. Castlecroft Securities Ltd. [2010] BCC 161.

  125. 125.

    Wishart v. Castlecroft Securities Ltd. [2010] BCC 161, per Lord Reed Opinion at 31.

  126. 126.

    Iesini v. Westrip Holdings Ltd. [2010] BCC 420.

  127. 127.

    See Victor Joffe QC et al., Minority shareholders, law, practice and procedure, (Oxford University Press, 2011), p. 48.

  128. 128.

    Iesini v. Westrip Holdings Ltd. [2010] BCC 420. at 75, 81–83.

  129. 129.

    Ibid.

  130. 130.

    See Arad Reisberg, ‘Corporate law in the UK after recent reforms: the good, the bad, and the ugly’, Current Legal Problems, (2010), Volume 63(1), 315, p. 349.

  131. 131.

    See Gower & Davies, Principles of Modern Company Law, (Sweet&Maxwell, 2012), p. 657.

  132. 132.

    Ibid.

  133. 133.

    There are a few cases to support this point of view. In Franbar Holdings Ltd v. Patel [2008] BCC 885, William Trower QC confirmed that the CA 2006 did not alter the common law position that certain wrongs were unratifiable. In Eastford Ltd v. Gillespie [2012] BCC 303, Lord Hodge indicated ‘I see nothing in the statutory provisions which suggests that Parliament intended to alter the pre-existing rules on ratification by a board of a director’s unauthorized acts’ (para. 15).

  134. 134.

    In Cook v. Deeks [1916] 1 AC 554, the directors concluded a contract for the interests of themselves instead of for the company, and tried to ratify their misconduct by proposing resolutions in a general meeting of the company (because the majority votes were held by those directors). In the case, the Privy Council indicated that the resolutions, which had been passed by virtue of the votes of the wrongdoers who held a majority of the votes, were not valid. Cook v. Deeks [1916] 1 AC 554, at 564.

  135. 135.

    See Victor Joffe QC et al., Minority shareholders, law, practice and procedure, (Oxford University Press, 2011), pp. 27–28.

  136. 136.

    Section 262(2) provides that the member of a company may apply to the court for permission to continue the action as a derivative on the ground that: (a) the manner in which the company commenced or continued the claim amounts to an abuse of the process of the court; (b) the company has failed to prosecute the claim diligently; and (c) it is appropriate for the member to continue the claim as a derivative claim.

  137. 137.

    Those conditions provided in section 264 are similar to that in section 262(2). However, as for the first condition, section 264 uses the expression ‘the manner in which the proceedings have been commenced or continued by the claimant amounts to an abuse of the process of the court’, which has been regarded as a comparatively higher threshold to overcome. See Victor Joffe QC et al., Minority shareholders, law, practice and procedure, (Oxford University Press, 2011) p. 61.

  138. 138.

    See Law Commission, Shareholder Remedies (LC 246), para. 6.63. And in para. 6.63, the Law Commission points out that the reason why they do not want individual shareholders to apply to take over current litigation being pursued by their company is that they are not satisfied with the progress being made.

  139. 139.

    See Victor Joffe QC et al., Minority shareholders, law, practice and procedure, (Oxford University Press, 2011), p. 62.

  140. 140.

    See Xiaoning Li, A comparative study of shareholders’ derivative actions: England, the United States, Germany and China, (Kluwer, 2007), p. 33.

  141. 141.

    Section 260 of the CA 2006.

  142. 142.

    Section 239 of the CA 2006 provides that directors are no longer able to vote on their own wrongdoings.

  143. 143.

    Brenda Hannigan, Company Law, (Oxford University Press, 2009), p. 229. David Gibbs, ‘Has the statutory claim fulfilled its objectives? A prima facie case and the mandatory bar: Part 1’, Company Lawyer, (2011), 32(2), 41, p. 42.

  144. 144.

    See Arad Reisberg, ‘Corporate law in the UK after recent reforms: the good, the bad, and the ugly’, Current Legal Problems, (2010), Volume 63(1), 315, p. 348.

  145. 145.

    Arad Reisberg, ‘Shadows of the past and back to the future: Part 11 of the UK Companies Act 2006 (in) action’, European Company and Financial Law Review, (2009), Volume 6, Issue 2–3, 219, pp. 224–225.

  146. 146.

    Section 261 of the CA 2006.

  147. 147.

    Julia Tang, ‘Shareholder remedies: demise of the derivative claims?’, UCL Journal of Law and Jurisprudence, (2012), Volume 1, 178, p. 183.

  148. 148.

    This doctrine was derived from Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd, [2001] 208 CLR 199 (High Court of Australia), see David Gibbs, ‘Has the statutory claim fulfilled its objectives? A prima facie case and the mandatory bar: Part 1’, Company Lawyer, (2011), 32(2), 41, p. 44.

  149. 149.

    David Gibbs, ‘Has the statutory claim fulfilled its objectives? A prima facie case and the mandatory bar: Part 1’, Company Lawyer, (2011), 32(2), 41, p. 44.

  150. 150.

    See Law Commission, Shareholder remedies, 1996, Consultation Paper No.142, para. 16.22, available at http://lawcommission.justice.gov.uk/docs/cp142_Shareholder_Remedies_Consultation.pdf (accessed on 10 August 2016).

  151. 151.

