COLUMBIA JOURNAL OF ASIAN LAW VOLUME 30 FALL 2016 NUMBER 1 ARTICLES MINORITY PUBLIC SHAREHOLDERS IN CHINA'S CONCENTRATED CAPITAL MARKETS- A NEW PARADIGM? Tamar Groswald Ozery* This article provides a detailed analysis of the role of public shareholders in firm monitoring and corporate governance in one of the world's most concentrated ownership environments-China's controlled capital markets . It moves beyond the existing literature to explore in a comparative fashion innovative and sometimes idiosyncratic ways by which public shareholders can be involved in firm monitoring and corporate governance. In so doing, this article sheds new light on the global shift in the role of public shareholders towards greater empowerment and governance participation. Contributing to comparative corporate governance literature, this article offers a new analysis of current and prospective developments in the Chinese market, which is of particular importance globally as this market becomes increasingly central to the world economy. I NTRODUCTION ................................... . ............................................................ . ......... . 2 I. MINORITY PUBLI C SHAREH OLDERS AND CHINA'S CONCENTRATED MARKET ..... .. .. 6 A. A Concentrated Capital Market with "Chinese Characteristics"- Corporatization without Privatization and "State Capitalism" ........ ......... 7 B. Monitoring oflnsiders and the Protection of Minority Shareholders in China ........................ ...................................... ....................... ...................... 11 1. Monitoring ................... .................. ....................... ........ ................. ........ 12 2. PRC Listed Companies and Minority Shareholder Protections ......... 15 • Michigan Grotius Doctoral Fellow, The University of Michigan Law School. I am grateful to Nicholas Howson for his cont inuous guidance and challenging suggestions. Special than.ks are owed to Curtis Milhaupt, Donald Clarke, and Virginia Harper Ho for their insightful comments on an earlier version of this work. I would also like to thank Afra Afsharipour, Laura Beny , Jianlin Chen, Mary Gallagher, Franklin Gevurtz, Martin Gelter, Vikrama ditya Khanna, Lingzheng Kong , Tahirih Lee, Yahli Shereshevsky, and the participants of the Business & Financia l Workshop of the American Society of Comparative Law, the ASCL Younger Comparativists 4th Annual Conference, the Hong Kong University Legal Scholarship Workshop, as well as several forums of the University of Michigan Lieberthal-Rogel Center for Chinese Studies and The University of Michigan Law School for useful conversations and comments. 1 2 COLUMBIA JO URNAL OF ASIA/\' LAW [Vol. 30:1 II. NEW p ARADIGMS-POSSIBIJ.,ITIES FOR MI:-SORITY Pl:BLIC SHAREHOLDERS IN CHINA'S CONCENTRATED CAPITAL :\fARKETS ····························:····· .................... ~. 22 A. Mechanisms from Other Concentrated Markets-Applicable to China. 22 1. Overcoming a Conceptual Barrier ......... • • • • •· .. • • • • •· • • •··· ······ ·· ............... ·· 22 2. A "Lujiazui Walk" ................................................................................. 24 3. Institutional Inve stors in Concentrated Markets .......... •········ .......... 26 4. Minority Public Sharehold er Part1c1pat1on Through Socia.I Organization s ... ....... ....... ............................................ ·· .............. ........ 33 C . · 37 5. Non-shareholder onstltuenc1es .. ....................................................... . B. .................... 41 1. Communist Party Policy and Empowerment of Minority Public Shareholders .... ..... ................................................................................ 41 2. Emergence of a Market for Corporate Control Within the Controlling CO!--CLUSI~~~~~.~~~:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: :~ I NTRODUCTION As a result of the Anglo-American focus on the separation between ownership and control at widely-held firms, 1 and the broad influence of this particular focus on corporate governance systems around the world, it is traditionally understood that most corporate governance design disempowers minority public shareh old ers. Indeed , the role of minority public shareholders in the corporate project is traditionally limited to that of mere suppliers of finance capital. In the last two decades, however, a new account describing "shareh older activism" has emerged with respect to widely -held Anglo -Am erican-styl e markets , a narrative which focuses on the possibilities for empow erm ent of minority public sharehol ders.2 The possibilities for such empowerm ent attend to their greater involvement in the firm and the capital market and can be divided into three main paths: (i) gr eater involvem ent in the monitoring of corporate insiders (whether through internal or external mechanisms); (ii) improved access to and the utilizati on of legal protections and remedies 1 Frank Easterbrook & D. Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395, 403 (1983) (citing Adolf A. BERLE & GARDINER MEANS, THE MODER:--1 CORPORATION AND PRIVATE PROPERTY 129 (rev. ed., 1967)); Ownership Matters , THE EC0!>-0:\fiST (Mar. 9, 2006), http ://www .economist.com/node /56 03458 (describing the separation of ownership and control as "corporate ca pitalism " and as the und erpinning of capitalism U.S.-style). 2 The scholarship here is vast; see, e.g., the writings of Professor Bebchuk, especially, Lucian A. Bebchuk, The Case for In creasing Shar eholder Pou:er , 118 HARV. L. REV. 833 (2005 ); Lisa M. Fairfax, Shareholder Democracy on Trial: I nternational Perspectfre on the Effectiveness of In creased Shareholder Power, 3 VA. L. & Bus. REv. 1 (2008); Bernard S. Black , Agents Watchin g Agents: The Promise of Institutional Int •est.cr Voice, 39 UCLA L. REV. 811 (1992) (depicting (tra dition a l) institutional investors as pronusing activists); Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control, 155 U. PA. L. REV. 1021, 1062, 1047-70 (200 7) (exp lainin g the disillusion from the traditional institutional investors' activism, yet reflecting similar hopes regarding hedge funds , as the new promi s ing activists). 2016] MINORITY PUBLIC SHAREHOLDERS IN CHINA 3 against oppression; and (iii) increased participation in the governance of the firm . In this article I focus mainly on the first and third paths,3 since the need to protect minority public shareholders through legal rights and remedies is not in contention even by those who advocate for their limited and passive role. 4 The widely-accepted rationale for this new empower- ment is economic, 5 positing that increasing shareholder monitoring powers and governance participation will reduce agency costs, improve firm performance and shareholder value, and make capital allocation more efficient, thereby encouraging investment and the development of capital markets. As a result, many now consider minority public shareholders ' involvement in monitoring and corporate governance a critical element in vibrant and efficient capital markets. This same view is also increasingly established even in markets characterized by concentrated ownership-the typical ownership structure around the world 6 -where the existence of controlling or dominant shareholders and the absence of an active market for corporate control have traditionally thought to render minority public shareholder involvement less effective . Even in concentrated markets, it is increasingly recognized that minority public shareholders can, and sometimes should, become more influential corporate players. 7 Thus, 3 That is, (i) greater involvement of minority public shareholders in the monitoring of corporate insiders and (iii) their increased participation in the governance of firms. Of course , the division suggested here is somewhat artificial as the paths are not completely separable. The second path-legal protections, for example, often merge with the third path-participation rights in the governance of firms, such as in the case of super majority votes or negative veto provisions. • Even scholars who hold the view that shareholders do not enjoy vested proprietary rights justify the protections of public shareholders as economically desirable. See Easterbrook & Fischel, supra note 1, at 403 (emphasizing the status of shareholders as the residual claimants and risk bearers); Rafael La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997) (suggesting causality between protections of shareholders legal rights and the availability and cost of external finance). • Some studies provide empirical evidence to support a positive correlation between shareholder activism and firm performance. See Jonathan M. Karpoff, The Impact of Shareholder Activism on Target Companies: A Survey of Empirical Findings, 44 tb l.3 (Aug. 18, 2001) (unpublished manuscript), http://ssrn.com/abstract=885365. But there are many studies to the contrary. See, e.g., Roberta Romano, Less Is More: Making Shareholder Activism a Valued Mechanism of Corporate Governance, 18 YALE. J. ON REG. 174, 177 n.8, 187-219 (reviewing studies that show no empirical evidence in support of the claim that activism improves long term performance). 6 Throughout this article, I use the terms "concentrated markets" and "controlled markets" interchangeably, referring to the market level in which the ownership of most public corporations is concentrated at the hands of (a) dominant or controlling shareholder(s). An individual corporation may have relatively concentrated ownership while operating in a widely dispersed market, and vice versa. 7 Indeed, even the European Union council, whose ownership structure of its member states feature concentrated ownership (but for the exception of the UK), saw an urgent need to empower shareholders by encouraging their participation through voting. See, e.g., Council Directive 2007/36, 2007 0.J. (1,184/07) (EC) (more particularly, seeking to encourage cross-border shareholder participation); see also Dirk Zetzsche, Shareholder Passi vity, Cross-Border Voting and the Shareholder Rights Directive, 8 J. CORP. L. STUD. 289 (2008) (suggesting ways to further mandate an effective regime for increased cross- 4 COLUMBIA JOURNAL OF ASIAN LAW [Vol. 30:1 minority public shareholders in legal systems around the world are gradually empowered by mechanisms that substitute the powers of a market for corporate control. These substitute mechanisms are implemented primarily through enhanced minority shareholder participation rightsS and legal protection devices ,9 which are embedded in corporate law and securities regulations or established through other institutional development in given markets. This article focuses specifically on what is considered to be the plight of minority public shareholders in firms established and operating in the People's Republic of China ("PRC" or "China")-a highly concentrated and largely state-controlled capital market, where few would envision any minority shareholder empowerment whatsoever. This article looks at two questions with respect to the now globally-significant Chinese capital markets and the Chinese firms that access them: first, whether the above-described shift in the role and powers of minority public shareholders occurring world-wide, even in concentrated markets, is also evident in the PRC circumstance, normatively and in reality? Second, if the answer to the first question is "no", and yet such a change is considered desirable, then if and how will the same shift eventually take place under specifically Chinese circumstances? Being perhaps the most concentrated and state-controlled market in the world , contemporary China presents a unique context for any consideration of minority public shareholder monitoring and governance participation. A decades-long process of "corporatization without privatization " in China, and the rise of what some have termed "state capitalism", have resulted in the Chinese Party-state's de jure and de facto control over the PRC 's (and increasingly the world's) most significant listed firms. 10 The ownership structure of Chinese firms and the control over the PRC capital markets have together created the basis for open oppression of minority public shareholder s, and an environment where there is no market for corporate control, and thus no apparent possibility for real shareholder monitoring of insiders or controlling border shareholder participation among European member states). Nevertheless, the skeptica l approach concerning the effectiveness and desirability of minority public shareholders ' involvement is of course even more relevant with regard to concentrated markets due to the existence of a controlling or a dominant shareholder. 8 Such as negative veto rights, super majority requirements , or mandatory participation of minority public shareholders in the approval of certam business decisions; various forms of minority public shareholder involvement in the process of directors' elections; their right to submit governance proposals to the board, etc. See, e.g., OECD, RELATED PARTY TRANSACTIONS AND MINORITY SHAREHOLDER RIGHTS 3~7 (2012), http ://www.oecd.org/daf/ca/50089215.pdf (listing countries that have adopted provisions of minority negative veto rights) . 9 Here I mainly refer to ex-post rights protecting devices such as group litigation, individual standing rights, and remedies against procedural violations which infringe upon shareholders' participation rights; as well as to other institutional substitutes discussed in this article (e.g., involvement by socia l organizations) that serve to implement minority public shareholders' rights and thus empower them towards greater involvement. 