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Funding Alternatives Through Fee or Cost Arrangements

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A Comparative Study of Funding Shareholder Litigation

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Abstract

The ICO applied in England is, in nature, a form of litigation funding provided by the company to finance a derivative action. The Civil Procedure Rule 19.9 (E) provides that the court may order a company to indemnify the claimant against liability for costs incurred in a derivative claim which was brought on the name of the company. The rationale for the company’s funding is that the company is, essentially, the beneficiary of a successful derivative claim, and the recoveries created by the lawsuit flow to the company directly. Thus, it is reasonable for the company to afford the costs incurred in the proceeding.

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Notes

  1. 1.

    Civil Procedure Rule (Practice Directions) 19.9 provides ‘The court may order the company, body corporate or trade union for the benefit of which a derivative claim is brought to indemnify the claimant against liability for costs incurred in the permission application or in the derivative claim or both’. Available at http://www.justice.gov.uk/courts/procedure-rules/civil/rules/part19#19.9E (accessed on 24 August 2016).

  2. 2.

    See Arad Reisberg, Derivative Actions and Corporate Governance: Theory and Operation, Oxford University Press, (2007), p. 229.

  3. 3.

    Ibid.

  4. 4.

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

  5. 5.

    In this case, through a series of manipulative transactions, Dr. Wallersteiner (the defendant), who was a director of the company at issue, had acquired his 80% shares using funds from the company. Mr. Moir (the plaintiff), who was a minority shareholder of the company, had applied to the board of trade to investigate the transaction done by Dr. Wallersteiner, however, he failed. Mr. Moir’s request for the disputes to be referred to the shareholders’ meeting for decision were also refused by the defendant, therefore, the court was the only place where the transaction could be challenged. At the first stage (Wallersteiner v Moir no. 1), the judgment had been done in favour of the Mr. Moir (the plaintiff), but a further judicial procedure was needed to assess the damages. Dr. Wallersteiner had also applied to appeal to the House of Lords. If the appeal was allowed, Mr. Moir should defend his case in the House of Lords, but Mr. Moir had exhausted all his financial resources through the action for more than ten years. In the Court of Appeal, though it was held that a plaintiff in a derivative claim was not eligible for legal aid, the court ordered the company to indemnify Mr. Moir his costs incurred and to be incurred in the forthcoming proceedings. Wallersteiner v Moir (No 2) [1975] QB 373.

  6. 6.

    Wallersteiner v Moir (No 2) [1975] QB 373, at 394.

  7. 7.

    Wallersteiner v Moir (No 2) [1975] QB 373, at 395.

  8. 8.

    Ibid.

  9. 9.

    See Arad Reisberg, Derivative Actions and Corporate Governance: Theory and Operation, Oxford University Press, (2007), p. 230.

  10. 10.

    Wallersteiner v Moir (No 2) [1975] QB 373, at 404.

  11. 11.

    Previously, there was no requirement that the application for indemnity cost order had to be integrated into the application for leave to proceed. The application was usually made without notice to the other side, shortly after the beginning of the proceeding and on affidavit evidence. But this might lead to a result that the company would thereafter find itself paying for an action which it almost invariably did not want to bring, and which would usually put the whole management under intense pressure. Given that, the application procedure was revised later. And in 19.9 of the Civil Procedure Rule (the CPR), it expressly authorizes the court to give the shareholder plaintiff an order to indemnify the litigation costs out of the company’s assets when it thinks appropriate, and also expressly requires the court’s approval for the continuance of a derivative action. It means that the application of an indemnity cost order has been integrated into the application for leave to proceed. See CPR 19.9 (3); BG Pette, Company Law (2nd edition Longman Law Series, 2005) pp, 219–221; Arad Reisberg, Derivative Actions and Corporate Governance: Theory and Operation, Oxford University Press, (2007), p. 231.

  12. 12.

    Wallersteiner v Moir (No 2) [1975] QB 373, at 407.

  13. 13.

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

  14. 14.

    See Qingxiu Bu, ‘The Indemnity Order in a Derivative Action’, Company Lawyer, 2006, 27(1), 2, p. 6.

  15. 15.

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

  16. 16.

    Ibid.

  17. 17.

    Smith v. Croft (No. 1) [1986] 2 All ER 551, at 564–565.

  18. 18.

    Ibid.

  19. 19.

    See Qingxiu Bu, ‘The Indemnity Order in a Derivative Action’, Company Lawyer, 2006, 27(1), 2, p. 6.

  20. 20.

    See Arad Reisberg, Derivative Actions and Corporate Governance: Theory and Operation, Oxford University Press, (2007), p. 230.

  21. 21.

    Smith v. Croft (No. 1) [1986] 2 All ER 551, at 567.

  22. 22.

    Ibid.

  23. 23.

    See Arad Reisberg, Derivative Actions and Corporate Governance: Theory and Operation, Oxford University Press, (2007), pp. 238–239.

