Shareholder litigation has been a prominent topic in the comparative corporate governance literature for decades. However, scholars trained in a particular jurisdiction often tend to look for types of lawsuits familiar from their home turf. In particular, the English-language literature has typically focused on derivative litigation, often from a somewhat US-centric or UK-centric perspective, in spite of the fact that derivative suits constitute only a minority of shareholder actions even in these jurisdictions. 

To broaden the functional perspective in the comparative analysis of shareholder litigation, this chapter attempts to create a (likely incomplete) taxonomy of shareholder lawsuits across countries. While the distinction between derivative suits and direct class actions in the US is largely familiar, many other jurisdictions employ different types of shareholder lawsuits. In doing so, we can identify some patterns that may in part reflect influence between jurisdictions reflecting legal families or legal origins. The derivative suit has risen to prominence in the United States as a frequently used mechanism, from where it has spread to a number of Asian civil law jurisdictions. In the United Kingdom and other “Commonwealth” countries, where it also has a long tradition, it is often eclipsed by the “unfair prejudice” or “oppression” remedy. In the civil law world, derivative litigation and close equivalents exist, but often another form of shareholder litigation takes a more prominent role, namely litigation regarding the validity of shareholder resolutions. 

After setting up the taxonomy, this chapter explores the main reasons that explain why specific types are pervasive in particular jurisdictions, analyzing especially standing requirements, allocation of cost and risk between plaintiffs and defendants, and access to information by plaintiffs. Finally, the chapter discusses lawsuits seeking to rescind shareholder decisions in Germany as an example for a frequently used type of litigation outside the American dichotomy of derivative and direct suits.

Mapping Types of Shareholder Lawsuits Across Jurisdictions

Extrapolating from modern international understanding of corporate Japan’s distinct form of managerial capitalism, we elaborate on the growing momentum of shareholder activism in Japan leading up to the COVID-19 health crisis, so as to inform the subsequent discussion on the relevant primary considerations that belie the future direction of shareholder activism in Japan post-COVID-19. On an initial logical extrapolation, it appears probable that COVID-19 could mark the peak of Japanese activism. However, it is crucial to acknowledge that the success of Japan’s managerial capitalism have also declined, which poses a question on to which direction Japanese corporate governance may be shifting. Finally, we point out how corporate Japan’s impeding market developments will provide a useful case-study for global financial discourse.

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COVID-19 and Japanese shareholder activism: brief respite for Japan’s self-healing concrete

Comparative corporate governance has focused either on prevailing differences across legal systems, or on spontaneous legal transplants of foreign institutions in response to global competition. This essay argues that corporate law today is not only a product of the invisible hand of the market, but also of the soft (and not-so-soft) hands of international organizations and standard setters. By tracing the emergence of international corporate law (ICL) since the Asian crisis of the late 1990s, it shows how the IMF, the OECD, the World Bank, and the United Nations, among several other international players, have helped shape legal reforms and corporate governance developments around the world. The observed influence of ICL ranges from the impulse for independent directors and the control of related-party transactions, to the growth of ESG investment factors and human rights policies. 

The rise of ICL responds to interjurisdictional externalities and nationalist bias of domestic regimes that have been largely neglected by prevailing theories, which failed to predict and notice the strong push for international coordination and standard setting in the field. ICL has also gone beyond merely prescribing an Anglo-Saxon model of corporate governance to also promote legal innovations that place the United States in the receiving end of international pressure. Legal implants from ICL, rather than legal transplants from a foreign jurisdiction, are an increasingly relevant force behind corporate governance change. While ICL has been influential, its efficacy and normative vision face challenges. The time has come to move beyond an exclusively comparative focus to also scrutinize the potential and limits of corporate lawmaking at the international level.

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The Rise of International Corporate Law

An important part of the current corporate governance trend is shareholder ‘empowerment’, a policy shift making corporate managers accountable to the shareholders as perceived ‘owners’ of the company. According to this policy thinking, the corporate boards should focus on monitoring on behalf of the shareholders, rather than managing the company independently. Shareholders should ‘engage’ with companies on issues ranging from strategy to corporate responsibility, issues that company law assigns to the board. 

