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Abstract: Shareholder derivative actions, serving as an external oversight mechanism for corporate governance, play a vital role in balancing management authority and protecting corporate and shareholder interests within the context of separated ownership and management rights. The 2023 revision of the Company Law of the People's Republic of China (hereinafter referred to as the ‘New Company Law’) introduces dual derivative actions for the first time and implements flexible adjustments to corporate governance structures, significantly altering the application logic of preliminary procedures and the determination of plaintiff standing. This paper systematically elucidates the institutional value, exemption scenarios, and practical shortcomings of pre-litigation procedures through normative analysis and case review. It examines judicial application of prerequisites such as plaintiff standing, damage assessment, and causation, subsequently proposing refinements in procedural specification, judicial consistency, and supporting mechanisms. These recommendations aim to advance shareholder derivative actions from ‘paper rights’ to ‘effective remedies’.

Keywords: shareholder derivative action; preliminary procedure; dual derivative action; corporate governance

Amidst corporate consolidation and diversified governance structures, instances where corporate interests suffer yet internal bodies neglect to initiate litigation have become increasingly prominent. Although the shareholder derivative action system established under the 2005 Company Law provided shareholders with an external remedy channel, its practical effectiveness remained limited due to issues such as rigid preliminary procedures and ambiguous standards for damage assessment. Article 189(4) of the new Company Law introduces dual representative actions and authorises companies to substitute the audit committee for the supervisory board, creating interdependent implications for both the preliminary procedure and plaintiff eligibility. This paper undertakes a systematic examination of the preliminary procedure and filing requirements for shareholder derivative actions from both interpretative and legislative perspectives, aiming to provide operational guidance for judicial application and corporate compliance.

I. Overview of the Shareholder Derivative Action System

(I) Definition of Shareholder Derivative Action

Shareholder derivative action, also known as derivative suit or derivative litigation, refers to proceedings initiated by a shareholder meeting statutory requirements in the company's name to protect corporate interests when the company's lawful rights are unlawfully infringed yet the company fails to pursue legal remedies against the infringer. Any compensation obtained through such litigation accrues to the company. This institutional design aims to compensate for deficiencies in internal corporate oversight mechanisms, providing an external remedy when corporate interests suffer harm.

From this definition, shareholder derivative actions possess the following characteristics. Firstly, their purpose is to safeguard corporate interests rather than the direct interests of the initiating shareholder. This constitutes the core principle of the system, wherein the shareholder acts as a defender of corporate interests during litigation. For instance, where directors engage in related-party transactions to seek personal gain by transferring valuable company assets to related parties at undervalued prices, causing substantial losses to the company, yet the board turns a blind eye, a qualified shareholder may initiate a representative action to hold the directors accountable and recover the company's losses. Secondly, the shareholder initiates the action in their own name. Although acting in the company's interest, shareholders appear as independent plaintiffs in the litigation process, distinct from cases where the company itself directly files as plaintiff. Furthermore, shareholder derivative actions presuppose corporate inaction in exercising litigation rights. Shareholders may intervene only when the company, despite having the capacity to litigate for its own protection, fails to act for various reasons. This respects the principle of corporate autonomy, preventing arbitrary shareholder interference in normal company operations.

(II) Distinction from Direct Shareholder Litigation

Although both shareholder derivative actions and direct shareholder litigation serve as means for shareholders to protect their rights, they exhibit several significant differences, as detailed below:

1.  Divergent litigation objectives. The purpose of shareholder derivative actions is to safeguard the company's overall interests. By holding those who infringe upon the company's interests accountable, the company obtains due compensation or relief, thereby indirectly protecting shareholder rights. In contrast, direct shareholder litigation is initiated by shareholders to protect their own direct interests. When an individual shareholder's rights—such as the right to dividends, the right to information, or the right to vote—are infringed upon, the shareholder may directly file a lawsuit in their own name with the People's Court, naming the infringer as the defendant, to seek redress for their own rights. For instance, should a company fail to distribute profits to shareholders as stipulated in its articles of association, shareholders may directly initiate proceedings demanding the company fulfil its dividend obligations. Conversely, if improper decisions by senior executives result in company losses and damage corporate interests, shareholders may bring a derivative action to safeguard the company's interests.

2. Differing plaintiff eligibility. Not all shareholders qualify as plaintiffs in shareholder derivative actions. Under China's Company Law, only shareholders of limited liability companies, or shareholders of joint-stock companies holding individually or collectively over one per cent of shares for at least 180 consecutive days, possess standing to initiate such actions. This restriction aims to prevent abuse of derivative rights by imposing time and shareholding thresholds on plaintiff shareholders. In contrast, direct shareholder litigation imposes relatively fewer restrictions on plaintiff eligibility. Any shareholder whose rights have been infringed may initiate proceedings, irrespective of the duration of their shareholding or the proportion of shares held.

3. Differing allocation of litigation outcomes. In shareholder derivative actions, compensation or other remedies awarded upon successful litigation accrue to the company, with the initiating shareholder benefiting only indirectly. This is because the restoration and preservation of corporate interests enhances the company's value, thereby safeguarding shareholder rights. In direct shareholder actions, the benefits of a successful claim accrue directly to the initiating shareholder to compensate for their personal losses.

