Brehmv. Eisner, 746 A.2d. 244 .[6] Particularized factual statement , not conclusory statement.[7] In Re the Limited, Inc., 2002 WL 537692.

Shareholder representative litigation is an important measure to prevent directors, supervisors and senior management from performing their duties inadequately, harming the interests of the company, and protecting the rights and interests of small and medium shareholders. At the same time, in order to prevent shareholders from abuse of their right to sue and interfere with the normal operation of the company, shareholder representatives set up a corresponding firewall for litigation, and represents the pre-litigation procedure - first lawsuit request.

However, in practice, there are situations such as , the relevant responsible person in charge of the enterprise, maliciously using this pre-procedure to hinder shareholders' rights protection channel , or maliciously reaching a settlement after falsely responding to the lawsuit; therefore, Article 151 of the " Company Law " stipulates that shareholders can exempt them from their obligation to appeal first under statutory circumstances.

Recently, the Supreme Court clarified and unified the judgment ideas in the "Nine Civil Minutes" in the "Nine Civil Minutes" to clarify and unify the judgment ideas; and related issues also have a set of recognition methods in the US Delaware Company Law, which the author will introduce them separately.

"Jiumin Minutes" Provisions on the Preliminary Procedures for Shareholders' Representative Litigation

"Jiumin Minutes" Article 25: According to Article 151 of the Company Law, one of the preliminary procedures for shareholders to file a representative lawsuit is that shareholders must first request the relevant authority of the company in writing to file a lawsuit with the people's court. Generally speaking, if a shareholder fails to perform the pre-procedure, the lawsuit shall be rejected. However, this pre-procedure is aimed at the general situation of corporate governance. means that when shareholders submit written application to the relevant company authorities, there is a possibility that the relevant company authorities will file a lawsuit. If the relevant facts found out indicate that there is no such possibility at all, the people's court shall not dismiss the lawsuit on the grounds that the plaintiff has not fulfilled the pre-procedures.

What is "there is no such possibility"? In the book "Minutes of the National Court Civil and Commercial Trial Work Conference" , the Second Civil Court of the Supreme People's Court listed several situations in which the court should exempt shareholders from the obligation to file a lawsuit first:

1. The relevant agency of the company does not exist or is in a business deadlock because the company is in a business deadlock, and the corresponding company institution or relevant personnel are no longer in their positions or fails to perform their duties, and shareholders are unable to make a request, such as the company has not established directors and supervisors in accordance with the law, or the company has been actually taken over by the liquidation group;

2. The director, senior executive or supervisor who is preparing to sue and the object (supervisor or director) who should request in writing are controlled by the same shareholder or actual controller;

3. The director or supervisor who should make a request to him first is the defendant;

4. The majority of members of the board of directors or executive directors themselves have an interest in the acts of others in damaging the interests of the company, or although they have no direct interest, they may lose their independence under the control of the interested parties related to the behavior.

In response to this issue, the Delaware Company Law also has a mature identification method.

Relevant provisions of the Delaware Company Law of the United States

The US Corporate Law has two influential legal systems, one is Model Business Corporation Act (US Standard Company Code, MBCA) [1], and the other is Delaware General Corporation Law (Delaware General Corporation Law, DGCL) [2].

MBCA regulations are relatively strict: If shareholders want to file a relevant lawsuit, they must first file a written request (Demand) to the relevant personnel of the company. If the company refuses (or does not reply within a certain period of time), shareholders may file a lawsuit regarding the company's decision to "refuse written request".

DGCL provisions are similar to the "Jiu Civil Minutes", that is, although the prerequisite procedure for first appeal request [3] is stipulated, the exception is also stipulated: When a written request is actually meaningless (futility test), shareholders can be exempted from the obligation to first appeal request.

The Delaware Supreme Court stipulated in the case of Aronson v. Lewis that shareholders must raise specific facts rather than abstract interests, which will cause the court to have reasonable doubts about the independence and non-stakeholder relevance of (1) or (2) the board of directors’ decisions are the “product of effective exercise of commercial judgments” by directors. [4][5] The court can exempt shareholders from the obligation to request in writing.At the same time, the court also stipulates that shareholders must present specific facts (concise, accurate, and direct) to prove their claims, rather than abstract, non-concrete factual inferences. [6]

(1) The independence or non-stakeholder correlation of half or more members of the board of directors

The court needs to make a separate judgment on the independence or non-stakeholder correlation of each director based on this point. In the case of In Re the Limited, Inc.[7], the court made a judgment on the position of the 12 directors and their relationship with the actual controller of the company, Mr. Wexner, and made a judgment based on this. If the court has reasonable doubts about the independence or non-interest relevance of half or more directors, the shareholder's obligation to apply in writing may be exempted.

Regarding the non-interestedness of directors, the court mainly focuses on whether directors can directly or indirectly obtain monetary or other personal benefits from transactions.

Such as related transactions are typical cases where directors have interests. Similar situations include directors collect kickbacks in transactions and third parties with influence on directors charge certain "lubricating fees". In the case of In Re the Limited, Inc., the company's board of directors decided to terminate a contract that would cause significant economic losses to its director Mr. Wexner and his wife. The court doubted the non-interest relevance of the Wexner couple, and combined with the determination of other directors, it ruled that shareholders could be exempted from the obligation to appeal first.

