Corporate Law in the Shaghai's People's Court, 1992-2008: Judicial
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CORPORATE LAW IN THE SHANGHAI PEOPLE’S COURTS, 1992-2008: JUDICIAL AUTONOMY IN A CONTEMPORARY AUTHORITARIAN STATE ∗ NICHOLAS CALCINA HOWSON, UNIVERSITY OF MICHIGAN LAW SCHOOL In late 2005 China adopted a largely rewritten Company Law that radically increased the role of courts. This study, based on a review of more than 1000 Company Law-related disputes reported between 1992 and 2008 and extensive interactions with PRC officials and sitting judges, evaluates how the Shanghai People’s Court system has fared over 15 years in corporate law adjudication. Although the Shanghai People’s Courts show generally increasing technical competence and even intimations of political independence, their path toward institutional autonomy is inconsistent. Through 2006, the Shanghai Court system demonstrated significantly increased autonomy. After 2006 and enactment of the new Company Law, a new, if partial, limitation on institutional autonomy seems to be at work, as the Shanghai People’s Courts refused to accept or adjudicate claims explicitly permitted in the revised 2006 statute but not yet elaborated in Supreme People’s Court Regulation. This reaction is perverse, as the same Courts had liberally adjudicated the same claims before 2006 without any statutory or Supreme People’s Court Regulatory authorization. That strange dynamic illustrates the bureaucratic embedding of the People’s Courts in China’s modified authoritarian system and how such entrenchment can divert or constrain the progressive autonomy won by the same Courts in the formal legal system. The conclusions have positive and negative aspects. On the positive side, there is significant momentum toward ever-increasing competence and autonomy of the People’s Courts in Shanghai, at least for the application of corporate and commercial law. On the negative side, a familiar paradox may be at work: with formal substantive law and institutional “modernization” promised and even partially delivered alongside equally apparent failures in ∗ The author would like to thank the following colleagues and friends for their help in researching and assembling this article: Professor and East China University of Politics and Law (“ECUPL”) Vice President Gu Gongyun, and Professors Li Xiuqing, Luo Peixin, Shi Tiantao, Tang Xin, Yang Zhongxiao, Wang Baoshu, Wu Hong, and Zhu Ciyun, and research assistant (and Luo Peixin student) Zhao Chenchen; and the following institutions for their support: the University of Michigan Law School and the University of Michigan Center for Chinese Studies, both in Ann Arbor, Michigan; the East China University of Politics and Law, Shanghai, PRC; and Tsinghua University School of Law, Beijing, PRC; and various justices, judges, officials and personnel at the Supreme People’s Court of the PRC in Beijing and the Shanghai Higher People’s Court system, including the Judges from the Shanghai Higher People’s Court No. 2 Civil Division and District Courts—notably the Chief Judge of the Shanghai Higher People’s Court No. 2 Civil Division Ms. Yu Qiuwei and the President of the Changning District People’s Court Mr. Zou Bihua—attending an open meeting on Company Law implementation in the Shanghai People’s Courts held on December 5, 2008 at ECUPL chaired by Vice President and Professor Gu Gongyun and Professors Yang Zhongxiao and Wu Hong. A special thanks to my colleague and friend Professor Li Xiuqing for all of her help in arranging for a fruitful sabbatical on the premises of ECUPL during the autumn of 2008. In addition, the author wishes to thank the following for their very helpful review of and comments on working drafts of this article: Laura Beny; Donald C. Clarke; Jerome A. Cohen; Mary Gallagher; Tom Ginsburg; Don Herzog; Vic Khanna; Benjamin J. Liebman; Kyle Logue; Liu Sida; Curtis Milhaupt; Carl Minzner; Randall Peerenboom; Adam Pritchard; William Simon; Rachel Stern; Tang Xin; Frank Upham; Tim Webster; Mark West; and Madeline Zelin; and the participants in the “China Judicial Developments” Conference at the Columbia Law School on Feb. 20, 2009; the China Law Center Workshop at the Yale Law School on Mar. 3, 2009; and the University of Michigan Center for Chinese Studies Noon Lecture Series on Mar. 10, 2009. A Case Reports Appendix and Table of Selected Cases appear at the end of the article. All translations of Chinese language materials into the English language are by the author. (303) 304 EAST ASIA LAW REVIEW [VOL. 5: 303 the exercise of judicial autonomy, the result may be to de-legitimize the very institutions offered by the state and ruling Party as twin pillars of “modern” governance and “rule of law.” I. INTRODUCTION ..............................................................................................................304 II. THE 2006 COMPANY LAW – A NEW JUSTICIABILITY ............................................316 III. AUTONOMY DEMONSTRATED....................................................................................327 A. Adjudication in the Absence of Statutory or (Supreme People’s Court) Regulatory Authorization; Caveat Autonomy ...................................................................................329 B. The People’s Courts Act in “Equity” or in a Common Law Fashion ............................349 C. The De Facto Partnership Problem and Autonomous Application of Substantive Law 356 D. Protecting Firm Autonomy and Private Ordering .........................................................365 E. Exercise of Judicial Power .............................................................................................372 IV. AUTONOMY CONSTRAINTS .........................................................................................374 A. Application of the Law to Support Public Policy in Contravention of Law ...................374 B. “Conservative” Adjudication .........................................................................................377 i. Limitation on Equity Court-like Decision Making ....................................................381 ii. Enabling to Mandatory ..............................................................................................382 iii. Strict Formalism or Non-application .........................................................................383 iv. Avoiding Application of Fiduciary Duties Doctrine .................................................392 C. Absence of Public Company Cases ................................................................................400 i. People’s Court Refusals – Voluntary and Instructed .................................................401 ii. Availability and Understanding of Substitute Enforcement ......................................407 iii. Negative Implications of the Public Companies’ Refusal .........................................409 V. CONCLUSIONS.................................................................................................................413 I. INTRODUCTION Political-legal reform in the People’s Republic of China (“PRC” or “China”) has lagged far behind the pace of economic system change and growth. Corporate law theorists hold that in transitional jurisdictions where the judiciary is politically weak or subject to oppressive influence, lacking in autonomy, or simply without technical competence, then company law and corporate governance must be largely “self-enforcing.”2 By “self-enforcing,” theorists mean a corporate law design characterized by voting rules and transactional rights granted to firm investor-principals, and reliance on procedural protections, clear prohibitions and bright-line 2 Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911, 1914 (1996) (stating “company law that depends on fast and reliable judicial decisions is simply out of the question”). 2010] CORPORATE LAW IN THE SHANGHAI PEOPLE’S COURTS 305 rules—all meant to operate ex ante as substitutes for less precise judicial standards applied ex post. China’s first post-1949 company law of 19943 was a textbook example of such a regime.4 Given the constraints acting on the PRC People’s Courts embedded in an authoritarian political system, and the burdens on China’s overworked public companies regulator, the China Securities Regulatory Commission (“CSRC”), the 1994 statute’s self-enforcing design and negligible allowance for judicial involvement were appropriate. In late 2005, the national legislature of the PRC passed a wholesale reworking of the 1994 Company Law, effective as of January 1, 2006.5 In a head-spinning departure from the self-enforcing model of corporate law, the Company Law was suddenly filled with broad invitations for sophisticated judicial involvement. Although there had been undeniable improvements in the quality of the PRC People’s Courts up to 2005, few would have judged such progress a match for the significantly increased demands placed on the judiciary. With the 2006 change in mind, I analyze corporate law adjudication in Shanghai between 1992 and 2008, focusing on People’s Court practice after adoption of the new Company Law. My purpose is to better understand the demonstrated technical competence, institutional autonomy and political independence of one major People’s Court system in the PRC. In particular, I examine how Chinese law and judicial institutions work for Chinese domestic stakeholders and enterprises, and thus not foreign investors, foreign-invested enterprises, or foreign participants in the global capital markets purchasing stock in PRC issuers—where 3 Adopted at