A Comparative Study of Funding Shareholder Litigation

Transcription

1 A Comparative Study of Funding Shareholder Litigation

2 Wenjing Chen A Comparative Study of Funding Shareholder Litigation 123

3 Wenjing Chen East China University of Political Science and Law (ECUPL) Shanghai China ISBN ISBN (ebook) DOI / Library of Congress Control Number: Springer Nature Singapore Pte Ltd This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Printed on acid-free paper This Springer imprint is published by Springer Nature The registered company is Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore , Singapore

4 Acknowledgements This book is mainly based on research conducted in Financial Law Institute, Ghent University, where it took shape under the guidance of my Ph.D. promoter Prof. Dr. Hans De Wulf. I would like to express my gratitude to Prof. Hans De Wulf for the guidance and support throughout the whole course of my research. I would also like to thank other members of my guidance committee, Prof. Stefaan Voet from KUL and Prof. Alain François from VUB for their insightful comments on my research. My sincere appreciation also goes to members of the Financial Law Institute for such great atmosphere for academic research. I would also like to acknowledge the funding provided by the China Scholarship Council to financially support my research in Ghent. Last but not least, my deepest gratitude goes to my family, especially to my husband Dr. Tiancheng Jiang who supported and encouraged me during my days in Ghent. The completion of this book would not have been possible without love and support from my family. v

5 Contents 1 Introduction A General Evaluation of Shareholder Litigation: Pros and Cons Positive Externalities Brought by Shareholder Litigation Potential Drawbacks of Shareholder Litigation The Proposal of Funding Shareholder Litigation What Is the Funding Problem with Shareholder Litigation? Why Funding Issue Is Crucial for Shareholder Litigation? How Will This Book Investigate Funding Issue of Shareholder Litigation? The Structure of the Comparative Study The Structure of the Book The Countries Chosen for the Comparative Study The Scope of the Comparative Study Public Funding Third Party Litigation Funding (TPLF) Lawyer s Funding Company s Funding (Indemnity Cost Orders, ICO) An Overview of Shareholder Litigation Introduction Shareholder Direct Actions Shareholder Derivative Actions Shareholder Derivative Actions in China Shareholder Derivative Actions in the United Kingdom Shareholder Derivative Actions in the United States vii

6 viii Contents 2.4 Shareholder Class Actions Class Actions in China Class Actions in the United Kingdom Class Actions in the United States Rules on the Costs and Funding of Shareholder Litigation General Rules on the Costs of Shareholder Litigation Costs Arising The Cost-Shifting Rule Shareholder Litigation Is Expensive and It Lacks Incentives for Litigants How to Fund Shareholder Litigation: General Funding Techniques Funding Regimes in General Self-funding Legal Aid Funding by Lawyers Public Funding Third Party Litigation Funding (TPLF) Legal Expenses Insurance Funding Shareholder Litigation: Public Funding An Overview of Public Funding The Analysis of Public Interest Element Public Funding of Derivative Actions: The Israeli Case Statutory Provisions Under the Israeli Law Rethinking Section 205A Dilemmas in Public Funding of Derivative Actions Public Funding of Class Actions: The Canadian Case Introduction Ontario Class Proceeding Fund The Quebec Fonds D aide Aux Recours Colleftifs (the Quebec Fonds) and Its Comparison with the Ontario Class Proceedings Fund The Potential for Public Funding in China Introduction Shareholder Litigation in China: How Does It Function Typical Characteristics of Chinese Judicial System The Selection of an Authority Taking Charge of Public Funding Conclusion Summary

7 Contents ix 5 Third Party Litigation Funding (TPLF) of Shareholder Litigation An Overview of TPLF The Traditional Avoidance of Champerty and Maintenance The Economic Analysis of TPLF Ethical Issues in TPLF Externalities Brought by the Use of TPLF Third Party Litigation Funding: The Australian Case Statutory Exceptions and Access to Justice Case Studies Regulations on TPLF in Australia Current Practice and the Way Forward Third Party Litigation Funding: The English Case The Origins of TPLF in England Rules Regarding TPLF Third Party Litigation Funding: The American Case The Traditional Prohibition of Champerty and Maintenance Ethical Concerns Concerns and Policy Arguments Brought by the Use of TPLF for Shareholder Litigation The Third Party Funder s Financial Adequacy The Opt-in and Opt-out Dilemma in Funded Class Actions The Termination of Third Party Litigation Funding The Risk of Refusal to Share The Potential for TPLF in China The Current Approach to Fund Shareholder Litigation in China Why Does China Need TPLF? The Legal Basis for TPLF Under the Current Legal System Potential Problems Brought by the Introduction of TPLF in China: From the Perspective of Current Legal System Summary Funding Alternatives Through Fee or Cost Arrangements Funding by the Company (Indemnity Cost Orders ICO in Shareholder Derivative Actions) The Origin and Working Mechanism of ICO Problems with ICO Summary

