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The Derivative Action in Asia

The Derivative Action in Asia A Comparative and Functional Approach

  • Author:
  • 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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  • Description 
  • Contents 
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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

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