This trend has been reflected not only in corporate governance codes, listing rules, company legislation, European Union directives and transnational regulatory standards but also as a ’stewardship trend’, which we have seen in the 2017 reform of the 2007 European Union Shareholders’ Rights Directive (SHRD II). A number of European jurisdictions have seen the emergence of specific ’stewardship codes’. According to the arguments behind the codes (and also in stewardship regulation such as SHRD II), encouraging shareholders to act as ‘stewards’ is a way forward not only towards better corporate governance in the mainstream, economics-focused sense, but also towards more sustainable and responsible companies in light of the environmental and social challenges we as a global community face. The stewardship concept is widely connected to institutional investors, referring to the actions that asset managers can take in order to enhance the value of the companies that they invest in on behalf of their own beneficiaries.

However, the nature of stewardship varies from jurisdiction to jurisdiction based on shareholder structures. In the Nordic region (similar to many Asian jurisdictions), the role of states, sovereign holding companies and wealth funds, other public market actors such as public pension funds, families, family-controlled investment companies and family-based foundations is significant compared to (other) national and international institutional investors. In this paper, we discuss the peculiarities of Nordic stewardship before concentrating on Norway and Norwegian stewardship, which is dominated by the state and the municipalities, but also to some extent by private investors. 

The structure of the paper is the following. In Part II we discuss the Nordic stewardship in light of international stewardship discussion, before concentrating on Norway and the current regulatory framework of stewardship there in Part III. In Part III, we reflect on the Norwegian choices on stewardship against global trends and especially jurisdictions in Asia with similar shareholder structures, with strong state and family shareholders. Part IV concludes with some reflections on why a stewardship code is not needed in Norway. What Norway does need, is a clear and mandatory regulation to ensure that Norwegian business and finance contribute to the transition to sustainability. A stewardship code would not be a sufficiently strong measure. Conversely, it could hold Norwegian business and finance back in the face of the rapid developments on EU and international level.

Stewardship Norwegian-Style: Fragmented and State-Dominated (but not without potential?)

In the context of corporate groups, related party transactions pose particular challenges. On the one hand, transactions within corporate groups are often economically desirable. The very raison d’etre of a corporate group may be to facilitate transaction between its constituent companies. On the other hand, the very frequency, volume, and depth of intragroup transactions make them particularly suitable vehicles for illicitly extracting wealth from a corporation at the expense of minority shareholders and creditors. Moreover, traditional techniques for policing related party transactions, such as judicial fairness review and or requirements that the transaction be approved by disinterested decision-makers can easily become impracticable where, as in the intragroup context, self-dealing transactions are the norm rather than the exception. It is therefore unsurprising that different legal systems have developed additional legal techniques for policing intra-group transactions in the context of corporate groups. The present contribution seeks to provide a survey over these different approaches and explain how they help to reduce the social costs of self-dealing.

Related Party Transactions and Intragroup Transactions

When a company suffers loss due to a wrongful act perpetrated against the company, the company’s shareholders suffer where the value of their shares or dividends decreases. However, in the UK and in Commonwealth jurisdictions, such shareholders have in principle no personal recourse against the wrongdoer because their loss is merely ‘reflective’ of the company’s loss; the loss is for the company alone to recover. This ‘reflective loss principle’ as it stands cannot be fully justified by the policy considerations offered in its support. I argue that the most convincing rationale for the principle is to preserve the primacy of the company’s internal governance arrangements in the corporate litigation context. I propose a framework reconstructing the reflective loss principle as a ‘priority rule’ under which resolution of the company’s claim takes precedence over the shareholder’s personal claim, but with an ‘exit exception’ that permits shareholders who exit the company to pursue their own claims. M...

Reconstructing the reflective loss principle

Since the UK adopted the world’s first stewardship code in 2010, stewardship codes have proliferated across Asia. Given the UK Code’s prominence, it is tempting to assume that every other stewardship code preforms the same function as the UK Code. This assumption belies the truth: all these codes – regardless of whether they have in fact drawn inspiration from the UK Code – have taken different trajectories due to each adopting jurisdiction’s distinctive institutional and legal context. 

Using empirical evidence and in-depth case studies of stewardship in Japan and Singapore, this article reveals how any reception of UK-style stewardship concepts is only skin-deep. Even where the text of stewardship codes in Asia resemble the UK Code in form, their functional impact on corporate governance significantly depart from, or even run counter to, the intended functions of the UK Code. The article illustrates how stewardship codes in Asia have been used as a convenient vehicle for local governments and/or market players to achieve their own particular interests through an inexpensive, non-binding, and malleable vehicle, the formal adoption of which sends a signal of “good corporate governance” to the rest of the world. While such practices explain and contextualize the widespread adoption of stewardship codes in Asia, they also compound the challenge of drawing positive or normative conclusions from this development. The observation advanced in this article is important as leading corporate governance scholars, prominent international organizations, and market participants, have appeared content to draw such conclusions unaware that stewardship codes generally do not fulfill a similar function to the UK Code in Asia. 