  24. 24.

    Jaybird Group Ltd v Greenwood [1986] B.C.L.C. 319, at 328.

  25. 25.

    Arad Reisberg, Derivative Actions and Corporate Governance: Theory and Operation, Oxford University Press, (2007), p. 240.

  26. 26.

    Ibid.

  27. 27.

    Walton J.’s ‘financial test proposal’ was not adopted by the subsequent case law. For example, in Jaybird Group Ltd v Greenwood [1986] B.C.L.C. 319, Wheeler Q.C. awarded an indemnity order to a wealthy plaintiff. In this case, the court applied the ‘necessity’ criterion alone, and the decision to award an indemnity cost order to the shareholder plaintiff was made on the basis that the independent and impartial board of directors of the company would have brought the derivative action for the best interests of the company. Jaybird Group Ltd v Greenwood [1986] B.C.L.C. 319, at 320.

  28. 28.

    Smith v Croft (No 2) [1988] Ch. 114.

  29. 29.

    r.19.9 (7) of the CPR 2000 provides that the application for an indemnity order and the application for the leave to proceed should be integrated together.

  30. 30.

    See Qingxiu Bu, ‘The indemnity order in a derivative action’, Company Lawyer, 2006, 27(1), 2, p. 7.

  31. 31.

    Smith v Croft (No 2) [1988] Ch. 114, at 147.

  32. 32.

    Julia Tang, ‘Shareholder remedies: demise of the derivative claims?’, 1 UCL Journal of Law and Jurisprudence 178, (2012), p. 204.

  33. 33.

    Kiani v Cooper [2010] BCC 463.

  34. 34.

    Ibid.

  35. 35.

    Stainer v. Lee [2011] BCC 134.

  36. 36.

    Julia Tang, ‘Shareholder remedies: demise of the derivative claims?’, 1 UCL Journal of Law and Jurisprudence 178, (2012), p. 205.

  37. 37.

    Smith v Croft (No. 2) [1988] Ch. 114; 19.9 (7) of the Civil Procedure Rule (2000).

  38. 38.

    Arad Reisberg, Derivative Actions and Corporate Governance: Theory and Operation, Oxford University Press, (2007), p. 237.

  39. 39.

    Ibid.

  40. 40.

    Unfair prejudice petition in the UK company law is a statutory form of action that may be brought by aggrieved shareholders against their company. Section 994 of the CA 2006 in relation of unfair prejudice remedy provides that the petition could be brought by any member of the company (not only shareholders) on grounds that ‘the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members; or an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.’ In general, the statutory requirements for an unfair prejudice petition are lower than those for a derivative action. The comparison between those two mechanisms can be found in Arad Reisberg, Derivative Actions and Corporate Governance: Theory and Operation, Oxford University Press, (2007), p. 286.

  41. 41.

    The reason why we suppose the court holds a ‘comparatively moderate attitude of the court at the early stage’ will be explained as follows. In Kiani v Cooper, it was indicated that the plaintiff should assume a portion of litigation financial risk instead of relying the indemnity cost order entirely. Although the indemnity cost application was approved to be genuinely-needed, the court could still grant an order in a limited scope. The plaintiff applicant is allowed to apply for an extension of the cost order to cover all the costs incurred in the court proceeding. Considering that, the court’s attitude may not be so harsh because if it finds the decision is improper, a correction on the indemnity cost order is still possible to be made.

  42. 42.

    John Peysner, ‘National Reports: England and Wales’, in Christopher Hodges et al. (eds), The Costs and Funding of Civil Litigation, (Hart Publishing, 2010), 289, p. 294.

  43. 43.

    See Jackson’s final report: Review of Civil Litigation Costs, (2009), p. 16.

  44. 44.

    The extra charge (the success fee) by a lawyer could be up to 100% of his normal bill.

  45. 45.

    See Jackson’s final report: Review of Civil Litigation Costs, (2009), p. 8.

  46. 46.

    It is generally thought that the lawyer is in the best position to know the potential risk involved in a case. Arad Reisberg, Derivative Actions and Corporate Governance: Theory and Operation, Oxford University Press, (2007), p. 252.

  47. 47.

    See Sonja Keske, Andrea Renda and Roger Van Den Bergh, ‘Financing and Group Litigation’, in Mark Tuil and Louis Visscher (eds.) New Trends in Financing Civil Litigation in Europe: A Legal, Empirical and Economic Analysis, (Edward Elgar Publishing, 2010) 57, p. 79.

  48. 48.

    Law Reform Commission of Hong Kong, Consultation Paper on Conditional Fee (2005), Ch. 7, Recommendation 5, paras 7.24 to 7.26, available at http://www.hkreform.gov.hk/en/docs/conditional-e.pdf (accessed on 20 August 2016).

  49. 49.

    See Sect. 58 of Courts and Legal Services Act 1990, available at http://www.legislation.gov.uk/ukpga/1990/41/section/58 (accessed on 20 August 2016).

