The legal mechanism of an indirect claim in Russia and China: a comparative study
The article discusses the objectives, features and procedures related to the filing of indirect claims. For the further development of this institution in Russia, the functions of the Chinese supervisory Board (observer) in an indirect claim, the principle of cross-claims, as well as the mechanism of "exhaustion of internal remedies of the company" are considered in detail. Based on a comparative study, the author puts forward proposals to optimize the legal regulation of indirect claims in Russian legislation.
Keywords: China, law, indirect claim, corporation control body, supervisory board, corporate governance.
The institution of indirect action <2> came from common law countries. It was developed as one of the instruments of equity law in the 19th century and is a major institutional innovation in the field of corporate law in common law countries. An indirect claim is understood to be a claim brought by a participant in a corporation (usually a business company) in the interests of this corporation, in the satisfaction of which such a participant has an indirect (indirect) interest <3>.
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<2> Shareholders' responsible action - a claim brought on the initiative of representatives of shareholders (participants).
<3> See: Encyclopedia of Solutions. An indirect claim of a participant (shareholder) of a business company.
The need to single out an indirect claim in Russia was generally supported by scientists <4>. However, it should be recognized that the theory of indirect claim in Russia is very scarce <5>.
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<4> See for example: Bushev A.Y. Joint-stock law. Questions of theory and judicial arbitration practice / A.Y. Bushev, O.Y. Skvortsov. M., 1997. pp. 94-95; Abolonin G.O., Class actions in civil proceedings: abstract of the dissertation ... cand. Jurid. Sciences / G.O. Abolonin. Yekaterinburg, 1999. p. 10.
<5> See for example: Erokhova M.A. Procedural features of corporate disputes in Russian law: collective and indirect claims. Joint stock company. 2016. N 11. P. 177.
In accordance with Part 1 of Article 225.1 of the Arbitration Procedural Code of the Russian Federation dated 07/24/2002 N 95-FZ (as amended on 12/28/2020), a corporate dispute is "a dispute related to the creation of a legal entity, its management or participation in a legal entity that is a commercial organization, as well as a non-profit organization uniting commercial organizations and/or individual entrepreneurs". As follows from clause 1 of Article 65.2 of the Civil Code of the Russian Federation, the participants of the corporation (including the participants of LLC and shareholders of JSC) have the right to: (1) demand, acting on behalf of the corporation (clause 1 of Article 182), compensation for losses caused to the corporation (Article 53.1); and (2) to challenge, acting on behalf of the corporation (paragraph 1 of Article 182), transactions made by it on the grounds provided for in Article 174 of the Civil Code of the Russian Federation or laws on corporations of certain organizational and legal forms, and to demand the application of the consequences of their invalidity, as well as the application of the consequences of the invalidity of void transactions of the corporation. These articles provide the legal basis for the application of an indirect claim in corporate cases.
Russian judicial practice explains and clarifies the theoretical rationale for the implementation of this institution. For example, the Supreme Court of the Russian Federation, in its Ruling on Economic Disputes of the Supreme Court of the Russian Federation dated 08/26/2016 in case No. 305-ES16-3884, emphasizes that "the interest of a legal entity, which is ensured by the protection of subjective law, in this case is derived from the interests of its participants, since the interests of society are not just inextricably linked with the interests of participants, they are predetermined they, and, consequently, the satisfaction of the interests of the company ensures the satisfaction of the interests of its participants" <6>.
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<6> The ruling of the Judicial Board for Economic Disputes of the Supreme Court of the Russian Federation dated 08/26/2016 in case No. 305-ES16-3884, A41-8876/2015.
An indirect claim is a means of resolving a conflict between the participants of a legal entity and its bodies, which often neglect the interests of the corporation. From the point of view of substantive law, a participant in a corporation (usually a minority shareholder) who brings such a claim, acting not on his own behalf, but on behalf of the corporation <7>, directly protects the interest of the corporation (in defense of all other participants) and only indirectly his own interest.
