Our China lawyers have been getting an influx of cases from investors and their lawyers wanting our help in suing Chinese companies in U.S. courts for corporate governance violations. Nearly every time their plan is to sue the Chinese company for having violated their “minority shareholder rights” or for breaching fiduciary duties owed to them as fellow investors.
First, as we discussed in The China Stock Option Scam, it is not possible under Chinese law for a Chinese domestic company (as opposed to a WFOE or a Joint Venture) to have foreign shareholders. Second, even if — as is often the case — we are not dealing with a true case of foreigners purportedly owning shares in a Chinese company, the duty owed to the foreigners is going to be based on Chinese corporate governance laws, not those of the United States. When we tell our potential clients (and even their lawyers) this, their response is usually to say something like, “but our contract calls for disputes to be resolved in a U.S. Court. We thought we had a slam dunk.”
So what? A contract provision calling for disputes to be resolved in one country’s court should and does have little to no influence on the law that court will apply to the case. Most importantly, it is difficult to imagine a thoughtful American judge applying U.S. corporate governance law to a transaction that took place wholly in Mainland China and that involves Chinese entities.
I thought of these corporate governance cases today after reading a really nice analysis (by Dorsey lawyers Lanier Saperstein and Jeremy Schlosser) of the Second Circuit’s recent decision in the big Vitamin C Antitrust Litigation, holding that U.S. courts must “defer to a foreign government’s interpretation of its own laws.” In their analysis, these lawyers opine that this decision should hardly be a surprise and yet note how it will likely have far-reaching implications:
That should hardly be a controversial proposition, but up until now, lower courts have treated the interpretations of foreign governments regarding their own laws with varying degrees of deference, ranging from strict deference to outright skepticism. But now, the Second Circuit has put litigants on notice that the principles of international comity have to be applied in cases implicating the laws of other sovereign nations.
The Second Circuit’s ruling will affect a wide spectrum of legal issues facing foreign companies and financial institutions, ranging from subpoenas to asset restraints, and from enforcement actions to discovery requests, as well as substantive matters such as antitrust law, intellectual property, and securities laws.
Without going into the Vitamin C case facts and the Second Circuit’s legal ruling, I will just say that if any lawyer still believes that a U.S. court will apply U.S. law in sorting out a China-related corporate dispute, they are just wrong. If you are going to do a transaction in China that involves your getting equity or even profit-sharing from a China-based entity, China law is going to apply to any subsequent dispute you might have against that China-based entity. And this will be true regardless of whether or not your contract (or something else) entitles you to bring your dispute in a U.S. court.
So if you are going to do a deal involving getting equity in or profits from a Chinese company, you should at least know that China’s corporate governance laws put more value on the contracts you sign and less on shareholder protection laws than the United States or Europe. What this means is that unless your contract explicitly provides you with protections, you probably have no protections. What this means in real life is that most of the time when American or European lawyers come to us with a China corporate case they are calling a “slam dunk,” it is anything but.