4. Preceding procedural requirements differ. Shareholder derivative actions typically require a preliminary procedure: before initiating litigation, shareholders must first submit a written request to the supervisory board (or the supervisor in a limited liability company without a supervisory board) to bring proceedings before the People's Court (where directors or senior management have harmed company interests), or to the board of directors (or the executive director in a limited liability company without a board) to bring proceedings before the People's Court (where supervisors have harmed company interests). Only where the relevant corporate body refuses to initiate proceedings, fails to do so within thirty days of receiving the request, or where urgent circumstances exist such that failure to initiate proceedings immediately would cause irreparable harm to the company's interests, may the shareholder directly initiate proceedings in their own name before the People's Court. Shareholder direct actions, however, typically lack such prerequisite procedural requirements; once a shareholder believes their rights have been infringed, they may directly initiate proceedings before the court.

The above comparison reveals several distinctions between shareholder derivative actions and direct shareholder actions. Accurate understanding of these differences assists shareholders in selecting the appropriate litigation method to safeguard their rights during company operations, based on the specific circumstances of their rights infringement.

II. Evolution and Regulatory Framework of the Shareholder Derivative Action System

(I) Legislative History

The 1993 Company Law did not provide for shareholder derivative actions, with judicial practice predominantly relying on Article 54 of the General Principles of Civil Law for adjudication.

Article 152 of the 2005 Company Law first introduced shareholder derivative actions, adopting a dual-tiered preliminary approval model involving the supervisory board and board of directors.

Article 189 of the 2023 Company Law introduced dual representative litigation, permitting the audit committee to substitute for the supervisory board and clarifying grounds for exemption.

(ii) Regulatory Framework

China's shareholder derivative litigation framework adopts a ‘principle of prior authorisation with exception exemptions’ structure. Applicable conditions include: unlawful infringement of corporate interests; failure or inability of corporate bodies to initiate proceedings; qualified shareholders fulfilling written request procedures or demonstrating exemption grounds; and litigation proceeds reverting to the company.

(iii) Fundamental Provisions on the Pre-litigation Procedure

Article 189 of the Company Law stipulates: "Where directors or senior management personnel fall under the circumstances specified in the preceding article, shareholders of a limited liability company, or shareholders of a joint stock limited company who individually or collectively hold more than one per cent of the company's shares for a continuous period of one hundred and eighty days or more, may submit a written request to the board of supervisors to initiate proceedings before the people's court. Where supervisors fall under the circumstances specified in the preceding article, the aforementioned shareholders may submit a written request to the board of directors to initiate proceedings before the people's court. Where the board of supervisors or board of directors refuses to initiate proceedings upon receiving the shareholders' written request as stipulated in the preceding paragraph, or fails to initiate proceedings within thirty days of receiving the request, or where urgent circumstances exist such that failure to initiate proceedings immediately would cause irreparable damage to the company's interests, the shareholders specified in the preceding paragraph shall have the right to initiate proceedings directly in their own name in the interests of the company. Where a third party infringes upon the lawful rights and interests of the company, causing loss to the company, the shareholders referred to in the first paragraph of this Article may initiate legal proceedings in the People's Court in accordance with the provisions of the preceding two paragraphs. Where directors, supervisors, or senior management personnel of a wholly-owned subsidiary of the company engage in conduct as described in the preceding article, or where others infringe upon the lawful rights and interests of a wholly-owned subsidiary of the company causing losses, shareholders of a limited liability company, or shareholders of a joint-stock limited company who individually or collectively hold more than one per cent of the company's shares for a continuous period of one hundred and eighty days or more, may, in accordance with the provisions of the preceding three paragraphs, submit a written request to the board of supervisors or board of directors of the wholly-owned subsidiary to initiate proceedings before the People's Court, or may directly initiate proceedings before the People's Court in their own name."

This provision clarifies the fundamental requirements for the preliminary procedures of shareholder derivative actions. Generally, when directors or senior management of a company engage in conduct violating laws, administrative regulations, or the company's articles of association, thereby causing losses to the company, shareholders of a limited liability company, and shareholders of a joint-stock limited company who individually or collectively hold at least one per cent of the company's shares for a continuous period of one hundred and eighty days or more, shall first submit a written request to the board of supervisors to initiate legal proceedings before the People's Court. Where a supervisor has infringed upon the company's interests, shareholders shall submit a written request to the board of directors to initiate legal proceedings. This provision reflects respect for the company's internal governance structure, allowing the internal supervisory body to determine whether to initiate proceedings against infringements and affording the company an opportunity to resolve matters autonomously. Only when one of the following three circumstances arises after the board of supervisors or directors receives a shareholder's written request—namely, refusal to initiate proceedings, failure to initiate proceedings within thirty days of receiving the request, or an urgent situation where failure to initiate proceedings immediately would cause irreparable damage to the company's interests—shall shareholders be entitled to directly initiate shareholder derivative proceedings in their own name before the People's Court to safeguard the company's interests.

Moreover, where third parties infringe upon the company's lawful rights and interests causing losses, shareholders must likewise adhere to the aforementioned prerequisite procedures to exercise their right to sue. The new Company Law further stipulates prerequisite procedures for shareholder derivative actions concerning losses to wholly-owned subsidiaries, which largely mirror those for parent companies, thereby refining the application of the shareholder derivative action system within corporate group structures.

(II) Purpose and Significance of the Preliminary Procedure

The preliminary procedure serves multiple vital purposes within the shareholder derivative action system, acting as a pivotal mechanism to balance corporate autonomy with the redress of shareholder rights.