    In recent cases, the prima facie test was bypassed or telescoped because of its defects. For example, in Mission Capital plc v Sinclair [2008] BCC 866, the permission procedure was telescoped into one; In Franbar Holdings Ltd v Patel case [2008] BCC 885, counsel for the defendants had accepted that ‘it would be appropriate… to deal with the entirety of the application for permission to continue at a single hearing.’ See Julia Tang, ‘Shareholder remedies: demise of the derivative claims?’, UCL Journal of Law and Jurisprudence, (2012), Volume 1, 178, pp. 182–183.

  152. 152.

    Section 239 of the CA 2006.

  153. 153.

    See J. Paul Sykes, ‘The continuing paradox: a critique of minority shareholder and derivative claims under the Companies Act 2006’, Civil Justice Quarterly, (2010), 29(2), 205–234, p. 223.

  154. 154.

    In a strict sense, not all small companies could be able to implement this provision. For example, in some family-run companies, most of the members belong to the same family. Therefore, there is usually no clear distinction between interested members and disinterested ones.

  155. 155.

    See Julia Tang, ‘Shareholder remedies: demise of the derivative claims?’, p. 200.

  156. 156.

    Prudential Assurance Co Ltd v Newman Industries [1981] Ch 257.

  157. 157.

    Prudential Assurance Co Ltd v Newman Industries [1981] Ch 257, at 324.

  158. 158.

    Pearlie Koh, ‘Directors’ Fiduciary Duties: Unthreading the Joints of Shareholder Ratification’ Journal of Corporate Law Studies, (2005), volume 5, 363, p. 389.

  159. 159.

    Civil Procedure Rule 19.9 E.

  160. 160.

    Wallersteiner v. Moir (No.2) [1975] QB 373.

  161. 161.

    Zhong Zhang, The derivative action and good corporate governance in China: Economic theories and legal rules, (Lambert Academic Publishing, 2011), p. 204.

  162. 162.

    Ibid.

  163. 163.

    Wallersteiner v. Moir (No.2) [1975] QB 373, per Scarman L.J at 408.

  164. 164.

    Smith v. Croft (No.1) [1986] 2 All ER 551.

  165. 165.

    Smith v. Croft (No.1) [1986] 2 All ER 551, Walton J at 597.

  166. 166.

    Ibid.

  167. 167.

    Rule 19.9 (E) of CPR, available at http://www.justice.gov.uk/courts/procedure-rules/civil/rules/part19#19.9E (accessed on 16 August 2016). This rule indicates that the costs could be indemnified by the company include fees incurred in the permission application or in the course of the derivative claim or both of them.

  168. 168.

    Recent cases suggest that the English courts, actually, hold a pragmatic attitude towards indemnity costs orders. In Kiani v Cooper [2010] BCC 463, Proudman J made a limited indemnity costs order in favour of the applicant, and further proposed that the applicant should undertake part of the litigation risk. Kiani v Cooper [2010] BCC 463, Proudman J at 49. See Zhong Zhang, The derivative action and good corporate governance in China: Economic theories and legal rules, (Lambert Academic Publishing, 2011), pp. 84–85.

  169. 169.

    For instance, how to prove a prima facie case.

  170. 170.

    The Model Business Company Act (MBCA) is a model set of law prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association and is followed by twenty-four states. It was created due to variation in how states defined companies after World War II in 1950. The variation and uncertainty resulted in many lawsuits in which a promoter was sued personally for obligations ostensibly incurred in the name of the nascent company. The widespread adoption of the MBCA brought some clarity to such confusion and other corporate law issues. Most states are now guided by the Revised Model Business Company Act (RMBCA), a revised version of the MBCA.

  171. 171.

    American Law Institute, Principle of Corporate Governance: Analysis and recommendations, St. Paul, Minnesota: American Law Institute Publishers (1994).

  172. 172.

    Although MBCA and ALI’s Principles are not law and have no binding effects, they reveal basic principles and rules of corporate law.

  173. 173.

    George D. Hornstein, ‘The Shareholder’s Derivative Suit in the United States’, Journal of Business Law, (1967), 282–289.

  174. 174.

    In Dodge v. Woolsey 18 How. (59 U.S.) 331 (1855), the shareholder plaintiff requested the board of directors to prevent the alleged corporate wrongdoings prior to the filling of the lawsuit. See Xiaoning Li, A Comparative study of shareholders’ derivative actions (Kluwer, 2007), p. 91.

  175. 175.

    Dodge v. Woolsey 18 How. (59 U.S.) 331, 341–344 (1855).

  176. 176.

    Section 7.42 of MBCA and Section 327.4.3 of Delaware General Corporation Law.

  177. 177.

    ‘Strike suits’ refer to claims which were brought without substantial merits in law or in fact, but simply for the benefits from a settlement. See A.J. Boyle, Minority Shareholders’ Remedies, (Cambridge University Press, Cambridge, 2002), p. 41.

  178. 178.

    Ralph C. Ferrara, Kevin T. Abikoff and Laura Leedy Gansler, Shareholder derivative litigation: besieging the board, (Law Journal Seminars-Press, 2013), Section 4.06.

  179. 179.

    American Law Institute (ALI), Principles of Corporate Governance: Analysis and recommendations, (American Law Institute Publishers, 1994), S7.04(c), comment at 91.

  180. 180.

    Ibid.

  181. 181.

    John C. Coffee and Donald E. Schwartz, ‘The Survival of the Derivative Suit: an Evaluation and a Proposal for Legislative Reform’, Columbia Law Review, Volume 81(2), 261, pp. 261–262.

  182. 182.

    Daniel J. Dykstra, ‘The Revival of the Derivative Suit’, University of Pennsylvania Law Review, (1967), Volume 116, 74, pp. 74–75.

