Evolution of Corporate Law in China: Mission Possible to Reform State-Owned Enterprises (SOEs)?

The evolution of law might take two basic paths: concentration of liability on a well-situated problem solver or, inversely, spreading or distribution of liabilities across a number of problem solvers. Under such a framework, the emergence and development of law relating to business organizations in China, particularly that relating to corporations, is clearly more closely following the latter path. Among all the problem solvers, namely shareholders, creditors and other entities represented by directors and other senior managers, shareholders are not always the ones who are to bear the ultimate risk. Meanwhile, the evolution of corporate law in China is similar to that in Taiwan, which fits well with the explanation of legal transplantation in the sense that many specific provisions borrow heavily from more advanced and mature economies. For a growth economy situated in the era of globalization to choose from an ‘existing menu’ is not a surprising strategy. The use of such a strategy lends further support to the argument that the saving of transaction costs is the key merit of “harmonization” or convergence of laws. However, China has not converged completely with either Anglo-Saxon law or German law, from which China borrowed many legal provisions and institutional designs. It is hence interesting to inquire as to what is the driving force behind such a “pick-and-choose” approach, or selective divergence, especially in the presence of competing models and provisions. In this chapter, I show that the driving force for these choices is a mixture of two potentially conflicting objectives. The first objective is to accommodate and unleash the power of investment from entities other than the government, such as foreign investors and later private entities. The second is to reform China’s state-owned enterprises (SOEs) so as to maintain the dominance of the state-economy in China. Hence, corporate law institutions from other countries were adopted in their original form in China but only when they could serve the first general purpose. Once such institutions could potentially compromise the second objective, substantial amendment and adjustments were made. To attain the aforementioned objectives, in addition to formal legislation and rules official announcements made by the Communist Party of China (CPC) are often used. Hence, to help understand the evolution of China’s corporate law, we will refer to some key announcements made by the CPC at certain critical points in time. To shed a new light on corporate law in China, this chapter also refers to legal and interdisciplinary empirical work. One valuable lesson that law and economics literature has taught us is that law often has unintended consequences and there are almost always gaps between law in book and law in action. We need therefore to make use of empirical tools to identify issues that have emerged from the actual operation of law. In this chapter, I introduce certain recent statistical and empirical studies on Chinese corporate law to expose issues in the actual law enforcement and implementation. The rest of this chapter is organized as follows. Section 2 provides a brief review of the evolution of corporate law in China since the 1970s and outlines the main types of corporate entities. Section 3 addresses the rule of the piercing of the corporate veil and its judicial practice in China. Section 4 deals with three corporate governance issues, i.e., shareholders’ supremacy, independent directors and the dual-board structure. Section 5 analyzes two topics relating to the liability of corporate officers: the business judgment rule and shareholders’ derivative suits. The chapter ends with a brief conclusion.