1. The preliminary procedure fully embodies respect for corporate autonomy. As independent legal entities, companies possess the right to autonomous decision-making and management. Within their internal governance structures, bodies such as the board of supervisors and the board of directors bear the responsibility of overseeing company operations and safeguarding corporate interests. The establishment of a pre-litigation procedure in shareholder derivative actions signifies that when corporate interests are infringed, these internal governance bodies must first determine whether litigation is necessary to pursue the infringing party's liability. This affords the company an opportunity to resolve matters internally, preventing premature or excessive judicial intervention in corporate affairs. Such an approach helps maintain normal operational order, safeguards the company's decision-making autonomy and independence, and enables it to conduct business activities according to its own commercial judgement within the competitive marketplace.

2. The preliminary procedure effectively prevents shareholder abuse of litigation rights. Should shareholders be permitted to initiate representative actions arbitrarily, certain shareholders might exploit their litigation rights for personal gain or malicious purposes, causing unnecessary disruption and harm to the company's normal operations. The preliminary procedure requires shareholders to submit a written request to the relevant corporate bodies before initiating litigation, enabling an initial review and filtering of the shareholder's claims. The company's relevant bodies may assess whether the shareholder's claims are reasonable and genuinely serve the company's interests, based on the company's overall welfare and actual circumstances. Shareholders may only initiate representative litigation if the company's relevant bodies fail to exercise their right to sue. This approach reduces unnecessary litigation, lowers the company's litigation costs and operational risks, and protects the lawful rights and interests of the company and other shareholders.

3. The pre-litigation procedure facilitates the conservation of judicial resources. Litigation proceedings typically consume substantial time, manpower, and material resources. Should all shareholder representative actions proceed directly to judicial proceedings, this would impose a heavy burden upon judicial authorities, adversely affecting judicial efficiency and impartiality. The pre-litigation procedure encourages companies to resolve disputes through non-litigious means such as internal negotiation and mediation. These methods are generally more flexible and efficient, resolving issues within a shorter timeframe and avoiding cumbersome litigation procedures. Shareholders should only bring proceedings before the courts when internal remedies prove unattainable. This ensures judicial resources are allocated more rationally, allowing the courts to concentrate on cases genuinely requiring judicial intervention, thereby enhancing the quality and efficiency of judicial adjudication.

(3) Manner and Requirements for Performing Preliminary Procedures

1. Content and Form of Written Requests. When shareholders perform preliminary procedures, the content and form of written requests are crucial, directly affecting the validity of such procedures and the smooth progression of subsequent shareholder derivative actions.

Written requests must contain clear and specific descriptions of infringing acts. Shareholders must detail the specific actions by directors, supervisors, senior management personnel, or others that infringe upon the company's interests, including the time, location, and transactions or matters involved. For instance, if a director engages in improper benefit transfers during a related-party transaction, the shareholder's written request should explicitly state the transaction's specifics—such as the counterparty, transaction price, and method—along with how this action harmed the company's interests, e.g., by causing asset loss or profit reduction. Only through a clear and accurate exposition of the infringing facts can the relevant company bodies gain a comprehensive understanding of the situation, thereby enabling correct judgement and decision-making.

The written request should also provide sufficient legal basis. Shareholders must cite relevant laws, regulations, and the company's articles of association to demonstrate which specific legal provisions or articles have been breached by the infringing party, thereby establishing the illegality and liability of the infringement. For instance, should a director violate the fiduciary duties and duty of care stipulated in the Companies Act, shareholders must explicitly reference the pertinent legal provisions in their written request. This should be accompanied by an analysis linking the infringement facts to how the director's actions contravened these provisions, along with an explanation of the legal liabilities incurred.

Clearly articulating specific claims is also indispensable to the written request. Shareholders should state the precise demands they wish the company's relevant bodies to assert when initiating legal proceedings against the infringing party. These may include seeking compensation for the company's financial losses, the return of misappropriated company assets, or reimbursement for additional expenses incurred by the company as a result of the infringement. Such claims must be practicable and reasonable, providing clear direction and objectives for the company's relevant bodies and any subsequent litigation.

Formally, the written request must adopt a standardised, formal format. It is generally advisable to submit it as a written letter via a delivery method providing proof of service (e.g., EMS), addressed to the relevant corporate body, while retaining the mailing receipt and delivery records. The correspondence must clearly state the recipient (i.e., the company's board of supervisors or board of directors), sender (the shareholder themselves), subject matter (written request for pre-litigation procedures concerning shareholder derivative actions), and other pertinent details, ensuring the content is lucid and the format compliant. Furthermore, to enhance the legal validity and evidentiary weight of the written request, shareholders may consider having it notarised to authenticate its genuineness, completeness, and timely delivery.

2. Determination of the Subject of the Claim. In the preliminary procedures for shareholder derivative actions, accurately identifying the subject of the claim is crucial, depending on the distinct status of the infringing party.

Where the infringing party comprises directors or senior management personnel, shareholders shall submit a written request to the company's supervisory board. As the corporate oversight body, one of the supervisory board's principal duties is to monitor the conduct of directors and senior management. Where such conduct may prejudice the company's interests, the supervisory board bears responsibility to investigate and pursue accountability on behalf of the company. For instance, should the company's general manager, without board approval, disclose material commercial secrets to competitors, thereby placing the company at a competitive disadvantage and incurring financial losses, shareholders should submit a written request to the supervisory board. This request should mandate the board to initiate legal proceedings against the general manager's infringing actions to safeguard corporate interests.