  183. 183.

    Xiaoning Li, A Comparative study of shareholders’ derivative actions: England, the United States, Germany and China, (Kluwer, 2007), p. 94.

  184. 184.

    Robert C. Clark, Corporate Law (Little, Brown, The United States, 1986), p. 645.

  185. 185.

    Ibid.

  186. 186.

    418 F Supp 508 (United States District Court, SDNY, D.C.N.Y. 1976).

  187. 187.

    Burks v. Lasker 441 U.S. 471 (1979).

  188. 188.

    Auerbach v. Bennett 47 N.Y.2d 619.

  189. 189.

    Andreas Cahn and David C Donald, Comparative Company Law: text and cases on the laws governing corporations in German, the UK and the USA (Cambridge University Press, Cambridge, New York, 2010), pp. 602–603.

  190. 190.

    Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Delaware 2004), at 1038.

  191. 191.

    Ibid.

  192. 192.

    Edward P. Welch, Andrew J. Turezyn and Robert S. Saunders, Folk on the Delaware General Corporation Law, (Aspen publishers, 2010), p. 919.

  193. 193.

    American Law Institute (ALI), Principles of Corporate Governance: Analysis and recommendations, (American Law Institute Publishers, 1994), S7.01(c).

  194. 194.

    American Law Institute (ALI), Principles of Corporate Governance: Analysis and recommendations, (American Law Institute Publishers, 1994), S7.01(c).

  195. 195.

    Ibid.

  196. 196.

    For example, in Aronson v. Lewis, the Delaware court held that ‘it is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company’. Aronson v. Lewis, 473 A.2d 805, at 812 (Delaware 1984); The same rule could also be found in Smith v. Van Gorkom, 488 a.2d 858, at 872 (Delaware 1985); Brehm v. Eisner, 746 A.2d 244, at 264 (Delaware 2000).

  197. 197.

    Section 327 of Delaware General Corporation Law.

  198. 198.

    Lewis v. Anderson, 477 A.2d 1040, at 1046 (Delaware 1984).

  199. 199.

    Stepben M. Bainbridge, Corporation Law and Economics, (Foundation Press, New York, 2002), p. 374.

  200. 200.

    American Law Institute (ALI), Principles of Corporate Governance: Analysis and recommendations, (American Law Institute Publishers, 1994), S7.02(a)(1).

  201. 201.

    Section 1782(b) of the Pennsylvanian Business Corporation Law (PBCL).

  202. 202.

    Section 800 of the California Corporation Code 1977 (CCC).

  203. 203.

    American Law Institute (ALI), Principles of Corporate Governance: Analysis and recommendations, (American Law Institute Publishers, 1994), S7.02(a)(2).

  204. 204.

    Lewis v. Anderson, 477 A.2d 1040, at 1049 (Delaware 1984).

  205. 205.

    Edward P. Welch, Andrew J. Turezyn and Robert S. Saunders, Folk on the Delaware General Corporation Law, (Aspen publishers, 2010), p. 928.

  206. 206.

    Blair L. Lockwood and Karen L. Barsch, ‘United States’, in Dennis Campbell and Sheila Buckley (eds), Protecting Minority Shareholders, (Kluwer, 1996), 656, pp. 667–669.

  207. 207.

    Xiaoning Li, A Comparative study of shareholders’ derivative actions: England, the United States, Germany and China (Kluwer, 2007), p. 161.

  208. 208.

    Stepben M. Bainbridge, Corporation Law and Economics, (Foundation Press, New York, 2002), p. 394.

  209. 209.

    Robert C. Clark, Corporate Law (Little, Brown, The United States, 1986), p. 644.

  210. 210.

    Deborah A. DeMott, Shareholder Derivative Actions: Law and Practice, (Thomson West Press, 2003), Section 5.11.

  211. 211.

    Section 220 of DGCL.

  212. 212.

    In re PSE & G Shareholder Litigation, 173 N.J. 258, 286, (2002).

  213. 213.

    Arthur R. Pinto and Douglas M. Branson, Understanding Corporate Law (LexisNexis 3rd edition, 2009), p. 479.

  214. 214.

    Stepben M. Bainbridge, Corporation Law and Economics, (Foundation Press, New York, 2002), p. 394.

  215. 215.

    Ibid.

  216. 216.

    Ibid.

  217. 217.

    There are several circumstances under which the case could be regarded as ‘demand excused’. For instance, among others, the company is threatened with irreparable harm; the company has taken an extraordinarily long period of time and make no responses.

  218. 218.

    Arthur R. Pinto and Douglas M. Branson, Understanding Corporate Law (LexisNexis 3rd edition, 2009). p. 480.

  219. 219.

    Aronson v. Lewis, 473 A.2d 805 (Delaware 1984).

  220. 220.

    Aronson v. Lewis, 473 A.2d 805, at 814 (Delaware 1984).

  221. 221.

    Ralph C. Ferrara, Kevin T. Abikoff and Laura Leedy Gansler, Shareholder derivative litigation: besieging the board, (Law Journal Seminars-Press, 2013), Section 6.02.

  222. 222.

    Aronson v. Lewis, 473 A.2d 805, at 814–815 (Delaware 1984).

  223. 223.

    See Carol B. Swanson, ‘Juggling Shareholder Rights and Strike Suits in Derivative Litigation: the ALI Drops the Ball’, Minnesota Law Review, (1993), Volume 77, 1339, pp. 1376–1377.

  224. 224.

    Robert C. Clark, Corporate Law (Little, Brown, 1986) p. 645.

