The Law and Practice of Shareholder Inspection Rights: A Comparative Analysis of China and the U.S.
Shareholder inspection rights allow a shareholder to access relevant documents and records of their company, so as to address the problem of information asymmetry inherent in the corporate form, and facilitate the monitoring of the operation of the company and if necessary, the bringing of further action for remedies.
In the United States, all states have now codified shareholder inspection rights, albeit with some significant differences amongst them. Drawing upon overseas experiences such as the US law, China has introduced the regime of shareholder inspection rights, but with some important adaptions made to its local environment. By providing access to relevant information, inspection rights have potential to serve as an effective mechanism to deal with different types of agency problems in the company: not only the manager–shareholder conflict that is the most serious agency problem in the United States, but also the conflict between majority and minority shareholders which mainly plagues the corporate governance system in China.
However, due to institutional differences, variations may exist between the two jurisdictions as to how inspection rights are structured and enforced. We thus compare shareholder inspection rights in China and the United States that is mostly represented by Delaware, the preeminent corporate law jurisdiction in the United States, both in terms of the law on the books and the law in practice.
We find that despite some general similarities, there are significant differences in the inspection rights regime between the two jurisdictions. For instance, the Chinese law tends to have detailed rules on the application of inspection rights, such as the list of corporate documents that can be inspected and the list of circumstances where improper purposes on the part of the applicant shareholder can be found so as to deny them the right to inspect relevant documents. In contrast, the Delaware statute is more standards based, leaving significantly larger room for the court to exercise ex post review of many issues, including the scope of corporate documents produced by the defendants and any restrictions on inspection rights. This is largely due to the fact that standards cannot be effectively deployed in China, where the judiciary is not sufficiently sophisticated on business law topics and may lack independence from the state.
Perhaps because of the political power of the state and of controlling shareholders, in striking the balance between shareholders and corporate management, Chinese law is considerably more favorable to shareholders than the Delaware law. For example, while both jurisdictions require shareholders to have a proper purpose in requesting documents, the requirements under the Chinese law are less stringent than those under the Delaware law. The empirical data we produced is consistent with the claim that Delaware seems to be more tolerant of attempts to restrict the exercise of inspection rights through the corporate charter, bylaws or other management actions.
We think that the above difference arises in large part because corporate governance in China is a three-party game that involves not only shareholders and managers but also crucially the state. As a result of China’s socialism, the state plays multiple roles in the corporate arena, being an intrusive regulator, a major shareholder, and a defender of “national champions” in which it may or may not hold an equity stake. The state has traditionally held a majority of outstanding shares in, and is the controlling shareholder of, many listed companies. Further, the state has control over, and indirect economic interests in, some of the main institutional investors in China, including the national social security funds and the funds of state-owned financial institutions such as banks, securities firms and insurance companies. Due to the crucial role the state has in so many companies, it is unsurprising that the Chinese company law adopts a pro-shareholder stance on many issues, including inspection rights. This may also help explain why corporate governance in China is centered around the shareholder meeting rather than the board of directors as is the case in the United States.
Further, while Chinese inspection right cases generate useful information for bringing subsequent shareholder suits, our empirical findings show this use seems to be less frequent than in Delaware: as shown earlier, the ratio of subsequent cases to sampled cases in China is 12.4 percent, which is lower than that in the United States (17.9 percent). A plausible explanation for this difference is that China and the United States rely on different strategies for reducing agency costs in the company. In brief, due to the difference in the structure of share ownership and thus the collective action problem for the shareholders, China relies more on governance strategies while the United States more on regulatory strategies in the form of public enforcement actions by regulators and private litigation by shareholders.
Overall, we find that shareholder inspection rights play an important role in both Chinese and the US legal systems. While Chinese corporate governance and American corporate governance face different sets of agency cost problems, improved shareholder monitoring creates important benefits in both of them. There exist, however, some important differences in the structure and enforcement of the inspection rights regime between the two jurisdictions, which can be largely explained by reference to their different contexts of political economy.