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This Thesis Has Been Submitted in Fulfilment of the Requirements for a Postgraduate Degree (E.G This thesis has been submitted in fulfilment of the requirements for a postgraduate degree (e.g. PhD, MPhil, DClinPsychol) at the University of Edinburgh. Please note the following terms and conditions of use: • This work is protected by copyright and other intellectual property rights, which are retained by the thesis author, unless otherwise stated. • A copy can be downloaded for personal non-commercial research or study, without prior permission or charge. • This thesis cannot be reproduced or quoted extensively from without first obtaining permission in writing from the author. • The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the author. • When referring to this work, full bibliographic details including the author, title, awarding institution and date of the thesis must be given. Derivative Actions in China Shaowei Lin Presented for the Degree of Doctor of Philosophy The University of Edinburgh 2014 Table of Contents TABLE OF CONTENTS ...................................................................................................................... 1 ABSTRACT .......................................................................................................................................... 5 ACKNOWLEDGMENT ........................................................................................................................ 6 STATEMENT OF ORIGINAL AUTHORSHIP ................................................................................................ 8 CHAPTER 1 INTRODUCTION .......................................................................................................... 9 1.1 THE NATURE OF THE DERIVATIVE ACTION ................................................................................................ 9 1.2 DERIVATIVE ACTIONS VERSUS OTHER DEVICES DESIGNED TO REDUCE AGENCY COSTS .................................... 11 1.2.1 Market Mechanisms ........................................................................................................ 14 1.2.2 Legal Mechanisms .......................................................................................................... 16 1.3 DEBATES ON DERIVATIVE ACTIONS: JUSTIFICATIONS AND DISADVANTAGES .................................................. 24 1.3.1 Justifications for Derivative Actions ............................................................................... 24 1.3.2 Weaknesses of Derivative Actions ................................................................................ 26 1.3.3 Summary ...........................................................................................................................27 1.4. A COMPARATIVE STUDY ................................................................................................................... 28 1.4.1 Derivative Actions in China ............................................................................................ 28 1.4.2 Derivative Actions in the UK .......................................................................................... 31 1.4.3 Derivative Actions in the US .......................................................................................... 34 1.4.4 Why Choose the UK and US as the jurisdictions for Comparison? ......................... 35 1.5 LEGAL TRANSPLANT ......................................................................................................................... 36 1.5.1 The Debate on Legal Transplants ................................................................................. 36 1.5.2 Why Legal Transplants could be Successful in China ............................................... 38 1.6 DERIVATIVE ACTIONS IN PUBLIC AND PRIVATE COMPANIES ....................................................................... 41 1.7 ORIGINAL CONTRIBUTION ................................................................................................................. 43 1.8 STRUCTURE .................................................................................................................................... 44 CHAPTER 2 THE NEED OF ENHANCING DERIVATIVE ACTIONS IN CHINA ..................... 45 2.1 DOUBLE AGENCY COSTS IN CHINA .................................................................................... 45 2.1.1. Introduction ..................................................................................................................... 45 2.1.2. Background to Agency Costs ....................................................................................... 47 2.1.3. Vertical Agency Costs between Shareholders and Managers................................. 50 2.1.4 Horizontal Agency Costs between Majority Shareholders and Minority Shareholders .............................................................................................................................. 59 2.1.5 Summary .......................................................................................................................... 64 2. 2 NON-LEGAL PROTECTIONS FOR MINORITY SHAREHOLDERS IN CHINA ............... 64 2.2.1 Introduction....................................................................................................................... 64 2.2.2 The Product Market ........................................................................................................ 65 2.2.3 The Labour Market for Managers ................................................................................. 68 1 2.2.4 The Capital Market .......................................................................................................... 70 2.2.5 The Market for Corporate Control ................................................................................. 73 2.2.6 Summary .......................................................................................................................... 77 2.3 LEGAL PROTECTIONS FOR MINORITY SHAREHOLDERS IN CHINA .......................... 77 2.3.1 Introduction....................................................................................................................... 78 2.3.2 The Sources of Legal Protections Conferred in favour of Minority Shareholders.. 78 2.3.3 Developments of Legal Protection for Minority Shareholders Prior to the Chinese Company Law 2005 .................................................................................................................. 80 2.3.4 General Protections for Minority Shareholders under the Company Law 2005 ..... 88 2.3.5 Conclusion ...................................................................................................................... 110 CHAPTER 3 DERIVATIVE ACTIONS IN CHINA ........................................................................ 112 3.1 SHAREHOLDERS’ DIRECT ACTIONS IN CHINA .............................................................. 112 3.1.1 Introduction..................................................................................................................... 112 3.1.2 The Grounds for Raising Direct Actions ..................................................................... 113 3.1.3 Distinctions between Direct Actions and Derivative Actions ................................... 122 3.1.4 The Connection between Direct Actions and Derivative Actions ........................... 126 3.1.5 Summary ........................................................................................................................ 131 3.2 DERIVATIVE ACTIONS IN CHINA Ⅰ ................................................................................... 131 3.2.1 The Background to the Chinese Company Law ....................................................... 131 3.2.2 The Development of Derivative Actions in China ..................................................... 141 3.2.3 Conclusion ...................................................................................................................... 159 3.3 DERIVATIVE ACTIONS IN CHINA Ⅱ ................................................................................... 160 3.3.1 Introduction..................................................................................................................... 160 3.3.2 Legal Framework of Derivative Actions in Chinese Company Law 2005 ............. 161 3.3.3 The Judicial Application of Derivative Actions under the Company Law 2005 ..... 178 3.3.4 The Role of Derivative Actions in China..................................................................... 186 CHAPTER 4 COMPARATIVE ANALYSIS .................................................................................... 189 4.1 WHY DERIVATIVE ACTIONS CAN BE ENCOURAGED .................................................... 189 4.1.1. Culture ........................................................................................................................... 190 4.1.2. The Judiciary ................................................................................................................. 194 4.1.3 Summary ........................................................................................................................ 196 4.2 IMPROVING CHINA’S DERIVATIVE ACTIONS ................................................................... 197 4.2.1 Who Can Sue? .............................................................................................................. 197 4.2.2 Who Can be Sued? ......................................................................................................
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