10 See Part I.A, infra. - 2016] MINORITY PUBLIC SHAREHOLDERS IN CHINA 5 shareholders. Moreover, it is commonly understood that the same structures and the legal environment within which they are situated likewise hinder conventional forms of minority public shareholder participation in corporate governance. In response to these easy presumptions about the Chinese markets and legal environment , in this article I seek to analyze alternative channels for minority public shareholder monitoring and corporate governance participation-both in existence and potential. The existing literature on corporate governance in China tends to focus on th e protections, or lack thereof, granted to minority public shareholders in PRC listed firms . In contrast , this article offers an analysis of minority public shareholder involvement in the monitoring and governance of Chinese listed firms. Moreover, this article is one of the first to analyze current and prospective changes in the ownership structures of Chine se listed firms , which can operate to empower minority public shareholders in the future. Finally , wh ile exist ing analyses of the Chinese legal system commonly use the Anglo-American legal system as their comparative modus operandi , this article uses developments in non-Anglo-American , and thus far more concentrated , capital markets as the basis for its approach. In my view , a comparative analysis of market and legal systems between markets that share similar ownership structures is the more suitable and enlightening comparative approach , especially when analysts seek to identify more applicable legal policy and market reforms which are more likely to be realized. I proceed as follows: Part I describes the prevailing concentrated ownership situation for most Chinese listed firms , focusing on the Chinese Party-state 's control of most significant industrial and service enterprises. I examine the consequences of such control for minority public shareholders in PRC listed firms , and the implicated legal and regulatory responses. Part II analyzes mechanisms that can contribute to greater minority public shareholder invo lvement in firm monitoring and participation in the corporate governance of China's listed firms. First, I look at mechanisms that have emerged in other concentrated markets, and analyze if they can fit in the Chinese circumstances. Then, I explore China-specific prospects for a shift in the power and involvement of minority public shareholders in PRC listed firms. Here, I point to certain concrete developments in the PRC capital markets and the nature of Party-state control, which I expect to broaden and which may eventually lead to greater involvement of minority public shareholders even as China preserves its own model of "state capitalism". I identify two possible routes: a direct push by a CCP-led Party-state , motivated by China's unique political economy considerations; and, changes in the structure of Party-state control, entailing the development of a narrow market for corporate control. The possibilities raised in this article for the future empowerment of minority public shareholders in China have global implications especially 6 COLUMBIA JO URNAL OF ASIAN LAW [Vol. 30:1 as China's capital markets, as well as Chinese listed firms raising money on global capital markets, become increasingly central to investors world- wide. Furthermore, the analysis here provides an example of minority public shareholders' empowerment under extreme circumstances of ownership concentration and market control, which also have several important comparative (practical and theoretical) implications. First, the analysis reflects the need for concentrated markets, especially those in transitional or developmental states, to consider more mandatory and interventionist approaches towards the involvement of minority public shareholders in firm monitoring and governance. Second , it reflects that policy makers in concentrated markets may empower minority public shareholders for reasons outside those commonly offered by the shareholder democracy and market for corporate control discourses. For instance, increasing international competitiveness and the need for an appearance of modern capital markets, as well as the necessity to maintain internal political legitimacy , all serve in the process of empowering minority public shareholders in China. Third, and most importantly, while it is normally understood that control parties operate primarily to entrench their controlling position and thus hinder corporate minority-friendly legal reform, the Chinese example suggests that even corporate control parties themselves (here, Party-state controlling shareholders) may sometimes operate to diminish their own powers in the service of other goals (for example here, capital market growth, firm level international competitiveness, and unique political economy power struggles). In so doing, this article not only contributes to the existing literature on the development of China's corporate governance and capital markets-it also offers new contributions to the general corporate governance discourse and specifically to comparative inquiries about the shifting role of minority public shareholders world-wide. I. MINORITY PUBLIC SHAREHOLDERS AND CIIlNA'S CONCENTRATED MARKET The position of minority public shareholders in PRC listed firms operating under China's "state capitalism " is likely more problematic than similarly-placed shareholders in a paradigmatic concentrated capital market . China's corporate landscape does not only feature prevalent concentrated ownership, but in addition such concentrated ownership is in the hands of instruments of the PRC Party-state. In this Part, I first outline the dominant ownership structure evidenced in the Chinese capital markets and the implications for shareholder rights and empowerment arising from those structures. Then, I examine the existing allowances for minority public shareholders' monitoring and governance participation with respect to such Chinese companies. 2016) MINORITY PUBUC SHAREHOLDERS IN CHINA 7 A. A Concentrated Capital Market with "Chinese Characteristics"- Corporatization without Privatization and "State Capitalism" The great majority of listed Chinese companies have highly- concentrated ownership. 11 But simply describing the Chinese market as one with "concentrated ownership" does not tell the whole story. Most of China's public companies are controlled and operated by various organs of the PRC Party -state, 12 the result of China's three decades-long project of "corporatization without privatization." While many state-owned economies have gone through privatization as part of their economic and political transition, 13 the PRC opted instead to restructure its traditional state-owned enterprises (SO Es) and develop a new capital market to finance such entities, while at the same time preserve ultimate Party-state control over the vast majority of its enterprises. Some economists have perhaps optimistically called this "gradual privatization," as if an end result of complete privatization is inevitable. 14 Most expert observers of China, however, agree that full privatization is not the end goal of the Chinese Party-state under any Chinese Communist Party (CCP)-led regime. 15 Hence, while over several decades there has been some reduction in the state's direct equity holdings in PRC firms, coupled with varying spurts of growth in small to medium enterprises often called "private", these reductions in formal equity shares in the hands of the PRC Party-state do not amount to even a gradual reduction in control over the Party-state-operated assets. 16 An important goal of the SOE corporatization process undertaken in the PRC in the late 1980s and early 1990s was the effort to raise equity 11 For instance, during 2012, the largest shareholder in Chinese listed firms owned, on average, over one-third of the firm, and often more than 40% in state-controlled enterprises. Moreover , 57.28% of A shares in Chinese listed firms were held by "legal person" companies, which include primarily state enterprises (this is without considering state ownership through institutional investors and the National Social Securities Fund). Fuxiu Jiang & Kenneth Kim, Corporate Governance in China: A Modern Perspective, 32 J. CORP. FIN. 190, 192, 196 (2015). 12Jd. 13 CORPORATE GOVERNANCE IN TRANSITIONAL ECONOMIES: INSIDER CONTROL AND THE ROLE OF BANKS (Masahiko Aoki & Hyung-Ki Kim eds., 1995) [hereinafter CORPORATE GOVERNANCE IN TRANSITIONAL ECONOMIES]. 14 Gerard Roland, Political Economy Issues of Ownership Transformation in Eastern Europe, in CORPORATE GOVERNANCE IN TRANSITIONAL ECONOMIES, supra note 13, at 31, 47-49. '"The term "Party-state" throughout refers to a one-party system in which one political party ultimately directs both the political process and the governance of the state. 16 Evidence for this view may be drawn from the PRC State Council and the CCP Central Committee's recent guiding opinion. Zhonggong Zhongyang, Guowuyuan Guanyu Shenhua Guoyou Qiye Gaige de Zhidao Yijian ('f'~'f':9c, OO*i!it*=fiitHt!Effie~t&tt,:1¥Jffi .\'fl:~) [CPC Central Committee and State Council Opinion on Deepening the Guidance of State-Owned Enterprise Reform] (Aug. 24, 2015), http://www.gov.cn/zhengce/2015-09/13/ content_2930440.htm (emphasizing state ownership as the pillar of the Chinese economy and calling for greater party involvement and not greater privatization, as might be inferred from the title). 8 COLUMBIA JOURNAL OF AsIAN LAW [Vol. 30:1 investment for SO Es from both Chinese and foreign investors in order to fund their operation.11 This required the transformation of China's SO Es from administrative entities that provided for all aspects of economic and social welfare (employment, health, education, retirement, etc.) into "modern" corporate establishments. 18 The so-called "modern enterprise" was understood to be a better form for the (economically) efficient management of productive state assets, and the only enterprise form suitable for capital-raising. 19 Notably, full privatization was never a goal, or even the means, for the policy-driven transformation of SOEs into modern enterprises. Thus, through the SOE corporatization process, non- production social functions were stripped out of the traditional SOE, and the core productive assets and human capital were assigned either to: (1) central and local-level state bodies (e.g., central, provincial, and municipal government organs with jurisdiction over a particular industrial sector or region) reorganized as corporate legal persons or holding entities with subsidiary holdings or (2) other existing PRC enterprises with "legal person " status, often companies or groups also controlled by non-central government bodies. 20 Later , many of the largest central and local government-controlled and now corporatized SO Es had their controlling equity assigned to what became the State-Owned Asset Supervision and Administration Commission (SASAC). SASAC is the central state asset management agency established in 2003 to act on behalf of the PRC state (or in the PRC idiom "all the people " (quanmin)) as the ultimate principal. 21 These corporatized SOEs were the PRC firms i; See generally STEPHEN GREEN, CHINA'S STOCKMARKET: A GUIDE TO ITS PROGRESS, PLAYERS, ANO PROSPECTS 9-46 (2003). 18 The corporatization initiative distinguished between two main forms of organization, both of which entitle shareholders to limited liability: (a) A Limited Liability Company ("LLC") intended for a small and more closely held group of investors, similar to the close corporation form in the United States; and (b) A Joint Stock Limited Company, also known as "companies limited by shares" ("CLSs"), which may be a listed company or an unlisted company, although the assumption is that a company will be established as such with the intention to list in the future. See Gongsifa (0ii.l~) [Company Law] (promulgated by th e Standing Comm. Nat'l People's Cong.,_ Dec. 29, 1993) , arts. 3, 9, 19, 20 (LLC form); arts. 3, 73, 74 (CLS form). The 1993 Company Law was revised wholesale in October 2005 , and limited amendments were introduced in 2013. See Gongsifa ( 0 ii]~) [Company Law] (promulgated by the Standing Comm. Nat '! People's Cong. Oct. 27, 2005, effective Jan. 1, 200?, as amended , Dec. 28'. 2013) [hereinafter China Company Law or 2006 Company Law], available at http://www.fdi.gov.cn/1800000121_39 _4814 _0_7.html. Unless noted otherwise, all references henceforth refer to the 2006 Company Law, as amended. With respect to these modern, now legally established, forms of organizations the article only addresses shareholders in public companies, m eaning, shareholders in CLSs whose shares are listed for trade. 19See Donald C. Clarke, Corporate Governance in China: An Overview, 14 CHINA ECON. REV. 494, 496-97 (2003). 20 Harry G. Broad man, The Business(es) of the Chinese State, 24 World Economy 849 8~1-64 (2?01). For an extensive analysis of Chinese ~isted firms' group formation see, e.g.'. Li-Wen~ & Curtis J. ~aup_t, We_Are the (National) Champions: Understanding the Mechanisms of State Capitalism in China, 65 STAN. L. REV. 697 (2013). 21 Lin and Milhaupt, supra note 20, at 716, 734-36. 2016] MINORITY PUBLIC SHAREHOLDERS IN CHINA 9 which, starting in the early 1990s, accessed domestic and global capital markets, even while an absolute control portion of the new corporation's shares continued to be held by the state or state proxies? 2 The Chinese corporatization without privatization process therefore enabled the PRC Party-state to raise much needed capital, while increasing the pool of assets under its control? 3 Furthermore, until 2005, shares held directly or indirectly by the state were legally prohibited from being traded. 24 Thus, enterprises under Party-state control were able to raise extremely passive and/or disempowered capital, without any diminution of the Party-state's total governance authority over the state assets now formally owned by modern corporate entities. 25 Even after further legal and market developments in the decades that followed, such as the 2005 "split share structure reform" (which permitted the trading of formerly untradeable state shares), 26 and a more recent wave of M&A activity (framed by some scholars as part of a privatization process), 27 ultimate Party-state control remained and is still prevalent. Now such control is increasingly maintained through groups of holding companies at the top of traditional pyramid structures and extending down to listed companies with a public float.28 As the dominant shareholders, and beyond direct ownership, Party- state institutions retain the ability to appoint group and subsidiary company management, and most often place Party members (advancing through a parallel Party nomenklatura system) as directors, supervisory 22 See Yingyi Qian, Reforming Corporate Governance and Finance in China, in CORPORATE GOVERNANCE IN TRANSITIONAL ECONOMIES, supra note 13, at 215, 217. 21 See Clarke, supra note 19, at 496-97. "" This changed only during the "split-share structure reform" starting in May 2005. Wenxuan Hou & Edward Lee , Split Share Structure Reform, Corporate Governance, and the Foreign Shore Discount Puzzle in China , 20 EURO. J. OF FIN. 703 , 709-710 (2014). 25 Nicholas C. Howson, Protecting the State from Itself?: Regulatory Interventions in Corporate Governance and the Financing of China's 'State Capitalism', in REGULATING THE VISIBLE HAND?: THE INSTITUTIONAL IMPLICATIONS OF CHINESE STATE CAPITALISM 49, 52, 67 (Benjamin L. Liebman & Curtis J. Milhaupt eds., 2015); Joseph P.H. Fan et al., The Emergence of Corporate Pyramids in China (Feb. 2005) (unpublished manuscript), http://ssrn.com/abstract=686582. More generally on the corporatization period, see Fang Liufang, China's Corporatization Experiment, 5 DUKE J. COMP. & !N"T'L L. 149, 224-28 (1994). 26 Michael Firth et al., Friend or Foe? The Role of State and Mutual Fund Ownership in the Split Share Structure Reform in China, 45 J. FIN. & QUANTITATIVE ANALYSIS 685 (2010). 27 GREGORY C. CHOW, CHINA'S ECONOMIC TRANSFORMATION 83-86, 268-280 (2d ed. 2007) (on the growth of the non-state sector); GOING PRIVATE IN CHINA: THE POLITICS OF CORPORATE RESTRUCTURING AND SYSTEM REFORM IN THE PRC (Jean C. Oi ed., 2011); NICHOLAS R. LARDY, MARKETS OVER MAO: THE RISE OF PRIVATE BUSINESS IN CHINA 45-46, 59-123 (2014). 28 For pyramid structures in China, see Guy S. Liu & Pei Sun, The Class of Shareholdings and Its Impacts on Corporate Performance: A Case of State Shareholding Composition in Chinese Public Corporations, 13 CORP. GOVERNANCE: INT'L REV. 46, 48 (2005) (finding ultimate government control in 81.6 percent of all public companies by the end of 2001). For more recent data, see Jiang & Kim, supra note 11. COLUMBIA JOURNAL OF ASIAN LAW [Vol. 30:1 board members, and senior executives. Those appointees in turn have full reign to manage business groups and individual firms in accordance with state and Party policy, separately from what might be in the best interests of the specific firm or its other shareholders. 29 An additional channel for Party-state control over listed firms and the capital market is achieved via its central position in other areas affecting the broadev political economy of China, particularly the financial sector and labor markets. This broad involvement by the PRC Party-state has been described as China 's model of "state capitalism." 