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<7> It is worth paying attention to the fact that Russian substantive legal norms governing the rights of corporate participants to file indirect claims in defense of the interests of the corporation and procedural norms follow different approaches to determining the proper plaintiff in such a case. For example, it follows from Article 225.8 of the APC of the Russian Federation that, while acting on its own behalf, a corporation participant files an indirect claim to protect the interests of the corporation, and not on behalf of the corporation. With the adoption of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated 06/23/2015 No. 25 "On the application by courts of certain provisions of Section I of Part One of the Civil Code of the Russian Federation" and the Resolution of the Plenum of the Supreme Court of the Russian Federation dated 06/26/2018 No. 27 "On challenging large transactions and transactions in which there is an interest", this conflict was resolved in favor of the Civil Code of the Russian Federation.
Prior to amendments to the Civil Code of the Russian Federation by Federal Law No. 99-FZ dated May 5, 2014, the range of subjects entitled to file an indirect claim for damages caused to the company is limited by the company itself and its participants (shareholders) in accordance with paragraph 5 of Article 44 of the Law "On LLC" and paragraph 5 of Article 71 of the Law "About JSC." However, as follows from paragraph 2 of paragraph 4 of Article 65.3 of the Civil Code of the Russian Federation, members of the collegial management body of the corporation have the right to demand compensation for losses caused to the corporation (Article 53.1 of the Civil Code of the Russian Federation), to challenge transactions made by the corporation.
There is an obvious contradiction between Article 65.3 of the Civil Code of the Russian Federation and the above-mentioned articles of the laws on business companies. Although, in accordance with paragraph 4 of Article 3 of Law No. 99-FZ of May 5, 2014, the Civil Code of the Russian Federation certainly has priority over the legitimate ones (the subsequent ones are applied in the part that does not contradict the Civil Code of the Russian Federation), there is a situation in practice when arbitration courts ignore the novel of the Civil Code of the Russian Federation, leaving without consideration the claims of members of the board of Directors <8>. On the one hand, this proves that, taking into account the "modern corporate legislation of the Russian Federation approaching the ideal" <9> after the reform of civil law, it should be coordinated even more; on the other hand, it can be noted that being the substantive legal basis for an indirect claim in corporate matters, the relevant provisions of the Civil Code of the Russian Federation and the laws on business entities dealing with this issue are not sufficiently detailed and need further development.
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<8> See, for example, No. 13AP-24992/18: "The Law on an LLC does not grant a member of the board of directors of the company the right, without a power of attorney, to apply to the court on behalf of the company with a claim for damages caused to this company by the general director."
Gutnikov O.V. Trends in the development of corporate law in modern conditions // Journal of Russian Law. 2020. N 8. P. 60.
Being a special controlling body of a corporation in China, which is on the same level as the board of directors, having no subordination relationship, the supervisory board (if no supervisory board is created in a limited liability company <10> - an observer) It is important there to bring an indirect claim <11>. Perhaps a comparison with Chinese laws in terms of legislative technique can give us some ideas.
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<10> Next - COO.
<11> As in Russia, members of the collegial body of the corporation in China are also among the subjects entitled to file an indirect claim for damages caused to the company. For more information, see below.
In earlier Chinese corporate rules, the right to submit an indirect claim is directly determined by one of the powers of the supervisory Board (observer) <12>, but it was abolished during the codification of the PRC Law "On Companies".
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<12> According to clause 6, clause 1, Article 65 of the Letter on Standards for a Limited Liability Company (""), adopted by the Committee on Structural Reform of the National Economy of China in 1992, one of the competencies of the supervisory board is "negotiating with members of the board of Directors on behalf of the company and to file a lawsuit against them."