  225. 225.

    Ibid.

  226. 226.

    The ‘binding effect’ will be discussed below.

  227. 227.

    John C. Coffee and Donald E. Schwartz, ‘The Survival of the Derivative Suit: an Evaluation and a Proposal for Legislative Reform’, Columbia Law Review, (1981), Volume 81, 261, pp. 262–263.

  228. 228.

    Xiaoning Li, A Comparative study of shareholders’ derivative actions: England, the United States, Germany and China, (Kluwer, 2007), p. 169.

  229. 229.

    John C. Coffee and Donald E. Schwartz, ‘The survival of the derivative suit: an evaluation and a proposal for legislative reform’, Columbia Law Review, (1981), Volume 81(2), 261, p. 283.

  230. 230.

    Ralph C. Ferrara, Kevin T. Abikoff and Laura Leedy Gansler, Shareholder Derivative Litigation: Besieging the Board, (Law Journal Seminars-Press, 2013), Section 8.01.

  231. 231.

    Auerbach v. Bennett, 47 N.Y.2d 619 (N.Y. 1979).

  232. 232.

    Auerbach v. Bennett, 47 N.Y.2d 619, at 621 (N.Y. 1979).

  233. 233.

    Ibid.

  234. 234.

    Auerbach v. Bennett, 47 N.Y.2d 619, at 623–624 (N.Y. 1979).

  235. 235.

    Ralph C. Ferrara et al., Shareholder Derivative Litigation: Besieging the Board, (Law Journal Seminars-Press, 2013), Section 8.02.

  236. 236.

    Ibid.

  237. 237.

    Miller v. Register & Tribune Syndicate, Inc. 336 N.W.2d 709 (Iowa 1983).

  238. 238.

    Miller v. Register & Tribune Syndicate, Inc. 336 N.W.2d 709, at 714 (Iowa 1983).

  239. 239.

    Ibid.

  240. 240.

    Kenneth B. Davis, ‘Structural bias, special litigation committee, and the vagaries of director independence’, 90 Iowa Law Review, (2005), Volume 90, 1035, p. 1041.

  241. 241.

    Ibid.

  242. 242.

    Zapata corporation v. Maldonado 430 A.2d 779 (Delaware 1981).

  243. 243.

    Zapata corporation v. Maldonado 430 A.2d 779, at 788 (Delaware 1981).

  244. 244.

    Ibid.

  245. 245.

    Ibid.

  246. 246.

    Zapata corporation v. Maldonado 430 A.2d 779, at 789 (Delaware 1981).

  247. 247.

    Zapata corporation v. Maldonado 430 A.2d 779, at 789 (Delaware 1981).

  248. 248.

    Ibid.

  249. 249.

    Kenneth B. Davis, ‘Structural bias, special litigation committee, and the vagaries of director independence’, 90 Iowa Law Review, (2005), Volume 90, 1035, p. 1045.

  250. 250.

    Section 23.1 of the Federal Rule of Civil Procedure (FRCP).

  251. 251.

    Robert C. Clark, Corporate Law (Little Brown, 1986), p. 657.

  252. 252.

    Robert C. Clark, Corporate Law (Little Brown, 1986), p. 652.

  253. 253.

    Through a settlement, the lawyer will get an amount of money for sure. But in a court’s trial, the attorney will not be paid in case of losing through a contingency fee arrangement which is widely applied in the U.S.

  254. 254.

    In earlier times, it was not the case that settlements had to be approved by the court. Consequently, many suspect settlements not in the company’s best interests occurred. To ensure the company’s interests, the judicial control by the courts is introduced in order to eliminate such settlements.

  255. 255.

    See Patrick M Garry et al., ‘The Irrationality of Shareholder Class Action Lawsuits: A Proposal for Reform’, South Dakota Law Review, (2004), Volume 49(2), 275, pp. 276–277.

  256. 256.

    Ibid.

  257. 257.

    Ibid.

  258. 258.

    See Adam C. Pritchard, ‘Markets as Monitors: A Proposal to Replace Class Actions with Exchanges as Securities Fraud Enforcers’, Virginia Law Review, (1999), Volume 85, 925, p. 928.

  259. 259.

    In shareholder class actions, the corporation’s misstatements can take various forms, including fraudulent filings with the Securities and Exchange Commission, public statements by corporate officers, or press releases issued by the corporation. See Patrick M Garry et al., ‘The Irrationality of Shareholder Class Action Lawsuits: A Proposal for Reform’, South Dakota Law Review, (2004), Volume 49(2), 275, pp. 278–279.

  260. 260.

    ‘Fraud on market’ could jeopardize the stock transaction in free market, and further has negative effect on the whole market system and damage the investors’ confidence. The mechanism of shareholder class actions could, in this regard, prevent the fraud behaviour and moreover protect the interests of investors.

  261. 261.

    See Patrick M Garry et al., ‘The Irrationality of Shareholder Class Action Lawsuits: A Proposal for Reform’, South Dakota Law Review, (2004), Volume 49(2), 275, pp. 283–285; and see Jill E. Fisch, ‘Class Action Reform: Lessons From Securities Litigation’, Arizona Law Review, (1997), Volume 39, 533, pp. 533–534.

  262. 262.

    The PRC Civil Procedure Law was enacted in 1991. Amendments to the CPR came out in 2007 and 2012 respectively. Provisions with regards to collective actions and representative actions are not changed by these two amendments.

  263. 263.

