Judicial Intervention to Corporate Governance: Causes and Approaches

A corporation is a legal person with group personality created by the law and is considered to have the freedom of autonomy as a subject of private law. A corporation is also considered as shareholders’ tool to pursue profit just like a kite flown by shareholders especially substantial shareholders. A corporation is considered as a contractual combination, a gathering place of stakeholders and constituting a cell of society. A corporation is described as a Utopia. …With different interest claims, subjects such as management, shareholders, directors, creditors, employees and others who coexist in a corporation through the certain formal structure of corporate governance.


Introduction
1. The need to protect the rights of minority shareholder under shareholder autonomy.
The traditional theory of company law insists on company law theory which considers that a company's legal personality is just its superficial characteristic and shareholders are undertakers of owner's equity and therefore the fundamental corporate nature is that of a shareholders' investment tool. Shareholders occupy the core positions as company owners in corporate autonomy and hence modern company autonomy is shareholder's autonomy in essence. The emergence and development of a company and company systems take place with shareholders as the core pushing power, and the function performance of the company system mainly depends on the realization of shareholder autonomy. However, the corporate governance with shareholder autonomy at its center indicates that the majority shareholders' opinions will be adopted to deal with company business and management affairs. Therefore, the majority shareholders in a company have the final decision-making right and their decision on any matter made through an ordinary or special resolution shall be binding on all shareholders. As to the matter decided by majority voting, the minority shareholders have to comply with the majority shareholders' will. 3 According to theoretical study and practical observation, the majority shareholders take advantage of their controlling position to suppress the minority shareholders, to avoid certain items in articles of association or to gain the maximum interest and wealth from the company for themselves. When the majority shareholders abuse the so-called democratic rights arbitrarily the company will not ensure an even bargain and shareholders' individual rights will not be respected. The abuse of majority rule shows more obviously in a non-listed company, because "In a closed setting, the corporate norms of centralized control and majority rule can become instruments of oppression. Some decisions vitally important to participants, such as their employment and salary, are left to the board of directors to make. When harmony between participants disappears, the minority participants may find that the majority interest can manage the affairs of the corporation in unexpected ways. The minority dominating the board can terminate minority shareholders' employment as officers, thereby diminishing the return on their investments. The corporation may not pay dividends to any shareholders to avoid double taxation, yet the majority shareholders will continue to receive a return on their investment in the form of salary or perhaps rent or interest on money loaned to the corporation. Indeed, these amounts may increase after the minority shareholders are excluded.