  50. 50.

    See Qingxiu Bu, ‘The indemnity order in a derivative action’, Company Lawyer, 2006, 27(1), 2, p. 13.

  51. 51.

    For example, after-the-event insurance. See A. Walters and J. Peysner, ‘Event-Triggered Financing of Civil Claims: Lawyers, Insurers and the Common Law’ (1999) 8 Nottingham Law Journal 1, p. 2.

  52. 52.

    Arad Reisberg, Derivative Actions and Corporate Governance: Theory and Operation, Oxford University Press, (2007), p. 254.

  53. 53.

    Ibid.

  54. 54.

    See Michael Zander, ‘The Government’s Plans on Legal Aid and Conditional Fees’ (1998) 61 Modern Law Review 538, p. 549.

  55. 55.

    See Jackson’s final report: Review of Civil Litigation Costs, (2009), pp. 91–93.

  56. 56.

    See Zhong Zhang, ‘Making Shareholder Derivative Actions Happen in China: How Should Lawsuits be Funded?’, 38 Hong Kong Law Journal (2008), 523, p. 543.

  57. 57.

    Ibid.

  58. 58.

    See Zhong Zhang, ‘Making Shareholder Derivative Actions Happen in China: How Should Lawsuits be Funded?’, 38 Hong Kong Law Journal (2008), 523, p. 544.

  59. 59.

    See Gerald Walpin, ‘America’s Failing Civil Justice System: Can We Learn From Other Countries?’, 41 New York Law School Law Review. 647 (1996–1997), p. 656.

  60. 60.

    See Zhong Zhang, ‘Making shareholder derivative actions happen in China: how should lawsuits be funded?’, 38 Hong Kong Law Journal (2008), 523, p. 544; Arad Reisberg, Derivative actions and corporate governance: theory and operation, Oxford University Press, (2007), pp. 255–256; J. Peysner, ‘What’s Wrong with Contingency Fees?’, (2001) 10 Nottingham Law Journal 22, p. 46; Winand Emons and Nuno Garoupa, ‘The economics of US-style contingent fees and UK-style conditional fees’, Managerial and Decision Economics, (2006), Volume 28, Issue 5, 379, p. 381.

  61. 61.

    See Ian Ramsay, ‘Corporate Governance, Shareholder Litigation and the Prospect for a Statutory Derivative Action’, (1992) 15 (1) University of New South Wales Law Journal 149, p. 174.

  62. 62.

    See Geoffrey Woodroffe, ‘Loser Pays and Conditional Fees—An English Solution?’, 37 Washburn Law Journal. 345, (1997–1998), p. 354.

  63. 63.

    The Conditional Fee Agreements Order 2013, available at http://www.legislation.gov.uk/ukdsi/2013/9780111533437 (accessed on 20 August 2016).

  64. 64.

    Historically, given the traditional common law prohibition of champerty and maintenance, contingency fee arrangements were prohibited in most of common law nations (But the US is an exception).

  65. 65.

    Uri Weiss, ‘The Regressive Effect of Legal Uncertainty’, Tel Aviv University Law Faculty Working Paper 30. (2005), pp. 2–5 http://law.bepress.com/cgi/viewcontent.cgi?article=1030&context=taulwps (accessed on 20 August 2016).

  66. 66.

    See GP Miller, ‘Some Agency Problems in Settlement’ (1987) 16 The Journal of Legal Studies, 189, pp. 192–193; T. Thomason, ‘Are Attorneys Paid What They Are Worth? Contingent Fees and the Settlement Process’ (1991) 20 The Journal of Legal Studies, 187, pp. 191–193.

  67. 67.

    Hugh Gravellea and Michael Waterson, No win, No fee: Some Economics of Contingency Legal Fees, The Economic Journal, (1993), Volume 103 (420), 1025, p. 1026.

  68. 68.

    23.1 of Federal Rule of Civil Procedure.

  69. 69.

    For example, Rule 23.1 of Rules of the Court of Chancery of the State of Delaware; Section 626(d) of New York Business Corporation Law; Section 7.45 of the MBCA; Section 7.14(a) of ALI (II).

  70. 70.

    For example, in Delaware, the notice is required unless the dismissal of the action is without prejudice to the plaintiff. See Deborah A. DeMott, Shareholder Derivative Actions: Law and Practice, Clark Boardman Callaghan (2012); Section 7.45 of the MBCA provides that ‘if the court determines that a proposed discontinuance or settlement will substantially affect the interests of the corporation’s shareholders or a class of shareholders, the court shall direct that notice be given to the shareholders affected’.

  71. 71.

    Arad Reisberg, Derivative actions and corporate governance: theory and operation, Oxford University Press, (2007), pp. 73–74.

  72. 72.