    In fact, the essential group litigation could also be a representative lawsuit. The act of the representative in the litigation should be valid for the party he represents (except for a few particular acts, e.g. modification or waiver of the claim). See article 53 of the CPL. According to the ‘inseparable’ nature of essential group actions, group members who do not agree with the result of the representative selection should join in the whole procedure personally. See article 60 of the Opinions of the Supreme People’s Court on Some Issues Concerning the Application of the Civil Procedure Law of the PRC (最高人民法院关于适用中华人民共和国民事诉讼法若干问题的意见).

  264. 264.

    See Xiaoming Xi (ed), Annotations to the Provisions in the New Civil Procedure Law (新民事诉讼法条文释义), (3rd edition, Beijing: People’s Court Press 2010).

  265. 265.

    The type of cases that could be regarded as essential group litigation are listed in art 43, 46, 47, 50, 52, 55 and 56 of the Opinions and in art 124 to 128 of the Judicial Interpretation of the Supreme People’s Court on Some Issues Regarding the Application of Security Law of the PRC (最高人民法院关于适用中华人民共和国担保法若干问题的解释). For example, litigation arising from joint credit or joint liability; litigation arising from joint succession property. And see Michael Palmer and Chao Xi, ‘Collective and representative actions in China’, National Report to the University of Oxford Centre for Social-Legal Studies and Stanford Law School Joint Project on the Globalization of Class Actions. (2007), p. 3.

  266. 266.

    In fact, essential group litigation could be divided into two categories: the positive essential group litigation and the passive essential group litigation. The former one means that two or more persons joint together to sue a single defendant, while the latter one indicates that two or more defendants are jointly sued by a single plaintiff.

  267. 267.

    See article 53 of the CPL, and article 60 of the Opinions of the Supreme People's Court on Some Issues Concerning the Application of the Civil Procedure Law of the PRC (最高人民法院关于适用中华人民共和国民事诉讼法若干问题的意见).

  268. 268.

    See article 60 of the Opinions of the Supreme People’s Court on Some Issues Concerning the Application of the Civil Procedure Law of the PRC (最高人民法院关于适用中华人民共和国民事诉讼法若干问题的意见).

  269. 269.

    In an ordinary group action, the final result (the judgment or the settlement) could vary from one member to another. See Xiaoming Xi (ed), Annotations to the Provisions in the New Civil Procedure Law.

  270. 270.

    See article 54 (2) of the CPL.

  271. 271.

    See article 53 of the CPL.

  272. 272.

    See article 59 of the CPL Opinions.

  273. 273.

    See article 62 of the CPL Opinions.

  274. 274.

    See article 55 of the CPL, and article 63 of the CPL Opinions.

  275. 275.

    See article 64 of the CPL Opinion.

  276. 276.

    See article 135 of General Principles of the Civil Law of the People’s Republic of China (中华人民共和国民法通则, ‘zhonghua renmin gongheguo minfa tongze’).

  277. 277.

    See article 54 (4) of the CPL.

  278. 278.

    Ibid.

  279. 279.

    The Supreme People’s Court: Notice of the Supreme People’s Court on Refusing to Accept Civil Compensation Cases Involving Securities For the Time Being (关于涉证券民事赔偿案件暂不予受理的通知).

  280. 280.

    See Bin Luo, Researchs on Securities Class Actions, (Law Press, China, 2011); and see Ren Zili, Securities Class Actions: International Experience And China’s Way Out, (Law Press, China, 2008).

  281. 281.

    The Supreme People’s Court: Notice of the Supreme People's Court on the Relevant Issues concerning the Acceptance of Cases of Disputes over Civil Tort Arising from False Statement in the Securities Market (关于受理证券市场因虚假陈述引发的民事侵权纠纷案件有关问题的通知) (2002).

  282. 282.

    The Supreme People’s Court: Some Provisions of the Supreme People’s Court on Trying Cases of Civil Compensation Arising from False Statement in Securities Market, (关于审理证券市场因虚假陈述引发的民事赔偿案件的若干规定) (2003).

  283. 283.

    See article 4 of the 2002 Notice.

  284. 284.

    See article 4 of the 2002 Notice and article 12 of the 2003 Interpretation.

  285. 285.

    See article 13 of the 2003 Interpretation.

  286. 286.

    See article 14 of the 2003 Interpretation.

  287. 287.

    See article 13 of the 2003 Interpretation.

  288. 288.

    Ibid.

  289. 289.

    See article 15 of the 2003 Interpretation and article 53 of the CPL.

  290. 290.