理员上以及员践员察所员，多数股员会利用其控制地位，员制少数股员、员避公司章程中的特
Traditionally, the minority shareholders have had no way to protect themselves against such an occurrence. If minority shareholders attempt to establish a contract for protection against this possibility, such as by agreements that the minority shareholder retain a corporate office and a salary, courts earlier this century struck down the agreement as an unlawful interference with the unfettered discretion of directors. The performance of the corporate form further compounds the minority shareholder's dilemma. Without a job and in the absence of dividends, the minority shareholder may face an indefinite future with no return on the capital he or she contribution to the enterprise. The majority may even be able to deny the minority shareholders any return in the long run by siphoning off corporate assets in the form of high salaries or rents, insulated from judicial review by the business judgment rule. In addition, the majority may force the minority to leave the company with unjust excuses." 4 在中国大员，国有企员以及家族企员在上市公司中普遍存在，员员的集中员员型体制以及文化 氛员造就了上市公司高度集中的股员员构。又由于上市公司股员人数众多且多员散员，员繁员 股，集体行员"搭便员"消极参与公司治理，员些因素员致"内部人控制"普遍存在于上市公司。 在员些公司中控制股员员有员员超员中小股员的员员特员，不员员员有股员员，员操员控制员 事、董事甚至于员员者的员利行使。大股员利用其员股员大会、董事会的控制形成决策，员达 成自己的特殊目的而漠员中小投员者的利益，甚至不惜侵犯中小股员利益。员员员员在上市公 司中员出不员，如关员交易、侵吞公司员员等。董事会的独立地位员失很员形成独立的员员决 策，与此同员更员以员员它的员控员能。 5 公司法存在短板：股员会决员代替股员共益员具有 合理性，但代替、员制股员自益员，缺少正当性基员。 There are many state-owned firms and family businesses among listed firms in China mainland. The traditional centralized economic system and cultural atmosphere have resulted in a highly centralized ownership structure in the listed companies. Moreover, the listed firms have a large number of shareholders who are retail investors. A majority of these can exchange shares frequently that is their collective "hitch-hiking" impacts on a corporation's share price, and negatively on corporate governance. All of these factors lead to the ubiquity of "insider control" in listed firms. In these firms, the controlling shareholders enjoy far more practical privileges than the minority shareholders, and they not only own the shareholders' rights but also manipulate and control the practice of the rights of supervisors, directors, even operators. By taking advantage of their control on the general meeting of shareholders and the board of directors, the big shareholders reach resolutions so as to achieve their special purposes while disregarding, even infringing the rights and benefits of small investors. These sorts of disputes frequently occur in the listed companies in respect to affiliate transactions, and annexation of firms' properties.
The board of directors loses its independent status, which makes it difficult to achieve a decision independently and at the same time, fails to perform its function of supervision. 5 There is an obvious shortcoming of company law; in response, it is reasonable to use resolutions of the shareholders' meetings to replace the common-interest rights of shareholders when the law lacks a legitimate basis to replace and suppress the self-interest actions of shareholders. The shortcomings of company law are: since the relationships between controlling shareholders and minority shareholders, companies and directors, shareholders and directors, debtors and companies, shareholders and directors, and companies and staff are very complicated, and the habitual thought of governing companies centers on shareholders, company law neither emphasizes the rights or problems of many shareholders, nor sets an effective relief system. It is necessary to depend on and learn from some concepts and values in Anglo-American Law such as "fiduciary obligation" "judgment of operators" and "business judgment", so that judges can discretionarily judge the legitimacy of shareholders and protect their rights and benefits in certain cases. In the Chinese mainland judicial system，it may be through the way of a Supreme Court case to guide the Primary Court firstly, and then by way of judicial interpretation, and ultimately by modifying the Companies Act, to determine the principles of judicial intervention on corporate governance, ways and necessary restrictions. The realization of lawful order in company governance is through unification between company autonomy and national enforcement (legislative regulation and judicial intervention). The judicial intervention in company management substantially reflects the state's will to correct company autonomy. Cheffins, a Canadian expert on company law analyzes judicial intervention in the operation of company from the dual goals of promoting efficiency and realizing fairness 8 . When it comes to the goal of efficiency, firstly, it is necessary for the judiciary to get intervention since the problem of incomplete information, including the problem of systematic information and unbalanced information, may cause the existence of a gap in a company contract, fraud in contract system, and a "lemons market", resulting in the waste of company resources; secondly, the cost of private conclusion to a contract is very huge, and the contracting cost can be reduced through mandatory law texts of the state; and thirdly, national enforcement can solve the problem of negative "externalization" as well as collective actions (game theory explains the reason why an individual trader practices in a way that can maximize his own benefits but obtain a result without efficiency).
As for a fair goal, national enforcement can appropriately prevent those fraudulent, misleading, and coercive conduct while paying more attention to the underprivileged ones. Moreover, the actual controllers of the company will have to shoulder strict fiduciary duties so that fair treatment to small and big shareholders and balanced interests among them can be realized. Furthermore, national enforcement can also restrict disordered competition and create a market mechanism with fair competition, ensuring that market participants observe the basic moral codes.

Feasibility of judiciary intervention into company management
(一)司法功能包含着员公司治理的外部保障

Judiciary function including an exterior safeguard for company management
公司治理是一个复员系员，涵盖了公司内部和外部不同的制度员构。司法与行政共同构成公司 治理的外部员控机制，司法机构及其代表的法律制度，又是公司治理的外部保障机制。司法机 构代表国家意志，员判公司自治(私人)行员，员正非正员的、利益失衡的自治行员，保障相 关当事人的员利，员员公司自治的良好秩序。司法员通员民事员员的途径介入公司自治，可以 保障员利，员员公司内部利益关系和公司与外部的关系，促员公司自治的有序有效地员行。 As a recheck system, company management covers different system structures inside and outside companies. The judiciary and administration together constitute an exterior monitoring mechanism of company management. Judiciary organizations and legal systems represented by the organizations are also an exterior safeguard mechanism of company management. Judiciary organizations represent the will of the state to judge company autonomy (private) conducts, correct autonomy conducts of injustice and imbalanced interests, safeguard the rights of relevant parties, and maintain a sound order of company autonomy. Jurisdiction intervention to company autonomy in the way of civil action can safeguard the rights, coordinate benefits relationships inside companies and the relationship between companies and the outside, and promote company autonomy in ways that are both orderly and efficient.

