Company law Litigation
About 9 min read

Can Foreign Company Shareholders Represent the Company in Chinese Litigation?

Written by Zhang&Partners · Guangzhou, China

Shareholder derivative lawsuit in China infographic: Company Law Article 151, Civil Procedure Law standing rules, and cross-border litigation considerations for foreign companies
The Company Law and Civil Procedure Law intersection—shareholder derivative action rules, procedural standing, and jurisdictional considerations—clarifies when foreign shareholders can sue in Chinese courts.
Follow us

Internal corporate governance disputes are a recurring challenge for foreign companies doing business in China. A common practical question arises: where directors or senior officers of a company incorporated overseas (e.g., in the United States, the Cayman Islands, or the British Virgin Islands) cause harm to the company's interests, and the company's internal governance mechanisms have failed — for instance, where the board of directors or supervisory board is unwilling to pursue accountability — can a shareholder of that foreign company bring a derivative action on the company's behalf in a Chinese court?

This question sits at the intersection of the scope of application of the Company Law of the People's Republic of China (the "Company Law") and the procedural rules of the Civil Procedure Law of the People's Republic of China (the "Civil Procedure Law"), and carries significant practical implications for shareholders of foreign companies with substantial interests in China.

Legal Framework

Scope of Application of the Company Law

Article 2 of the Company Law provides: "For the purposes of this Law, the term 'company' refers to a limited liability company or a joint-stock limited company incorporated within the territory of China in accordance with this Law."

On a plain reading, the substantive provisions of the Company Law apply only to companies duly incorporated within China. For companies incorporated overseas, substantive matters such as corporate governance structures and shareholder rights are, in principle, governed by the law of the place of incorporation.

The Shareholder Derivative Action Mechanism

Article 151 of the Company Law establishes the shareholder derivative action (also known as the shareholder's representative action). Under this provision, where a director or senior officer violates laws, administrative regulations, or the company's articles of association in the performance of their duties, causing loss to the company, shareholders of a limited liability company, or shareholders of a joint-stock limited company who individually or collectively have held at least one percent of the company's shares for 180 consecutive days or more, may make a written request to the supervisory board (or the supervisor of a limited liability company without a supervisory board) to bring an action in the people's court. Where a supervisor engages in such conduct, the aforementioned shareholders may make a written request to the board of directors (or the executive director of a limited liability company without a board of directors) to bring an action in the people's court.

If the supervisory board or board of directors refuses to bring an action upon receipt of the shareholder's written request, or fails to initiate an action within 30 days of receipt of the request, or if the circumstances are urgent such that failure to bring suit immediately would cause irreparable harm to the company's interests, the shareholder shall have the right to bring an action directly in the people's court in their own name for the benefit of the company.

The Court's View: Procedural Rights Are Governed by the Law of the Forum

Although Article 2 of the Company Law limits the application of its substantive provisions to companies incorporated within China, Chinese courts have taken the position in judicial practice that the right to bring an action is a procedural right and should therefore be governed by the law of the forum — i.e., the Civil Procedure Law — rather than by the scope provision of the Company Law.

The Civil Procedure Law does not restrict shareholders of companies incorporated overseas from bringing derivative actions in Chinese courts. In other words, the procedural provisions of the Civil Procedure Law regarding standing to sue, conditions for initiating an action, and related matters do not differentiate based on the place of incorporation of the company. So long as the conditions for filing suit under the Civil Procedure Law are satisfied, shareholders of foreign companies are equally entitled to initiate civil proceedings — including derivative actions — in Chinese courts.

Practical Analysis

Distinguishing Between Substantive and Procedural Law

The core legal reasoning in this area turns on the distinction between substantive and procedural law:

  • Substantive law: The internal governance relations of a foreign company (including the directors' and officers' duties of loyalty and diligence owed to the company) are generally governed by the law of the company's place of incorporation. When adjudicating a derivative action, a Chinese court may need to ascertain and apply foreign law to determine whether the conduct of the defendant director or officer breached their duties to the company.
  • Procedural law: Whether a shareholder has standing to bring suit in a Chinese court is a procedural question and should be determined under Chinese law. Neither the Civil Procedure Law nor its judicial interpretations restrict plaintiff standing to shareholders of companies incorporated in China. Shareholders of foreign companies therefore have standing to sue.

Determining Jurisdiction

A shareholder of a foreign company seeking to bring a derivative action in a Chinese court must still satisfy the jurisdictional requirements under Chinese law. Typically, jurisdiction may be established based on the following connecting factors:

  • Defendant's domicile: If the defendant director or officer has a domicile within China, suit may be brought before the people's court at that domicile;
  • Place of the tortious act: If the conduct alleged to have harmed the company's interests occurred within China, the people's court at the place of the tortious act may exercise jurisdiction;
  • Place of contract performance or location of assets: Depending on the nature of the case.

Status of Parties in the Derivative Action

In a derivative action, the shareholder brings suit in their own name, but the benefit of the litigation accrues to the company. Under Article 24 of the Supreme People's Court's Provisions on Several Issues Concerning the Application of the Company Law (IV), when hearing a shareholder derivative action, the people's court shall join the company as a third party to the proceedings.

Practical Recommendations

  • Do not bypass the pre-suit demand requirement: Shareholders of foreign companies should, in principle, first make a written demand on the company's internal supervisory body (supervisory board or board of directors) to bring suit before initiating a derivative action, unless the circumstances are urgent and failure to sue immediately would cause irreparable harm to the company's interests.
  • Prepare materials for proof of foreign law in advance: For substantive questions involving the application of foreign law (e.g., whether a director or officer breached their duties), shareholders should prepare evidentiary materials concerning the relevant foreign legal provisions in advance and, where necessary, engage foreign law experts to issue legal opinion letters.
  • Mind the shareholding duration requirement: For shareholders of joint-stock limited companies, the requirement of "individually or collectively holding at least one percent of the company's shares for 180 consecutive days or more" must be satisfied. Shareholders of limited liability companies are not subject to this shareholding duration or percentage requirement.
  • Evaluate litigation costs and feasibility: Cross-border derivative actions involve additional procedures such as proof of foreign law and notarization and authentication of foreign evidence, resulting in relatively higher litigation costs. It is advisable to fully assess the economic viability of litigation and the availability of enforceable assets belonging to the defendant within China before commencing suit.

Conclusion

It is legally viable for shareholders of foreign companies to bring derivative actions in Chinese courts. The procedural provisions of the Civil Procedure Law do not restrict standing to sue based on whether the company is incorporated in China or overseas, and the right to initiate suit, being a procedural right, is governed by the law of the forum. This legal position provides an important remedial avenue for shareholders of companies incorporated overseas that have significant business interests in China.

That said, each case must be evaluated on its own facts, with a comprehensive assessment of jurisdiction, applicable law, litigation costs, and other relevant factors. It is recommended to consult with professional legal counsel experienced in foreign-related litigation before initiating suit to formulate a workable litigation strategy.

Request a consultation

This article is general information only, not legal advice for your matter. For professional assistance, consult a PRC-licensed lawyer at Zhang&Partners.