    Actually the British law adopts procedures by which claimants with similar claims may group together to bring collective claims against the same defendants (Part 19 of the Civil Procedure Rule UK). Under the Civil Procedure Rules (CPR), two types of collective actions could be brought by claimants. One is a group litigation order (GLO) made by the court, which permits a number of claims concerning common or related issues to be managed collectively (Part 19 of the Civil Procedure Rule UK). Under the GLO mechanism, once it is issued, a register of group claims must be established, and a court which will manage the claims (the management court) has to be specified as well [19.11 (2) (a) and 19.11 (2) (c) of the Civil Procedure Rule, and its Practice Direction 19B (6)]. The other approach is through representative actions. Under this mechanism, a claim where more than one person has the same interests could be begun or continued by representatives selected from this group of persons (Part 19 II of the Civil Procedure Rule). In a representative proceeding, any order of the court is binding on all persons represented in the claim (19.6 of the Civil Procedure Rule). In fact, the mechanism of representative actions is infrequently used in the UK because of narrow interpretations by the courts. Theoretically, the mechanism of representative actions allows a person to take legal action on behalf of persons who had ‘common issues’ arising from ‘the same interest’ in a claim against the same defendant. But the ‘same interests’ requirements has proven to be the most problematic aspect of the rule. Much of its controversy arises from the meaning of ‘same interests’ (See Rachel Mulheron, The Class Action in Common Law Legal System, a Comparative Perspectove, Hart Publishing 2004, p. 78). A relatively broad interpretation of representative litigation was given in the House of Lords decision Duke of Bedford v. Ellis in 1901. In this case, Lord MacNaughten held that the requirement of ‘the same interest’ is satisfied if the representative can show a common interest or common grievance and that the relief sought is beneficial to all. However, in a series of later cases, the requirement of common interest was used to give the rule a more restrictive application. And representative proceedings were therefore not available where the sole relief sought involved damages: these would have to be proved individually (Edward F. Sherman, ‘Group Litigation under Foreign Legal Systems: Variations and Alternatives to American Class Actions’, DePaul Law Review (2003) Volume 52, 401, p. 422). In the framework of representative lawsuits, damages cannot be awarded without reference to the particular loss suffered by members of the class (see Neil Andrews, ‘Multi-Partv Proceedings in England: Representative and Group Actions’, Duke Journal of Comparative and International Law (2001) Volume 11, 249, p. 253). These limitations on damages awards were reflected in case laws. For example, in E.M.I. Records Ltd. v. Riley, the court indicated that the damages in a representative claim could be awarded only when ‘(1) the class members’ losses can be readily ascertained at the time of the judgment; (2) the class members have waived their rights to individual receipt of damages and wish their compensation to be paid to a body enjoying care of their interests’ [E.M.I. Records Ltd. v. Riley, 1 W.L.RI 923 (Ch. 1981)]. Given the shortcomings of English representative claims and their practical difficulties, amendments to CPR were made in 2000 to permit the use of GLOs in order to facilitate case management for claims concerning related issues of fact or law. In a GLO, each individual claimant has to start his own proceeding, and parties who want to join in the group must choose to ‘opt in’ [19.11 (2) (a) of the Civil Procedure Rule, and its Practice Direction 19B (6.2)]. It means that litigants have to choose affirmatively to litigate by entering their names on the group register [19.11 (3) (a) of the Civil Procedure Rule, however, claimants can apply for their claims to be removed from the register, see 19.14 (a) of the CPR]. For the management court, the scope of its power ranges over a wide field. For example, it may vary the GLO issues, it may appoint the solicitor of one or more parties to be the lead solicitor for the claimants or defendants (19.13 of the Civil Procedure Rule). In addition, any judgment or order given on a GLO issue is binding upon other parties on the group register, and the court may give directions as to the extent to which that judgment or order is binding on the parties to any claim which is subsequently entered on the group register [See 19.12 (1) of the Civil Procedure Rule]. Moreover, the management court may give directions for the trial of common issues as well as the trial of individual issues, and the latter ones may be heard from another court whose locality is convenient for the parties [Practice Direction 19B (15.1 and 15.2)]. In October 2015, the U.S.-style class action was introduced into UK by the Consumer Rights Act 2015, making it far easier for groups of consumers to seek compensation from firms that have fixed prices and formed cartels.

  291. 291.

    There are several typical categories of class actions in the U.S.. For example, shareholder class actions, consumer class actions.

  292. 292.

    See Robert H. Klonoff, Edward K.M. Bilich and Suzette M. Malveaux, Class Actions and Other Multi-Party Litigation: Cases and Materials, (Second Edition, Thomson/West 2006), pp. 68–70. Janet Cooper Alexander, ‘An Introduction to Class Action Procedure in the United States’, Presented Conference: Debates over Group Litigation in Comparative Perspective, Geneva, Switzerland, (July 21–22, 2000), pp. 4–5.

  293. 293.

    As a matter of fact, these four requirements are key battleground in the grant of class certification. For instance, the ‘numerosity’ requirement. What should the court take into consideration when assessing whether or not the class meets this requirement? Does it mean that the court only needs to focus on the number? In fact, some courts have emphasized that it is wrong to focus on numbers alone. ‘Sometimes, joinder may be impracticable even where the relative size of the potential class is small’, Hernandez v. Alexander, 152 F.R.D. 192, 194 (D.Nev.1993). It is indicated that the court must look at numbers as well as ‘all other relevant factor’. See Robert H. Klonoff, Edward K.M. Bilich and Suzette M. Malveaux, Class Actions and Other Multi-Party Litigation: Cases and Materials, (Second Edition, Thomson/West 2006), pp. 78–82.

  294. 294.

    Crow v. California Department of Human Resources., 325 F. Supp. 1314 (N.D.Cal. 1970).

  295. 295.

    See Robert H. Klonoff, Edward K.M. Bilich and Suzette M. Malveaux, Class Actions and Other Multi-Party Litigation: Cases and Materials, (Second Edition, Thomson/West 2006), pp. 166–167.

  296. 296.

    Janet Cooper Alexander, ‘An Introduction to Class Action Procedure in the United States’, Presented Conference: Debates over Group Litigation in Comparative Perspective, Geneva, Switzerland, (July 21–22, 2000), pp. 4–5.

  297. 297.

    John Bronsteen and Owen Fiss, ‘The Class Action Rule’, Notre Dame Law Review (2002), Volume 78, 1419, pp. 1423–1424; Robert H. Klonoff, Edward K.M. Bilich and Suzette M. Malveaux, Class Actions and Other Multi-Party Litigation: Cases and Materials, (Second Edition, Thomson/West 2006), p. 245.