    Xiaoning Li, A Comparative Study of Shareholders’ Derivative Actions: England, the United States, Germany and China, (Kluwer, 2007), pp. 178–179; HM Kritzer, ‘The Wages of Risk: The Returns of Contingent Fee Legal Practice’ (1997) 47 De Paul Law Review 267, pp. 268–270; See Eyal Zamir and Ilana Ritov, ‘Neither Saints Nor Devils: A Behavioral Analysis of Attorneys’ Contingent Fees’ (January 22, 2008), pp. 6–8 Available at SSRN: http://ssrn.com/abstract=1085985 or http://dx.doi.org/10.2139/ssrn.1085985; see James D. Dana, Kathryn E. Spier, ‘Expertise and Contingent Fees: The Role of Asymmetric Information in Attorney Compensation’, Journal of Law, Economics, & Organization, 1993, 9(2), pp. 349–367.

  73. 73.

    For example, compared to directors (who are sometimes defendants in a derivative lawsuit), minority shareholders have less professional knowledge with regards to corporate governance. And business operation which is normally professional and complicated may not be easy for shareholders to understand.

  74. 74.

    See HM Kritzer, ‘The Wages of Risk: The Returns of Contingent Fee Legal Practice’, De Paul Law Review, (1997), Volume 47, 267, pp. 268–170; and see HM Kritzer, Risks, Reputations, and Rewards: Contingency Fee Legal Practice in the United States (Stanford University Press, 2004).

  75. 75.

    For example, if a shareholder plaintiff sues the director on grounds that the director made a transaction infringing the company’s interests. When they negotiate a settlement agreement, the defendant can give an offer which might be less than the company’s expectation but is still in favour of the company. For the shareholder plaintiffs, the defendant may give them other benefits outside the company. (which is, actually, not practically prohibited, even though this sort of trade-off must be legally forbidden.) Considering that, it is possible for the shareholder plaintiff and the defendants to conclude a settlement agreement which is more beneficial for the personal interests of the shareholder plaintiffs rather than that of the company. Therefore, it could be said that the interests of shareholder plaintiffs are not always in line with that of the company.

  76. 76.

    See Herbert M. Kritzer, ‘Contingency Fee Lawyers as Gatekeepers in the Civil Justice System’, Judicature Volume 81, Number 1 (1997), p. 22.

  77. 77.

    In A Nation Under Lawyers, the author indicated that ‘about half of the practice of the decent lawyer consists in telling would-be clients that they are damned fools and should stop’. See Mary Ann Glendon, A Nation Under Lawyers: How the Crisis in the Legal Profession is Transforming American Society, (Harvard University Press, 1996), pp. 37 and 75.

  78. 78.

    See Herbert M. Kritzer, ‘Contingency Fee Lawyers as Gatekeepers in the Civil Justice System’, Judicature Volume 81, Number 1 (1997), p. 22.

  79. 79.

    See supra 5.1.4.4.

  80. 80.

    In most Canadian provinces (except Ontario) CGFAs are legally allowed. But it should be mentioned that the cost rule in Canada is mostly followed English cost-shifting rule which make the litigation practice in Canada differ from that in the US. As a matter of fact, in Canada, CGFAs are not used as much as they are in the US. So the fears of CGFAs abuse have not materialized in Canada. See Arad Reisberg, Derivative actions and corporate governance: theory and operation, Oxford University Press, (2007), p. 266.

  81. 81.

    See Arad Reisberg, Derivative actions and corporate governance: theory and operation, Oxford University Press, (2007), p. 264. And see Kevin M. Clermont and John D. Currivan, ‘Improving on the Contingency Fee’ (1978) 63 Cornell Law Review 529, p. 570.

  82. 82.

    See Herbert M. Kritzer, ‘The Seven Dogged Myths Concerning Contingency Fees’ (2002) 80 Washington University Law Quarterly, 739, pp. 755–757.

  83. 83.

    Kevin M. Clermont and John D. Currivan, ‘Improving on the Contingency Fee’ (1978) 63 Cornell Law Review 529, p. 573.

  84. 84.

    Ibid.

  85. 85.

    Actually, in the US, the setting of the contingent rate is unregulated in most of states. Lack of regulation prompts some concerns about windfall fees where the level of contingency fee dramatically exceeds the level of effort a lawyer expends on a case. But is has also been stated that regulation of contingency fees through caps would be likely to reduce the access to justice (there is clear evidence that such caps reduce the number of cases brought). See Richard Moorhead, ‘Contingency Fees: A Study of the Operation of Contingency Fee Arrangements in the United States of America’, (2008), pp. 8–9. http://www.judiciary.gov.uk/wp-content/uploads/2011/06/JCO_Documents_CJC_Publications_CJC+papers_Civil+Justice+Council+Contingency+Fees+Report.pdf (accessed on 20 August 2016).

  86. 86.

    Daniel L. Rubinfeld and Suzanne Scotchmer, ‘Contingent Fees for Attorneys: an Economic Analysis’, The RAND Journal of Economics Vol. 24, No. 3 (1993), 343, pp. 343–344.

