Legal Protection of Minority Shareholders in Chinese Listed Companies

Abstract

This thesis comprises comparative research, focusing on the legal design of minority shareholder protection and the effectiveness of this protection. Through comparison with similar legal arrangements in developed countries, this thesis aims to find ways to improve minority protection in Chinese listed companies. At the heart of this thesis are six main contributions.

Firstly, the thesis begins by investigating the possibility of and effectiveness of self-protection by shareholders. It is argued that activism by institutional investors, rather than individual minority shareholders, would eliminate misconduct by management and infringement by majority shareholders. In addition, in order to encourage and support minority shareholders to become more involved in corporate governance in China, this thesis suggests the reinforcement of specific legal institutions for minority protection, such as the cumulative voting system and the derivative claim. Moreover, the thesis notes that the newly introduced derivative claim could provide better protection of minorities if the locus standi requirement were lower, and the litigation procedure easier.

Second, this thesis argues that the board of directors is the most important participant in corporate governance. A professional and independent board of directors can guarantee that corporate decisions are made in the interests of all shareholders, including the minorities. With an effective board, majority shareholders would have less opportunity to obtain private benefits by infringing the rights of minorities. Accordingly, the question of how to guarantee board independence is the most important concern in corporate legal design. This thesis reviews the law concerning independent directors in the US, and concludes that the institution of independent directors in Chinese listed companies is still immature. If current deficiencies were overcome, independent directors in Chinese listed companies could help to increase corporate transparency, providing minorities with timely and accurate information.

Thirdly, unlike Anglo-American countries, China uses a two-tier corporate governance structure, with a board of directors and a supervisory board. Although the effectiveness of the supervisory board in Chinese listed companies has frequently been challenged, this thesis argues that the supervisory board is and will remain the one of the most important internal monitors in the Chinese corporate governance structure. It will not be replaced easily. Therefore, this thesis suggests that legislators should clarify the function and responsibilities of the supervisory board and independent directors, and authorize more substantial powers to the supervisory board, for the purpose of increasing minority protection.

Fourth, with regard to that unique participant in Chinese corporate governance, the party committee of the Chinese Communist Party, this thesis argues that it cannot improve corporate efficiency or minority protection. Rather, owing mainly to the mismatch of rights and responsibilities in legislation, it has brought about problems related to corruption. Therefore, this thesis argues that legislators should restrict the involvement of the party committee in corporate affairs, so as to reduce the potential for infringement of minority shareholders’ rights.

Fifth, this thesis also argues that, in order to protect minority shareholders, the existence of a powerful external monitor is equally as important as that of an internal one. This study investigates the Chinese Securities Regulatory Commission (CSRC) and compares it to the Securities & Futures Commission in Hong Kong and the Securities and Exchange Commission in the US. The thesis highlights the efforts by the CSRC to improve the quality of governance in the Chinese market, and suggests that it should go further in increasing corporate transparency and investor education, in order to establish a better market environment for minority investors.

Finally, this thesis advances a new ideal model of corporate governance structure, based on the principle of board-centralization and with a higher level of minority protection. The thesis has proposed that listed companies be divided into two categories, the competitive area and the non-competitive area. In the competitive area, the state should begin by ensuring a fair competitive market, and eventually quit that market. In the non-competitive area, the state should operate companies in the interests of both shareholders and social welfare. Furthermore, a three-level structure should be established, in which one or more state-owned asset management companies are set up as an insulation layer, or alternatively a buffer, between the government and the listed companies, in order to eliminate undue government intervention. This would make it less likely that the rights of minorities would be infringed.