  298. 298.

    Ibid.

  299. 299.

    Notes of Advisory Committee on Rules—1966 Amendment, available at http://www.law.cornell.edu/rules/frcp/rule_23 (accessed on 21 July 2016).

  300. 300.

    See James William Moore et al, Moore’s Federal Practice, para 23.45(2), at 323–333, (third edition, 1997).

  301. 301.

    Janet Cooper Alexander, ‘An Introduction to Class Action Procedure in the United States’, Presented Conference: Debates over Group Litigation in Comparative Perspective, Geneva, Switzerland, (July 21–22, 2000), p. 5.

  302. 302.

    Ibid.

  303. 303.

    The term ‘At an early practicable time’ takes place of the previous term ‘as soon as practicable’ after the 2003 amendment.

  304. 304.

    See Robert H. Klonoff, Edward K.M. Bilich and Suzette M. Malveaux, Class Actions and Other Multi-Party Litigation: Cases and Materials, (Second Edition, Thomson/West 2006), p. 311.

  305. 305.

    Rule 23(c)(2) of Federal Rules of Civil Procedure.

  306. 306.

    Rule 23(e) of Federal Rules of Civil Procedure.

  307. 307.

    American Law Institute, Principles of the Law: Aggregate Litigation, (American Law Institute Publishers, 2010), pp. 212–213; John Bronsteen and Owen Fiss, ‘The Class Action Rule’, Notre Dame Law Review (2002), Volume 78, 1419, p. 1443.

  308. 308.

    John Bronsteen and Owen Fiss, ‘The Class Action Rule’, Notre Dame Law Review (2002), Volume 78, 1419, p. 1443.

  309. 309.

    American Law Institute, Principles of the Law: Aggregate Litigation, (American Law Institute Publishers, 2010), p. 213.

  310. 310.

    Ibid.

  311. 311.

    For example, La. Code Civ. Proc. Ann. art. 591(B)(4) (1997), see American Law Institute, Principles of the Law: Aggregate Litigation, (American Law Institute Publishers, 2010), pp. 213–216.

  312. 312.

    Rule 23(e)(4) of Federal Rules of Civil Procedure.

  313. 313.

    The first opt-out right appears in the certifying procedure of a class action, see Rule 23(c)(2)(B)(v) of Federal Rules of Civil Procedure.

  314. 314.

    American Law Institute, Principles of the Law: Aggregate Litigation, (American Law Institute Publishers, 2010), p. 242.

  315. 315.

    See for instance, Denney v. Deutsche Bank AG, 2006 WL 845727, at 12 (2d Cir. Mar. 31, 2006); and see Hicks v. Morgan Stanley & Co., 2005 U.S. Dist. LEXIS 24890, at 17 (S.D.N.Y. Oct. 24, 2005); and see In re Visa Check/Mastermoney Antitrust Litig., 297 F. Supp. 2d 503, 518 (E.D.N.Y. 2003). In all those cases, the second opt-out rights are denied by the courts. For more, see Robert H. Klonoff, Edward K.M. Bilich and Suzette M. Malveaux, Class Actions and Other Multi-Party Litigation: Cases and Materials, (Second Edition, Thomson/West 2006), pp. 706–707.

  316. 316.

    Rule 23(g)(1)(2) of Federal Rules of Civil Procedure.

  317. 317.

    Rule 23(g)(2) of Federal Rules of Civil Procedure.

  318. 318.

    The issues must be taken into consideration and may be considered by the court when such a selection is made are incorporated in Rule 23(g)(1)(A) and Rule 23(g)(1)(B) of Federal Rules of Civil Procedure.

  319. 319.

    Janet Cooper Alexander, ‘An Introduction to Class Action Procedure in the United States’, Presented Conference: Debates over Group Litigation in Comparative Perspective, Geneva, Switzerland, (July 21–22, 2000), p. 10; and also see Rachael Mulheron, The Class Action in Common Law Legal Systems: a Comparative Perspective, (Hart Publishing, 2004), pp. 469–470.

  320. 320.

    The common fund doctrine was endorsed for federal class actions in Boeing Co. v. Van Gemert, 444 U.S. 472 (1982).

  321. 321.

    In practice, the successful lawyer must submit a request to the court to claim reasonable lawyer’s fees, which are paid out of the class compensation (the common fund).

  322. 322.

    See Robert H. Klonoff, Edward K.M. Bilich and Suzette M. Malveaux, Class Actions and Other Multi-Party Litigation: Cases and Materials, (Second Edition, Thomson/West 2006), pp. 996–997. See Donna M. Nagy, Richard W. Painter and Margaret V. Sachs, Securities Litigation and Enforcement: Cases and Materials, (Thomson/West 2003), pp. 2–11.

  323. 323.

    Securities Exchange Commission Rule 10b-5.

  324. 324.

    Ibid.

  325. 325.

    The Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research has identified this figure, available at http://securities.stanford.edu (accessed on 11 August 2016).

  326. 326.

    Patrick M. Garry, Candice Spurlin, Debra A. Owen, William A. Williams and Lindsay J. Efting, ‘The Irrationality of Shareholder Class Action Lawsuits: A Proposal for Reform’, South Dakota Law Review, (2004), Volume 49(2), 275, pp. 281–282; and see Jill E. Fisch, ‘Class Action Reform, Qui Tam, and the Role of the Plaintiff’, Law and Contemporary Problems, (1997), Volume 60, 167, p. 168; and see Susan P. Koniak and George M. Cohen, ‘Under Cloak of Settlement’, Virginia Law Review, (1996), Volume 82,1051; and see Jonathan R. Macey and Geoffrey P. Miller, ‘The Plaintiffs’ Attorney’s Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform’, University of Chicago Law Review, (1991), Volume 58, 1.