In accordance with the Law of the People's Republic of China "On Companies", in the presence of circumstances concerning violations of the provisions of laws, administrative legal acts or the company's charter by a member of the Board of Directors, a member of the Supervisory Board (observer), senior management in the performance of official duties (art. 149), any participant(s) A COO or a shareholder (shareholders) holding more than 1% of the shares of a joint-stock limited liability company (LLC) jointly or separately for 180 days or a longer period has the right to request in writing from the supervisory board (observer) to file a claim with the people's court; if there are circumstances concerning a member of the supervisory board (the observer) and provided for by art. 149 of this Law, the above-mentioned participants or shareholders have the right to require the board of Directors (if the board of Directors is not created in the COO - executive director) to file a claim with the People's Court (Part 1 of Article 151) <13>. Chinese scientists usually refer to the possibility of filing an indirect lawsuit by the supervisory board and the board of directors against each other's members as the "principle of cross-claims". The company is a plaintiff in accordance with paragraph 23 of the Supreme People's Court Ruling on a number of issues related to the application of the PRC Companies Act IV <14>.
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<13> It is worth noting that, although according to this article, the participants (shareholders) of the company may in writing require the supervisory board (observer) to file a lawsuit in the people's court against the members of the board of Directors and directors, the wording of this article (in Chinese) did not explicitly indicate that the supervisory board (observer) in in this case, he undertakes to file a claim on behalf of the company, i.e. there is a flaw in the legislation.
<14> Resolution of the Supreme People's Court of the People's Republic of China on a number of issues related to the application of the Law of the People's Republic of China "On Companies" ( ): adopted at the 1,702nd meeting of the Judicial Committee of the Supreme People's Court of the People's Republic of China on Dec. 2016
The principle of cross-claims of the board of Directors and the supervisory board in an indirect claim can strengthen the supervisory board's supervisory function in the following two aspects:
1. Preliminary security. Shi Tiantao wrote vividly and convincingly about this: "An indirect claim is a "sword" hanging on the heads of members of the board of directors and senior management. He always reminds them that they must serve the interests of the company loyally and in good faith." <15> The mechanism of "cross-claims" expands the supervisory powers of the supervisory board in the form of judicial law. In addition, this mechanism also compensates to a certain extent for the inefficiency of the supervisory board's control over the daily activities of the board of Directors.
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<15> Shi Tiantao. Corporate law. Beijing: Pravo, 2018. p. 455. [].
2. Protection after violation of the interests of the corporation. The principle of cross-claims can theoretically improve the effectiveness of the judicial process. On the one hand, the supervisory board and the board of directors may pre-check the status of participants (shareholders) who have requested in writing from one or another body to file a lawsuit in court in order to avoid problems with filing a lawsuit by unqualified participants (shareholders). On the other hand, the decision to file a claim, adopted after discussion by the board of directors or the supervisory board, may take into account the interests of the participants (shareholders) to a greater extent. This avoids a number of problems, such as a large number of participants in the lawsuit and difficulties in organizing a class action when participants (shareholders) directly file an indirect claim.
In addition, a member of the supervisory Board (observer) may also act as a defendant in an indirect claim <16>.
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<16> In case of harm to the company as a result of violation of the rights and legitimate interests of the company by third parties, the participants (shareholders) specified in Part 1 of Article 151 of the Law of the People's Republic of China "On Companies" also have the right to file a claim with the People's Court (Part 3 of Article 151 of the Law of the People's Republic of China "On Companies").
In accordance with paragraph 24 of the Resolution of the Supreme People's Court on a number of issues related to the application of the PRC Law on Companies, when participants (shareholders) who meet the requirements of Part 1 of Article 151 of the PRC Law On Companies file a lawsuit directly against members of the Board of Directors, members of the Supervisory Board, senior management or third parties in accordance with the provisions Part 2 and 3 of Article 151 of the Law of the People's Republic of China "On Companies", the company should be added as a third party to participate in court proceedings.
From all of the above, it can be concluded that the Chinese corporate governance model, which establishes the board of directors and the supervisory board as parallel bodies, is important for practice. When the participants/shareholders discover that the interests of the company have been infringed, the board of Directors and the supervisory board may initiate a corporate lawsuit separately. This mechanism is enshrined in legislation to ensure effective and timely protection of the company's interests, as well as to develop a system of checks and balances between the supervisory board and the board of directors through judicial means.
