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The Derivative Action in Asia

The Derivative Action in Asia A Comparative and Functional Approach

Author: Dan W. Puchniak; Professor Harald Baum; Dr Michael Ewing-Chow
Publisher: Cambridge University Press
ISBN: 9781107012271
Published In: June 2012
Format: Hardback , 474 pages
Jurisdiction: Asia ? Disclaimer:
Countri(es) stated herein are used as reference only

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This in-depth comparative examination of the derivative action in Asia provides a framework for analysing its function, history and practical application and examines in detail how derivative actions law works in practice in seven important Asian jurisdictions (China, Hong Kong, India, Japan, Korea, Taiwan and Singapore). These case studies allow an evaluation of a number of the leading Western comparative corporate law and governance theories which have come to define the field over the last decade. By debunking some of these critically important theories, this book lays the foundation for an accurate understanding of the derivative action in Asia and a re-examination of the regulation of the derivative action around the world.

• Provides a single entry point for the reader who wishes to understand how shareholders may protect their interests by litigating on behalf of a company in Asia's leading economies

• Includes a legislative appendix containing an English-language comparison of the derivative actions legislation in each of Asia's leading economies

• Holistic approach takes into account other mechanisms for corporate governance in order to explain the operation of the derivative action

List of tables	xiv
List of contributors	xv
Foreword	xvii
Preface	xix
List of abbreviations	xxi
1 The derivative action: an economic, historical and practice-oriented approach Harald Baum and Dan W. Puchniak	1
I Introduction	1
II The derivative action from an economic and functional perspective	7
1 Definition, characteristics and delimitation	7
a Definition	7
b Characteristics	8
c Delimitation	10
2 Economic efficiencies and inefficiencies	12
a Function	12
b Empirical studies on the derivative action’s compensatory value	15
c The comparative value of the empirical research	19
d The ambiguous empirical picture is compounded by the deterrence effect	23
e Illuminating the potential negative effects of derivative actions	26
3 Key elements of regulatory design	31
a The need for economic incentives and disincentives	31
b Designing appropriate economic incentives	35
c Sufficient access to corporate information	43
d Making the company the first option	46
e Filtering out unmeritorious actions	47
f Settlement and abandonment	58
4 The derivative action in context: functional alternatives	60
III The derivative action from a historical perspective	64
1 Historical development in the United States	64
2 Historical development in the United Kingdom	66
3 Germany’s historical rejection of the derivative action	72
IV The derivative action from a practical perspective	74
1 Procedure and practice in the United States	74
2 Procedure and practice in the United Kingdom	77
3 Procedure and practice in France	82
4 Procedure and practice in Germany	84
2 The complexity of derivative actions in Asia: an inconvenient truth Dan W. Puchniak	90
I Introduction	90
II The seven leading Asian jurisdictions	98
III An overview of the derivative action in Asia	100
1 Japanese derivative actions: the rise of non-economic litigiousness	100
2 South Korean derivative actions: moderately litigious and intriguingly unpredictable	104
3 Taiwanese derivative actions: the chill of financial disincentives and domestic cultural norms	108
4 Chinese derivative actions: a complex pathway to minority shareholder protection	111
5 Hong Kong derivative actions: a late and partial break with common law tradition lays a path for reform	114
6 Singapore’s derivative actions: mundanely non-Asian, intriguingly non-American and at the forefront of the Commonwealth	117
7 Derivative actions in India: explaining the rarity of derivative actions in a sea of litigation	120
IV The complexity of derivative actions in Asia: a less convenient, but more realistic, truth	124
3 Land of the rising derivative action: revisiting irrationality to understand Japan’s unreluctant shareholder litigant Masafumi Nakahigashi and Dan W. Puchniak	128