  327. 327.

    See Donna M. Nagy, Richard W. Painter and Margaret V. Sachs, Securities Litigation and Enforcement: Cases and Materials, (Thomson/West 2003), p. 9.

  328. 328.

    Moreover, Professor John C. Coffee’s article states that ‘The present structure of securities class actions benefits a trio of interest groups—corporate officials, plaintiff's attorneys, and insurers but not shareholders’. See John C. Coffee, ‘Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation’, Columbia Law Review, (2006), Volume 106(7), 1534, p. 1535.

  329. 329.

    See Section 21(E)(c) of the PSLRA 1995.

  330. 330.

    See Section 21E(c) (1) (A) (i) of the PSLRA 1995.

  331. 331.

    See Section 21E(c) (1) (A) (ii) of the PSLRA 1995.

  332. 332.

    See Section 21E(c) (1) (B) of the PSLRA 1995.

  333. 333.

    See Section 27 (a) (3) of the PSLRA 1995.

  334. 334.

    See R. Chris Heck, ‘Conflict and Aggregation: Appointing Institutional Investors as Sole Lead Plaintiffs Under the PSLRA’, University of Chicago Law Review, (1999), Volume 66(4), 1199, p. 1202.

  335. 335.

    See the House of Congress Report, Securities Litigation Reform, (No. 104-369), (1995), p. 31.

  336. 336.

    See Donna M. Nagy, Richard W. Painter and Margaret V. Sachs, Securities Litigation and Enforcement: Cases and Materials, (Thomson/West 2003), p. 398.

  337. 337.

    See Section 27 (a) (3) (B) (vi) of the PSLRA 1995.

  338. 338.

    Section 21D (a) (2) (A) (i) to 21D (a) (2) (A) (vi) lists several requirements for the certification of the lead plaintiff.

  339. 339.

    Patrick M. Garry, Candice Spurlin, Debra A. Owen, William A. Williams and Lindsay J. Efting, ‘The Irrationality of Shareholder Class Action Lawsuits: A Proposal for Reform’, South Dakota Law Review, (2004), Volume 49(2), 275, pp. 276–278; see Jill E. Fisch, ‘Class Action Reform, Qui Tam, and the Role of the Plaintiff’, Law and Contemporary Problems, (1997), Volume 60, 167, pp. 169–170; Susan P. Koniak and George M. Cohen, ‘Under Cloak of Settlement’, Virginia Law Review, (1996), Volume 82,1051; and see Jonathan R. Macey and Geoffrey P. Miller, ‘The Plaintiffs’ Attorney’s Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform’, University of Chicago Law Review, (1991), Volume 58, 1.

  340. 340.

    See Patrick M. Garry, Candice Spurlin, Debra A. Owen, William A. Williams and Lindsay J. Efting, ‘The Irrationality of Shareholder Class Action Lawsuits: A Proposal for Reform’, South Dakota Law Review, (2004), Volume 49(2), 275, pp. 275–276.

  341. 341.

    See James D. Cox, ‘Making Securities Fraud Class Actions Virtuous’, Arizona Law Review, (1997), Volume 39, 497, p. 501.

  342. 342.

    In theory, the class members own the class action, however, lawyers control and conduct the entire proceeding. The separation of ownership and control would easily lead lawyers to ‘monopolize’ the whole litigation proceeding. Adam C. Pritchard, ‘Markets as Monitors: A Proposal to Replace Class Actions with Exchanges as Securities Fraud Enforcers’, Virginia Law Review, (1999), Volume 85, 925, p. 928.

  343. 343.

    Further analysis in this regard will be in Sects. 6.2 and 6.3 of this book.

  344. 344.

    Simple civil disputes (e.g. contract dispute) are generally not multi-party actions, where complex procedures like ‘opt-in’, ‘register with the court’ are not applied.

  345. 345.

    Patrick M. Garry, Candice Spurlin, Debra A. Owen, William A. Williams and Lindsay J. Efting, ‘The Irrationality of Shareholder Class Action Lawsuits: A Proposal for Reform’, South Dakota Law Review, (2004), Volume 49(2), 275, p. 284.

  346. 346.

    Donna M. Nagy, Richard W. Painter and Margaret V. Sachs, Securities Litigation and Enforcement: Cases and Materials, (Thomson/West 2003), p. 399.

  347. 347.

    See Elliot J. Weiss and John S. Beckerman, ‘Let the Money do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions’, Yale Law Journal, (1995), Volume 104, 2053, p. 2061.

  348. 348.

    See Elliot J. Weiss and John S. Beckerman, ‘Let the Money do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions’, Yale Law Journal, (1995), Volume 104, 2053, p. 2060.

  349. 349.

    See 27 (a) (3) (B) of the PSLRA 1995. For example, the most adequate plaintiff shall select and retain counsel to represent the class; [27 (a) (3) (B) (v)].

  350. 350.

    Janet Cooper Alexander, ‘Do the Merits Matter? A Study of Settlements in Securities Class Actions’, Stanford Law Review, (1991), Volume 43, 497, p. 535.

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Chen, W. (2017). An Overview of Shareholder Litigation. In: A Comparative Study of Funding Shareholder Litigation. Springer, Singapore. https://doi.org/10.1007/978-981-10-3623-1_2

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