Should the infringing party be a company supervisor, shareholders should submit a written request to the board of directors. As the company's decision-making and management body, the board bears overall responsibility for the company's operations and development, and concurrently has a duty to supervise the conduct of supervisors. When a supervisor acts in violation of laws, administrative regulations, or the company's articles of association, thereby harming the company's interests, the board should take measures on behalf of the company to protect its rights. For instance, should a supervisor intentionally conceal material financial information during the performance of their duties, thereby misleading shareholders in their decision-making and causing losses to the company, shareholders should submit a written request to the board of directors, demanding that the board initiate legal proceedings against the supervisor for their infringing acts.

In specific circumstances, such as where the company has not established a supervisory board or board of directors, shareholders of a limited liability company without a supervisory board should submit a written request to the supervisor; shareholders of a limited liability company without a board of directors should submit a written request to the executive director. This is because in such instances, the supervisor or executive director assumes corresponding supervisory and management responsibilities within the corporate governance structure and should be accountable for safeguarding the company's interests. By clearly defining the appropriate addressees for requests based on the infringing party, the orderly progression of the shareholder representative litigation pre-trial procedure is ensured, enabling the company's internal oversight and redress mechanisms to function effectively.

(3) Exemptions from the Prerequisite Procedure

1. Criteria for Determining Urgency. In shareholder derivative actions, while the prerequisite procedure constitutes the general rule, exemptions may apply under certain exceptional circumstances, with urgency being a significant exemption ground. However, the law does not provide explicit, specific criteria for determining urgency, necessitating analysis based on individual cases and practical experience.

From the perspective of temporal urgency, an emergency may be recognised where an infringement is ongoing and failure to take immediate action would result in irreparable damage to the company's interests. For instance, if directors are rapidly transferring core company assets – such as patent technologies or critical production equipment – to related parties at undervalued prices, the company would lose its core competitiveness upon completion of such transfers, incurring substantial economic losses that would prove difficult to remedy effectively through litigation or other means after the fact. In such circumstances, should shareholders follow conventional preliminary procedures—submitting written requests to the supervisory board or board of directors and awaiting responses—they risk missing the optimal window for safeguarding rights, potentially causing irreparable harm to corporate interests. Shareholders may then bypass preliminary procedures and directly initiate representative litigation in court.

The irreversibility of the damage is also a crucial factor in determining urgency. If the harm caused by the infringement is irreversible – meaning that once incurred, even subsequent litigation securing compensation cannot restore the company to its original state – then the condition of urgency may be deemed satisfied. For instance, the disclosure of a company's trade secrets, which represent the fruits of long-term research and development investment and constitute a key competitive advantage in the marketplace. Once disclosed, competitors could readily imitate the company's products or services, capturing market share and inflicting substantial economic losses. Such damage cannot be fully compensated monetarily, as trade secrets hold value not only in economic terms but also in their uniqueness and confidentiality. In such circumstances, shareholders may invoke urgency to bypass preliminary procedures and initiate representative litigation directly, thereby swiftly halting the infringement and minimising corporate losses.

For instance, suppose a company's senior management colludes with an external third party to unlawfully transfer the results of a research project on the verge of a major breakthrough to a competitor. Upon learning this, if shareholders were to follow the standard preliminary procedure by petitioning the board of directors or supervisors, it could consume considerable time. During this period, the infringement might already be completed, causing the company to lose substantial commercial benefits from the research project's outcomes – losses that subsequent litigation could not effectively remedy. In adjudicating this case, the court comprehensively considered the urgency of the infringement and the irreversibility of the damage, recognising it as an emergency situation. It permitted the shareholders to bypass the preliminary procedures and directly initiate a representative action, thereby safeguarding the company's interests in a timely manner.

2. Circumstances where internal remedies within the company prove ineffective. Beyond urgent situations, the failure of internal remedies also constitutes grounds for exemption from the prior procedural requirement. During company operations, when exceptional circumstances arise rendering internal redress mechanisms inoperable, insisting shareholders adhere to prior procedures would fail to safeguard corporate interests effectively. In such instances, shareholders may directly initiate representative actions.

The absence of a supervisory board constitutes a typical instance of internal remedies failing. In such circumstances, lacking a dedicated oversight body, shareholders cannot submit written requests to a supervisory board as part of the standard preliminary procedure. For example, some small limited liability companies, considering factors such as cost, establish only a single supervisor rather than a full supervisory board. When directors or senior management engage in conduct detrimental to the company's interests, shareholders cannot request litigation from a non-existent supervisory board. Requiring shareholders to fulfil prior procedures under such circumstances is manifestly unreasonable, and shareholders may directly initiate representative actions.

When both directors and supervisors are defendants, internal remedies also become ineffective. In such scenarios, submitting written requests to either the board of directors or the board of supervisors equates to petitioning the infringers themselves to pursue their own accountability – an inherently unrealistic expectation. Consider instances where board members and supervisors collude to transfer company assets to enterprises under their personal control through fictitious related-party transactions, thereby harming corporate interests. In such circumstances, should shareholders petition the board of directors or the board of supervisors, these bodies would inevitably fail to take any action to safeguard the company's interests. Shareholders would therefore be compelled to initiate representative litigation directly through the courts to seek judicial redress.

A similar failure of internal remedies occurs when the sole shareholder and sole supervisor are the same person. Under this particular corporate ownership and governance structure, the shareholder cannot initiate internal remedies by petitioning the supervisory board, as the shareholder and supervisor are one and the same, rendering an effective oversight and restraint mechanism impossible. For instance, in a one-person limited liability company where the shareholder also serves as the supervisor, should the shareholder discover conduct by senior management detrimental to the company's interests, they cannot follow the preliminary procedure of petitioning the board of supervisors due to their dual role. In such circumstances, the shareholder may directly initiate a representative action to protect the company's interests.