30 In this article, I use this term to describe a system in which the Chinese Party-state directly or indirectly functions as the controlling shareholder of most significant PRC industrial groups and their domestic and globally-listed companies, as well as of the commercial and policy banks and financial industry firms, and at the same time acts as the market's regulator and enforcement institution. 31 This multi-channel control can be exercised at both the firm and general market levels to the detriment of minority shareholders in specific firms, whenever any conflicts between the interests of the Party- state--economic, social, or political-and an individual firm (and its minority public shareholders) arise . Sometimes, of course, that Party- state interest can be benign-and so the PRC can use Chinese firms (or the groups within which they are embedded) to advance important social and political goals, even when those goals conflict directly with the interest of the firm as a whole or of the minority shareholders in the firm. For example, the PRC may wish to use firms to advance certain fiscal or production policies, lower unemployment, or address other social stability concerns, all before the more limited interests of firm efficiency or profitability (value to shareholders). At the same time, these structures can create opportunities for Party-state appointees to extract the private benefits of control seen across the world by unmonitored insiders, whereby they use their position to engage in tunneling , self-dealing, or the outright theft of corporate assets , to benefit themselves and their affiliates at the expense of minority shareholders and the firm.3 2 29 See Firth et al., supra note 26 (introducing how managers of firms were pressured politically to rush the implementation of a reform scheme, even when not in the best interests of their unit holders); Nancy Huyghebaert & Lihong Wang, Expropriation of Minority Investors in Chinese Listed Firms: The Role of Int ernal and External Corporate Governance Mechanisms, 20 CORP. GOVERNANCE: INT'L REV. 308, 311, 328 (2012) (measuring the costs of political control over directors-through labor redundancy-following approvals of related party transactions that serve the state's public interests). 30 See, Lin & Milhaupt, supra 20, at 700 n.9. 31 Commentators have taken different views as to China 's Party-state involvement in the economy. Some have argued against the characterization of the Chinese economy as "state-capitalism." See, e.g., LARDY, MARKETS OVER MAO, supra note 27 (considering the rapidly growing private business sector as a major driver of economic growth and employment in China today). si For general implications of corporate pyramid structure and ownership concentration, see Lucian A. Bebchuk et al., Stock Pyramids, Cross-Ownership, and Dual 2016] MINORITY PUBLIC SHAREHOLDERS IN CHINA 11 In addition to the potential exploitation of minority shareholders by the Party -state qua controlling shareholder or by its appointees, the incentives for minority exploitation are further exacerbated by the lack of an ultimate principal at the top of state -controlled pyramids . This is an aggravated version of the well-known "who monitors the monitor?" problem. 33 Because there is no ultimate principal who will benefit from the increased value that effective monitoring might generate, there is no specific controlling owner who would otherwise be incentivized to incur the costs of monitoring firm insiders. 34Thus, even when the interests of the Party -state, in its capacity as a given firm's controlling shareholder, aligns with those of the minority shareholders, the lack of any ultimate human principal deprives the firm of any truly interested monitor, or at the most creates relative apathy among otherwise potential monitors. B. Monitoring of Insiders and the Protection of Minority Shareholders in China For corporate governance advocates, the PRC stands as one of the most challenging environments because it is among the world's most concentrated markets and yet is so central to the global economy. As in many other markets evidencing similar concentration, there is currently almost no hostile takeover activity and thus no market for corporate control in China. This means that the primary external monitoring mechanism celebrated with respect to Anglo -American -style capital markets is entirely absent in China . As noted above, in China the situation is even more aggravated because of the absent principal problem, which results in a pronounced lack of internal monitoring mechanisms as well. And so, at least one result of the "corporatization without privatization " program in China has been an open and unrestrained invitation to unmonitored insider opportunism and minority shareholder oppression,35 in a transitional legal system which offers minority shareholders little in the way of protections much less remedies. Given the above, most analysts will then further assume that there is no policy or legal basis for minority shareholder participation in firms operating in the PRC. Class Equity: The Mechanisms and Agency Costs of Separating Control from Cash-Flow Rights, in CONCENTRATED CORPORATE OWNERSHIP 295, 295 (Randall K. Morck ed., 2000). Specifically, for tunneling in the Chinese market , see Huyghebaert & Wang, supra note 29. 33 See, e.g., Ronald J. Gilson, A Structural Approa ch to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 STAN. L. REV. 819, 835-36 (1981) (discussing this question as part of the costs of the separation between ownership and control). 34 Clarke, supra note 19, at 499: ("however, no matter how far up the chain of monitors we go, we never run into an ultimate principle ... As a re s ult, effective monitoring cannot take place because there is nobody in the chain of monitor s with the appropriate incentives ; nobody is entitled to the increase in asset value that effective monitoring would bring about."). 33 Howson, supra note 25, at 53. 12 COLUMBIA J OURNAL OF ASIA.\' LAW [Vol. 30:1 Notwithstanding the above and contrary to most com~ on understandings of the Chines e situation , there is evid~nce of alte rnativ e mechanisms in the highly-concentr ated Chinese capital markets that may act as partial substitutes for conve nt ional internal corporate governance mechanisms and for a robu st market for corporate contr?l. 36 I canvas some of these mechanisms immediately below, and then consider whether they do indeed enable the monit oring of corporate insiders ~nd some level of protection for minority public shareholders agamst exploitation-thus resulting in the empowerment of minority public shareholders in China . 1. Monitoring 37 In my view , the absenc e of common external monitoring mechanisms and the weakness of conventional int er nal monitoring mechanisms are in some ways compensated for by two mechanisms in Chma: the Party- state's (really the Party' s) monitoring of control parties and corporate insiders directly and through th e Party 's per sonnel management system; and relatedly, how the capital markets themselves-even in the absence of a market for corporate control-impact upon the advanceme nt of human agents inside the Party per sonn el system. Th ese somewhat sui generis monitoring mechanisms derive from the PRC 's unique Party-state governanc e model. That structure embraces a unified (single) Party-state with Party governance institutions shadowing formal state structures, and a devolution of power from the center to local actors at various level s. 38 More t han a decade ago , Professor Clarke lamented the absent principal problem outlined above. due to which state organs as dominant shareholders of publicly listed 16 See, e.g., Nicholas C. How so n, "Quack Corporate Governance" As Trodillonal Chinese Medicine: The Securities Regulation Cannibalization of Chinas Corporate Lau and a State Regulator's Battl e Against Par ty State Political Economi c Pou:er, 37 SEATTLE U.L. REV. 667 , 698 , 701 - 07 (20 14) (focusing on the role of t he Chin ese sec urities regulator). ,r, T he main concern of thi s article is the s hiftin g role of mrn ority public shareholders as corporate governance play ers in Chin a. T herefore, I only discuss specific monitoring mec hanisms which dir ectly involve shar eholders, including monitormg of insiden, by control parties and the traditional fun ct ion of capital markets monitoring . Additional common external a nd internal monitoring mec hani sm s, however , are also known to be weak, or absent, in China. Specifically, listed firm s in China, and even more so state-controlled firms, hav~ little fear ofban~uptcy. !ti s assumed th at ce ntr al and local governments, which rely on listed firms for social sta bility purposes (ma inl y through emp loyment) will aid them befor _e_bankruptcy. Additionally, credito~ s tend not to monitor and banks ~ntmue lending to ~ailing State-c~ntr?lle~ ~m s. See, Jiang & Kim , supra note 11. For a comprehe ns ive '.ev1ew of a ltern at'.ve mst1tut1ons of corporate governance in China, outside of s hare holders' mv?lvem e nt specifically, see Don~Jd C. Clar ke, The Rol e of S on-Legal Institutions in Chinese Corpo~te Governance, 111. TRANSFORMI~G CORPORATE Go\'Eft.'-A.'-CE 1 ~ EAST AslA 168 (Hideki Kanda et al. e ds., 2008) . 38 See generally KENNETH LIEBER.THAL & MI CHEL OKSENBERG, POLICY !\.'Lumm IN CHI_NA: LEADE~ , S:RUCTURES, _AND PROCESSES 135-168 (1990) (describing the hierarchical honwntal (terntonal) and vertical (from central level down to localiti ) 1 1 f h within th e Chinese government). es eve 5 0 aut onty 2016] MINORITY PUBUC SHAREHOLDERS IN CHINA 13 corporations in China seem "to either abuse their control or to fail to exercise it entirely." 39 I assert, however, that where the controlling state shareholder fails to monitor the insiders in individual firms, the Chinese Communist Party and its institutions step in . The Communist Party and its human agents have various discrete incentives to actively monitor the activities of both formal state owners and the managers appointed by them, especially when formal state ownership and control is vested at non-central state levels. The central Chinese Communist Party has every incentive to restrain the accumulation of economic and political power at the local level, notwithstanding more than three decades of devolution in (the state's) administrative authority in the service of economic development. Indeed, through the national Party personnel management system it has a ready tool to govern the career advancement path of local level Party (and state) officials who control or manage locally-promoted :firms. 40 This Party system-far more unified and centralized than the formal state system which it stands behind-sets the criteria for personnel promotion through the Party hierarchy. Notably, economic development and firm performance are major evaluation criteria under this system. Said another way, the economic performance of state- controlled corporations-with performance measured by revenue growth, total profits, operating profits, investments in technological innovation, environmental protection, legal disputes, etc.-is an important factor in the Party's evaluation of agents who are tasked with managing, and of officials tasked with monitoring such enterprises. This constitutes both a monitoring mechanism and an incentive for such officials to produce good results at corporatized SOEs. 41 A recent example of how this works, and the connection between the CCP's personnel management system advancement and corporate malfeasance, can be seen in the inspection of corruption and waste conducted by the Party's interna l disciplinary body- the Central Commission for Disciplinary Inspection (CCDI) at Sinopec Group, one of 39 Clarke, supra note 37, at 185. "° Chih-shian Liou & Chung-min Tsai, Betu;een Hierarchy and the Market: Managerial Career Trajectories in China's Energy Sector, in CHOOSING CHINA'S LEADERS 124 (Chien - wen Kou & Xiaowei Zang eds., 2013). 41 See Zhongyang Qiye Fuzeren Xinchou Guanli Zanxing Banfa (9":!k:iE:il:fftJJrAfMiffl~ ll!Fli'fft.1-7!) (Interim Measures for Remuneration Management for Central State-Owned Enterprise Executives) (adopted by the State-Owned Assets Supervision and Admin. Comm 'n of the State Council, May 13, 2003, effective May 13, 2003), http://en.sasac.gov.cn /nl408035/cl477199/content.html; Zhongyang Qiye Fuzeren Jingying Yeji Kaohe zhanxin Banfa (9".:!k:1£:il:fft]Jr,A.~g ~~!fffj/Jri;) [Interim procedures on the Evaluation of the Financial Performance of Central SOE leaders] (promulgated by the State-Owned Assets Supervision and Administration Commission of the State Council, Dec. 28 2009, effective Jan. 1, 2010), http://www.gov.cn/flfg/2010-0l/22/content_15l 7096 .htm; Yubo Li et al., A Sur vey of Executive Compensation Contracts in China's Listed Companies, 6 CHINAJ. ACCT. RES. 211 (2013) (examining executive compensation contracts in Chinese listed firms, including a description of evaluation measures for executive performance in government- controlled listed firms). 14 COLUMBIA JOURNAL OF ASIAN LAW [Vol. 30:1 the PRC 's centrally-controlled energy conglomerates whose main subsidiary Sinopec Corp Ltd. is publicly traded on the China, Hong Kong, New York and London stock exchanges. Following the inspection, the president of Sinopec Group , Wang Tianpu , who was at the time also the general manger of its listed subsidiary, was accused of taking bribes and abuse of power and was put under further Party disciplinary proceedings. Wang was removed from his corporate positio ns , prosecuted under the criminal law, and expelled from the Communist Par ty. 42 This is one recent example of the ways in which a highly "politicized" corporate governance system creates an alternative mechanism for monitoring corporate insider 's conduct 3 and holding them accountable, thus creat ing deterrence. 44 The above -described mechanisms also have implication s for the monitoring function of the capital markets (through public share prices) , even with the absence of a functioning market for corporate control. While studies and recent market volatility have shown that the Chinese capital markets are not informationally or fundamentally efficient , 45 and thus share price movements are not strictly determined by an issuer 's market performance , the public share price of a corporatized SOE will be taken into account for the Chinese Communist Party 's personnel system evaluations. A drop in the share price of a PRC issuer, whether or not •2 Zhongyang Zhongguo Shihua Dangzu Guanyu Xunshi Zhenggai Qingkuang Tongbao ('f'::lfi'Pli:P-ftjtffl.~i'-ifili!j!.lft&tf/Jl.(j{Jiffiffl) [Circular of the Chinese Communist Party on the Inspection and Ratification in China Petroleum Chemical Corporations], (promulgated by the Central Commission of Disciplinary Inspection , Apr. 30, 2015), http: //www.ccdi.gov. cn/yw/201504/t20150430_55638.html; Zhongguo Shiyouhuagong Jituangongsi Zongjingli Wangtianpu Shexian Yanzhong Weijiweifa Jieshou Zuzhid iaocha ('P li::fi711!-f.tI~Ufl0ii.l .(;i I!Jl .:E :Ji:-tf rJ; Ill F .iK :i:Uc ii~ 1t s'.t ffl. fSU.1'1 'ff) [Notice by the CCDI on the Disciplinary Investigation of Wang Tianpu] (promulgated by the CCDI, Apr. 27, 2015), http: //www.ccdi.gov.cn/xwtt/201504 /t2 0l50427 _55436.ht ml ; Zbongguo Shi you Huagong Jituangongsi Yuan Dongshi , Zongjingli , Dangzu chengyuan Wangtianpu Yanzbong Weiji Bei Kaichudangji ('fl l!il:P711!-ftI~000ii.J Et-Ji$, .