I Introduction	128
II Applying the assumption of the economically motivated and rational shareholder litigant to Japan	132
1 The economically motivated and rational explanation for the absence of shareholder litigation in postwar Japan	132
2 Japan’s explosion of derivative actions (mis)understood through the lens of the economically motivated and rational shareholder litigant and its testable hypotheses	139
III Putting the hypotheses of the economically motivated and rational Japanese derivative litigant to the test	144
1 Testing the economically motivated and rational shareholder hypothesis: do shareholders benefit financially from derivative actions in Japan?	144
2 Testing the economically motivated and rational attorney hypothesis: do economically motivated and rational attorneys drive derivative litigation in Japan?	150
3 Testing the financial tracking hypothesis: does the rate of derivative actions track changes in their financial costs/benefits?	155
IV Providing a rational explanation for ‘economically irrational’ derivative litigation in Japan	158
1 Demarcating the boundaries between rational and irrational behaviour	158
2 Quasi-rational (non-economically motivated) behaviour drives derivative litigation in Japan	160
3 Purely irrational behaviour as a potential driver of derivative litigation in Japan	163
V Conclusion	168
Appendices	170
4 Invigorating shareholder derivative actions in South Korea Hyeok-Joon Rho and Kon-Sik Kim	186
I Introduction	186
II Basics of derivative actions: law and reality in South Korea	187
1 Background: the shareholding structure and the legal institutions for shareholder protection	187
a The shareholding structure	187
b Legal institutions for shareholder protection: shareholder direct suits and class actions	189
2 Overview of the structure of a derivative action	192
3 Some statistics and features	193
III Standing for plaintiffs	196
1 General shareholding requirement under the KCC	196
2 Double derivative actions	198
a Concept of a double derivative action and a recent Supreme Court case	198
b Analysis: why are double derivative actions necessary in South Korea?	199
IV Entrepreneurial lawyers: fees and incentives	200
1 Lack of shareholders’ incentives and the role of entrepreneurial lawyers in derivative actions	200
2 Who will pay the plaintiff’s lawyer?	201
3 How much will the plaintiff’s lawyer be paid?	203
a Limitation on contingency fees	203
b Limitation of directors’ liability	205
V Regulation of frivolous actions	206
1 Demand requirement	206
a Introduction	206
b A corporation’s decision not to sue	207
c A derivative action filed without going through the demand process	207
d Analysis	209
2 Limiting collusive settlements	210
VI A new trend in case law: digression from the passive role model?	211
VII Concluding remarks	213
Appendix	214
5 Derivative actions in Taiwan: legal and cultural hurdles with a glimmer of hope for the future Wang Ruu Tseng and Wallace Wen Yeu Wang	215
I Introduction	215
II The legal mechanism for conducting a derivative action: requirements for maintaining a derivative action	216
1 The shareholder rules	219
2 The ‘continuing ownership’ rule	220
3 The ‘security for damages or costs’ rule	220
III The ambiguity of civil procedure in Taiwanese derivative actions	223
1 Notification of and intervening in a derivative action	224
2 Ambiguity in an involuntary decrease in a plaintiff’s shareholdings	225
3 The binding effect of settlements in derivative actions	227
4 Court fees in derivative actions: a flat rate or a percentage?	227
IV Derivative actions versus direct suits	228
V The relationship between culture, institutional background and the derivative action	230
1 The controlling shareholder system	230
2 Weak company code	231
3 Emphasis on criminal/administrative sanctions	233
4 Taiwan’s legal culture	233
5 Paternalism and mass dispute resolution: ‘Asian values’ after all?	234
VI The impact of the derivative action on corporate governance	235
VII The perception of the derivative action and professional services in the marketplace	237
VIII Idiosyncrasies in derivative actions: the role of the government-sanctioned non-profit organization	240
IX Concluding remarks	241
6 Pathway to minority shareholder protection: derivative actions in the People’s Republic of China Donald C. Clarke and Nicholas C. Howson	243
