The Eligibility of Claimants to Commence Derivative Litigation on Behalf of China's Joint Stock Limited Companies

Derivative actions in modern company law play a crucial role in promoting the efficiency of corporate law and the soundness of corporate governance. However, since China’s inauguration of derivative action in 2005, now enshrined in s 151 of the Chinese Company Law (CCL) 2013 (revised in 2013 and enforced on 1 March 2014), there have been complications surrounding the eligibility of shareholder claimants in terms of taking derivative action, especially for joint stock limited liability companies (JSLCs). Under art 151 of the CCL 2013, JSLCs are treated differently from limited liability companies (LLCs). Standing requirements are imposed on shareholders in JSLCs, whereas any shareholder has the right to sue in LLCs. Shareholders who intend to bring derivative action are required to separately or jointly hold 1 per cent or more of the company’s shares for 180 consecutive days. These prescribed thresholds may not only prevent trivial or malicious suits but also hinder the effective enforcement of the mechanism. Through doctrinal, comparative and empirical analyses of the eligibility of claimants to bring derivative action in JSLCs, the article puts forward proposals for how the effectiveness of the regime in China can be improved in hope of increasing the effectiveness of the mechanism and the enforcement of company law, contributing to the fairness and accountability of corporate governance. It is argued that future revision of laws concerning claimants’ eligibility should not only make sure that reasonable shareholders are able to use the mechanism but also take into account current commercial practices, stock market structures and government policy.