(;i~I!Jl, 11:ffl.lilt~.l:;Ji:-U P: .l{iji~~Jf!liijt ffi) [Notice by the CCDI on Wang Tianpu's expulsion from the Party , September ] (promulgated by the CCDI, Sept. 18, 2015) , http://www.ccdi.gov .cn/x wtt/201509 /t 20l50918 _62038.html. On the consequent legal criminal prosecution, see China to Prosecute Former Top Executives for Alleged Graft, REUTERS (Sept . 29, 2016), http://www.reuters.com/article / us-china-corruption- sinopec-idUSKCN 11 WOVX. ' 3 Nicholas C. Howson , China's Restructured Commercial Banks - The Old Nomenklatura System Serving New Corporate Governan ce Structures?, in CHINA'S EMERGING FINANCIAL MARKETS: CHALLENGES AND GLOBAL IMPACT 123 (M. Avery et al. eds. 2009 ). , •• Without doubt , the internal mechanisms for monitoring, accountability , and det er rence have only operated mor e rigorously via the Party disciplinary enforcement action s. and ou_tside the formal criminal legal system during the present Anti-Corruption Campaign, which commenced with President Xi Jinping's as ce nsion to power. •• See, e.g., Zhiwu Chen, Stock Market in China's M oderniza tion Process- It s Past Present and Future Prospects 40-41 ('{ ale Sch. of Mgmt. Working Paper 2006) (on file ·th author) ("[T]he Chinese stoc k mark et as a whole has acted to determi~e stock prices:~ a way totally detach ed from the economi c growth process."). Generally, on the "inefficie ncies " m t~e ?hinese st<;><:k _markets, see Guoping Li , China's Stock Market: Inefficiencies and Institutwnol Implicatrons , 16 China & World Eco. No. 6, 2008, at 81. 2016] MINORl1Y PUBLIC SHAREHOLDERS IN CHINA 15 reflective of actual economic performance, may deny Party officials acting as firm managers ' future advancement within the Party . This can serve to discipline the behavior of powerful corporate officials, while also incentivizing them to increase shareholder value even in an inefficient market. I realize of course that this could also lead to the opposite result by encouraging managerial misconduct, whether engaging in false or misleading disclosure to fraudulently prop up a public share price, or by being deferential to political commands. 46 While these risks are certainly present, I believe not enough attention has been given to the possible beneficial effects of CCP domination in the disciplining and accountability of firm managers. 2. PRC Listed Companies and Minority Shareholder Protections As noted above, China's "corporatization without privatization" program was designed to allow the PRC's industrial enterprises to raise money in the domestic and global capital markets, while preserving a passive role for minority public shareholders. This conforms to the traditional view, which depicts minority shareholders in public firms-in both concentrated and widely-held markets-as mere suppliers of capital. 47 Pursuant to this view, minority public investors need only be protected-or seen to be protected-in a way that secures their expectations of investment return, and protects that future return (e.g., against expropriation). 48 Through the entire course of China's program of economic "reform and opening up ," PRC policymakers have recognized a relationship between formal legal protections and the ability of Chinese enterprises to attract capital and thus to contribute to economic development. This was evident even in the late 1970s with the promulgation of China 's first business enterprise statute directed at attracting specifically foreign direct investment while ensuring against expropriation by the state. 49 Decades later, a similar concern can be 46 See, for example, th e Nanjing Textile Import & Export Co. fraud case mentioned in note 72, infra. 41 E.g., Stephen Bainbridge , The Case for Limited Shareholder Voting Rights, 53 UCLA L. REV. 601,6 04 (2005) (positing a contractarian view in which shareholders are only owners of a residual claim, not of the corporation itself); Henry G. Manne, Our Two Corporation Systems: Law and Economics , 53 VA. L. REV . 259 (1967) (establishing a law and economics view of public shareholders as suppliers of capital). ,s La Porta et al., supra note 4 (suggesting causality between protections of shareho lder s' legal rights and the availability and cost of external finance). 49 The law, allowing foreign capital investments through Joint Ventures, was issued before any recognition in property rights or other legal institut ional establishment. In the absence of such institutions , to ensure that the economic interests of foreign investors were met, the state had committed to protect the "rights" of foreign investors-specifically not to nationalize or expropriate joint ventures. Zhongwai Hezi Jingying Qiye Fa ('f':YH1:·l:lf~#:11': ~i'!) [Sino-Foreign Equity Joint Venture Law] (promulgated by the Standing Comm. Nat'l 16 COLUMBIA JOURNAL OF ASIAN LAW [Vol. 30:1 perceived in Chinese law and regulation but now with respect_ to the aggravated exploitation of the minority public share~olders _ (m now corporatized and listed firms) by inside controlling parties . Thi~ can be seen in the policy statements issued by the PRC's highest executive level of government , th e State Council, 50 and the subsequent body of regulations issued by the Chinese securities regulator (the CSRC), many of which explicitly emphasize the protection of investors' interests for the promotion of stable and healt hy capital market development. 51 In 2006, the 1994 PR C Company Law was revised , wholesale, in line with this policy comm and, 52 evidencing a more robust shareholder em power ing approach .53 Thu s, in formal terms the stat ute as revised in 2006 creates or stre ngth ens various mechanism s for the protection of shareholders' right s and interests , including, for example, explicit fiduciary duties for corporate directors , supervisory board members, and officers, a derivative law suit for shareholders, and certain buy back People's Cong., July 1, 1979, effective July 8, 1979 , as amended Mar. 5, 2001), http ://engli sh.mofcom.gov .en/article/la wsda ta/ch mesela w/200301/20030100062 855 .shtml. 50 For instance , a relevant State Council Opinion states: The quality of listed companies must be upgrad ed. The quality of Listed companies is the source of value for securities market investment... We should improve the structure of corporate governance of listed companies, and by following the requirements of the modern corporate system, form a check and balance mechanism among the power organ, the decision-making organ, the supervisory organ and corporate mana gers ... We s hould regulate the acts of controlling shareholders and prosecute those committing acts to damage the interests of listed companies or those of small and medium-sized shareholder,, ... Guanyu Tuijin Zibenshic hang Gaigeka ifang he We ndingfazhan de Ruogany1J1an (::X:=flm.iit ~:;,fs:rJi:ij,i&l(iJftil(~~;;i;~~(IIJ:l:r-f#~) [Some Opinions of the State Council on Promoting the Reform , Opening and Stead y Growth of Capital Markets} (promulgated by the State Council, GuoFa (2004) No.3, Jan. 31, 2004 ), available at http ://www.as1an lii .org/cn /legis/cen/laws/sootscoptroasgocm970. See also, Guanyuzuohao Guancheshish1 Xiudmghou de Gongsifahe Zhe ngqu anfa Youguangongzuo de Tongzhi (x-f-{.\'.{Pf !J!M'.:t~tJiJ J;;Q(J~uJi-;/; .flliiE~il'iHf*Iftc(IIJJi!l?af) [State Council Notice on Good Implementation of the Revised Corporate an d Securiti es Law ] (promulgated by the State Council, Guofa (2005) No. 62 Dec. 23, 2005), available at http ://www.gov.cn/gongbao/content/2006/content_212077.htm (the Opinion empha sizes to vari ous levels of the government the necessity to implement the revised Company and Securities laws, which established mechanisms for the protections of corporate const ituents, in order to promote capital market development). Moreover, Chapter IV of Chin a's 2008 White Paper on promotion of the "rule of law" deals specifically with "Lega l Systems Regulating the Or der of Market Economy", which pomts to the need for "safegua rdin g the lawful righ ts and interests of corporate investors and stakeholders". Zhongguo de Fazhi Jianshe ( cf, l'iil (l(J it rail ii) [China 's Efforts and Achievements in Prom oti ng the Rule of Law] (promulgated by the Information Office of the State Council Feb. 28, 2008), available at ht tp://www.cbina.org.cn/government/whitepaper/node_704 l 7 33 .htm . 51 For a lis t of these regulations, see Howson, supra note 36. 52 The Company Law was revised at the 18•h meeting of the 10•h National Peop le's Congr ess of th e People 's Republic of Chin a on October 27, 2005 and was last amended December 28•h, 2013. Gongsifa (0 ii] it) [Company Law] (promulgated by the Standing Comm. Nat') People's Cong'. Dec. 29, 1993, revised, Oct . 27, 2005, amended, Dec. 28, 2013, effective Mar. 1, 2014 ), available at http://www.fdi.gov.cn/l800000121 39 4814 o 7 html .'1.1 Howson, supra note 36, at 698 , 701--07 . - - - - · · 2016) MINORITY PUBLIC SHAREHOLDERS IN CHINA 17 guarantees. 54 Perhaps most striking, the 2006 Company Law also adopted something like fiduciary duties for controlling shareholders, owed to the company and to other shareholders.55 More importantly, the 2006 Company Law goes beyond the mere protection of basic shareholder rights, by also establishing mechanisms to enable public shareholder participation in listed firm governance, including: involvement in the composition of the board of directors;56 decision power on numerous corporate matters including changes in the company's registered capital, bond issuances, re-organizations, dissolution and liquidation decisions , and bylaw amendments;5 7 and even a supermajority requirement for the approval of certain fundamental transactions. 58 The PRC Company Law even allows a group of shareholders with a 10 percent or more equity interest in the firm to request a special shareholders' meeting, and enables shareholders holding at least 3 percent of the firm's equity to submit shareholder proposals to the board. 59 The formal provisions above raise an important question-how is it that China's national policymakers , who it is assumed might wish to maintain the power of incumbent control parties and the relative passivity of public investors , have adopted an approach in the PRC's corporate law statute which seems to empower public shareholders? Under a traditional law and finance view, the assurance of basic economic rights to public investors--e .g ., the ability to enjoy from equity appreciation , participation in profits and in the firm's residual in liquidation-should presumably suffice to secure investors' expectations of returns on investment. I believe there are two related answers as to why China seems to have gone beyond the assurance of basic economic rights for public investors. First, the formal participation rights granted to shareholders under the 2006 Company Law are in effect rather narrow and do not operate to improve the position of non-controlling (thus real public, or minority) public shareholders . In my view, the "shareholder empowering'' approach (a rhetorical characterization tied to the empowerment of collective action-challenged shareholders in widely-held firms against corporate 54 2006 Company Law arts. 22 and 147-150 , 53(6) and 151, 152, 142, respectively. 55 Id. arts. 20, 21. 56 See id. arts. 37, 98, 99. These articles also enable written consent in lieu of convening an actual shareholders ' meeting, reducing the costs of shareholders' participation. s7 See id. arts. 37(7)-( 10). These rules also apply to listed companies. Id. art. 99. 58 The general rule for s hareholder resolution is majority vote. Id. art. 103. Yet, some business decisions require approval by two-thirds of the voting rights of the shareholders in presence: bylaw amendments , changes in the registered capital of the company, resolutions concerning merger , split-up, dissolution, or change of the company form; as well as a decision to purchase or sell any important asset or to provide guaranties that exceed 30 percent of the company's total assets within a year. Id. arts. 103, 121. Yet, article 16, is the only article under the Company law that addresses directly the concern from ab usive related party transactions, by requiring the approval of the majority of disinterested shareholders for guarantees given by the company to its controlling shareholder. Id. art. 16. 59Id. arts. 101, 102 . 18 COLUMBIA JOURNAL OF AslAN LAW [Vol. 30:1 managers) taken in the 2006 Company Law, serves in effect only to further empower the Party-state qua controlling shareholder of China's listed firms. General "shareholder empowerment" in the PRC circumstance means that the controlling shareholder will be the one to nominate and elect the subsidiary company's board members , who will in turn have singular power to appoint top management. Thus, the controlling shareholder will continue to govern the firm absolutely in a myriad of ways. For example, the controlling shareholder 's appointed board members will set the agenda for shareholder meetings , and thereby be able to hinder any shareholder proposal from a 3% percent shareholder authorized under the 2006 Company Law. Similarly , since voting participation is not mandatory, and most Chinese legal norms do not call for recusal of controlling shareholder(s), any mandated supermajority requirement for the approval of certain transactions will usually be satisfied by the controlling shareholder alone. 60 In a related fashion , the admittedly more "enabling " approach taken in the revised 2006 Company Law, in contrast with a mandatory orientation, simply enables the parties to contract around the default rules (which really means enab les the controlling shareholder to contract into even more robust control). 61 Said another way, given the pyramidal holding structure prevalent for PRC firms and the almost non-existent bargaining power of minority shareholders-any "opt -in" governance arrangement that is specifically favorable to minority shareholders will not be adopted.6 2 Thus, as observed with respect to France, "a n interventionist state, concentrated ownership, and shareholder-friendly law may be mutually reinforcing , especially when the state holds large blocks of stock in its own right." 63 Furthermore-and lest anyone think that whatever minority shareholder protections on offer (whether mandatory , or contracted -into ) can or will be enforced-the relative lack of technical competence , decisional autonomy and political independence commonly thought to characterize the Chinese judiciary raises skepticism for the ability of non- controlling public shareholders to secure such rights. For example, Professors Clarke and Howson have shown that derivative lawsuits involving listed PRC companies are almost completely absent from the PRC People's Courts . They attribute this to the fact that publicl y-listed 60 Article 16 of the 2006 Company Law which specifically requires the approval of disinterested, thereby usually the non-controlling, shareholders, is a unique exception where the minority is granted a de-facto negative veto. Id. art. 16. 61 Howson, supra note 36, at 698, 701-07. 62 See, e.g., 2006 Company Law, supra note 18, art. 105 (" A shareholders' assembly may adopt a cumulative voting system to elect the directors or supervisors according to the bylaw or its resolutions.") (emphasis added). 63 Luca Enriques et al., The Basic Goi:ernance Structure: The Interests of Shareholders as a Class, in THE ANATOMY OF CORPORATE LAW: A COMPARATIVE AND FUNCTIONAL APPROACH 55, 85 (Reiriier H. Kraakman et al. eds., 2nd ed., 2009). As pointed later in this Article, the role of the French State in the development of its corporate environment presents an interesting comparison with the Chinese system. See Part Il.A4 , infra. 