III. Conditions for Initiating Shareholder Derivative Actions

(1) Standing of the Plaintiff

1. Determination of Shareholder Status. In shareholder derivative actions, the primary prerequisite for plaintiff standing is holding shareholder status. Under China's Company Law, only company shareholders possess the capacity to initiate such actions. This constitutes the cornerstone of the shareholder derivative action system, delineating the scope of eligible litigants. Legally speaking, both shareholders of limited liability companies and shareholders of joint-stock limited companies may qualify as plaintiffs in shareholder derivative actions, provided certain conditions are met.

In practice, establishing shareholder status is not always straightforward, presenting various complex scenarios. For limited liability companies, shareholder status is typically determined based on the company's articles of association, shareholder register, and industrial and commercial registration records. The articles of association serve as the company's ‘constitution,’ explicitly recording fundamental shareholder information, capital contribution methods, and contribution amounts, constituting one of the primary bases for establishing shareholder status. The register of members constitutes a vital internal management document, detailing shareholders' names or designations alongside shareholdings, and carries substantial probative weight. Business registration, possessing public notice and good faith effect, often serves as primary evidence of shareholder status in external dealings. However, in exceptional circumstances—such as involving nominee shareholders—determining shareholder identity becomes intricate. A nominee shareholder refers to an individual who has made actual capital contributions but whose name does not appear in the company's articles of association, shareholder register, or business registration records. Such individuals typically have a nominee shareholding agreement with the registered shareholder. In such circumstances, should a nominee shareholder wish to initiate a shareholder derivative action, they must demonstrate their actual capital contribution, the nominee shareholding relationship with the registered shareholder, and evidence of having exercised shareholder rights in practice—such as participating in company decision-making or receiving company dividends—to establish their shareholder status.

For joint-stock companies, establishing shareholder status is relatively straightforward, typically based on the shareholder's holding of company shares. Shares serve as the external manifestation of shareholder status in a joint-stock company; holding shares signifies the shareholder's entitlement to corresponding equity interests in the company. However, certain special circumstances in practice, such as share custody or pledging, may impact the determination of shareholder status. For instance, when a shareholder pledges their shares, although they remain the nominal holder during the pledge period, the exercise of their shareholder rights may be restricted under certain circumstances. In such cases, whether they possess the standing to initiate a shareholder derivative action requires analysis based on the specific circumstances. If the pledge does not impair the shareholder's right to be informed of damage to the company's interests, and the shareholder remains concerned about the company's welfare when such damage occurs while actively seeking remedies, then provided other prerequisites for bringing the action are satisfied, the shareholder's standing as plaintiff in a shareholder derivative action should not be denied solely on the basis of the share pledge.

2. Shareholding Duration and Proportion Requirements

Beyond meeting shareholder status, the Company Law imposes additional requirements on shareholders of joint-stock companies regarding shareholding duration and proportion. Specifically, only shareholders who have individually or collectively held at least one per cent of the company's shares for a continuous period exceeding one hundred and eighty days are eligible to initiate shareholder derivative actions. This provision aims to prevent the abuse of derivative action rights by shareholders and to safeguard the company's normal operational order.

From a legislative perspective, the shareholding duration requirement ensures that shareholders initiating representative actions possess a certain degree of loyalty and alignment of interests with the company. Only when shareholders hold company shares over an extended period do their interests become closely intertwined with the company's long-term development, making them more likely to exercise representative action rights prudently in the company's overall interests. Permitting shareholders with short-term holdings to initiate derivative actions indiscriminately could lead to abuse of litigation rights by certain shareholders for short-term speculative purposes, disrupting normal company operations and harming the interests of the company and other shareholders. For instance, some shareholders might maliciously initiate derivative actions during periods of short-term operational difficulties or share price volatility to gain immediate benefits, imposing unnecessary litigation burdens and negative impacts on the company.

The requirement for a minimum shareholding ratio serves to ensure that shareholders initiating representative actions possess a certain degree of representativeness and influence. Only when a shareholder holds a significant proportion of shares can they reasonably represent the interests of other shareholders to a certain extent, making their representative action more likely to gain support and recognition from fellow shareholders. Should any minority shareholder be permitted to initiate representative actions arbitrarily, this could lead to excessive and frivolous litigation, undermining the formation of an effective oversight and restraint mechanism while diminishing corporate operational efficiency. For instance, shareholders with extremely low shareholdings might initiate representative actions solely to pursue minor personal interests, which may not align with the company's overall interests or those of the majority of shareholders. Permitting such arbitrary litigation would destabilise the company's operations.

In practice, calculations of holding duration and shareholding ratios must strictly adhere to statutory provisions and relevant judicial interpretations. Holding duration shall be calculated from the date of actual acquisition of shares, running continuously until the date of filing without interruption. Shareholding ratios shall be determined by the proportion of shares actually held relative to the company's total share capital. Where holdings are aggregated, the shareholding ratio shall be calculated by summing the holdings of multiple shareholders. For example, if shareholders A, B, and C hold 0.4%, 0.3%, and 0.3% respectively of a joint-stock company, collectively holding 1% of the company's shares, they may jointly initiate a shareholder derivative action to protect the company's interests, provided the holding period requirement is satisfied.

(II) Damage to Corporate Interests

1. Types of Damaging Conduct. Damage to corporate interests constitutes a key prerequisite for initiating shareholder derivative actions. Such conduct manifests in diverse forms, primarily encompassing infringements by internal personnel and external parties.

