The United States filed a claim in the WTO over Chinese subsidies to its car manufacturers today.  Subsidies are okay under the world's trade rules, but subsidies premised on exports are not (i.e., the government gives you 100 RMB for every car you sell in Japan).  It's the second high profile recent WTO case involving the US and China - rare earths is the other - but it has plenty of medium profile company.  China has found, since joining the WTO that a. it was totally worth it, and b. it has become one of the three most most sued nations through that body ever, even though it is pretty choosy about suing back.

Top three?  What does that mean?  Well, the United States has 14 disputes in various stages of litigation against China, according the the USTR's latest report.  It has been sued back four times.  By comparison, the US has 17 disputes in progress with the EU and is defending no fewer than 32 claims made by Europe.

UPDATE: Simon Lester, of the trade-indispensable International Economic Law & Policy Blog, observes that a more accurate way to talk about subsidies would be to say this: "Subsidies that are contingent on export or on the use of domestic inputs are strictly prohibited; other kinds of subsidies may still be challenged, but will only be found in violation if it can be shown that they cause economic harm to foreign competitors."  Point taken!

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Ah, January.  Here in Champaign, January for me means running on the indoor track here at the U of I (5 times around is a mile, can't beat that!).  Yesterday, I was running and listening to This American Life on my iPod.  I am never disappointed by TAL, but the epidsode I listened to yesterday beat even my high expectations.  When I clicked on the app, I was a little hesitant because the title, "Mr. Daisey and the Apple Factory" didn't instantly suggest anything to me.  I was quickly engrossed though by Mike Daisey, a comedian-actor, giving a 40-minute monologue on his trip to China to see where iPods and other Apple products are made.

Daisey has a two-hour one man show on the trip called "The Agony and the Ecstasy of Steve Jobs," returning to the stage in NY, but I had not heard about it until the condensed TAL podcast.  In the monologue, Daisey confesses himself to be a true follower of the Apple religion and lover of all things Apple.  Then, he was inspired to travel to Shenzhen, a city in China (bordering Hong Kong) where consumer electronics are manufactured for devices from the most popular companies.  His first stop is a factory called Foxconn, which employs 400,000 people at that location.  Daisey, risking arrest, interviews hundreds of workers and (as you can probably guess) hears as many stories of harsh working conditions, work-related illnesses and injuries, retaliation and general oppression by employers and the government.  These stories are hard to hear, but I think it is only right that as an iPod/iMac owner, I have to hear them.

Now, I'm not anti-globalisation or anti-trade, and I'm from a right-to-work state.  I understand that the alternative ways to make a living for some Foxconn workers may be even worse than working for Foxconn.  I know that as horrible as it is to imagine 12, 13 and 14 year-olds working long hours in a factory doing repetitious work, there are worse fates for pre-teens in many developing countries.  But none of that takes away from the fact that developed societies, who benefit from these ultra-cool technology devices, have all determined that these types of working conditions are intolerable and codified that determination into law.  In a perfect world, China would experience the same legal transformation that occurred in Western countries during our industrialization to prohibit child labor and unsafe working conditions and provide workers legal remedies for pay disputes.  That transformation seems a long way off for China, though.

Anyway, I have no development answers, but I do recommend the podcast or play.  It is not preachy or ideological.  It's even funny.

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Yesterday, I attended our David C. Baum Memorial Lecture on Civil Liberties and Civil Rights, given by Lee C. Bollinger, President of Columbia University and Professor of Law at Columbia Law School.  President Bollinger is also the author of Uninhibited, Robust, and Wide-Open:  A Free Press for a New Century.  (As a blogger, I can confess that I have not read the book, or even started it and finished mid-stream.)  Readers of this blog may already know that President Bollinger is the Deputy Chairman of the Federal Reserve Bank of New York.

President Bollinger's talk had many excellent insights that I had not focused on before.  As newspaper publishing becomes less profitable and newspaper budgets shrinks, foreign correspondence, presumably the most costly type of reporting, shrinks.  In our era of global interconnectedness, the diminishment of first-hand reporting of events in foreign countries would seem to come at exactly the wrong time.  President Bollinger made a cogent argument for state-supported newspapers, given the success of public universities in developing knowledge and objective commentary; the U.S.'s robus traditional of first amendment rights; the success of public-sponsored radio and television (NPR and PBS); and the success worldwide of public-sponsored news (BBC).  (He has also made this argument in the WSJ.)  But, what interested me was his consideration (and dismissal from consideration) of a substitute to traditional newspaper reporting in foreign countries:  bloggers.