2016] MINORITY PUBLIC SHAREHOLDERS IN CHINA 19 company cases involve large plaintiff groups who actually seek the accountability of Party-state actors and institutions, and thus may affect "social stability" in a politically related context, discouraging or prohibiting court involvement. 64 Hence, the relative weakness of the courts and other institutions and their pronounced reluctance to adjudicate or enforce in such cases, curtails the system's ability to restrain controlling shareholders or hold them accountable ex post as well. My second answer to the fundamental question posed above is this: I argue that the expectations of foreign and PRC domestic investors alike are shifting, and no longer focus solely on the guaranty of basic economic rights, but now increasingly value governance participation in and of itself. I believe that the Chinese legislator and especially China's capital markets' regulator-the CSRC-is increasingly intent on responding to these broad investors' expectations so as to encourage capital investment flow. This view coincides with a general shift I identify in global markets, whereby, even in concentrated markets, opportunities for participation by minority public shareholders are growing and increasingly regarded as essential by national market regulators for the development of vibrant capital markets.65 How do these perhaps contradictory insights-enhanced powers for control parties in the Chinese scheme under the benign slogans of "shareholder-empowering'' and "enabling" corporate laws vs. expectations from the investor side that go beyond the protection of basic economic rights-work together? My view is that the limited protections and/or governance participation rights granted to minority public shareholders under the Company Law, coupled with the inadequacy of ex post enforcement, do not necessarily mean that Chinese corporate governance 64 Nicholas C. Howson & Donald Clarke, Pathway to Minorit y Shareholder Protection: Derivative Actions in the People's Republic of China, in THE DERIVATIVE ACTION IN AsIA: A COMPARATIVE AND FUNCTIONAL APPROACH 243, 254-257 (Dan W. Puchniak et al. eds., 2012); see also Nicholas C. Howson, Corporate Law in the Shanghai People's Courts, 1992-2008: Judi cial Autonomy in a Contemporary Authoritarian State, 5 E. AsIA L. REV. 303, 404-07 (2010). 65 The shift is evident through academic discussions and market participants alike. For such shift in the U.S.-dispersed market, see the writings of Professor Bebchuk, especially in note 2, supra; Lucian A. Bebchuk , Letting Shareholders Set the Rules, 119 HARV. L. REV. 1784 (2005); Paul Rose, The Corporate Governance Industry , 32 J. CORP. L. 887 (2007) (describing the rising dominance of the Institutional Shareholder Services (ISS) firm and the growth of the proxy advisory sector in general); see also U.S. SEC Proxy Reform, 75 Fed. Reg. 56,668, 56,763 (Sept. 16, 2010) (facilitating shareholder director nominations). For evidence of such shift in concentrated markets, see, e.g., Miguel A. Ferreira et al., Shareholders at the Gate? Institutional In vestors and Cross-Border Mergers and Acquisitions, 23 REV. FIN. STUD. 601, 601-03 (2010) (stating that "a more active international role of institutional money managers has taken cross-border portfolio investment to record levels, representing an unprecedented internationalization of the shareholder base of corporations worldwide"); Directive 2007/36/EC, of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of shareholders in listed companies, 2007 0.J. (L 184) 17; and other sources referred to in note 7, supra. 20 COLUMBIA JOURNAL OF ASIAN LAW [Vol. 30:1 entirely lacks effective minority shareholder protections. Nor does it mean, I argue, that public investors in these PRC firms are condemned to eternal passivity. Rather, in my view, these insufficiencies open a route for other mechanisms and institutions to fill-in such gap and promote minority shareholders' empowerment in Chinese publicly-listed firms. These alternative mechanisms also suggest greater possibilities for minority public shareholders' future involvement in firm monitoring and governance participation. What are these other mechanisms? Institutionally the Chinese securities regulator has intervened strongly in the realm of the Company Law (and part of the PRC Securities Law which governs corporate law ) with a number of mandatory regulations that override what is only enabled in primary statutes. 66 The CSRC has put the protection of so- called "public" (gongzhong) shareholders at the forefront of its mission to develop "healthy" capital markets. 67 For instance , before the 2006 amendment of the Company Law , in 2004 , the CSRC issued provisions promoting minority shareholder participation in listed firm governance through a public shareholder negative veto for certain corporate decisions. 68 The provisions mandate approval by the shareholders assembly with the support of at least 50% of the "general public shareholders" (understood to mean holders of publicly-listed shares not affiliated with the control group), for: matters that would have a material impact on them; any new issuance of stock or convertible debt to the public; rights offerings; major asset reorganization; repayment of any debt owed to the company by one of its shareholders; and any overseas listing by a significant subsidiary of the listed company. 69 This negative veto conferred on minority shareholders in listed firms by the CSRC and outside of PRC corporate and securities laws, presents a substantial mechanism for minority shareholder protection and an opportunity for minority participation in the governance of listed firms. The CSRC 2004 Provisions also urge firms to proactively seek to increase the presence of "general public shareholders" in shareholders' meetings, and to enhance participation rights by enabling the public solicitation of voting proxies , promote cumulative voting, etc. Indeed, the mandatory rules set forth in the CSRC 2004 Pro visions are but one example of how China's capital markets regulator recognizes the value of the appearance and reality of increased minority public shareholder involvement. Nonetheless, while the mandatory norms 66 Howson, supra note 36 (offering reasons why the CSRC was allowed into such position). G1Jd. at697-99, 709-11. 68 Guanyu Jiaqiang Shehui Gongzhonggu Gudong Quanyi Baohu de Ruogan Guiding (*'f:lmsU±~0A.lll!:ll!t*tll~H~Hr>fi(Jlfft;fi~) [Provisions on Strengthening the Protection of the Rights and Interests of the General Public Shareholders] (promulgated by the Sec. Regulatory Comm'n, Dec. 7, 2004, effective Dec. 7, 2004), http://en.pkulaw.cn/display .aspx?cgid=56204&lib=law [hereinafter CSRC 2004 Provisions]. 69 Id. art. l(l)(a}-(d ) (referring to "general public shareho lders group" ("shehui gongzhong gu gudong')). 2016) MINORITY PUBLIC SHAREHOLDERS IN CHINA 21 introduced by the CSRC might result in the empowerment of minority public shareholders toward fairer treatment, it should be noted that under current political economy conditions, they are probably not as effective in empowering them towards active participation in firms. The reasons for this are twofold, both of which only intensified following the recent 2015-2016 Shanghai market crash, and the consequent legal and Party-disciplinary enforcement procedures against CSRC leading officials, which discredited the agency and likely seriously wounded its authority: 7° First, the protection of minority public shareholders against exploitation creates different levels of tension within the PRC political economy than does the promotion of their active participation. If a higher level of CSRC intervention is required to establish public shareholder participation under the current PRC ownership structures and political economy, this might not be tolerated by other Party-state actors (including the control parties in listed firms) . Indeed, the CSRC or any other state agency is more likely to enforce law, regulation or policy (or enforce them more rigorously), even against pure oppression or fraud, when minority shareholder rights are infringed upon by a non-Party- state controller. 71 The recent fraud case involving Shanghai Stock Exchange-listed Nanjing Textile Import Export Corp., Ltd., is a good example. The firm is a state-controlled listed company with its primary (then, 35%) and controlling shareholder being the Nanjing Municipal branch of SASAC. The company falsified profits for five consecutive years, publicly disclosing non-existent profits of RMB 350 million (approximately USD 54 million). The fraud was designed to conceal losses which would have forced the company to de-list. In May 2014, the CSRC merely issued an administrative penalty decision against the company, subjecting it and several of its managers to minor fines, despite broad public calls for delisting and for a more rigorous prosecution of the fraud. 72 If this is the common picture when the CSRC is called upon in 70 Party disciplinary proceedings took place against Yao Gang-Vice Chairman of the CSRC-and Zhang Yujun-Assistant Chairman of the CSRC. See, e.g., Zhongyang Jiwei Jiancha Bu ( 'P 9c ti: ~fill~ ffil) [CENTRAL COMMISSION FOR DISCIPLINE INSPECTION], Zhongguo Zhengquan Jiandu Guanli Weiyuanhui Dangwei Weiyuan, Fu Zhuxi Yao Gang Shexian Yanzhong Weiji Jieshou Zuzhi Diaocha (rt, OOiiE*llii~tl':f!l~~{t,Jl:~~_m, !i!JJ.:tfft !dlif1~iffetllP:iiiitcf:t~ffi.i'Ril,H01/n vestigation of Yao Gang, Member of the Party Committee and Deputy Chairman of CSRC, under Suspicion of Serious Disciplinary Violations] (Nov. 13, 2015), http ://www.ccdi.gov .cn/jlsc/zggb/jlsc_zggb/201607/t20160104_83027.html. More formal institutional consequences in such directions can be seen in the removal of Xiao Gang-the Chairman of the CSRC-from his position following the crises: See, e.g., China Removes Xiao as CSRC Head After Stock Market Meltdown, BLOOMBERG NEWS (Feb. 20, 2016) , http: //www.bloomberg.com/news/articles/2016-02-19/head-of-china-s-securities- regulator-to-step-down-wsj-reports. 11 Henk Berkman et al., Political Connections and Minority-Shareholder Protection: Evidence from Securities-Market Regulation in China, 45 J. FIX & QUANTITATIVE ANALYSIS 1391, 1393 (2010). 12 See Zhongguo Zhengjianhui Xingzheng Chu.fa Juedingshu (Nanjing Fanzhipin Jinchukou Fufen Youxian Gongsi, Dan Xiaozhong, Ding Jie Deng 13 Ming Zefuren) ('P ill: lla {t,frjij[~ f,J ~)E C ffl"~tMR ~ill l±l !J IN-f1HflllH~ i'rJ, -4\ ~#, T *.~ 13~ ~-ff.A.) ) 22 COLUMBIA JO URNAL OF ASIAN LAW [Vol. 30:1 cases of minority public shareholder protection against pure oppression, it is likely that its powers to actively promote participation rights in such firms are even further hindered. Second, the CSRC is but only one state-organ which occupies a position among other ministry-level organs-including listed firm control groups-with respect to control parties , PRC institutional investors and Chinese financial institutions. Overlapping authorities, for example, might make it difficult for the CSRC to mandate and enforce actual voting at shareholders' meetings by Party-state-tied institutional investors who in other systems are considered the ultimate candidates for action on behalf of minority public shareholders. This example suggests that there may not be a suitable market player able or willing to take up a regulatory or statutory invitation for enhanced participation, even when such is given.73 II. NEW PARADIGMS-POSSIBILITIES FOR MINORITY PUBLIC SHAREHOLDERS IN CHINA 'S CONCENTRATED CAPITAL MARKETS Even if China 's corporate governance system provides uniquely Chinese monitoring mechanisms and does at some level protect minority shareholders against exploitation, and even if China's controlling shareholder groups are somewhat restrained, an important question still remains: Are there Chinese actors, institutions , or practices which can enable the shift towards greater minority shareholder involvement that I have argued is evident in other global markets? In this section, I address that question from two angles: First, I examine whether examples from other concentrated markets apply to the Chinese circumstance. Second, I examine perhaps idiosyncratic ways in which China can advance minority public shareholder monitoring and governance participation, even in its highly-concentrated markets. A. Mechanisms from Other Concentrated Markets-Applicable to China? l. Overcoming a Conceptual Barrier The idea of meaningful minority public shareholder involvement in the governance of PRC's corporatized SO Es might seem a non-starter in an authoritarian state like China where civil society is generally highly [Administrative Penalty Decision (Nanjing Textile Import & Export Co., Shan Xiaozhong, Ding Jie and 13 Responsible Persons) , Zhongguo Zhengquan Jiandu Guanli Weiyuanhui (cp 13!1 iiE !f illi: ff .!,l ) [China Sec. Reg. Comm.) (Apr. 30, 2014) , http://www .csrc.gov .cn/pub/zjhpublic/G00306212/201407/t20140707 _257345.htm ?keyword s=%E5%8D%97%E4%BA%AC. The company was fin ed RMB 500,000 (approximately USD 76,000), and the individual managers were fined sums between RMB 300,000- 30,000 (USD 46,000 - 4,600). Id. 73 See Part II , infra. 2016] MINORITY PUBUC SHAREHOLDERS IN CHINA 23 constricted . Shareholder participation in corporate governance is traditionally linked to the shareholder franchise and what some describe as "corporate democracy" 74-concepts which seem wholly inapplicable in authoritarian regimes. Therefore, it could be argued that shareholder participation mechanisms seen in other concentrated markets, but which function in the embrace of liberal democracies, are conceptually irrelevant to China with its very different political and ideological environment. However , minority shareholder empowerment (perhaps misleadingly associated with notions of "corporate democracy") does not necessarily align with constitutional democracy. It is facile and misleading to conflate representative political institutions with market institutions and efficiency concerns. Thus, what I argue is a global shift in which the increasing power of minority public shareholders is seen not as an end in itself dictated by democratic morality, but instead a means to a separate goal-higher allocative efficiency for the capital markets and better economic performance by firms. 75 If this is true, and understanding that the same goals pertain for markets and firms operating under concentrated ownership conditions, 76 then there should be no conceptual barrier to the possibility of enhanced minority public shareholder monitoring and governance participation even in firms operating under an authoritarian regime. In fact, China's policy makers clearly make just this distinction-permitting and encouraging economic liberalization in the service of national economic development, while at the same time impeding concomitant political or social liberalization. 77 74 Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 959 (Del. 1985) ("If the stockholders are displeased with the action of their elected representatives, the powers of corporate democracy are at their disposal to turn the board out."); see also Lisa M. Fairfax, The Future of Shareholder Democracy, 84 IND. L.J. 1259 1260, 1269 (2009) (noting that shareholder activists refer to their actions as aiming to increase "shareholder democracy" by "increasing the efficacy of their voting right"). 