I Introduction	243
II Economic and legal reform in the PRC and the derivative action	244
1 Introduction: the derivative lawsuit and corporate governance in the Chinese context	244
2 Corporatization and its effects	245
3 The LLC form and other non-Company-Law forms	249
4 The legal representative	253
5 The Chinese judiciary: local protectionism, Party control and the avoidance of ‘mass’ litigant cases	254
6 Derivative versus representative	257
7 Costs, cost allocation and cost–benefit analysis for shareholder plaintiffs	258
III Derivative actions before 2006	260
1 Non-statutory rule making: CSRC principles, SPC utterances, local ‘opinions’, and the (draft) ‘Omnibus’ regulation on the 1994 Company Law	260
2 Pre-2006 cases	263
a Genesis of the 1994 SPC Approving Response and other LLC cases	263
b Widely held companies	267
IV The 2006 Company Law and statutory authorization for derivative actions	269
1 Standing	270
2 Demand	272
3 Defendants and associated causes of action	273
V The reality of derivative actions in the PRC from 1 January 2006 to date	275
1 Absence of CLS or publicly listed CLS-related cases	275
2 ‘Straddling’ actions: 2006 Company Law application to pre-2006 transactions	278
3 Avoidance of derivative pleadings	279
4 Autonomy and acceptance	280
5 Technical competence	282
6 Difficulties regarding underlying substantive claims	284
7 Confusion between derivative and representative lawsuits	286
8 Judge-made direct litigation right for supervisors	286
9 Allocation of court fees and ‘loser pays all’	287
VI Critique of article 152 and reform suggestions	288
VII Conclusion	293
7 A parallel path to shareholder remedies: Hong Kong’s derivative actions Paul von Nessen, S. H. Goo and Chee Keong Low	296
I Introduction	296
II The common law derivative action: Foss v. Harbottle and its exceptions	297
III The reform process in Hong Kong	304
1 The consultancy report	304
2 The report of the Standing Committee on Company Law Reform	305
3 The SCCLR corporate governance consultation paper (July 2001)	307
4 Companies (Amendments) Bill 2003	308
IV How successful is Hong Kong’s statutory derivative action?	310
1 The judicial pronouncements	311
2 Coexistence with the common law	315
3 Should Hong Kong adopt the British reforms?	319
4 Conclusions and observations on future success	321
8 Derivative actions in Singapore: mundanely non-Asian, intriguingly non-American and at the forefront of the Commonwealth Meng Seng Wee and Dan W. Puchniak	323
I Introduction	323
II Law of minority protection	326
1 History and development	326
a English tradition and seeds of change	326
b Development of company law	328
c Evolution of minority protection law	330
2 Common law derivative action	331
a Introduction	331
b Critique	332
c Conclusion	336
3 Statutory derivative action	336
a Impetus for reform	336
b Scope	338
c The law	341
4 Personal right, corporate right and section 216	348
a Introduction	348
b Giving corporate relief under section 216	349
5 Conclusion	351
III Debunking Western stereotypes	351
1 Western stereotypes of Singapore	351
2 Realities	354
a The evolution of Singapore society and the concurrent rise in shareholder litigation	354
b Singapore’s shareholder litigation defies the ‘nanny state’ and ‘Asian values’ stereotypes	359
IV Intriguingly non-American in its success	365
9 The rarity of derivative actions in India: reasons and consequences Vikramaditya Khanna and Umakanth Varottil	369
I Introduction	369
II Why have derivative actions?	371
1 The desirability of derivative suits to enforce corporate laws	371
2 Application to the Indian context	378
III The derivative action in India	380
1 Foss v. Harbottle and its exceptions	381
a Ultra vires transactions or illegality	382
b Matters requiring special resolution	382
c Fraud on the minority	382
2 Procedural constraints	383
a The ‘clean hands’ doctrine	384
b Order I, rule 8, Civil Procedure Code 1908	384
3 Availability of other remedies	386
a Oppression and mismanagement	386
b Securities laws and SEBI	388
4 Other constraints	390
a Directors’ duties	390
b Controlling shareholders’ duties	391
c Cultural concerns	392
d Costs	393
IV Recent developments and reform efforts	394
V Conclusions and recommendations for the future	396
10 The derivative action in Asia: some concluding observations Dan W. Puchniak and Harald Baum	398
Legislative appendix	404
Bibliography	422
Index	443