Common instances of harm to corporate interests involve directors, supervisors, and senior management breaching laws, administrative regulations, or the company's articles of association. As the core decision-makers of the company, directors owe duties of loyalty and diligence. Should they exploit their positions to pursue personal gain by engaging in unfair related-party transactions, transferring the company's prime assets to related parties at undervalued prices, or misappropriating company funds for personal investments, such conduct constitutes a grave breach of the duty of loyalty, harming the company's financial interests. During the decision-making process, directors who fail to perform their duties diligently, neglect thorough market research and risk assessment, and make decisions recklessly, thereby causing significant economic losses to the company, breach their duty of care. Supervisors, as the company's oversight personnel, similarly harm the company's interests if they fail to effectively perform their supervisory duties, turn a blind eye to illegal acts by directors or senior management, or even assist in such unlawful activities. Senior management personnel disclosing company trade secrets during the execution of corporate affairs, thereby placing the company at a competitive disadvantage in the market and causing it to lose key clients and market share, also constitutes conduct detrimental to the company's interests.

Shareholders abusing their shareholder rights likewise harms the company's interests. For instance, a controlling shareholder exploiting their dominant position to manipulate shareholders' meetings or board resolutions through unreasonable decisions—such as unjust profit distribution schemes or related-party transaction proposals—harms the company and minority shareholders. Similarly, shareholders withdrawing capital during operations, thereby reducing registered capital and weakening the company's solvency and operational capacity, also damages corporate interests.

Beyond infringements by internal personnel, external parties frequently violate a company's lawful rights and interests. For instance, third parties may maliciously infringe upon the company's intellectual property rights by, without authorisation, utilising the company's patented technologies, trademarks, or copyrighted works to produce and sell infringing products, thereby capturing the company's market share and causing economic detriment. Competitors engaging in unfair competitive practices, such as commercial defamation or false advertising, which damage the company's commercial reputation and brand image while disrupting its normal operations, also constitute acts detrimental to the company's interests.

2. Determination of Damages. The assessment of damages constitutes a pivotal step in determining whether corporate interests have been harmed, directly impacting the viability of shareholder derivative actions. In practice, establishing damages requires a comprehensive evaluation of multiple factors, analysed within the context of specific cases.

In terms of manifestation, damages primarily encompass economic and non-economic losses. Economic losses represent the most prevalent form of harm, manifesting as diminishing corporate assets, reduced profits, increased liabilities, and similar consequences. For instance, where a director misappropriates company funds for personal investments, causing capital shortages that prevent timely debt repayment and incurring additional interest charges and penalties, this directly results in economic detriment to the company. Similarly, the disclosure of trade secrets enabling competitors to launch similar products or services, thereby capturing market share and reducing the company's sales and profits, constitutes typical economic loss. Non-economic losses, though less tangible than financial losses, can similarly inflict severe damage upon a company, such as damage to its commercial reputation or brand image. For instance, competitors may maliciously disparage the quality of a company's products or service standards, creating negative consumer perceptions and diminishing the company's market reputation. This indirectly impacts the company's future development and market competitiveness.

When establishing the extent of damages, robust evidence is essential. Shareholders must furnish relevant financial statements, contractual documents, market research reports, and other supporting materials to demonstrate that the company's interests have indeed been harmed, along with the magnitude and scope of such harm. For instance, when demonstrating economic losses, shareholders may present financial statements comparing pre- and post-damage asset values and profit margins to visually illustrate the financial detriment. Regarding losses from trade secret breaches, evidence such as client contracts, market share fluctuations, and documentation of business losses due to disclosure can prove the impact on market position and consequent damage to corporate interests.

Consider a scenario where a company's director colludes with an external third party to transfer a crucial patented technology at an unduly low price, causing the company to lose its competitive edge in the market. This results in a significant decline in market share and a sharp reduction in profits. When initiating the derivative action, the shareholders submitted the company's financial statements, which demonstrated a marked decline in sales and profits following the patent technology transfer. They also provided market research reports analysing the market value of the patent technology and the subsequent changes in the company's market share after its loss. Furthermore, they presented the patent technology transfer contract signed between the company and the third party, proving that the transfer involved an unreasonable price. The court, having comprehensively considered this evidence, determined that the company's interests had been harmed and upheld the shareholders' claims.

(3) Proof of Causation

1. The causal link between the act and the damage. In shareholder derivative actions, establishing causation between the tortious conduct and the detriment to the company's interests is paramount, constituting one of the key elements for the action to succeed. The purpose of proving causation is to determine that the detriment to the company's interests was directly caused by the defendant's tortious conduct, rather than attributable to other causes.

From the perspective of the logical chain of causation, the first step is to clearly establish the defendant's tortious conduct. This involves detailed investigation and documentation of the specific nature of the tortious act, its timing, location, and manner of occurrence. For instance, should a director misappropriate company funds, the precise amount embezzled, the timing of the misappropriation, and the destination of the funds must be ascertained. Should an external third party infringe the company's intellectual property rights, the specific manifestations of the infringement must be determined, such as the production and sales scope of the infringing products and the duration of the infringement. Only by accurately grasping the particulars of the infringing act can the connection between it and the damage to the company's interests be further analysed.