76 Lucian A. Bebchuk , The Myth of the Shareholder Franchise, 93 VA. L. REV. 675 at 678-79 (2009) (citing Henry G. Manne, The 'Corporate Democracy' Oxymoron, WALL ST. J. (Jan. 2, 2007)) (referring to Manne's criticism of his proposals for greater shareholder empowerment); id. (citing Matthias Benz & Bruno S. Frey, Towards a Constitutional Theory of Corporate Governance 11-12 (June 14, 2006) (unpublished manuscript), available at http://papers.ssrn.com/sol3/papers.cfm? abstract_id =933309) (referring to the opposite end of the debate that sees increase in shareholders' 'constitutional' rights as intrinsically desirable)). 76 The implied position here that better economic performance can be achieved even in concentrated mark ets following an increase in public shareholder participation goes both ways. The inefficiencies involved in minority participation when there is a controlling or dominant shareholder, and arguments supporting the right of a controller to exercise "selfish control", can justify an opposite position . Since there is no unequivocal empirical proof one way or another, this article takes the former position in the Chinese context especially considering the costs of ownership concentration, and the vast potential for minority exploitation that is inherent to (pyramidal-)concentrated-ownership and is often unresolved by common monitoring and enforcement mechanisms. 77 The quest ion if this is a sustainable model of development that can be contained to the economic sphere is a different one which I discuss in a separate manuscript (in progress). 24 COLUMBIA JOURNAL OF ASIAN LAW [Vol. 30:1 2. A "Lujiazui W alk"78 One aspect of monitoring through the firm's public share price is constituted by the shareholders' exit from an investment, colloquially termed "voting with their feet" or "the Wall-Street Walk." 79 This market price mechanism has been shown empirically to have a disciplinary effect on firm management. In fact, just the credible threat of shareholders selling has a disciplinary effect, and provides groups of shareholders some traction in influencing management decisions, thereby amounting to a form of public shareholder monitoring. 80 Of course, that leverage is only amplified in a situation where there is a functioning market for corporate control, where mass selling decreases the price to a level at which a hostile acquirer can purchase control cheaply and then oust incumbent management. Yet, the firm 's public share price and the theory of"exit" as a form of shareholder voice cum monitoring , operates as a disciplinary mechanism even without a threat of a hostile acquirer. Thus , there is no reason why the same principle should not also apply in concentrated markets without a market for corporate control. Without a doubt, a share price drop from mass shareholder defection has consequences for firm market value in these markets as well; and the relative success or failure of a corporation as measured by firm market value will almost certainly affect the reputation and/or advancement of corporate insiders. A controlling shareholder can be similarly affected by a threat of larg e scale defection of public investors (and the resultant decrease in market value), especially with regard to future capital raising. Moreover, where ownership is concentrated but control is organized through business groups, a reduction in the public valuation of a given firm in the group and the associated reputational harm caused to the control parties will have negative implications at the group level and on individual firms within the group. Hence , under conditions where there is sufficient liquidity in the public float of a controlled firm3 1-meaning the easy 78 Lujiazui is the name of the new financial district in Shanghai. See, Lujiazui , WIKIPEDIA, https: 1/en.wikipedia.org/wiki/Lujiazui (last modified Jan. 26, 2017). 79 Anat R. Admati & Paul Pfleiderer, The "Wall Street Walk" and Shareholder Activism: Exit as a Form of Voice, 22 REV. FIN. STUD. 2645 (2009) (distinguishing between overt activism and a threat of exist as a form of shareholder activism). 00 Robert Parrino et al., Voting with Their Feet: Institutional Ownership Changes Around Fo_rced CEO Turnover, 68 J. FIN. ECON. 3 (2003); Admati & Pfleiderer , supra note 79 (proVJdmg a mod el whereby the threat of exit by a large shareholder on the basis of private information can have a disciplinary impact on managers ' decisions). . _ 81 Most of the research o? market liquidity is focused on widely held firms. See, e.g., Patrick Bolton & Ernst-Ludwig Von Thadden, Blocks, Liquidity, and Corporate Control 53 J. FIN_. 1, 2 (1998) (ass~rting that "the benefits of dispersion are mainly greater ma:ket liqwd1ty and better risk-diversification"); Amir Rubin , Ownership Level Ownership Concentmtio,_i ~nd Liquidity, 10 J. FIN. MARKETS 219 (2007) (examining the ' relationship ?et\:een liqwd1ty level to ownership concentration measured by insiders ' ownership and m stitutio nal mvestors hold~g in ~-8. _ ~sted firms). But see Marco Becht, European Corporate Governance: Tr°';ing off Liquidity Against Control, 43 EURO. ECON. REV. 1071, 1077 (1999) (asserting that [t]or the Umted States , there is extensive empirical evidence ... 2016] MINORITY PUBLIC SHAREHOLDERS IN CHINA 25 availability of the shareholders' exit option or the credible threat of it- even firms in concentrated capital markets and their management can be disciplined by standard capital markets mechanisms such as public price, exit threats, etc., and even without a market for corporate control, thereby potentially subjecting them to pressures by minority public shareho lders. As I have described above, the political advancement of nomenklatura appointees to the management of China's corporatized and listed SO Es is directly influenced by the success of the firms they manage. There are various criteria to measure such success, including changes in market price and corporate value. 82 Thus, one might think that even with respect to the PRC's listed SOEs, public shareholders can sell, or threaten selling to discipline even the nomenklatura-origin managers, and thereby influence or participate in corporate decision-making . While the theory has much to commend it, I should note, however, the difficulties in this argument in the Chinese capital markets context: Despite the link between public share price and evaluation of management, minority public shareholders invested in PRC listed firms in many occasions cannot effectively utilize exit, or the threat of exit, as a disciplinary mechanism. Exit as a form of shareholder voice or empowerment presupposes a certain level of market sophistication and informational efficiency. It also assumes a high degree of reliable information flowing into the market, signaling to investors the relative desirability of a given investment, and at the same time reflecting investors' appraisal of past and future performance of the corporation. The Chinese capital markets do not function this way presently, as they are in many ways informationally inefficient . Share prices often seem to be driven not by economic considerations based on information disclosed into the market but instead by factors often unrelated to firm performance.83 The response to the 2015 and 2016 stock crashes by the PRC central government-propping up share prices through massive mandated purchasing and blanket suspe nsions of tradingBL-reflect the that the number of shareholders is positively related to liquidity," but attempting to provide similar evidence for the German and Belgium markets); David A Lesmond, Liquidity of Emerging Markets, 77 J. FIN. ECON. 411 (2005) (examining liquidity of emerging markets on a macro level cross-country basis). 82 See supra notes 40 & 41 and associated text. Other evaluation criteria relate for instance to contribution to GDP growth, tax compliance, reduction in environmenta l footprint, the amount of socia l unrest created around corporate conduct (reflected for example through shareholder complaints, derivative suits, etc.). &1 Chen, supra note 45, at 41. See generally Tarun Khanna & Krishna Palepu, Emerging Market Business Groups, Foreign Intermediaries, and Corporate Governance, in CONCENTRATED CORPORATE OWNERSHIP, 319 (Randall K. Morck ed., 2000) 265, 292-94 (citing Randall Morck et al. , The Information Content of Stock Markets: Why Do Emerging Markets have Synchronous Stock Price Movements?, 58 J. FIN. ECON. 215 (2000)). 81 By July 8, 2015, 1,300 listed firms-representing 45 percent of the market suspended trading to hold back share price decrease. See, Almost Half of China's Firms Halt Trading 26 COLUMBIA JOURNAL OF ASIAN LAW [Vol. 30:1 limited impact of public shareholders' evaluation of firm value and capital market activity, while emphasizing the direct influence of a government policy on share price. Moreover, investm ent alternatives-namely other comparable listed PRC firms that evidence better performance or governance-are scarce, because the vast majority of these listed companies are also Party-state controlled firms. 85 This is one reason why public investors in China tend to invest alongside dominant Party-state shareholders, even if performance is lacklu ster or corporate governance breaches become apparent, preferring to benefit from the inside knowledge and relationships of the Party-state control party, rather than make much riskier investment deci sions. Hence, while the force of the capital market and thus a share price creates a kind of attenuated monitoring mechanism, it functions to that extent mainly through the Party personnel management system, while the function of a threat of exit a la 'Wall Street Walk'' by public shareholders is more limited. Nevertheless , whereas this is the current situation in the PRC, I expect it to gradually change in the future through changes in the structure of Party-state control of the economy, entailing the development of a partial market for corporate control. These suggested changes and their implications on minority public shareholders' ability to execute "exit" as a form of monitoring are discussed further below. 86 3. Institutional Investors in Concentrated Markets8i In recent decades an incr ease in equity shares managed by in stitutional investment services and a corresponding narrative describing the possibilities for "shareholder activism " by such institutional investors in the widely-dispersed Anglo-American markets has led to rising expectations focused on institutional investors as the tool for greater minority public shareholder monitoring and governance participation. 88 In concentrated markets , however, the view of as Market Dives, FRANCE 24 (July 8, 2015), http://www.france24.com/en/20150708-a1most- half-chinese-fi.rms-suspend-tr ading-mark et-dives. Bil Chen, supra ~ote 45, at 40--41 (studying co-movement levels among md1vidual stocks, concluding that Chmese mvestors treated every stoc k the same, an d that from investors' perspective the stocks were md1stinguishable from one a noth er). 86 See Part II.B.2, infra. 8 '. Her~ th e discuss~on concerning Chinese-listed firms refers only to listed "A shares" meamng s ares of. Chmese domestic companies that are traded on mainland stoc'k exchanges (Shanghai and Shenzhen) m· the domest· 1c currency (Re · b · "~ffi") 88 See Bernard S. Black Agents Watchi nmm I- · Voice, 39 UCLA L. REV. 8 11' 0992 ) (d . . ng Agents: Promise of Institutional Investor investors as promising mo ·t )· Marepictilng th e classical view of traditional institutional Ill ors ' ce Kahan & Ed d B . Corporate Governance and C C war - Rock, Hedge Funds in orporate ontrol 155 u p L RE (2007) (explaining the disillusion fr th di,. . ·. A. · V. 1021, 1042 & 1047-70 om e tra tional mst ·t .., 1 · • · · t reflecting simi lar hopes regard.in h d f 1 uwona investors activism, ye g e ge unds as the new · · · · ) v h evidence concerning the actual · 1 ' promismg activists. ,et, t e mvo vement and contribution of institutional investors is 2016] MINORITY PUBLIC SHAREHOLDERS IN CHINA 27 institutional investors has been less optimistic. This is because institutional investors in concentrated markets are often entwined within larger business groups, and in some cases even controlled by the listed firm whose public share float they manage. 89 Hence, institutional investors in concentrated markets can experience a conflict of interest and favor the interests of the dominant shareholders of their affiliate group over those of unaffiliated minority public shareholders, or otherwise just remain passive. 90 This kind of co-option within larger business groups in concentrated markets can affect the ability of institutional investors to participate effectively in corporate governance on behalf of minority public shareholders. Therefore, as some scholars have already noted , it seems clear that there must be an additional intervention for institutional investors in such concentrated markets to become active participants in monitoring and corporate governance on behalf of minority public shareholders. 91 Examples of such required interventions include the adoption of a mandatory requirement for non- controlling shareholder board representation;9 2 the use of disinterested shareholders consent as a regulatory device 93 (e.g., minority veto rights ("majority-of-minority" approval requirements), super majority requirements, etc. 94) while at the same time compelling a minority blockholders ' vote in potentially abusive circumstances. 95 inconclusive: See, e.g., Roberta Romano , Less Is More: Making Shareholder Activism a Valued Mechanism of Corporate Governance, 18 YALE. J. ON REG. 174, 187-219 (2001) (reviewing studies on shareholder proposals submitted by public pension funds in the United States and concluding an insignificant effect on firms' performance)); Gillan and Starks draw a similar conclusion following a survey of empirical studies concerning various forms of activism. Id. at 177 n.8 (citing Stuart L. Gillan & Laura T. Starks, A Surv ey of Shareholder Activism: Moti vation and Empirical Evidence, CONTEMP. FIN. DIGEST, Autumn 1998, 10, concluding that no empirical evidence supports the claim that activists improve long term market performance). 89 Assaf Hamdani & Yishay Y afeh, Institutional Investors as Minority Shareholders, 17 REV. FIN. 691 (2012); (examining institutional investors voting patterns in the Israeli market). oo Id. at 711-13 (finding that institutional investors with potential business interests, or who are owned within a business group, are more likely to support proposals by insiders). 91 lb., at 713-14 (finding that: "it is legal intervention - rather than minority shareholders' voting power - that drives institutional investors to cast a vote."). 92 For an example from the Italian corporate law, see Matteo Erede, Governing Corporations with Concentrated Ownership Structure: An Empirical Analys is of Hedge Fund Activism in Italy and Germany, and Its Evolution, 10 EURO. Co. & FIN. L. REV. 328, 350-54 (2013). 93 Jennifer Hill , Visions and Re visions of the Shareholder, 48 AM. J. COMP. L. 39, 69- 71 (2009) (discussing the idea of shareholders voice as a regulatory monitoring device, screening questionable transactions in Australia-a dispersed market). 94 For data on countries that adopted minority veto rights , see OECD , RELATED PARTY TRANSACTIONS AND MINORITY SHAREHOLDER RIGHTS 30-37, http://www.oecd.org/daf/ca /50089215.pdf . oo See Zohar Goshen, The Efficiency of Controlling Corporate Self-dealing: Theory Meets Reality , 91 CALIF. L. REV. 393 (2003) (arguing that corporate laws must incorporate some form of minority protection as a mandatory rule, and examining various such forms in differ ent jurisdictions). 28 COLUMBIA JOC:R., .