Corporate Governance under the New Company Law (Part 2): Shareholder Lawsuits and Enforcement

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clpstaff &clp articles

China's new Company Law has laid a solid foundation for companies to improve their corporate governance, including new provisions granting significant rights to minority investors vis à vis management and controlling shareholders. The new law also grants shareholders the ability to enforce these rights through derivative and direct lawsuits. However, given China's weak enforcement environment and relative inexperience with private lawsuits, is the new law adequate to uphold shareholders' rights?

By Craig Anderson and Bingna Guo, O'Melveny & Myers LLP

The new PRC Company Law (New Company Law)(中华人民共和国公司法), which became effective on January 1 2006, reconstructs the legal relationships between the investors and management of Chinese companies.1 Minority shareholders in particular have been granted a range of new protections, the most significant of which are the explicit fiduciary duties of loyalty and diligence conferred upon company managers in China. Likewise, controlling shareholders, who generally enjoyed immunity from civil action, may now be held liable for their abuse of power. The protection offered by these new provisions is reinforced by the civil enforcement framework constructed by the New Company Law, which marks a bold departure from the previous Chinese corporate governance regime.

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