Intra-corporate dispute (ICD) arbitration may cover a wide range of disputes between shareholders, between shareholders and the company, and between shareholders and third parties such as the company directors. ICD arbitration has been practiced in the US for many years for resolving disputes both in non-listed and listed companies. It has also been used for shareholder claims for breach of fiduciary duty against the company’s directors in a takeover bid (tender offer). In my paper, I argue for the UK to facilitate ICD arbitration more widely and, in particular, for UK listed companies. However, I also discuss that although the US advanced ICD regime provides both the policy arguments and the technical framework for a wider use of ICD arbitration in the UK, the exact benefits that can be derived from adopting ICD arbitration in the UK (or England and Wales be more precise) are different to those in the US. In the US, ICD arbitration is being used to mitigate the risks flowing from litigation that has been considered a critical governance enforcement tool for the capital market. On the other hand, whereas in the UK, litigation has not been used to enforce corporate governance norms nor to allow shareholders to obtain redress for losses in the capital markets, ICD arbitration can be used to enhance investor participation in corporate governance. The theoretical conflict between the public policy of investor protection and party-autonomy of arbitration is helpful. Yet, arguments that have been drawn on the conflicts between the Federal Arbitration Act and the Securities Exchange Act are not useful for the UK. Therefore, based on English case law, I argue that the contractual approach has been and should continue to offer the basis for ICD arbitration for UK companies incorporated in England and Wales. For this contractual approach to function as the basis for ICD arbitration, a number of areas require clarifications, in particular third party participation in ICD arbitration, the arbitrability of shareholder derivative actions, and problems around multi-party arbitration. Supplementary rules should be developed so that they can be incorporated into the company constitution or be adopted by parties in the arbitration agreement to provide legal certainty in the proceedings and ensure the enforceability of the award. In the US, the Financial Industry Regulatory Authority (FINRA) has developed rules providing a contractual framework for securities law arbitration. The UK can develop a model law that can be incorporated into the company’s constitution. Major arbitration institutions such as the London Court of International Arbitration (LCIA) can develop rules dealing with multi-party arbitration, notably in the case of derivative actions against the management or representative suits for securities law disputes.
The UK and US experiences can also offer policy choices for China, which has the fastest growing capital market. Litigation is being developed to enforce governance norms and increase investors chances to obtain redress for financial losses. Similar to the UK, ICD arbitration is not being used to resolve corporate and securities law disputes. Chinese law does not provide clear guidance on whether corporate and securities law disputes are arbitrable. The position is – to some extent – similar to that of the UK. Whether China will continue to follow the US using litigation as a private enforcement tool and react at certain point with arbitration as a solution to mitigate litigation risks is yet to be seen. When it happens, China will need to provide a theoretical foundation for using ICD arbitration so as to balance party-autonomy in arbitration and public interest of investor protection. Chinese company law will need to answer if company’s constitution is –currently not- a contract or quasi-contract (as in the UK) binding on the shareholders and the company. What technics in contract law may be used to bind other third parties such as the company’s directors and creditors? What supplementary rules should be developed to deal with class-actions or collective redress? Chinese arbitration is developing faster than the procedure in the Chinese courts. The majority of Chinese ICD arbitration cases deal with contract disputes such as disputes arising out of shareholder agreements. Corporate law and securities law disputes go beyond the considerations of contract law. Foreign investors – especially minority shareholders – may need to enforce their rights in company law to hold the management to account so as to obtain redress. Would ICD arbitration increase accountability in State-Owned-Enterprises (SOE) than litigation in the courts? Foreign investors – especially retail investors and asset management companies – may wish to bring organised collective claims to obtain redress. As asset management is becoming active in the Chinese investment market, ICD may offer them an alternative way to maintain the value of their investment portfolios as legal claims are becoming an asset. ICD arbitration may be an alternative to shareholder activism- a method not frequently used in the UK and which may not be welcomed in China.
From an international perspective, cross-border investment often results in disputes and ICD arbitration offers some solution. However, conflict of laws issues are often overlooked and can pose obstacles to ICD arbitration to resolve disputes concerning investment in capital markets. Company X incorporated in country A can have its headquarters in country B, while having its securities traded in country C. Which law is the applicable one is critical. In a contract dispute, parties may choose the substantive governing law. In corporate or securities law disputes, the substantive governing law may be the law of the incorporation (under the legal-seat theory), the law of the headquarters (under the real-seat theory), or the law of the place of listing of the securities. Whereas generally applying the wrong governing law to the disputes should not result in the award being set aside or refused enforcement, this is not always the case. Some countries may not allow arbitration to resolve intra-corporate disputes. When this is the case, the arbitrators would lack jurisdiction in the eyes of the law of that country. Or the breach of certain corporate or securities law rules may be regarded as a breach of public policy in certain legal systems. This may therefore be a ground for challenging the award or resisting enforcement. Currently, there is no international instrument giving guidance on conflict of laws problems in intra-corporate disputes. This is an area where international collaborative work involving academics, the industry, and policy markers will bring much public good to the development of global capital markets.
The preceding post comes to us from Dr. Joseph Lee, Senior Lecturer at the University of Exeter School of Law. The post is based on his paper, which is entitled “Intra-Corporate Dispute Arbitration and Minority Shareholder Protection: A Corporate Governance Perspective” and available here.