On the contrary, the director's receipt of normal remuneration and normal business transactions will not arouse reasonable doubts from the court. Also in the case of In Re the Limited, Inc., five directors performed their duties normally and received reasonable remuneration, and the court did not have reasonable doubts about the correlation between their interests. Director Kollat, who is also an employee of the company's supplier, although there is a transaction relationship between the company and the supplier, the court did not generate reasonable doubts because there was no obvious transfer of interests and the contract involved was not related to the supplier.

It is worth noting that the fact that the director will be a defendant will not cause reasonable doubts to the US court, because this is inevitable within the US binary corporate system. However, in China, because of the existence of supervisors, this was recognized by the Second Civil Court of the Supreme Court as one of the circumstances in which the request for first complaint can be exempted.

Regarding the requirements for director independence (Independence), the court mainly focuses on the impact of interested parties on the director. This impact is not limited to the situation where directors have legal obligations to interested parties, but also includes special circumstances such as owing favors to others and being held by others. Also in the In Re the Limited, Inc. case, although director Gee has no direct relationship with the Wexners, as the president of Ohio State University, the school collects $2.5 million in free donations from the foundation under the Wexners every year. Because of this stable donation, the court has raised reasonable doubts about the independence of director Gee.

(2) "The product of effective exercise of commercial judgment" [8]

On this point, the court refers to the criteria for determining the duty of directors' attention (Duty of Care), which is generally considered as a responsibility when committing gross negligence in directors' decisions. When making a decision, directors should consider all material information reasonably available, such as reading contract text, listening to relevant financial opinions, legal opinions, and opinions of other professionals, etc., otherwise they will be determined by the court to violate the director's loyalty obligation (Fiduciary Duty) and bear personal responsibility. In the determination of this point, the court emphasizes more on the legitimacy of procedures rather than the rationality of results.

For example, in the Brehm case, the board of directors of White Disney Company first approved in 1995 to hire Mr. Ovitz as the company's chairman. The term of office is 5 years, and the salary includes some of the company's equity, which is very generous. However, in 1996, the board of directors decided to fire Ovitz and compensate him for the termination (about $1 million). The shareholder filed a shareholder representative lawsuit on this matter.

In the judgment, the court found that in the process of making relevant decisions, the board of directors did not calculate the amount payable, contingent debts, liquidated damages, or termination fees involved in the contract, and did not seek the opinions of relevant persons (financial, legal persons).Therefore, the court has reasonable doubts about the board of directors' serious negligence in this decision, and then exempts shareholders from their obligation to apply in writing and conducts factual trials on the relevant disputes. Comparison of the pre-procedures for litigation of shareholder representatives in the US Company Law in

Although the proof standards in the "Nine Civil Minutes" and related Supreme Court cases are significantly different from those in the US Company Law cases, the logical core is the same:

First, the court does not make legal judgments on the director's specific business decisions, unless the shareholder provides the contrary proof, so shareholders need to apply in writing to the company to file a lawsuit first;

Second, when there is no possibility of relief in the company, shareholders can be exempted from the obligation to apply in writing.

Compared with the "Nine Civil Minutes" and related precedents, the provisions in the US Delaware Company Law are more detailed, and future legislators and practitioners can learn from them when dealing with related issues.

[1] MBCA is mainly compiled by relevant committees of the American Bar Association and is not formally legislated, but about 24 states in the United States have adopted or partially adopted its regulations.

[2] DGCL is the law of Delaware, USA, but it is the most important corporate law in the United States since the 20th century. Because more than 50% of US listed companies and more than 60% of the Fortune 500 companies are established in Delaware, the laws of Delaware actually have great influence.

[3] See Delaware Chancery Court Rule 23.1 (a) for details.

[4] Aronson v. Lewis, 473 A.2d. 805, 814-15 (Del.Supr. 1984).

[5] The initial provision was that shareholders needed to meet two requirements at the same time, but in practice it evolved to as long as the provisions of Article 1 were met, the court believed that Article 2 actually met at the same time. The Delaware Supreme Court found that the two provisions had different requirements in the 2000 Brehm v. Eisner case, but shareholders could be exempted from the obligation to apply in writing as long as they meet one. Brehm v. Eisner, 746 A.2d. 244 (Del.Supr. 2000).

[6] Particularized factual statement (simple, concise, direct), not conclusory statement.

[7] In Re the Limited, Inc., 2002 WL 537692 (Del.Ch. 2002). This case mainly involves the decision of shareholders to terminate a contract that is beneficial to the company but is unfavorable to Mr. Vixner (as a shareholder of the company as a director of the company) is detrimental to the interests of the company and should be sentenced to invalid.

[8] The main reference of this section is: Brehm v. Eisner, 746 A.2d. 244 (Del.Supr. 2000).

Article: Xu Yuanhao

Instructor: Wei Xin

This article is original by Xinghan. If you need to reprint it, please contact us first.

The information in this article is for general reference only and should not be regarded as a legal opinion or basis for specific matters.

Contact the author/cooperation contact: [email protected]