1.司法的员利保障功能(员利保员救员型介入)。
(1) Rights safeguard function of jurisdiction (intervention to a rights safeguard and relief type) Rights are divided into substantial rights and procedural rights (relief rights). "Where there are rights, there is protection; there will be no rights if remedies do not exist". The purpose of civil action lies in protection for the substantial rights by offering necessary remedies to the substantial rights. 9 On the other hand, the purpose of civil action also lies in settling disputes, so the system of civil action will become meaningless if disputes between individuals fail to be settlrd. 10 Disputes are objects of the jurisdiction function and safeguarding rights is the function of judiciary.

公司员利生员平衡的外部手段。公司法上相关主体员员员是否解决，员利有否得到保障，是衡 量司法员介入公司治理有效性的基本员准。
There is a rights chain in companies, and shareholders' rights are the base for other rights in the companies. It is through shareholders' conduct that a group personality of companies is established.
The separation of the shareholders' rights and companies' rights maintain their own independent personality. The best organization and structure mode for maintaining companies' independent personality should be the establishment of a powerful board of directors not a board of shareholders.
The members in a board of directors do not have to be shareholders themselves.
Only by an operations group which is not comprised of shareholders completely, can the other personality subject-companies' benefits---be taken into consideration independently. 11 Besides some main linking points in the rights chain of companies such as shareholders, companies, and directors, there are debtors, staff in companies and other rights-holders. The "ecological balance" of companies' rights will be destroyed if the rights of each chain are too strong or too weak. Therefore, the remedy on rights is an exterior practice to maintain the ecological balance of companies' rights.
The fundamental standards on evaluating the effectiveness of the jurisdiction's intervention to company management are whether disputes among relevant parties in company law get settled, and whether the rights get safeguarded.

2.司法的秩序员持功能(秩序员员型介入)。
(2).Order maintenance function of jurisdiction (intervention in an order maintenance type) Civil action enables parties to obtain safeguards when successful, so that the parties can predict the result of planning and performing in accordance with the norms and regulations of substantial law.
Self-discipline in compliance results in an overall stable social life. 12 Company autonomy is a private order inside and outside companies supported by a company management structure. Good company management is a fair, orderly, and effective autonomous structural system formed by multiple rightsholders such as companies, shareholders, directors, managers, debtors, staffs. Jurisdiction's intervention in company management can correct the malfunction and disorder of company autonomy besides settling disputes and safeguarding rights.

司法机构作员公司治理系员的员成部分，有效及员干员公司自治活员，引员公司完善公司的治 理员构，使公司自治回员正员、公平和有效的公司治理目员。
As a part of a corporate governance system, the judicial body gives effective and timely intervention to corporate autonomy, and leads to a perfect corporate governance structure so as to achieve the goal of justice, fairness, and effectiveness for corporate governance. about public policy, among other factors, to guide their decisions, usually suggesting that adherents of this philosophy tend to make constitutional violations and are willing to ignore precedent." 13 There exists a trade-off relationship between judicial activism and judicial restraint. The application of judicial activism is a confirmation on judicial discretion, which allows judges to extract rules and bridge law gaps to ensure the integration of specific application of laws and justice. Lord Denning had explained the complementary function of judicial discretion for legal limits, and described the basic principle to be followed by judicial discretion as "Judges must not change the texture of laws but ironing the folds". 14 员持司法能员主员，需要警惕保守司法员念。保守司法员念之一员员，公司内部管理事员法院 不员干员，法院不员介入公司的员员决策活员，不涉及公司商员方面的员员判断。在私法员域 ，奉行"有员员即裁决"的司法准员，"法院不得以法律未员定员由拒员裁判民事员员"是民事司 法的基本原员。司法员员不介入公司事员的员念，员然不符合司法最员裁决的原员。员有一种 保守司法员念员员，司法介入员公司内部事员的员员，即等同于干员企员，犹如大员员划员员 年代"政企不分"和政府的员度管控。司法员尊重公司的员员，不员极主员介入公司，但并不意

味着司法要像行政一员离公司"越员越好"，司法与行政员竟担员着员员的员能。
Conservative judicial concepts need to be alert while judicial activism is followed. One of the conservative judicial concepts is that the court should not intervene in corporate internal management, corporate operations and decision-making activities, or corporate business judgments. Jurisdiction pursues a judicial criterion of "ruling follows disputes". "The court shall not reject to adjudicate civil disputes on the ground of no provision provided in law" is the basic norms of civil justice. The conception that justice never intervenes in corporate affairs does not accord with the principle of final judicial adjudication. Another conservative judicial concept is that a judicial view on corporate internal affairs is equal to intervening in corporate management, which is similar to the governmental over-controlling of companies in China's planned economy era. Jurisdiction plays a different role from that of administration. Jurisdiction should respect corporate operations, which does not mean jurisdiction needs to be away from corporate operations such as administration. In the US judicial activism is mostly used by the legal realism school created by Holmes. When a judge deals with a specific dispute, a balance needs to be made between codes tightly held in his left hand and some integrated factors such as specific case contents, social influences, mortality, ethics, policies, and legal principles touched by his right hand. Based on this balance, a final decision is made. Therefore, when a judge is involved in corporate governance affairs in the name of judicial review, he /she has to adhere to the principles of legality review first while a rationality review is second, and a formal examination first while a substantial examination second, so as to be wary of corporate affairs, respect corporate autonomy, and maintain corporate ordering.