It is necessary to analyse how the infringement impacts the company's interests. This requires consideration from multiple angles, including the company's operational and financial status. Taking the example of a director misappropriating company funds, such actions may lead to a disruption in the company's cash flow, affecting its normal production and business activities. This could manifest as an inability to procure raw materials or pay employee wages on time, subsequently causing production stagnation, reduced orders, and ultimately resulting in decreased profits and asset impairment. Regarding external third-party infringement of the company's intellectual property rights, the emergence of infringing products may capture the company's market share, leading to declining sales volumes and reduced prices. Concurrently, the company may incur substantial human and material resources in litigation to protect its rights, thereby increasing operational costs. These factors directly or indirectly damage the company's interests.

In practice, establishing causation is often complex, as corporate operations are influenced by multiple factors, making it difficult to definitively attribute a single infringement as the sole cause of financial loss. For instance, a company may simultaneously face intensified market competition and shifts in the macroeconomic environment during its operations, factors which could also contribute to reduced profits and diminished market share. Therefore, when establishing causation, it is necessary to exclude other factors potentially contributing to the company's loss or to analyse the proportion and role of the infringement within the broader set of factors affecting the company's interests. The extent of the infringement's impact on the company's interests can be assessed by comparing the company's operational performance before and after the infringement occurred, alongside examining the performance of other companies within the same industry operating under comparable market conditions.

2. Allocation of the Burden of Proof. In shareholder derivative actions, the allocation of the burden of proof plays a pivotal role in establishing causation, directly affecting the rights and obligations of shareholders and defendants during litigation, as well as the outcome of the proceedings.

In accordance with the general principle of civil litigation in China that ‘the burden of proof lies with the party making the allegation’, shareholders, as plaintiffs in shareholder derivative actions, assert that the company's interests have been harmed by the defendant's infringing acts. Consequently, shareholders bear the burden of proving the causal link between the infringing acts and the damage to the company's interests. Shareholders must gather and present various forms of evidence to substantiate their claims. Such evidence may include the company's financial statements, internal documents, contractual agreements, communication records, witness testimony, and so forth. For instance, shareholders may utilise the company's financial statements to demonstrate changes in assets, profits, sales figures, and other data before and after the infringement occurred, thereby proving damage to the company's interests. Internal documents and communication records can be employed to establish the defendant's involvement in the infringement, along with its specific content and process. Witness testimony may further corroborate the existence of the infringement and its impact on the company's interests.

However, in certain circumstances, requiring shareholders to bear the full burden of proving causation may place them at a disadvantage in litigation. This is because shareholders often face difficulties in accessing all internal company information and evidence, particularly when the defendant holds positions such as director or senior executive with access to core corporate intelligence. To balance the evidentiary capacities between shareholders and defendants, the burden of proof may be appropriately alleviated in specific situations through measures such as shifting the burden of proof or adopting other reasonable methods of burden allocation. For instance, where a shareholder presents prima facie evidence of the defendant's tortious conduct demonstrating a reasonable connection to the company's detriment, the defendant may be required to bear the burden of proving the absence of causation between their actions and the company's loss. Should the defendant fail to furnish sufficient evidence establishing the irrelevance of their conduct to the company's detriment, the court may, based on the shareholder's evidence and the specific circumstances of the case, establish the existence of causation.

In one shareholder derivative action, shareholders alleged that company directors had engaged in improper benefit transfers through related-party transactions, causing detriment to corporate interests. Shareholders provided preliminary evidence including contracts for the related-party transactions and abnormal fluctuations in assets and profits evident in the company's financial statements. During the proceedings, the court determined that the shareholder had presented preliminary evidence demonstrating both the directors' tortious conduct and the resulting harm to the company's interests, with a certain degree of correlation between the two. Consequently, the court shifted the burden of proof to the directors to demonstrate that their actions in the related-party transactions were reasonable and lawful, and that no causal link existed between their conduct and the company's losses. The directors failed to furnish sufficient evidence to establish the reasonableness of their actions or the absence of any causal connection. Ultimately, the court established the causal link and upheld the shareholder's claims.

IV. Potential Issues and Recommendations in Practice

(I) Issues Encountered in Practice

1. Challenges in Implementing the Pre-Action Procedure. In practice, the implementation of the pre-action procedure for shareholder derivative actions faces numerous difficulties. It is common for shareholders' written requests to be non-compliant. Many shareholders fail to articulate their claims accurately and clearly when submitting written requests, providing vague descriptions of the alleged infringements and lacking crucial details and supporting evidence. In some cases, shareholders merely state that the company's interests have been harmed without specifying how directors or senior management infringed their rights, what specific losses were incurred, or providing supporting evidence such as contracts or financial statements. This renders it difficult for relevant corporate bodies to conduct effective review and assessment of the request.

Significant delays by internal corporate bodies impede the smooth progress of the preliminary procedure. Under statutory provisions, the supervisory board or board of directors must decide within thirty days of receiving a shareholder's written request whether to initiate litigation. In practice, however, some internal bodies habitually delay responses under various pretexts, or fail to respond for extended periods. This may stem from complex internal interests where members of relevant bodies share stakes with the infringing parties, disinclining them to actively exercise litigation rights. Alternatively, it may arise from cumbersome internal decision-making procedures lacking effective oversight and accountability mechanisms, resulting in inefficiency. Such delays not only squander shareholders' time and resources but may also permit infringements to persist, inflicting greater losses upon the company.

2. Disputes over the determination of prerequisites for bringing proceedings. Regarding plaintiff eligibility, while the law stipulates requirements concerning shareholder status, holding period, and shareholding proportion, practical application remains contentious. Differing judicial perspectives and adjudication standards exist concerning the recognition of plaintiff standing for undisclosed shareholders. Some courts hold that a hidden shareholder may bring a shareholder derivative action provided they can demonstrate actual capital contribution and the exercise of shareholder rights. Conversely, other courts maintain that hidden shareholders must undergo a formal disclosure procedure to become registered shareholders before acquiring standing.