The article concludes by explaining how adopting globally recognized mechanisms of “good corporate governance” at a superficial formal level, and then altering their function to serve local purposes, appears to be a rising trend in corporate governance in Asia (and elsewhere). This phenomenon, which we coin “faux convergence”, calls for the re-examination of important and impactful theories about corporate governance convergence. As an initial foray, this article develops an expanded taxonomy of corporate governance convergence and lays the foundation for future research on “faux convergence”.

Diversity of Shareholder Stewardship in Asia: Faux Convergence

Appraisal is making a comeback in Japan. Until recently, it was an underutilized and largely forgotten legal transplant introduced by the Americans during the Occupation Period (1945-1952). Following a major reform to Japan’s corporate law with the enactment of the Companies Act in 2005, however, appraisal has drawn considerable academic attention and produced an unprecedented wave of appraisal litigation in Japan – much of it involving listed companies. The spotlight is now on appraisal’s function as a check on managerial and controlling shareholder conduct – but why are shareholders turning to appraisal when they have other options? With a sophisticated concept of ‘fair value’ and litigated with unique ‘non-contentious’ procedures, Japan’s appraisal is thoroughly Japanese – and effective compared to other shareholder remedies in Japan’s Companies Act. The Japanese success with appraisal proves that appraisal can play a central role in modern corporate law and governance – at least within a certain corporate governance context. It is also a timely reminder that shareholder remedies need not (and probably should not) be unmodified American legal transplants, and that above all, local adaptations and context matter.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2302908_code1855690.pdf?abstractid=2168965&mirid=3

Appraising Japan's Appraisal Remedy

Embraced by US managers in the 1980s as a lifeline in a sea of hostile takeovers, the poison pill fundamentally altered the trajectory of American corporate governance. When a hostile takeover wave seemed imminent in Japan in the mid-2000s, Japanese boards appeared to embrace this American invention with equal enthusiasm. Japan’s experience should have been a ringing endorsement for the utility of American corporate governance solutions in foreign jurisdictions – but it was not to be. Japan’s unique interpretation of the “poison pill” that was so eagerly adopted by Japanese companies in the mid- to late-2000s has turned out to be nothing like their potent American namesakes – and, in fact, the opposite of what would be expected by leading US academics who have built a cottage industry publishing on the US poison pill. 

Based on hand collected empirical data, we provide the first in-depth analysis for why Japan’s “poison pill” (defensive measures) is heading towards extinction – a watershed reversal that is unexplained in the Japanese literature and has almost entirely escaped the English language literature. By drawing on our hand collected data, case studies, and Japanese jurisprudence, we illuminate the unique and untold story of how one of the most discussed mechanisms of American corporate governance has worked almost entirely differently when transplanted to Japanese soil – the importance of which is heightened as Japan is by far the largest economy in which the poison pill has been tested outside of the United States. In addition, our analysis sheds light on the unexpected importance of Japan’s recently implemented corporate governance code and stewardship code – two Western legal transplants that have garnered considerable attention in the English language literature, but which have yet to be evaluated in light of their impact on defensive measures in Japan.

Land of the Falling 'Poison' Pill: Understanding Defensive Measures in Japan on Their Own Terms

Corporate groups, a ubiquitous feature of modern business, pose formidable challenges for common law courts relying on traditional corporate law doctrine. Arising out of a corporate group's recent bid to recover millions of dollars in lost profits from a former director and CEO who had diverted a core business, Goh Chan Peng v Beyonics Technology Ltd raised thorny issues of separate legal entity doctrine, single economic unit theory, and reflective loss shared by common law legal systems. Despite finding that the defendant had breached his duties to the ultimate holding company, the Singapore Court of Appeal absolved the faithless director from most of his liabilities, relying on limited domestic precedent to the exclusion of a rich body of Commonwealth jurisprudence – including the House of Lords’ landmark Johnson v Gore Wood decision. This note explores the paths not taken by the court, and highlights the pitfalls of a narrow, autochthonous approach to problems of common law doctrine.

Alan K. Koh

Papers

Reconstructing the reflective loss principle

Diversity of Shareholder Stewardship in Asia: Faux Convergence

Appraising Japan's Appraisal Remedy

Land of the Falling 'Poison' Pill: Understanding Defensive Measures in Japan on Their Own Terms

(Non‐)Enforcement of Directors’ Duties in Corporate Groups: Goh Chan Peng v Beyonics Technology Ltd