-tL OFASIAS L .. rn· [Yo!. 30:1 Israel is one example of a highly-concentrated market where the --tate regulator sought to increase institutional inve. tor participation and power by addressing the passivity of institutional im·e-.tor, and their co- option within a larger, dominated, group and the potential conflict of interest resulting therefrom. A rule introduced into I,racl'-- Company Law requires that "extraordinary" transactions between the company and its control party (including affiliates) be appro,·ed by the shareholders general meeting, provided that the approving majority votes will include a majority of disinterested (minority) -.harebolder:, participating in the meeting (abstentions not accounted). At the ,-ame time, various financial laws and regulations mandate that in--titutional investors cast a vote in certain matters,97 thereby leveraging ,-bareholder consent into a regulatory device. In addition, in a recent law the Israeli legislature has taken action to mitigate the conflict.-. of intere,t often experienced by institutional investors. 98 The law establi,-.he-. owner,hip limitations within business groups with respect to financial "en·ices institutions in a move designed to increase the independence of institutional investors from the highly-concentrated corporate pyramids prevalent in the Israeli market. With respect to the PRC, several market conditions impede the ability of institutional investors to monitor as well as to significantly participate in firms' governance. The size of the industry is the first impediment. Currently most retail investors in the domestic capital markets manage ~heir equity investments individually, and not through institutional mvestor accounts. 99 Institutional investor services are strictly • 00 _Alternati _vely, shareholder approval is considered granted tf the total of objecnng :no~ty votes ts lower _than 2%_of_ the total voting rights of the company. Either way, the nority approval reqwrement is in addition to an approval by a Supen,-. ,n Committee ~Ind by the Board of Directors. See Company Law 5 7 59-1999 § 275(a) l LSI 11 (hr ) The nterpr etatto n" chapter in the I li Co • • ' ' ~ • · · • "a transact· t · srae mpany Law defines an Mextraordman· transaction : ton no m a company's o d" · · undertaken in market conditi r mary co~se of bus1~ess. a tran!'lact1on that 1s not the profitability of ~ns or a transaction that is Likely subi;tantiall) to influence . a company, its property or liabilities." Id art 1 : Ha'.11~am & Yafeh, supra note 89, at 696-700. . . . · A sunilar move was recommended b Hamd . • . _ Indeed, in a novel step, the Israeli le . 1 Y am and 'I: afeh m their article. Id., at 69a. of Concentration and Increase of ~;tor_h_as ~ecently adopted MThe Law for the Decrea!'l! curtail the excessive clout of a I t· 1 petition · It aims to strengthen competinon and economy by limiting pyrami "d re a ive Y small number of business group over the Isr. aeli groups to two h Id Ia f financial institutions from non £i . 1 ° mg yers and eparatmg ownership o ,Yew Business Conce11tration i.ai::t::: ~rporattons. ~ee ldo Baum et al., ifhat ls Israel's http://www.haaretz com/israel news/b . Y Should H-e Care?, liAARETZ (Dec. 29, 2013), oo s SHAN · · usmess/1.565986. ee GHAJ STOCK EXCHANGE ST Zhengquan Jiaoyisuo Xinxi Guanli Bu ( .• , :!j ~:ISTICS ANXUAL •175 (2014 ,, Shenzhen MANAGEMENT DEPARTMENT OF SHEN 1* I tiE /Ji f(!J .Q. f ~) [I:--FOR\L\TIO:-: Ji!loyisuo Shichang Tongji Nianjian (:~~~iT~CK EXCHA.'\GE), Shenzhen Zhengquan EXCHANGE FACT BOOK) 269 (2013 ) *h . Y., In in~ tit n 4'° £) [SHE:--ZHE.'-STOCK 710.pdf(reflecting a low number of• 't·tt~.//www.szse.cn/UpFiles/largepdf/2.015031914.5 . , ms 1 ut1onal acco ts . I) investors accounts in the People's R bli un co. mpared to mdn'l.dual (reta1 epu c of Chin (O 46• of total stock exchanges accounts). a · ¾I m SSE and 0.33% m SZSE, out 2016) MINORI TY PUBLIC SHAREHOLDERS IN CHINA 29 regimented, with limited investment choices. For example, pension funds are funded and managed by local -leve l Provinc ial and City governments and until very recently could only invest in national treasury bonds and deposits. 100 Similar investment limitations apply to the PRC's National Social Security Fund , which functions as the central government's social security reserve fund. 101 As for mutual funds, in recent years there been a large increase in the number of mutual fund investors and the total scope of their equity investments. In 2012, 7 .6% of all shares were held by mutual funds. Yet , at the firm level their holdings are marginal , e.g., for 2011 mutual funds held a median of 0.067% in firms. 102 Scho lars noted a short-term investment horizon as one implication of institutional investors ' firm level small holding scope (and consequent lack of influence). 103 Nevertheless, there is no doubt that the institutional investment industry in China is growing. This should remain true especially after the 2015 and 2016 stock market collapses, and in light of recent administrative regu lations issued by the State Council in August 2015 , which allowed pension funds to invest up to 30 percent of their net assets in domestic equities.104 An additional impediment is related to concerns regarding the competency of institutional investors-a re latively young industry in the PRC , such that institutional investors in China are simply not skilled enough to have a meaningful disciplinary effect on managerial power. 105 It was expected that the Qualified Foreign Institutional Investors JOO See ROBERT C. POZEN, TACKLING THE CHINESE PENSION SYSTEM 3-6, 8 (2013), http://www.tandemsites.com/paulson/website/wp-content/uploads/20 15/04/China-Pensions _Pozen_Englis h_FINAL .pdf. In s urance funds and mutual funds have other restrictions. See Cha o Xi, Institutional Shareholder Activism in China: Law and Practice, 17 INT'L Co. & COM. L. REV. 251 , 252 (2006). However, in August 2015 , new administrative rules were enac ted by the State Council to allow pension funds to invest in equity securities: See, Guowuyuan Guanyu Yinfa Jiben Yanglao Baoxian Jijin Touzi Guanli Banfa de Tongzhi (Guofa (2015) 48 hao ) (OO~~~-'ffflt,t!i!i;;!l:iJF~f,'ild~il!:~tli~'m'mtJ/.1-i'!l't-JJm~ (i;ii11Jt ( 2015 ) 48 Ji})) [State Council Administrative Measures for Investment Management of Pension Funds'1, Guowu Yuan (Ii~~). STATE COUNCIL (August 17, 2015) , http://www.gov.cn/zheng ce/conten t/2015-08/23 /content _ lO 115.htm 101 Information about the PRC National Social Security Fund is available on the NSSF webs ite About the National Council for Social Security Fund, SOCIAL SECURITY FUND, http://www .ssf.gov.cn/Eng _Jntroduction/201206/ t20120620 _5603.html# (last visited Mar. 3, 2017). 102 Jiang & Kim, supra note 11, at 197 tbl.6, 211. 1oa Id. , at 211. (pointing to an average holding period of less than six months by mutual funds in 2011). 10.. See State Council Administrative Measures for Investment Management of Pension Funds, supra not e 100, art. 36 & 37. This move was said to potentially contribute up to RMB 600 billion , managed by PRC pension fund , into the PRC domestic stock markets. See China to Allow Pension Fund s to In uest in Stock Market for the First Time, The Guardian, August 23, 2015 , https://www.theguardian.com/world/2015/ a ug/23/china-to-allow-pension -fund-to- in vest- in -stock- market- for- first -time. ,os Yongbeom Kim et al., Developing Institutional Investors in People's Republic of China, WORLD BANK, http: //documents.worldbank.org/curated/en/2804214687 43976037 /pd f/302480CHA0develtitutiona!Oinvestors.pdf. For a more recent and more positive analysis of institutional investors in China, see .Xi, supra note 100. 30 COLUMBIA J OURNAL OF ASIA.\' LAW [Vol. 30:1 (QFII)l06 program would bring experience and professional i-kill~ that will influence the quality of dom estic institutional investors and their m8:ket involvementl eve ls.107The educational value ofQFIIs, however, remamed marginal. Limit ed by operational quota restriction s and their own limited level of governanc e particip ation, even QFIIs prioritize goab i:;uch as maintaining a strong relationship with Party -state controlling shareholders. They were found to often entrust controlling party- appointed directors to vote on their behalf , 108 instead of opting for action · that might more directly m aximize value for their unit holden, and other minority shareholder s.109 It should neverthel ess be noted that in recent years the Chinese gove rnm ent increased the QFII quota allotment several time s, thu s increasing the scope of authorized foreign institutional investors and potentially their influence .110 Given the likelihood of increased institutional investor market hare, competency and sophistication, could they become major participant:-. in listed firm corporate governance as has been the case in other markets? In my view, there remain considerable barriers relating specifically to China 's political economy , which prevent institutional investor from becoming truly effective agents for minority public shareholde rs in the Chinese capital mark ets. First , institutional inv estors in China are subject to close regulation, supervision and enforcement at a multitude of levels . Various competing central government mini st ry-level bodies regulate the industry: the CSRC, the China Insuranc e Regulatory Commission, the China Banking Regulatory Commission, National Council for Social Secu.nty Fund, and the State Administration of Foreign Exchange. This segregated regulatory and supervisory aut hority produces multiple, cumberi:;ome, and often overlapping regulation of competing interests which likely 106 The program was introdu ced in 2002, revised in September 2009 and once agam in Dece mbe~ 2012 ._A sepa ra~ program was approved in 2011 to facilitate the use of Renminbi held _outsid e ~ru~land Chi na for investments in the domestic market_ Renminbi Qualified Foreign Instituti onal Inve stors. General information on th QFII d RQFII h · 1 d · • . e an sc emes, me u m~ summari es of unportant policy revisions and relevant quotas, is available on the Shanghai . Stock Excha~ge website: QFII & RQFII, SHA.'.;GHAf STOCK E.XCHAXGE. http ://engh sh .sse.eo m.cn/ mv estors/qfiilscheme (last visited u 3 2017 ) F I ill ti h "iar. , . or COO\i?ruence reasons, w re er to t ese programs together as QFII. 107 See generally Khanna & Palepu , supra note 83 t 319 108 OECD CORPORATE G ' a . • OVER..'IANCE OF LiS'l'ED C0:',1PAXJE.S rx CHl::SA. SELF· AsSESSMENT BY THE CHINA SECURITIES REGULATORY CO!'.t.,USSIOX 39 (2011). ht tp ://www.oecd.org/daf/ ca /48444985 .pdf . 109See Curti s J. Milhaupt Nonpro',.t O · · · Theo and EL·ilknce fr ' . '' rgan,zations as In t·eswr Protectwn: Economic ry om EaSl ASta , 29 YALE J. INT'L L 169 190 (2004) (providmg examples how these cons iderations may have led to th · '. • · institutional investo rs in Japa S h K . e generally passive role of foreign n, out orea, and Taiwan as well) 110 See QFII & RQFII , su.pra note 106 for uota in£ · · REG COMMISSION http·// ' q ormation. See also QFII. CHINA SEC. • •, • www.csrc.gov.cn/pub/csrc n/Op · 20 1212/t20121210_217805.html. _e enmgUp/RelatedPo lices/QFII/ 2016) MINORITY PUBLIC SHAREHOLDERS IN CHINA 31 restrict institutional initiative and autonomy. 111 These regulatory system encumbrances may also function to hold back policy which the CSRC seek to promote as part of its broad efforts to empower minority shareholders, and which otherwise could have pushed harder for mandatory institutional participation. 112 Most importantly, the ownership structure of PRC firms accessing capital in the Chinese and global capital markets is likely to inhibit institutional investor involvement in firm corporate governance. The conflicts of interest experienced by PRC institutional investors are particularly acute, since these investors are closely affiliated with SOE groups, group company insiders, and with key political players at various levels of the Party and state. 113 The state capitalism model implies strong Party-state involvement in the capital markets not only through the control of listed companies, but also through the control of the financial industry (commercial banks, investment banks, and brokerages) and the major players in the investment sector. 114 Thus, in the PRC, central organs of the Party-state have both administrative and regulatory control over the financial and investment sectors, but also absolute ownership and management control of the firms in these sectors. The PRC Party- state can therefore promote its interests via its controlling shareholder position in its subsidiary listed firms, and via state regulatory agencies and the legal system, but also through its controlling ownership position in most of China's fund managers, insurance companies and other public 1 " E.g. both the CSRC and the State Administration of Foreign Exchange are responsible for the administration of the QFII schemes. See Shanghai Stock Exchange, supra note 106; the CSRC and the China Insurance Regulatory Commission share administrative authority over the operation of pension insurance funds which are also securities investment funds; the authority of the China Banking Regulatory Commission to regulate and supervise the entire banking industry includes, inter alia, some authority interface with the CSRC's authority e.g., over mutual funds, since financial in stitutions often operate as securities companies. u2 In fact , the CSRC requires disclosure of the votes of the ten largest public shareholders on certain issues discussed at a shareholders meeting. CSRC 2004 Provisions, supra note 68, art. 1.1(5). Yet, there is no affirmative duty of institutional investors to vote. Hence, without a corresponding mandatory vote, and given institutional investors' network affiliation described hereto, such requirement is more likely discouraging their vote altogether. us See Xi, supra note 100, at 258--63; Michael Firth et al., supra note 26, at 692, 699--- 704 (providing an interesting insight into institutional investors' decisions during the split- share structure reform, when mutual funds were pressured politically to accept compensation schemes to rush the implementation of the reform, even when not in the best interests of their unit holders). 114 See, e.g., LARDY, supra note 27, at 20-23 (measuring state control over the financial industry by asset-holding ratio (private bank assets account for only 17 percent of all bank assets, and a more limited scope is ascribed to institutional investors), and by the reshuffle of senior executives between state administration and the industry, for example, between the Central bank , to commercial banks and branches of the administration such as China Banking Regulatory Commission and the CSRC). 32 COLUMBIA JOUR.\'AL OF A SU.S LA II' (\'ol. 30:1 investment vehicles, securities companies and banks. 