8 x Contents 6.2 Funding by Lawyers: The First Option (Conditional Fee Agreements, CFAs) The Nature of CFA Funding Derivative Actions with a CFA Funding by Lawyers: The Second Option (Contingency Fee Arrangements, CGFAs) The Conflict of Interests and the Agency Problem Under a CGFA CGFAs and Shareholder Derivative Actions in the US: A Potential Rise in Case Volume Information Asymmetry in CGFAs Lawyers Ethical Issues in CGFAs The Potential for CGFAs: The English Experience Legal Practice of Funding Alternatives (ICOs, CFAs and CGFAs) in China Legal Practice of CGFAs in China and Its Potential to Fund Shareholder Litigation Potential for CFAs to Fund Shareholder Litigation in China The Potential for ICOs to Fund Shareholder Derivative Actions in China Summary Policy Proposals for Solving Funding Problems with Shareholder Litigation in China Overview Option 1 Public Funding Option 2 Third Party Litigation Funding (TPLF) Option 3 Reformed Indemnity Cost Orders Conclusion The Problem of Funding Shareholder Litigation Public Funding From the Social and Political Perspectives From the Perspective of Chinese Judicial System The Selection of Regulatory Authority of Public Funding Third Party Litigation Funding Positive Externalities Brought by the Use of TPLF Concerns Brought by the Use of TPLF Concerns and Policy Arguments in the Special Context of Shareholder Litigation Proposals for China Regarding the Use of TPLF

9 Contents xi 8.4 Funding Alternatives Indemnity Cost Orders (ICOs) Lawyers Funding Contingency Fee Arrangements Lawyers Funding Conditional Fee Agreements Bibliography List of Selected Cases List of Selected Legislation

10 Abbreviations ABA AFSL ALF ALI ASIC ATE ATLA BTE CA 2006 CCL CFA CGFA CJC CL CPL CSRC CWDF DBA FCA Act FRCP GDP GPCL ICJ ICL ICO ISA JSLC LEI LFO The American Bar Association Australian Financial Services Licence The Association of Litigation Funders The American Law Institute The Australian Securities and Investment Commission After-the-Event insurance The American Trial Lawyers Association Before-the-Event insurance Companies Act 2006 of the United Kingdom Chinese Contract Law Conditional Fee Agreement Contingency Fee Arrangement The Civil Justice Council Company Law of the People s Republic of China Civil Procedure Law of the People s Republic of China The China Securities Regulatory Commission The China Women s Development Foundation Damages Based Agreement The Federal Court of Australia Act Federal Rules of Civil Procedure Gross Domestic Product The General Principle of the Civil Law of the People s Republic of China Institute for Civil Justice The Israeli Company Law Indemnity Cost Order The Israel Securities Authority Joint Stock Limited Company Legal Expenses Insurance The Law Foundation of Ontario xiii

11 xiv Abbreviations LLC Limited Liability Company MALF The Measures for the Administration of Lawyer s Fees of the People s Republic of China MBCA The Model Business Corporation Act MPLC Measures for the Payment of Litigation Costs of the People s Republic of China NPO Non-Profit Organization PIOB Public Interest Oversight Board PRC The People s Republic of China RCSC The Red Cross Society of China SOE State Owned Enterprise SPC The Supreme People s Court of the People s Republic of China The PSLRA 1995 The Private Securities Litigation Reform Act 1995 TPLF Third Party Litigation Funding UK The United Kingdom US The United States U.S.C. United States Code

12 Summary Litigation is costly. The concern of high litigation costs would be greater than average in the context of shareholder litigation, where shareholder claimants would bear high financial risk when accessing to justice. In a collective lawsuit like shareholder litigation, litigation costs paid by shareholder claimants is highly likely to exceed benefits brought by a successful claim since proceeds must be distributed among group members, making such claims under-valued. To ensure the sound functioning of shareholder litigation and facilitate injured shareholders claim for damages before the court, the study on how to remove funding obstacles with shareholder litigation is of importance. Shareholders disincentives as a consequence of funding difficulties would, to a certain extent, negatively affect the functioning of shareholder litigation and further lead to a failure on judicial approach to redress remedies. Shareholder litigation in China is a good case to clarify the importance of funding issues for the functioning of shareholder litigation and the implementation of shareholders right to sue. China introduced shareholder derivative litigation in 2006 but empirical research ( ) suggests that the functioning of it is not good as expected. Shareholder class actions have similar problems. Through a comparative study, this book considers that funding difficulties confronted with potential shareholder claimants contribute to the failure of shareholder litigation. Neither in China, nor has it been specified, in statutory provisions or case law of some other countries where shareholder litigation is adopted, how such actions should be properly funded. As a matter of fact, funding problems with shareholder lawsuits may largely discourage potential shareholder litigants who bear high financial risk in pursuing such a claim, while they may not have much to gain. In consideration of the lacks of incentives for shareholder claimants, effective funding techniques should be in place to avoid the death of shareholder litigation. This book concentrates on examining, in a functionally comparative way, whether there are proper financing methods for shareholder plaintiffs to overcome financial obstacles, and also presents an in-depth analysis on how they work. There are two main research questions this book will address: (1) how shareholder litigation is funded in selected countries; (2) which funding technique(s) is xv