In addition, since the material rights (or interests) that should be protected by an indirect claim belong to the company, the legislation of various countries (and regions) <17> requires that participants (shareholders) first apply to the board of directors or the supervisory board of the company with a request to file a lawsuit against the violator on behalf of the company. Only after the refusal of the request by the relevant body of the company, the participants (shareholders) can file an indirect claim in court. This preliminary procedure is known as the "principle of exhaustion of the company's internal remedies" (eng. Exhaustion of internal remedies) in Anglo-American corporate law <18>.
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<17> See, for example: Article 7.42 of the Model Law on entrepreneurial corporations of the USA (Model Business Corporation Act, MBCA), paragraph 3 of Article 847 of the Corporate Code of Japan, Article 214 of the Regulations on Companies in Taiwan, etc.
<18> Zhu Jinqing. Corporate law / Ts. Zhu. Volume 2. Beijing: Jinghuai University. p. 289. []; Fan Jian, Wang Jianwen. Corporate law: textbook / Ts. Fan, Ts. Wang. 5th ed., reprint. and an additional one. Beijing: Pravo. p. 289. [].
The Chinese legislator also determines the board of Directors and the Supervisory Board (observer) as elements of the preconditions for the filing of an indirect claim by participants (shareholders) on their behalf. In accordance with Chinese law, in the event of 1) refusal of the supervisory board (observer), the board of Directors or the executive director to go to court at the written request of the participants (shareholders); 2) expiration of 30 days from the date of the request; 3) the existence of extraordinary circumstances in which immediate recourse to the court is necessary to prevent difficult to recover damage to the company, the participants (shareholders) specified in Part 1 of Article 151 of the Law of the People's Republic of China "On Companies" have the right to file a claim in defense of the interests of the company in the People's Court on their behalf (Part 2 of Article 151 of the Law of the People's Republic of China "About companies").
The above three conditions not only guarantee the "exhaustion of the company's internal remedies" through "cross-claims", but also can ensure the final realization of the right of participants (shareholders) to bring an indirect claim on their behalf.
Thus, the institution of an indirect corporate claim brought by the supervisory board (observer) in China may provide an opportunity for minority shareholders to control the activities of members of the board of Directors and directors.
Due to the limited number of participants and the element of pooling the capital of limited liability companies, the freedom of the participants of the Chinese COO and the Russian LLC is almost not limited by the size of their share in the exercise of their right to file an indirect claim. It is worth noting that since the entry into force of the amendments introduced by Federal Law No. 343-FZ dated 07/03/2016 <19>, only participants holding at least 1% of the total number of votes of LLC participants or JSC shareholders have the right to challenge large transactions and interested-party transactions in court. In addition, Russian corporate law, as in China, also defines a general standard of ownership of shares only for shareholders of a joint-stock company who have the right to bring a claim relating to ordinary transactions. In accordance with clause 5 of Article 71 of the Law "On JSC", a shareholder (shareholders) who wants to file a lawsuit against the relevant bodies of the corporation (as well as the management organization or manager) or their members must own in aggregate at least 1% of the outstanding ordinary shares of the company. It is worth paying attention to the fact that the Chinese legislator has added an additional restriction to the standard for shareholders of the company who have such a right - the shareholder(s) must jointly or separately own shares for 180 days or a longer period. The establishment of this period is undoubtedly advisable for a joint-stock company, whose shares are transferred more often than the shares of an LLC. Among other things, not being interested in the corporation, short-term investors pay more attention to the rise and fall of the market price of their shares; This restriction may prevent the abuse of an indirect claim by unscrupulous minority shareholders <20>.
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<19> Federal Law No. 343-FZ dated 07/03/2016 "On the Introduction of amendments to the Federal Law "On Joint Stock Companies" and the Federal Law "On Limited Liability Companies" (regarding the regulation of large transactions and transactions in which there is an interest), signed by the President of the Russian Federation on July 3, 2016.