  87. 87.

    Ibid.

  88. 88.

    Ibid.

  89. 89.

    Ibid.

  90. 90.

    See supra 2.3.1.

  91. 91.

    See supra 6.3.2.

  92. 92.

    U.S. District Court Judge Robert R. Merhige, presiding over the Dalkon Shield Claimants Trust litigation, stated:

    It is to be borne in mind that counsel has already received, in the vast majority of instances, fees of at least one-third of the gross settlement amount, plus costs. These fees, in many instances, exceed $100,000.00 per claim, and the aggregate fees received by some counsel, especially those with hundreds of cases, runs as high as several million dollars per attorney or law firm. Generally, the sole efforts related to such compensation consist of garnering medical records and advising a client whether to accept a non-negotiable settlement offer.

    A.H. Robins Co., 182 B.R. 128, 137 n. 10 (E.D. Va. 1995); see Lester Brickman, ‘Contingency Fee Abuse, Ethical Mandates, and the Disciplinary System: The Case Against Case-by-Case Enforcement’, Washington and Lee Law Review, (1996), Volume 53, Issue 4, 1339, p. 1320.

  93. 93.

    Lester Brickman, ‘Effective Hourly Rates of Contingency-Fee Lawyers: Competing Data and Non-Competitive Fees’, Washington University Law Quarterly, (2003), Volume 81(3), 653, pp. 657–659.

  94. 94.

    Ibid.

  95. 95.

    In Olavi Maru, Digest of Bar Association Ethics Opinions (1970), it commented that ‘where no agreement exists with regard to a fee, it is proper to charge only a reasonable fee, which will ordinarily be less than a fee fixed on a contingent basis’. Therefore, it could be found that Contingent fees usually produce a higher fee than a fixed or hourly fee for the same service. See Lester Brickman, ‘Contingency Fee Abuse, Ethical Mandates, and the Disciplinary System: The Case Against Case-by-Case Enforcement’, Washington and Lee Law Review, (1996), Volume 53, Issue 4, 1339, p. 1347.

  96. 96.

    See Richard Moorhead, ‘Contingency Fees: A Study of the Operation of Contingency Fee Arrangements in the United States of America’, (2008), pp. 8–9; Michael Horowitz, ‘Making Ethics Real, Making Ethics Work: A Proposal for Contingency Fee Reform’, Emory Law Journal, (1995), Volume 44, 173; Lester Brickman, ‘ABA Regulation of Contingency Fee: Money Talks, Ethics Works’, Fordham Law Review, (1996), Volume 65, 247; Lester Brickman, ‘Contingency Fee Abuse, Ethical Mandates, and the Disciplinary System: The Case Against Case-by-Case Enforcement’, Washington and Lee Law Review, (1996), Volume 53(4), 1339.

  97. 97.

    See Michael Horowitz, ‘Making Ethics Real, Making Ethics Work: A Proposal for Contingency Fee Reform’, Emory Law Journal, (1995), Volume 44, 17.; Lester Brickzan, ‘ABA Regulation of Contingency Fee: Money Talks, Ethics Works’, Fordham Law Review, (1996), Volume 65, 247; Lester Brickman, ‘Contingency Fee Abuse, Ethical Mandates, and the Disciplinary System: The Case Against Case-by-Case Enforcement’, Washington and Lee Law Review, (1996), Volume 53(4), 1339.

  98. 98.

    See Lester Brickzan, ‘ABA Regulation of Contingency Fee: Money Talks, Ethics Works’, Fordham Law Review, (1996), Volume 65, 247, p. 248.

  99. 99.

    Ibid.

  100. 100.

    In a publication by the ATLA, it urges its members to ‘exercise sound judgment in using a percentage in the contingent fee contract that is commensurate with the risk, cost, and effort required’. See American Trial Lawyers Association, Keys to the Courthouse: Quick Facts on the Contingent Fee System, (1994), p. 4.

  101. 101.

    In other words, it means that in contingency fee arrangement the lawyer fee is not calculated on an hourly-rate basis. Instead, the lawyer’s fee is calculated in proportion to the damages brought by a successful case. Obviously, compared to ordinary hourly-rate calculation approach, the CGFA will urge the lawyer to work hard to get more rewards. In a conditional fee agreement, the basic theory is the same. The lawyer is motivated to work hard to get ‘success fee’ which is only available only if the case is won. Compared to hourly rate which is irrelevant with the event, contingency fee arrangements and conditional fee agreements seem to be able to provide more incentives for lawyers.

  102. 102.

    See Richard M. Bimholz, ‘Comment: The Validity and Propriety of Contingent Fee Controls’, 37 UCLA Law Review, 949, pp. 950–951 (1989–1990).

  103. 103.

    See Patricia M. Danzon, ‘Contingent Fees for Personal Injury Litigation’, 14 The Bell Journal of Economics, 213, (1984), p. 222.