Numerous disputes also arise concerning the assessment of damage to corporate interests. The criteria for determining the extent of harm are insufficiently clear. For non-economic losses, such as damage to a company's commercial reputation or brand image, there is a lack of specific legal provisions and practical guidance on how to accurately quantify the degree of loss. Establishing causation proves particularly challenging. Given that corporate operations are influenced by multiple interrelated factors, it is difficult to determine a direct and exclusive causal link between a specific tortious act and the resulting harm to corporate interests. In complex commercial environments, damage to corporate interests may stem from a convergence of factors including market competition and shifts in macroeconomic conditions, presenting significant difficulties for shareholders seeking to prove causation between the tortious act and the harm suffered.

(II) Improvement Recommendations

1. Standardise the operational procedures for preliminary proceedings. To address the implementation challenges of preliminary proceedings, the content and format of written requests must be standardised. Legislation or judicial interpretations should explicitly stipulate the specific elements a written request must contain, such as a detailed description of the alleged infringement, clear legal basis, specific claims, and relevant evidence materials. Standardised templates for written requests should be provided for shareholders' reference. When submitting written requests, shareholders must strictly adhere to these requirements to ensure completeness, accuracy, and clarity of content.

Establishing clear response deadlines and accountability mechanisms for internal corporate bodies is paramount. Legislation should further emphasise that the supervisory board or board of directors must provide a definitive response within thirty days of receiving a shareholder's written request, accompanied by a statement of reasons. Should internal bodies delay responses or refuse to initiate proceedings, they shall bear corresponding legal liabilities, such as fines imposed on responsible individuals or restrictions on holding corporate positions. A supervisory mechanism should be established whereby shareholders may lodge complaints against improper conduct by internal bodies with the company registration authority or other regulatory bodies. These authorities shall possess the power to investigate and urge companies to ensure effective implementation of the preliminary procedures.

2. Clarify the criteria for determining eligibility to initiate proceedings. To resolve disputes over eligibility criteria, it is recommended that judicial interpretations be issued to further clarify the standards for recognising plaintiff status. Regarding the plaintiff status of beneficial shareholders, adjudication standards should be unified, stipulating that such shareholders may be recognised as eligible plaintiffs and permitted to initiate shareholder derivative actions provided they can furnish sufficient evidence demonstrating their actual capital contribution, the existence of a legally valid nominee shareholding agreement with the registered shareholder, and the actual exercise of shareholder rights.

Regarding the determination of harm to corporate interests, the criteria for assessing damage outcomes should be refined. For economic losses, calculation methods and bases should be explicitly stipulated, such as calculations based on the company's financial statements and audit reports. For non-economic losses, assessment methods and reference factors should be established, such as considering the company's market reputation, brand value, and customer attrition, with evaluations conducted by professional assessment bodies to accurately determine the extent of damage. The standard of proof for causation should be lowered by adopting reasonable approaches such as the ‘theory of substantial causation.’ Causation should be established where a shareholder demonstrates that the infringing act could reasonably be expected to cause harm to the company's interests under ordinary circumstances, and where no other plausible explanation exists for the harm suffered.

In summary, the shareholder derivative action system, as a crucial mechanism for safeguarding the lawful rights and interests of companies and shareholders while refining corporate governance structures, exhibits numerous new characteristics and changes under the revised Company Law.

Regarding preliminary procedures, the new Company Law explicitly stipulates the general rule that shareholders must submit a written request to the company's supervisory board or board of directors before initiating a derivative action. This provision aims to respect corporate autonomy, leverage the role of internal oversight mechanisms, and prevent frivolous litigation by shareholders. Concurrently, the law provides exemptions to the pre-litigation procedure, such as in urgent circumstances where failure to initiate proceedings immediately would cause irreparable harm to the company's interests, or where internal remedies prove ineffective. This safeguards shareholders' ability to promptly protect corporate interests under exceptional circumstances. Analysis of practical cases reveals implementation challenges in the pre-litigation procedure, including non-standardised shareholder requests and delays by internal corporate bodies, necessitating further standardisation of operational processes.

Conditions for initiating shareholder derivative actions include plaintiff standing, damage to corporate interests, and a causal link between the conduct and the damage. Plaintiff standing requires the shareholder to possess shareholder status; for shareholders of joint-stock companies, additional requirements regarding holding period and shareholding proportion apply. Damage to corporate interests encompasses both economic and non-economic losses arising from infringements by internal or external parties. Proving causation requires shareholders to furnish conclusive evidence demonstrating a direct link between the infringing act and the harm to corporate interests. However, practical application often involves contentious determinations regarding prerequisite fulfilment, such as establishing plaintiff standing for beneficial shareholders or clarifying evidentiary standards for proving damage and causation. Further refinement of these criteria is warranted.

The revised Company Law has significantly impacted the preliminary procedures and conditions for initiating shareholder derivative actions. The newly introduced dual shareholder derivative litigation system broadens standing, offering parent company shareholders a new avenue to protect wholly-owned subsidiaries' interests. Its preliminary procedure also differs from traditional shareholder derivative actions, adopting a more streamlined ‘standalone application scheme’. Refinements to corporate governance provisions—such as adjustments to supervisory board establishment, board of directors' powers, and the legal representative system—have also created a chain reaction affecting the implementation methods and eligibility criteria for pre-litigation procedures in shareholder derivative actions.