员，很多当事人可能就以此作员员取其他不正当利益的筹员，以达到敲员公司的目的!
Judicial intervention to corporate governance could prevent some shareholders' opportunism. If the cost of suing, or judicial remedies without suing, is low, it may cause the disadvantages associated with opportunism while easing the rights protection of minority stockholders. Once justice intervenes in corporate disputes, the corporate management must make efforts to deal with the intervention, causing some damages to the whole corporation's benefits. Considering this risk, many shareholders may make use of this risk to blackmail a corporation in exchange for improper benefits. The Company Law has provisions on protection of substantive rights. In those cases heard through ordinary civil procedure and involving active judicial intervention in the internal decisions of the company and the policymaking of the operator, however, the judicial bodies shall specify and fulfill the mechanism of judicial remedies on substantive rights protection stipulated in the Company Law through the approach of judicial interpretation. The protection of shareholders' rights is an example.
In the existing Company Law, considerable protection has been given to the rights of shareholders, but it is relatively conservative and rigid. It lacks a broader remedy and protection mechanism towards those behaviors that are harmful to the rights of shareholders and are not listed in the Company Law. Examples are lacking a mechanism or policy to remove invalid decisions that could damage parts of the shareholders' rights; to confirm or forbid the stock right transfer that could damage the rights of other shareholders; to force the company or other shareholders to purchase the stock of the shareholder who is treated with unfair prejudice from by a resolution of a shareholder meeting. In the framework of existing Company Law, the following situations shall be handled through the ordinary civil procedure by judicial interpretation: the expansion of shareholder derivative action, the confirmation and valuation of targeted share repurchases and the disputes in corporate governance such as the examination of the legality to the rules, regulation and articles of incorporation. The unfair predjudice remedy mechanism in British Company Law is worth drawing on. Unfair conducts violating the by-laws of the company usually infringe the personal rights of the shareholders.