  104. 104.

    It was proposed that a schedule of permissible contingency fee rates could be a solution to lawyer’s overcharging. See Philip H. Corboy, ‘Contingency Fees: The Individual’s Key to the Courthouse Door’, 2 Litigation (1975–1976), 27, p. 36.

  105. 105.

    Lester Brickman, ‘Contingency Fee Abuse, Ethical Mandates, and the Disciplinary System: The Case Against Case-by-Case Enforcement’, Washington and Lee Law Review, (1996), Volume 53, Issue 4, 1339, pp. 1350–1351.

  106. 106.

    Ibid.

  107. 107.

    See Philip H. Corboy, ‘Contingency Fees: The Individual’s Key to the Courthouse Door’, 2 Litigation (1975–1976), 27, p. 35.

  108. 108.

    See Centre for Justice Democracy at New York Law School: ‘White Paper: Courthouse Cornerstone: Contingency Fees and Their Importance for Everyday Americans’, p. 12 & appendix, http://centerjd.org/content/white-paper-courthouse-cornerstone-contingency-fees-and-their-importance-everyday-americans (accessed on 20 August 2016).

  109. 109.

    Ibid, Appendix.

  110. 110.

    See Section 34-18-18-1 IND. CODE.

  111. 111.

    See Section 474 (a) NY JUD. LAW.

  112. 112.

    For this reform, the Illinois Governor’s spokesperson said, ‘Flat rates for contingency fees in medical malpractice cases will provide more consistency and certainty for both malpractice victims and attorneys, while eliminating the awarding of additional attorney compensation by the courts’. See Centre for Justice Democracy at New York Law School: ‘White Paper: Courthouse Cornerstone: Contingency Fees and Their Importance for Everyday Americans’, p. 13.

  113. 113.

    Steven Garber et al., ‘Do Noneconomic Damages Caps and Attorney Fee Limits Reduce Access to Justice for Victims of Medical Negligence?’, 6 Journal of Empirical Legal Studies, (December 2009), 637, pp. 640–641.

  114. 114.

    See American Bar Association Tort Trial & Insurance Practice Section, Report on Contingent Fees in Medical Malpractice Litigation (2004), p. 32.

    http://apps.americanbar.org/tips/contingent/MedMalReport092004DCW2.pdf (accessed on 20 August 2016).

  115. 115.

    Actually, the side effects of standard contingency fee and fee caps have been elaborated. In Report on Contingent Fees in Medical Malpractice Litigation (2004) by the American Bar Association Tort Trial & Insurance Practice Section, it was indicated that ‘Elimination of, or significant constraints on, contingent fees would make legal assistance available only to those injured persons who are wealthy. The poor, retired, African Americans, and women especially will suffer because they are often unable to afford hourly fees’. And the book ‘Two Cheers For Contingent Fees’ by Professor Alexander Tabarrok and Eric Helland also expressed the negative viewpoints towards restrictions on contingent fees. They pointed out that ‘restrictions on contingent fees are restrictions on the freedom to contract and, as such, must clear a high hurdle to be justified’. Alexander Tabarrok and Eric Helland, Two Cheers for Contingent Fees, (AEI Press, 2006), p. 5. https://www.aei.org/press/two-cheers-for-contingent-fees/ (accessed on 20 August 2016).

  116. 116.

    The American Bar Association, in fact, urges its members to self-regulate. The principal means of effectuating self-regulation is the promulgation of professional codes. For instance, the ABA Model Code of Professional Responsibility. The Standing Committee on Ethics and Professional Responsibility, which focus on the development of ethics standard for lawyers, has made effort to regulate lawyer’s work with regards to ethical issues. For more issues about the ABA’s role in lawyers’ ethical code, see Lester Brickzan, ‘ABA Regulation of Contingency Fee: Money Talks, Ethics Works’, Fordham Law Review, (1996), Volume 65, 247, pp. 255–256.

  117. 117.

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

  118. 118.

    Wallersteiner v Moir (No 2) [1975] QB 373, at 393.

  119. 119.

    Wallersteiner v Moir (No 2) [1975] QB 373, at 403.

  120. 120.

    See D.D. Prentice, ‘Wallersteiner v Moir: A Decade Later’, (1987) Conveyancer 167, p. 174; D.D. Prentice, ‘Wallersteiner v Moir: The Demise of the Rule in Foss v Hatbottle?’ (1976) 40 Conveyancer 51, p. 59.

  121. 121.

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

  122. 122.

    For instance, the English law does not require the company’s consent before the commencement of a derivative lawsuit. And a derivative action is only allowed to be brought on grounds of some causes of actions (e.g. negligence, default, breach of duty). The company’s consent is not required. What is needed to proceed the case is the court’s permission, see section 261 of UK Companies Act 2006.

  123. 123.

