Bureaucracy in the Service of Law: Holding Chinese Controlling Shareholders Accountable

Ezra Wasserman Mitchel


Common law style fiduciary duty has existed in Chinese Company Law as a statutory matter since 2006 and, by at least one account, far longer in practice. But most of the literature has pronounced it a failure, or, at best, a slowly developing doctrine. All of this literature deals with fiduciary duty in privately-held companies, because that is where virtually all of the cases take place. Yet proposed amendments to the China Company Law double down on fiduciary duty.

Company Law also provides for controlling shareholder liability, but cases are few and far between, and virtually non-existent in listed State-Owned Enterprises.

How can fiduciary duty be adapted to Chinese institutions in order for it to succeed? My research finds that recent judicial enforcement of fiduciary duty is quite healthy in privately-held companies, at least in Shanghai. Although doctrinal analysis is almost non-existent, Shanghai judges know a fiduciary breach when they see one and possess the statutory means to redress it.

Matters are also well when it comes to holding controlling shareholders accountable in privately-held companies. Although the controlling shareholder statute is rarely used, it is the case that virtually all of the defendants in fiduciary duty cases – directors, officers, and senior managers – are almost always shareholders in these companies, if not controlling shareholders, so the effect of liability, disgorgement, and damages is largely the same as if they had been sued as shareholders.

The real problem is the virtually non-existent legal accountability of controlling shareholders in mixed ownership enterprises and especially listed SOEs. The problem is institutional. This article proposes a way to situate fiduciary enforcement within the appropriate and suitable Chinese bureaucratic tradition rather than to continue to try to force adjudicative methods where they have failed and will continue to fail because of structural, political, and cultural impediments, thus creating a uniquely Chinese way of controlling shareholder fiduciary enforcement.

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DOI: https://doi.org/10.22158/ibes.v5n1p1


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