Rules Versus Standards in Shareholder Protection under Chinese Law: A New Taxonomy and Empirical Analysis

Abstract The law and finance literature posits that courts in common law jurisdictions can apply flexible fiduciary duty standards and are therefore more effective than courts in civil law jurisdictions at protecting minority shareholders. This Article revisits this claim by conducting several empirical studies on cases involving related-party transactions, share buybacks, and the modification of control rights in China. To better analyze the regulatory approaches, this Article identifies four distinct regulatory strategies: substance-oriented rules, process-oriented rules, substance-oriented standards, and process-oriented standards. The findings show that Chinese courts currently utilize the first three approaches. They apply both rules and standards, but the standards are predominantly substance-oriented. In contrast, process-oriented standards, which are more typical in common law jurisdictions, are largely absent in the Chinese context. This Article further argues that process-oriented standards offer important advantages over substance-oriented rules and standards in certain circumstances, as they alleviate the concerns about information disadvantages and institutional incompetence. They are also more flexible than process-oriented rules in protecting minority shareholders. This Article then examines both institutional and conceptual limitations to developing process-oriented standards in China. It argues that institutional constraints do not constitute insurmountable barriers. Chinese courts are already working with open-ended standards in several types of corporate disputes. In addition, courts possess greater authority than some listed corporations and most non-listed corporations. The absence of process-oriented standards is more likely attributable to the conceptual limitations.