英国公司法上的不公平员害之救员制度员得借员。当不公平行员员足员公司章程员反同员，通
In the Common Law, shareholders exercise their personal rights endowed by the by-laws of the company in a limited way. They cannot file a lawsuit against internal irregularity. British scholars believe that the personal rights of a shareholder shall not be changed or removed by other shareholders and they advocate the protection of shareholder's rights by expanding their rights endowed by the by-laws to other rights within reasonable anticipation. In 1962, the Company Law Committee also known as Jenkins Committee put up a remedy to unfair predjudical actions and proposed to expand the judicial power of the court so as to enable the court to interfere with the affairs of the company by offering remedies to unfair prejudicial actions based on the principle of equity.
This proposal was not adopted by the British Company Law until 1980. Article 994 in British Company Law stipulates that a member of a company may apply to the court by petition for an order on the grounds that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or that an actual or proposed act or omission of the company is or would be so prejudicial. 16 The Jenkins Committee's report points out that unfairness obviously deviates from fair trade standards, violating the fair game rule set by the shareholders who invest money into the company. 17 The legal precedent considers the test criterion of an unfair prejudice as objective rather than subjective, which means that the applicant is not required to testify whether the behavior of the defendant is out of malice. That is to say the court will affirm the establishment of an unfair prejudice when the result leads to unfair prejudice no matter whether the behavior of the defendant is out of malice or not. The most commonly used remedies for unfair prejudice are command and writ. When the rights of a shareholder are infringed by unfair conduct, the court will order the company or other shareholders in prejudicial to the interests of members generally or of some part of its members (including at least himself)， or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf)is or would be so prejudicial. the company to buy the stock of the shareholder so as to help the shareholder get rid of the awkward situation in which he/she is forced to leave the company. But it is fair only when the stock of the shareholder is not sold at a low price with a discount. 18 With regard to the base date, the court may choose one from the following options: the date of occurrence of unfair behavior, the date of filing the application, the date of issuing the stock purchase warrant or the date of evaluating the price warrant.
The judges' opinions vary from one to another when it comes to choosing the date in a specific case.
The judge Vinelott J believed that the evaluation date shall be the date of filing the application on the grounds that on this day the applicant decides to file a lawsuit against the unfair prejudice and the cooperative foundation of the two sides no longer exists on the same day. 19 The judge Nourse J believes that the base date shall be the date of issuing the stock purchase warrant on the grounds that it is appropriate to evaluate the basic interest when it is decided to be purchased. 20 当不公平员害行员是公司本身行员的失当员，员于公司正在员行的行员或将要员行作员或不作 员有悖股员员益的案件，法院将会做出要求公司从事某一行员的令状。从员员救员申员的提出 到法院员行令状需要员日，会员生行员上的员延和耽员，造成因阻止不及员使不公平行员员原 告造成了员员的员害，如原告被员逐出公司股员之列等。在此情形下，原告需要申员法院员行 员员令状，法院会在充分考员令状员原告员益员员和公司正常运员秩序的影响后作出适当的决 定。更多员候，法院员会员行员持员状的令状，员一令状旨在固定公司员状保员申员人利益不 受员害。 When the unfair infringement is caused by the misconduct of the company itself, the judicial court will issue a writ that the company should perform an act based on the case in which the company is conducting or will conduct an act, or even an omission, if it infringes the shareholder's rights. After the petition for litigation relief, there will be a period of time before the court issues the writ, causing delay of actions and untimely prevention from actual harm of unfair practices to the claimant, like being expelled from the shareholders. Under such a circumstance, the claimant should apply for a temporary command, which will take into full consideration in the decisions, the command effects on the operation order of the company and the protection of the claimant rights. More often, the court will also issue a present-situation-maintenance command for the purpose of guarding the petitioner's rights under a fixed situation. The adoption of an unfair infringement remedy system, in ordinary civil procedural lawsuits, and granting the court the authority of command (writ) to intervene in the phenomenon of "tyranny of the majority" in the company and protect the property rights of a few shareholders from unfair infringement. As to stock price, the principle should be "it is fair only when one's stock is not sold at a low price with discount"; and as to the date of evaluation, from the perspective of equity, from the day the claimant institutes the legal proceedings to the day he/she submits the application, he/she could not continue to require sharing the profits gained from the proper management of the accused or other managers caused by the breach of trust deeds between the claimant and other shareholders or directors of the company; on the contrary, the claimant shall not assume unfavorable consequences would be caused by a reduction of management vigor, business hours or the company's reputation resulting from the proceeding. Accordingly, we should fix the date of evaluation on the second day of the proceeding, which is a price indeterminate for both sides. In this way, the value target of ensuring stock equality can be better realized. However, adopting ordinary civil procedure to solve every company dispute has been obstructed by enormous difficulties and challenges. Existing types of company disputes possess at least the following cases that are available to special procedure when the company fails to obtain favorable judgment through ordinary civil procedure. In terms of function, the special procedure focuses on prevention while the usual procedure is on remedy afterwards and supervision. The special procedure does not aim to make a judgment on the dispute of rights and obligations between parties, but takes some detailed measures to intervene in the company operation. By means of judicial intervention, it is possible to promote the effective operation, prevent unfair behaviors and avoid the infringement of company's as well as the related parties' interests The cases of special business procedure related to company are as follows: 1．股员员利表彰性案件，如股员员求公司填写并在公司置员股员名册，员求公司员员出

员员明员，员求公司员股员员更登员等案件。
(1). The case of rights recognition of shareholders such as shareholders request the company to prepare and fill in a roster of the shareholders, sign and issue an investment certificate, and register the modification of shares.

公司披露董事、员事、高员管理人员的员酬，公众公司股员员求知悉公司员员活员和重大并员 、员员等信息。
(2). (3). The case of dispute on the convening of shareholders' assembly, board of directors and board of supervisors; including the cases like irregular convening, negative omission, and if the entitled convener appeals to judicial support to conducting a temporary board meeting in accordance with the law.

4．董事、员事、高员管理人员的任员与解任员员案件。
(4).The case of dispute on appointment and dismissal of director, supervisors and senior Managers; This paper argues that China should learn the concepts, institutions and measures of judicial intervention to company governance from western countries and build a non-litigation intervening mechanism paired with China's civil action system to solve company disputes. Courts should be entrusted some rights to punish violating and unfair conduct by company staff, including the right of judicial curb (ban), the right of invalidation, the right of judicial selection, the right of judicial dismissal and the right of judicially convening stockholders' meeting. Thereby, it is possible to defuse injustice and unfairness, maintain the normal order and enhance the efficiency of corporate governance.