The Complexity of the Derivative Action in Asia: An Inconvenient Truth

By Dan W. Puchniak, Assistant Professor, Faculty of Law, National University of Singapore. Author of the forthcoming article in the Berkeley Business Law Journal, “The Derivative Action in Asia: A Complex Reality.”

In this era of globalization, the field of comparative corporate law has come of age.   With corporations and capital increasingly transcending national borders, academics have been on a quest to uncover grand universal truths about corporate law which similarly transcend national borders. Ostensibly, this quest for universal truths has produced impressive results.  Indeed, the field of comparative corporate law has come to be defined by a series of grand theories which all claim universal applicability.

The theory that common law countries provide better protection for shareholders than their civil law counterparts (the “common law superiority theory”) has monopolized the minds of comparative corporate law scholars for over a decade and has been used to explain the postwar dominance of American and British capital markets.  The theory that corporate law regimes around the world are converging on a single optimally efficient shareholder primacy model (the “convergence theory”) has similarly produced a cottage industry of experts and provided a rationale for America’s postwar rise to the position of the world’s leading economic superpower. The theory that shareholders will only sue when the financial benefit of suing exceeds the cost (the “economically motivated and rational shareholder theory”) has become the dominant approach for understanding shareholder litigation around the world and is a byproduct of the Chicago School’s law and economics movement, which has been a bulwark in modern American legal scholarship for the production of grand universal claims.

Indeed, the combined impact of these three grand universal theories has shaped a generation of comparative corporate law scholarship. However, in spite of their monumental impact and grand universal claims, these theories have been primarily derived from and/or evaluated based on the American corporate law and governance experience. More recently, some efforts have been made to test the robustness of these ostensibly universal (American-centric) theories by evaluating their explanatory and predictive value in the context of evidence from other leading Western countries. Thus far, however, limited efforts have been made to test the robustness of these ostensibly universal theories in the context of Asia—an oversight which has become glaring in the face of the immense shift in economic power towards Asia.

My forthcoming article in the Berkeley Business Law Journal, “The Derivative Action in Asia: A Complex Reality,”** which extends upon my forthcoming co-edited Cambridge University Press Book, The Derivative Action in Asia: A Comparative and Functional Approach, attempts to reduce this glaring oversight. The article (and book) uses derivative actions in Asia as a lens to re-evaluate the robustness of the grand universal theories.  It demonstrates that in the context of Asia, the grand universal theories not only mislead, but are often turned on their heads. Indeed, based on evidence from derivative actions, civil law countries in Asia often appear to protect shareholders better than their common law counterparts; the corporate law appears more often to diverge than converge with the American corporate governance model; and the primary driver of derivative actions appears to be politics and not economics.

In this sense, the truth revealed in the article (and book) is an inconvenient one. The fact is that the forces that drive derivative actions in Asia’s leading economies are far too complex to conform to any one grand universal theory. This means that to accurately understand how derivative actions (and, most likely, all other areas of corporate law) function in Asia (and, most likely, everywhere else), it is necessary to consider a myriad of local factors that affect derivative actions in each individual jurisdiction, including the specific regulatory framework, case law, economic forces, corporate governance institutions, sociopolitical environment, and local (but not monolithic Asian) culture.

Such an approach may seem like common sense—because it is. Unfortunately, the field of comparative corporate law has increasingly shunned such an approach in its lust for elegant grand universal theories. Hopefully, the article (and book) will spark a new trend in comparative corporate law scholarship to embrace, rather than avoid, the complex reality that is comparative corporate law—for beautiful academic theories are sure to become historical footnotes unless they actually help explain the world in which we live.

**A link to this article will be added upon publication.