11~ This control model certainly poses difficulties for institutional investors to act autonomously from the larger Party-state groups with re ·pect to the governance of specific listed firms. Hence, even if the . market sh~re of domestic institutional investors in China grows , that rncrea~e will not translate into any reduction in Party-state control or to any increa-.e in participation by institutional investors in corporate governance for the benefit of minority public shareholders. Quite the contrary I argue. This control st ru cture makes the role of institutional inve:-tor:- in the PRC more conflicted than in other concentrated mark ets. Therefore, the solutions applied in other concentrated markets to empower institutional investors and ad dre ss their passivity and conflicted position , may not work in the Chinese context. For example , the institutional investor industry embedded in the same Party-state system won 't exerci~e even a formally granted minority veto against Party-state controlling shareholders (provided for in the CSRC 2004 Provisions) .116 Likewise, an effort like the one taken by the Israeli legislator to di~entangle institutional investors and other financial service firm from listed companies and their bu siness groups 117 is probably not a viable option in the Chinese case, because simply separatmg mve tment service:-- institutions from corporate groups will not suffice to eliminate the complex conflicts of interest that exist. In China , real independence of institutional investors from the corporate group requires their independence from the Party-state , and thus more extr e me privatization. It would entail an overh aul of the entire political econ omy- a sensitive reorganization of local-go vernment powers over listed firms. 118 This scenario is unlikely mainl y because such an overhaul will eradicate the reaso ns for which the Chinese state-capitalism system was established in the first place and maintain ed thus far.119 Consequently, for th ese given political economy impediments, it seems that the primary route for institutional investors m China to become more involved in the interests of their unit holders will specificall y require a n increase in the segment of institutional investors ?ot directly subject to control by the PRC Party-state. While the mdep endence of domestic institutional investors from corporate groups II ~ Kim e t al., supra note 105; see also Ho:-:a Ko:-:a ST OCK EX CHAXGE IXSTITUTIO),;AL INVESTORS IN MAINLAND CHINA (2004) htt ·// k ' • , ps. www.h ex.com.hk/eng/ s tat/research/rpaper / Documents/IIMC.pdf. 116 The owner ship-ma~ket_ st~cture and th e network of co nfli cting interests make 1t reasonable to assume that mst1tutional investors wh · I • • · negotiatio ,ns as their pr eferred method. ' en mvo ved, will take mformal pnvate 117 See notes 89 & 99, supra, and associated text 118 Whil e not advocating for the possibility of . · · · discuss es some potential ch ng · th r. Privatization , Part B of this . .-\r.ticle . . a es 1n e 1orm of Party-st t 1 . · fi h" h may mfluen ce the mcentive s of · t·t t · al . e contro o"er listed mu,,\\ 1c in s 1 u 10n mvestors m · ·1 · d · h t greater market involvement. suru ar ways m ucmg t em o 119 See Howson, supra note 36, at 697. 2016] MINORITY PUBUC SHAREHOLDERS IN CHINA 33 and mainly from the Party-state is unlikely, there seems to be an increasing space for competition in the industry by foreign institutional investors outside and beyond the QFII quota system. In my view, this evolving space signals a shift in the central government powers over the financial industry, as well as the beginning of a reconceptualization of the role of the financial sector more broadly (which is to a large extent still perceived to be first and foremost a financing source at the service of corporatized SOEs). A few recent initiatives seem to be pointing and aiding in that direction: 120 The 2013 Shanghai Free Trade Zone experimenting a reduction of barriers for foreign investors' participation in the capital market. 121 At the national level, the recent China-Hong Kong Stock Connect initiative and the Mutual Recognition of Publicly Offered Funds between Hong Kong and the PRC, are expected to bring more off-shore institutional investors and wider range of investment tools into the PRC domestic market outside the existing QFII system.1 22 Not only will this increase the activity of foreign institutional investors not embedded in business group affiliation and Party-state control, but the Chinese domestic market (both retail and institutional investors) will also get better exposure to investor protection, disclosure standards and monitoring practices from the Hong Kong market, and to potential positive implications of greater governance participation. 4. Minority Public Shareholder Participation Through Social Organizations Non-governmental organizations (NGOs), non-profit organizations (NPOs), and other social organizations have emerged as significant stakeholders in several concentrated-ownership markets. 123 The ,20 As part of the new economic policy established at the 3rd plenum of the 18th CCP Congress , see infra note 156, China's policymakers are slowly increasing the role of the private sector in the financial-services market. 121 See Policy Measures for the Capital Market to Support and Promote the Shanghai Free Trade Zone, CHINA SEC. REG. COMM'N (Sept. 29, 2013), http://www.csrc.gov.cn/pub/ csrc en/newsfacts /release/20131l/t20131126_238765.html. - ,22 The mutual stock-connect initiative allows off-shore retail and institutional investors mutual stock market access between the SSE and the Hong-Kong Stock Exchange. The Mutual Recognition of Funds opened up an authorization process for off-shore funds eligibility to trade in the respective domestic market, thus increasing the accessibility of PRC and Hong-Kong investors to asset management funds registered in the Hong- Kong /PRC market, respectively. See SECURITY FUTURES COMMISSION, MUTUAL RECOGNITION OF F'UNDS (MRF) BETWEEN THE MAINLAND AND HONG KONG (2015). 12a See, e.g., Erede , supra note 92, at 370 (describing a decline in hedge fund activism in Italy and the raise of the "Assogestioni"-a nonprofit association who serves as a facilitator for minority shareholder minimum board representation and advocates stronger engagement of intermediaries in corporate governance); Curtis J. Milhaupt, Nonprofit Organizations as In vestor Protection: Economic Theory and Evidence from East Asia, 29 YALE J. INT'L L. 169 (2004) (discussing NPOs governance participation as shareholders, as one of the most important corporate law enforcement agents in South Korea, Taiwan, and Japan). 34 COLUMBIA JOURNAL OF ASIA.\ ' LAW [Vol. 30:1 involvement of the se players can take the form of public pressure on shareholders' and directors' voting, as well as direct intervention via ownership of shares and associated voting rights. 12~ As shareholders. they can utilize their participation rights to influence corporate governance through actual voting, shareholder proposals, or trigger broader public attention through the press and ex-post legal claims accruing to shareholders. This involvement functions to discipline corporate insiders and control parties , enabling them to expo:;e problems and push firms and their management to act in a more socially responsible manner. Oth er social organizations function solely to facilitate coalition-forming for public shareholders , especially where true institutional investor s are absent. In the French capital markets, for example , "association s d'actionnaires" ("[public] shareholders' associations ") have become influential institutions able to coordinate minority shareholder action , despite significant ownership concentration in French firms long supp orted by the government. The capital structures of France's most important firms evidences concentrated ownership business group dominat ed by elite familiest 25 - the result of "s trategic .. · privatization of a formerl y state-dominated economy - with continuing robust state intervention in the market. 126 One might observe, similar in a way to China ,127 that corporate governance in France has developed to formally empower shareholders but in a highly politicized environment, which results in the interest s of dominant shareholders (elite families and the state itself) being mostly served . 128 Nevertheless, the French Commercial Code permits publi c shareholders with at least five percent of the voting right s and who ha ve held their shares for more than two years to form "association s d'actionnaires " to act in concert to further the public shareholder s' collective interest.129 These associations pursue legal 12 • Emma Sjostrom, Translating ldeolom cally Based c H c· ·z s · t • . . . o • oncerns: ou ,u ocie ) Organizations Use the Financial Market to Protect Human Rights 6 L,--r'L J OF E:--,•r & SUSTAINABLE DEV. 153 (2007 ). ' . . 125 Mara Faccio & Larry H P La Th Ul · · C . · · ng, e timate Ownership of Western European orporatwns, 65 J. FIN. ECON., 365 (2002). 126 MARK J. ROE, P OLITICAL DETERMINANTS OF CO CONTEXT CORPORATE IMPACT 65 70 . . RPORATE Go\'ER.',A..',CE: POLITICAL , - (2003)· V1V1en A "·h "d "' I Ca · 1· Tran sformed Yet Still a Third v; • . ' . · oc mi t, rr enc I prlo ism 127 ' • anet y of Capitalrsm, 32 ECON. & SOCIETY 526 (2003). It seems fair to say that F r a nce's capita l market f · · · of Social Democratic state-capital" S hm'd . . unctions 10 the embrace of a kind i sm, c 1 t id and 1s th fi f · ul · t the comparati ve analysis her e fort h with Chin~. , ere ore o parnc ar mteres to 128 Mariana Pargendler, State Ownershi d REV. 2917 2954 (2012) (not;ng ho th F p ban Corporate Governance, 80 FORDHA)I L. • ~, w e renc "do ubl ti · · d magnify the voting power of the st t ) S e vo ng nghts syste m 1s serve to GOVERNANCE STRUCTURE: THE INTE:E:;s oe.: /enerally Luca Enriques et al., THE BASIC CORPORATE LAW: A COMPARATIVE AND FuNHAREHOLDERS AS A CLASS, THE AXATO~!Y OF H. Kraakman ed , 2d ed. 2009) (positing h th CTlONAL APPROACH 55, 84-5 (Reinier state, concentrated owner ship and h ohw ld e re_lationship between an interventionist ' s~o~hndll . · priorities ) . Y aws may promote the states 129 See CODE DE COMMERCE [C. COM] [C L.225-230 to L.225-233, & L.225 -25 2 (Fr.) S O~RCIAL CODE] arts. L.225-103. L.225-105, · · ee a so Yaron Nili, Missing the Forest from the -- 2016] MINORITY PUBLIC SHAREHOLDERS IN CmNA 35 remedies through litigation, and statutory and regulatory protections by lobbying the French regulators for minority shareholder-friendly corporate governance mechanisms. Scholars have argued that the coalition-building enabled by these associations has meaningfully strengthened minority public shareholder participation m the governance of French firms_ 130 However , it seems unlikely that a role comparable to the one played by the French shareholders' associations is possible for Chinese social organizations in the capital markets governed by the PRC's authoritarian single party regime. The traditional reliance such social organizations place on law and legal institutions to enforce their rights, as well as their ability to publicly critique corporate misconduct through a relatively free financial press, make similar fun:ctions in China difficult. The Chinese People's Courts are not an independent branch of government, and are part of the Party-state bureaucracy. This means that the Chinese judiciary is weak, and in many cases lacks the technical competence, bureaucratic autonomy or political independence necessary for it to act as a vehicle for rights protection and enforcement for such social organizations, even if permitted, against far more powerful Party-state actors. 131 Furthermore, one needs to understand the current state of "civil society" in China to assess the possibilities for Chinese social organizations, even as shareho lders, as corporate governance participants in the PRC. The emergence of civil society, including citizens' access to rights-enforcing institutions, is a matter of some complexity in China. Suffice it to say that the Western notion of "freedom of association" is absent . Civil society and organizations, as well as the financial press, are largely confined to areas that do not pose a threat to central Party - state interests or can help the center keep local power in control. 132 Indeed , while the financial press is becoming more autonomous and increasingly influential, it is still ultimately controlled by the Party, and will continue to be used to protect Party -state interests. A clear example of this orientation was what occurred in the wake of two recent stock market crashes in the PRC, where "disloyal" journalists were arrested for Trees: A New Approach to Shareholder Activism, 4 HARV. BUS. L. REV. 157, 197-98 (2014) (discussing relevant sections of the French Code de Commerce). 1:,0 Carine Girard, Success of Shareholder Activism: The French Case, BANKERS, MARKETS & INVESTORS, Nov.-Dec. 2011. See also Nili, supra note 132, at 199 & n.229. 1a1 Howson, supra note 64, at 327-56. 132 See, e.g., BRUCE J. DICKSON, WEALTH INTO POWER: THE COMMUNIST PARTY'S EMBRACE OF CHJNA'S PRIVATE SECTOR (2008); Donald C. Clarke, The Private Attorney- General in China: Potential and Pitfalls, 8 WASH. U. GLOB. STUD. L. REV. 24 1 (2009); Benjamin L. Liebman, Changing Media, Changing Courts, CHANGING MEDIA, CHANGING CHJNA 150, 151 (Susan L. Shirk ed. 2011); Benjamin Van Rooij , People's Regulation: Citizens and Implementation of Law in China, 25 COLUM. J. ASIAN L. 116 (2012). 36 COLUMBIA JOL'RSAL OFASU.\' LAIi ' [YoL 30;1 contributing to the market declines and state-owned media accused foreign forces for causing market volatihty. 133 In addition to these limitations on the operation. of the judicial system, the financial press and civil society at large, there al-.o exi,-t in China an embedded traditional cultural perception of the legal -.y~tem a~ a coercive instrument of control and administration put in the hands of the state .134 Thus , law and legal institut10ns operate!'\ ..;o a to re,trict any non-state institutions , much less social organizations , from taking the lead on the enforcement of private rights of any kind, and certainly the enforcement of private shareholders' rights against t.uperior force,- of the PRC Party-state. The exclusion of private rights holden; from effective use of the formal legal system, coupled with a strong concern about the maintenance of social (and political) stability , are e\;dent from the constraints applied on group litigation cases. The ·e constrainti- deny securities law class actions outright, and radically minimize the number of corporate law derivative lawsuits , especially tho e im·olving Party- state controlled companies or their management. 1ss In the word:. of Professor Clarke: The notion that private citizens should be involved in law enforcement for public goals does not find a ready home in ... [the] Chinese political culture. The state jealou:-ly guards its control over the machinery of coercion .... [l]t may be unwilling to allow [enforcement by private action] because of the perceived political risks of giving citizens too much control over the operation of the legal system 36 In addition, a recent law for the supervision of overseas XGOs. which sta~ds as a ve~y broad reaching legal effort to regulate the activities of foreign NGOs m China, is yet another sign of the general prohibitive approach toward civil society and privately organized operations in China. 137 The law will likely deter any involvement of foreign :-.:GOs in 133 China Is Trying to Blam e Its St k M k C · · VICE NEWS (Aug. 3l 2015 _oc ar. et rash on Journal1s~ and Businessmen, tock k h .' }, http s.//news. vtce.corn/arttcle/chma-1s-trying-to-blame-it~· s -mar et-eras -on-Journalists-and-busmessmen. t:i.l See, for example, Liang Zhipin E 1· · • • · Ch • d .., g, xp icatrng Lau : .-1 Comparatit e Pcrspectne of 111ese an rrestern Legal Culture, 3 J. CHINESE L 5 . . · of Chinese Law: The Ge e · d E 1 . · · 5 (1989) , Derk Bodde, &sic u:mctpts n sis an vo ution of Leaal Th h · "' d " · · o~ PROC. AM. PHIL. Soc•y 375 (1963) Both sou O . oug t In , ro 1/1onal China, I I of the Chinese traditional legal · te h rces emphasize the punitive and coerci\·e aspect:; meaning of"Law." sys mt rough an analysis of China's legal culture and the ,a., Howson & Clarke, supra note 64. l