China’s Minority Shareholders Find Louder Voice

Capitalism is old news in China but minority shareholders' rights are relatively new.

Minority shareholders got a boost from a May 11 ruling by the Shanghai Financial Court. The court ordered the defendant, Feilo Acoustics, to compensate 315 plaintiff stockholders for various losses totaling 123 million renminbi (about $19 million), an average of approximately 390,000 renminbi per plaintiff. The case is the latest judicial action on civil law litigation since the Supreme People’s Court issued its provisions on “Issues Concerning Representative Litigation in Securities Disputes” in July 2020.

What makes the case more significant is that Feilo was the first joint-stock company listed in the People’s Republic of China. Established in 1984, it is one of the oldest Chinese manufacturers of lighting and related products. The company has restructured several times over the past four decades, and false information found in 2017 financial reports discovered during a 2019 China Securities Regulatory Commission (CSRC) investigation led to the class-action lawsuit the plaintiffs filed in August 2020.

Considerable improvement of Chinese companies’ corporate governance is needed. The plaintiffs’ success in the Feilo case outlined one step shareholders can take to protect their interests. The case also demonstrated the Chinese legal system’s efforts to align corporate governance with international standards.

China started developing its corporate governance regime in the ’90s and progressed through the first stage of learning from the West. In its current stage, it established Chinese models with characteristics that distinguish it from its Western counterparts. One of the most significant differences is the limitation on shareholder power and influence due to the low rate (9%) of institutional investors’ shares in Chinese companies, in contrast to 72% in US companies and 38% in European companies, with a compiled 41% global average, according to a 2019 report issued by the Organization of Economic Cooperation and Development.

Although the CSRC’s 2018 revision of its Code of Corporate Governance for Listed Companies contains provisions to encourage investors to raise their voices through voting rights and promote minority shareholders’ protections via policies such as dividend distribution, the concept is still new for the majority of Chinese investors.