    For example, in English law there is no relevant provisions dealing with the company’s consent in a derivative action.

  124. 124.

    See Edward A. Snyder and James W. Hughes ‘The English Rule for Allocating Legal Costs: Evidence Confronts Theory’, (1990) 6 Journal of Law, Economics, & Organization 345, p. 367.

  125. 125.

    These findings were based on data collected during 1980–1985.

  126. 126.

    ‘Successful claimants using DBAs will recover their costs (the lawyer’s hourly rate fee and disbursements) from defendants in the usual way, but the claimant will be responsible for paying from their damages any shortfall between the solicitors’ costs paid by the losing defendant and the agreed DBA fee and will also be required to pay any shortfall in respect of disbursements.’

    See Damages-based agreements (DBAs).

    http://www.justice.gov.uk/civil-justice-reforms/main-changes (accessed on 20 August 2016).

  127. 127.

    See Jackson’s final report 2009, p. 133.

  128. 128.

    Ibid.

  129. 129.

    There is not a precise provision how many plaintiffs/defendants could be treated as a mass group. The principle is the group should not be too big, and monetary value at stake in each group should not be excessive. From the practical perspective, less than 30 persons for each group and several million RMB monetary value involved is maximum. See ‘The future of mass litigation’ (群体性诉讼之前景), (in Chinese), available at http://news.sina.com.cn/c/2005-07-22/17007297908.shtml (accessed on 20 August 2016); In the Daqing Lianyi (2004) case, the Harbin intermediate court broke the plaintiffs into several groups, and there were less than 20 persons in each group in order to avoid the ‘mass litigation’. See ‘The Daqing Lianyi case is pushed forward with difficulties’, (in Chinese), (大庆联谊案件难推进), Southern Weekend, available at http://www.southcn.com/weekend/economic/200308140057.htm (accessed on 20 August 2016).

  130. 130.

    For instance, in Daqing Lianyi Case, 381 litigants were divided into smaller groups of ten or twenty persons for each. See ‘The Daqing Lianyi case is pushed forward with difficulties’, (in Chinese), (大庆联谊案件难推进); See also Wuliangye case 2014, a lawyer Mr. Xufeng represents 28 injured investors, and total monetary value at stake in this group is 1.5 million RMB. See, ‘Wuliangye, lost costs for the company’s false statement’, (五粮液,虚假陈述成本太低), (in Chinese), available at http://shipin.people.com.cn/n/2013/0604/c85914-21731032.html (accessed on 20 August 2016).

  131. 131.

    Article 52 of Civil Procedure Law provides only when the court thinks it fits, separate claims brought by different groups of persons with the same or similar disputed issues could be merged into one case. No further criteria are provided.

  132. 132.

    No shareholder collective litigation lasting for less than 3 years is found. The lengthiest case is Shengfang Keji (2001) case, which lasted for 12 years. see, ‘A Long March of 12 Years: Move Forward with Difficulties in Securities Fraud Litigation’, (12年漫漫征途,维权团队负重前行), (in Chinese), (2013), available at http://www.cqn.com.cn/news/cjpd/710456.html (accessed on 20 August 2016).

  133. 133.

    For instance, in the Daqing Lianyi case, the damages were 9 million RMB. The lawyers’ fees were less than 1 million. The case lasted for 7 years, and the principal lawyer Ms Weihua Xuan stated that in order to do investigation, her assistance and she reviewed documents weighted 1 ton in total. Ms Xuan emphasized if she had done this case for earning lawyers’ fees, it would have been a bad deal. See Nan Jiang, ‘Interview with Ms Weihua Xuan, Daqiong Lianyi case will be of historic significance in Chinese securities fraud litigation’, (专访宣伟华律师,大庆联谊案件会被写进历史), (in Chinese), available at http://finance.sina.com.cn/stock/y/20061212/19143157928.shtml (accessed on 20 August 2016); See Silu Guo, ‘Who will knock the door of shareholder litigation arising from false statement, a ten years’ case review’, (谁将叩开股东利益保护之门,虚假陈述诉讼十年探讨), (in Chinese), (2014), available at http://www.infzm.com/content/97734 (accessed on 20 August 2016).

  134. 134.

    In fact, the lengthy court proceeding of shareholder litigation is largely attributed to the vague provision in article 149 (3) of the CPL. For instance, in Daqing Lianyi case, the court procedure lasted for more than 2 years (between the court’s acceptance of the case and the declaration of the final judgment); An even worse case is Yinguangxia (2001) case, which was accepted by the court in 2001 but the judgment came out in 2007. And Kelong 2006 case, which was accepted by the court in 2006 and the settlement agreement was achieved and approved by the court in 2009. See ‘More than 100 injured investors joined the Wuliangye case and damages might exceed 1 billion RMB’, (五粮液诉讼再添近百股民,索赔或超十亿), (2009), available at http://finance.sina.com.cn/stock/s/20091106/00036929876.shtml (accessed on 20 August 2016).