13 xvi Summary (are) applicable in China to finance shareholder litigation. This book attempts to, through a comparative way, investigate funding techniques in selected countries, including lawyer s funding (contingency fee arrangements and conditional fee agreements), company s funding (indemnity costs orders for shareholder derivative litigation in England and Wales), public funding (funding of private litigation by public authorities notably in Israel and Canada) and third party litigation funding. The aim of the book is to examine whether funding techniques investigated above are workable in financing shareholder litigation, potential problems caused in each technique, proper solution to such problems, and the potential of those funding methods for China in the context of its legal and social background. In terms of funding techniques in selected countries, Chap. 4 contains an insightful analysis on public funding uniquely adopted by Israeli and Canadian (mainly in Ontario and Quebec) legal regime. Main finding in this regard is that public funding could be used to support shareholder litigant to pursue a lawsuit if several practical dilemmas, such as, the selection of a proper public authority administering public funding, designing a reimbursement system based on the gains of previous applicants, are solved. When public funding s potential for China is considered, it is extremely important to associate this issue with China s social and legal background. For instance, the concern of inside system might largely contribute to the infeasibility of public funding in China. The interplay between the government and public authorities administering public funding might negatively affect the independent functioning of public funding, which is precisely the core requirement of this approach. A conclusion is drawn in this respect that public funding is not suitable to finance shareholder litigation in China currently, while it might be appropriate for China in the future in consideration of reforms on the political and judicial system that is likely to be conducted in the future or are already ongoing now. Chapter 5 of this book mainly presents a comprehensive study on third party litigation funding (TPLF) and its potential for China. Cores issues in relation to the use of TPLF are analysed through a comparative study of the US, the UK and Australia, three countries where there already is some experience with this mechanism. The use of TPLF creates positive externalities, such as, facilitating the access to justice; indirectly deterring potential wrongdoers. On the other hand, concerns, such as the confusion of lawyer s duty of loyalty, are raised. In order to regulate the proper use of TPLF and meanwhile prevent negative effects brought by it, regulations should be adopted. The study of the practice of TPLF in Australia, the UK and the US demonstrates that codes on certain aspects, such as the funder s ethical issues, could be imposed to ensure the proper use of TPLF. This chapter then analyses its potential for China and reaches a conclusion that TPLF could be adopted to fund shareholder litigation in China, but with cautious. Reforms on PRC Contract law need to be carried out for solving potential problems brought by the use of TPLF. Lawyers funding (contingency fee arrangements, CGFAs and conditional fee agreements, CFAs) and company s funding (indemnity cost orders, ICOs) are investigated in Chap. 6 of this book. The main problem with ICOs lies in its

14 Summary xvii procedural uncertainties. For instance, whether the eligibility of an ICO application contains the assessment of the applicant s financial capacity; under what circumstances could an ICO be awarded to the applicant. Since statutory rules do not set clear standards in relation to issues indicated above, ICO s practice in England generally refers to case law such as Wallersteiner v. Moir (No 2) and Smith v. Croft, which, however, easily make the procedure develop into a costly mini-trial. In terms of ICO s potential for China, this book proposes a reformed approach under which an ICO could be awarded if the court allows the claim to proceed as a derivative lawsuit. Two forms of lawyers funding studied in this book are all based on the no win, no fees principle, while CGFAs are associated with the damages granted by a successful suit and CFAs are only in relation to the outcome of a case (win or lose). Both of these two funding techniques have a common concern about lawyer s moral hazard, mainly referring to a condition where the lawyer s interests and clients are divergent from each other. In addition, the risk of refusal to pay lawyer s fees was typically revealed in the Grandall v. Weiguan 2012 case. In China, lawyers might be further discouraged to conclude either a CGFA or a CFA with shareholder claimants to finance shareholder litigation considering the fact that Chinese courts are resistant to mass litigation. With regards to lawyers funding, this book, in summary, argues that CGFAs and CFAs are not suitable to finance shareholder litigation in China. Based on the functionally comparative studies on existing funding techniques, the principal conclusion of this book is reached that a reformed indemnity cost order and third party litigation funding could be used to finance shareholder litigation in consideration of China s existing legal and social context, while certain reforms should be carried out firstly to ensure the sound functioning of those funding mechanisms. Policy proposals about the potential use of indemnity cost orders and third party litigation funding are then specifically presented in Chap. 7 of this book.