A more efficient derivative action system in China: challenges and opportunities through corporate governance theory

The derivative action is an exception to the rule in Foss v Harbottle1 that was introduced with high expectations during a Chinese company law (CCL) reform that came into effect in 2006. It is vital to combat the abuse of derivative action in China, a country with an emerging corporate governance model, a weak legal system and inefficient enforcement measures. This article examines several deficiencies in derivative actions, with the purpose of arguing for a more effective and positive derivative action rule for the benefit of shareholders and their companies, and also for the development of CCL and the reconstruction of the Chinese corporate governance system. Corporate governance theories will be discussed as theoreticalsupports for a more efficient and enforceable derivative action system in China.