  135. 135.

    See Sufan Guo, ‘Pratical difficulties in shareholder litigation’, (中国资本市场民事维权缘何艰难), (in Chinese), (2012), available at http://www.kuaiyilicai.com/201202/fbcec86b-a0f4-4555-b3c5-67f00b1b8d5a.html (accessed on 20 August 2016). See Rongbin Cheng and Xiaochuan Jiang, Civil Procedure Law: Cases and Rules, (民事诉讼法案例与法规), (in Chinese), (2006), China Legal Publishing House, pp. 30–40. Ms Weihua Xuan (the principal lawyer of Daqing Lianyi case) is now mainly doing project relating initial public offering (IPO), Merge & Acquisition but not shareholder litigation. See her official work page, http://www.grandall.com.cn/zyry/hhr/140327144742.htm (in Chinese), (accessed on 20 August 2016).

  136. 136.

    For example, Mr. Litai Zhou, a lawyer based in Chongqing, was refused to be paid by his clients after the case was won. The total amount of unpaid lawyer’s fee is more than 5 million RMB; And also a lawyer from Jiangsu Zhengda Law Firm was refused by his client to pay the lawyer fee of 1.5 million RMB. http://www.legalinfo.gov.cn/moj/lsgzgzzds/content/2007-12/17/content_763147.htm?node=282 (accessed on 20 August 2016).

  137. 137.

    Grandall Legal Group (国浩律师集团 guohao lvshi jituan), the official site http://www.grandall.com.cn/index.htm (accessed on 20 August 2016).

  138. 138.

    See http://tech.sina.com.cn/it/2012-07-23/09227417612.shtml (in Chinese) (accessed on 20 August 2016).

  139. 139.

    This is a disputed issue. When Weiguan received the whole amount of compensation of 60 million US Dollars from Apple, it did not pay the lawyer’s fee immediately. When the insolvency procedure began, Weiguan then refused to pay the lawyer’s fee based on the reason that it was insolvent. Therefore, Grandall supposed that Weiguan purposely delayed to pay the lawyer’s fee and wanted to enter into the insolvency procedure to evade the obligation of affording lawyer’s fees. See http://tech.sina.com.cn/it/2012-07-23/09227417612.shtml (In Chinese), (accessed on 20 August 2016).

  140. 140.

    See Contingency Fee Arrangements Need to be Developed (律师风险代理制度亟待健全), http://www.moj.gov.cn/lsgzgzzds/content/2007-12/17/content_763549.htm?node=287 (in Chinese) (accessed on 20 August 2016).

  141. 141.

    A similar suggestion in this regard could be found in Lihang Geng, ‘Cost Assumption and Judicial Approval in Shareholder Derivative Actions’ (论我国股东派生诉讼的费用承担和司法许可), Science of Law, Volume 1 (2013), 170.

  142. 142.

    In fact, this document is just a consultation paper without binding effect. ‘Higher People’s Court of Shanghai Municipality: Several Opinions on Adjudicating Company Litigation’ makes a similar provision in this aspect, which provides that if a judgment is made in favour of the shareholder plaintiff, the company should make reasonable monetary compensation to the shareholder plaintiff.

  143. 143.

    This article uses the word ‘reasonable’ litigation costs, but it does not further indicate what kinds of litigation costs could be regarded as ‘reasonable’. For our points of view, the reasonable costs mean that the shareholder plaintiffs use the money properly, and do not waste money on purpose. But in fact, under this provision, the shareholder plaintiff is only reimbursed after a successful derivative lawsuit. Therefore, we suppose that there is no need to worry that the shareholder plaintiff may waste the money because he pays the costs out of his own pocket and there is no guarantee that the case will definitely succeed in the end.

  144. 144.

    See Lihang Geng, ‘Cost Assumption and Judicial Approval in Shareholder Derivative Actions’ (论我国股东派生诉讼的费用承担和司法许可), Science of Law, Volume 1 (2013), 170, p. 179.

  145. 145.

    Ibid.

  146. 146.

    Ibid.

  147. 147.

    Ibid.

  148. 148.

    The case was not accepted by the court because at that time derivative actions were not statutorily confirmed in China, therefore, Chinese courts with conservative attitudes did not want to accept such a case to make an innovation. See ‘The Investigation of Sanjiu Medical & Pharmaceutical Co. Ltd: the Eve of Shareholding Reform’ (三九医药被查:股改前夜打响清欠第一枪), Shanghai Security News (上海证券报), in Chinese, (27 December 2010), available at http://finance.sina.com.cn/stock/s/20101207/03019064496.shtml (accessed on 20 August 2016).

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    Wenjing Chen

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Chen, W. (2017). Funding Alternatives Through Fee or Cost Arrangements. In: A Comparative Study of Funding Shareholder Litigation. Springer, Singapore. https://doi.org/10.1007/978-981-10-3623-1_6

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