For example, when a competitor of the company, who does not in good faith acquire a sufficient number of shares of the company within a short period of time, in order to achieve the goal of disrupting the company's activities and affecting its reputation by filing such a lawsuit against the company's management.
In the current Russian legislation, there are not only loopholes in limiting the qualifications of shareholders who have the right to file an indirect claim, but also there are no relevant provisions embodying the principle of "exhaustion of internal remedies of the company". Shi Tiantao writes in this regard: "If strict restrictions are not imposed on the filing of an indirect claim for minority shareholders, one of the basic principles of corporate governance will be violated - the decisions of the corporation (including the decision to file a claim) must be made by the competent bodies of the corporation" <21>; of course, the Russian legislator should pay attention to this issue.
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<21> Shi Tiantao. Corporate law. Beijing: Pravo, 2018. p. 449. [].
As for the reasons for the above-mentioned characteristics of a corporate indirect claim in China <22>, there is no such "ground" for this institution as in the United States. The institution of indirect action in corporate matters is designed to fully play the role of the market in limiting activities that harm the interests of the company. There is no consensus in China that "the market is being fully used to save judicial resources for indirect claims," which is the common understanding of most lawyers, in particular judges in the United States <23>. Indirect lawsuits are not widespread in Russia. M.A. Erokhova writes: "Apparently, everyone is afraid to use an institution that is atypical for the Russian process." <24> Moreover, the "engine" of indirect lawsuits in the United States are lawyers. If the transparency of the activities of (public) corporations is low, then it is difficult for external persons (including lawyers) to find out internal information about the violation of the interests of the company. The state of development of the secondary market in China and Russia is clearly insufficient to support the full borrowing of the American indirect claim mechanism.
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<22> It should be noted that the supervisory board (observer) rarely implements this function. However, until 2013, there were only about 80 such indirect lawsuits in the practice of applying the PRC Law "On Companies", and most of them concerned medium-sized and small enterprises. See: Zhang Hanwen. An empirical study of an indirect claim in China. Southern Finance. 2013. N 7. P. 85. [].
<23> See Zhu Jinqing. Corporate law / Ts. Zhu. Volume 2. Beijing: Jinghuai University. p. 310. [].
Erokhova M.A. Procedural features of corporate disputes in Russian law: collective and indirect claims. Joint stock company. 2016. N 11. P. 175.
Given that China and Russia have similar socio-economic conditions for the development of an indirect claim, perhaps the experience of Chinese legislative regulation can be used to improve this institution in Russia. Specifically, it would be possible to introduce the principle of "exhaustion of internal remedies of the company" into Russia and add its implementation as the task of the relevant body of the corporation (in particular JSC).
Thus, the aforementioned contradiction between the Civil Code of the Russian Federation and individual laws will be resolved, and the legislative vacuum in the Russian institute of indirect action in corporate affairs will also be filled.
The author believes that the Russian legislator can proceed from two directions. First, the relevant regulatory legal acts should be detailed. Based on the premise of a full study of the applicability and compatibility of the foreign experience of an indirect claim with the current Russian legislation, the named principle and the requirement that, before shareholders can file an indirect claim, they must own shares for a certain period of time, can be defined in the legislation as mandatory norms. Secondly, on the other hand, based on the study of the Chinese experience in creating a special supervisory authority to participate in the trial in a certain way, the Russian legislator could also provide for the possibility of creating a special structure in the corporation that will be responsible for exhausting the company's internal remedies. For example, it is possible to provide in the legislation dispositively that the company may determine in its articles of association that this function is performed by the board of directors or a special supervisory body (according to the variable model of corporate governance <25>).
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<25> The variable model is characterized by the possibility of choosing one or another model of corporate governance, fixed by legislation.
Based on its socio-economic conditions and unique corporate governance structure, the Chinese legislator has reformed the indirect claim mechanism. Comparative legal research can provide new ideas for improving the current state of legislation in Russia. The problem of improving the mechanism of indirect claim in Russia requires more attention and research.