Shareholder Proposal Right in Public Corporations in China's Transitional Economy: From the Perspective of Shareholder Activism

AuthorQing Cao
Qing Cao
This paper is dedicated to find the appropriate approach to adopt
a new “shareholder proposal rule” for the improvement of the
corporate governance of Chinese public companies. This paper
argues that the current Chinese shareholder proposal rule is
primitive and not practical and it does not provide a mechanism for
the shareholders to seek remedies after their proposals are illegally
excluded by the board of directors. In this paper, the author spends
substantial effort on examining the Chinese shareholder proposal
rule which is in its infancy stage. Based upon the examination of
shareholder rules in nine representative jurisdictions, the author
stresses that the proposal right should be treated and protected as
one of shareholder’s fundamental rights. Unfortunately, the
existing Chinese law does a poor job on securing this right. After
demonstrating how the current corporate law and policies in China’s
transitional economy indirectly eviscerate and limit the shareholder
proposal right, this paper proposes that the Chinese legislators and
the government agencies, especially the China Securities Regulatory
Commission (CSRC), should notice this regulatory disadvantage and
promulgate a practical and integrated shareholder proposal rule in
order to encourage shareholder’s participation in corporate
Since this paper is an exploration of the shareholder proposal
rule, it will begin with an introduction of the shareholder proposal
and the shareholder proposal rule. The second section of this
chapter will focus on the comparative study of the shareholder
proposal rules in nine representative jurisdictions, which provides a
PhD candidate, School of Law, City Universit y of Hong Kong.
basis for the analysis of the Chinese shareholder proposal rule. An
introduction of the shareholder activism in which shareholder
proposals are used as a main legal device is provided in the third
section, and the fourth section focuses on the theoretical discussion
of why shareholders should be granted the right to submit proposals
to corporations. In the fifth section, the author will give a detailed
analysis of the shareholder proposal rule. The last section draws the
A. An introduction to shareholder proposal
In this section the author will make a comprehensive introduction
of shareholder proposal and the “shareholder proposal rule”. The
objective is to enable the reader to fully understand the background
of this article. It will begin with an explanation of the shareholder
proposal and the utilization of shareholder proposal in the context of
shareholders’ meeting, which is the main platform for the
shareholders to participate in corporate governance. After that, the
author will make a general explanation of “shareholder proposal
rule” and its emergence in the United States.
1. Shareholders and meeting of shareholders
Modern public corporations 1 are generally structured with
several tiers of organs charged with different powers and functions.
Theoretically, the shareholders are collectively on the top of the
organizational structure, since they are regarded as the ultimate
owners of the corporation.2 However, due to the large number of
shareholders in a corporation, it is impossible to allow every
shareholder to participate in the daily management of the
corporation. Therefore, the corporation law gives the power of
supervising and monitoring the operations of the corporation to the
board of directors who are elected by the shareholders, and then the
board will appoint senior management to operate the daily business
of the corporation. Thus, the shareholder’s financial interest3 in the
corporation is guaranteed only when the directors and senior
1 Here pu blic corporations mean publicly held corporations whose sha res are listed in the stock
exchanges and can be freely transferred, see generally ROBERT W. HAMILTON, THE LAW OF
2 There are many theories on the nature of the corporati on. Some of the theories suggest that the
shareholders are just the supp lier of the capital such as t he nexus of contract th eory, see id. at 6-12.
But in practice, the shareholders are collectively regarded as the owner of the corporation, while the
corporation itself enjoys its own legal p ersonality.
3Basically, the shareholder’s fi nancial interest in the corporati on comes from the dividend
distributed by the corporation and selling th e shares in a higher price which depend upon the well
financial performance of the corporation, see generall y Julian Velasco, The Fundamental Rights of The
Shareholder, 40 U.C. DAVIS L. REV. 407 (2006), available at
management can skillfully fulfill their fiduciary duties to the
corporation.4 This kind of separation of ownership and control is a
common feature of modern public corporation. 5 Noticing this
feature as the economic background, legislators around the world had
modified corporation laws to be in accordance with the transitioned
ownership structure and provided mechanisms to protect the interest
of shareholders.6
Therefore, the regulations on public corporations should try to
minimize the negative effect of this agency problem.7 They should
provide mechanisms for the shareholders to monitor the activities of
the directors and corporate officers, and empower them with the right
to make decisions on the fundamental matters of the corporation in
certain circumstances. One of these mechanisms is the
shareholders’ meeting.8
As prescribed by the corporation laws 9 and the charters or
bylaws of the corporations, the corporations are required to convene
all the shareholders to have an annual meeting to vote on
fundamental matters of the corporation. 10 Besides the annual
general meeting, an extraordinary general meeting can also be called
by the board of directors or the shareholders who own certain
percentages of the outstanding shares independently or jointly, or by
the corporate officers11 under certain circumstances.
A shareholders’ meeting essentially consists of three steps: (1) the
preparation of the meeting; (2) the meeting/voting itself; and (3) the
judicial review of whether the directors, the controlling shareholders,
4 The directors are considered a s the trustees of the corporation. And they bear a fiduciary duty to
the shareholders. Generally speaking, the fiduciary duty comprises two duties: duties of loyalty and
duty of care, see HAMILTON,supra note 1, at 378.
5 This feature was first identified by the U.S scholars Berle and Means, see ADOLF A. BERLE,JR.&
6 Christine L. Ayotte, Reevaluating the Shareholder Proposal Rule in the Wake of Cracker Barrel
and the Era of Institutional Investors, 48 CATH.U.L.REV. 511, 512 (1999) (“For example, in the
United States, the Securities Act of 1933 was promulgated to address matters such as the disclosure of
corporate information to shareholders si nce they were in a disadvantageous positi on. It was
considered as the first step in en suring corporate accountability to the shareholders through sh areholder
knowledge and participation .”).
7 Agency problem is a trust problem between the prin cipal and the agent when the agent does not
perform his duty well. The agency problem in the public corporations will be discussed in the third
chapter as the reason for supporting the i ncorporation of shareholder proposal ru le in the corporation
law framework, see infra Part 3.2.
8The rule on the shareholder’s meeting is an indispensable part of the corporation law, see, e.g.,
Canadian Business Corporation Act §§ 132-154; Code de Commerce § 3 (art. L. 225-96- L 225-126)
(Fr.); Germany Federal Stock Corporation Act §§ 118, 241; Del. Gen’l Co. Law §§ 211-233.
9 See, e.g., MODEL BUS. CORP.ACT § 7.01(a) (1984). (A shareholders’ meeting shall be held
annually at a time stated in or fixed in accordance with the bylaws.).
10 Due to the time limit, some instituti onal investor can not attend the shareholder’s meetings of all
its portfolio companies, they may gra nt its voting right through proxy and other voting agreement.
11 See HAMILTON,supra note 1, at 204.

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