Actually, President Bollinger never used the word "blogger."  He used the term "citizen-journalists."  He brought up the argument that citizen journalists could replace traditional institutions of a free press in the sphere of foreign correspondence, and he said "no."  I was not sure, however, that I caught his reasoning.  He had already mentioned the lack of a free press culture (censorship) in many of these countries (particularly China), so he may hae suspected that bloggers in those countries would never be able to replace professional U.S. reporters with more resources and legal protections.  Or, he may have just assumed that citizen-journalists did not have the expertise or wherewithal to be a good substitute for a professional press.

On the heels of this talk, the NYT today runs an op-ed from Thomas Friedman, Power to the (Blogging) People, which is very optimistic that the 70 million bloggers in China may begin to act as a "third party" in U.S.-China relations.

Interesting stuff!

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To be fair, it is a Monday, which has never made the lives of news-seeking reporters easy, but the A1 story about China, suggesting that it uses WTO discipline to prevent other countries from excluding its exports, but gooses those exports by keeping the value of the RMB low - there is no international strength-of-currency discipline - is both wrong and trite, a rare accomplishment.  Let's count some of the ways:

• It is trite because we've known that China, like all exporters (and economists think, all people), benefits from low trade barriers, which the WTO provides, for a very long time.  We've also been hearing about China's weak currency for years.  There's no news in those insights.
• It is wrong because China isn't an active plaintiff in the WTO - though it is easily the most sued defendant - as the Times admits: "China joined the W.T.O. in 2001 and in its first seven years filed only three cases. But it has stepped up its pace recently, and has filed four of the 15 cases in the last year." China benefits from the WTO baselines, like all members, but it hardly "aggressively" uses all of its WTO resources.
• The implication is that we should have some sort of global currrency discipline, as the EU had before it moved to the Euro, I suppose.  Such a discipline could be had by the lamented-by-few gold standard, I suppose.  But ... really?  Gold?
• More to the point, I, like the Times, believe in international law and institutions - maybe we should have an international currency union!  But story that suggests that what China has going for it is membership in the iron-disciplined WTO and rogue-state status as a currency provider suggests that international law has much, much more power than it probably really does.  If the US and EU wanted to invoke safeguards and slap massive tariffs on Chinese goods, they could do it.  If they want to trade Taiwan arms sales for massive currency deflation, they could possibly do that as well.  Even without a WTO for the world's currencies. 

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I couldn’t agree with Rachel more. The discussion on the role of corporations in society is not over, in fact two seemingly separate stories from last week – the standoff between Google and China and the landmark Supreme Court decision in Citizens United –together signal that we are a watershed moment in this question. I don’t claim to have done the type of deep thinking that Rachel or Gordon or Lisa or other corporate scholars who have written on corporate social responsibility have. But at the risk of interloping into territory others know and think about far deeper and better than I, consider a few quick thoughts on how contrasting Google/China with Citizens United suggests we are returning to some very old questions about the twin risks of not having corporations separated from government power and not having governments separated enough from corporate power.

I would argue that Google’s threat to leave China because of government intrusion into its operations can be seen as a victory for those who advocate for corporate social responsibility. And the Citizens United decision obviously represents a victory for those who want to see corporations as not being creatures of the state, but rather as persons that can check government action. But these two victories pose thorny intellectual problems for the victors. These problems, in turn, reveal something about the horrible tangle we find ourselves in after the financial crisis as we cut our way between the risks of government being captured by corporate interests and corporations becoming the playthings of the state. Bear with me, because I think these two stories also have something to tell us about New Governance and the need for even greater cross pollination between public and private law in scholarship and the classroom.

Google v China: Do we know corporate social responsibility when we see it?

Many (I won’t even attempt to embed links) have applauded Google’s threat to pull out of China on account of state censorship and cyberattacks on Google’s servers as a victory for corporate social responsibility. Some scholars, like Ribstein, complicate this interpretation, in part, because Google’s actions may stem more from pure economic self interest. Given Google’s business model -- particularly their need to reassure users of the sanctity of personal information -- it may be impossible to disentangle definitively whether this resistance to China is an example of self-interest or social responsibility.

Let me ask a more basic question. How do we define what corporate social responsibility is? And who gets to define it? When we discuss corporate social responsibility at the end of my Business Associations class, there inevitably seems to be widespread consensus in the classroom about what responsible behavior means. Everyone seems to agree that dumping mercury in the Rio Grande or employing child laborers is irresponsible. But then I ask students what if social activists were pushing a corporation either to include abortion coverage in their health plans or to exclude same sex partners from employee health benefits. Consensus evaporates.

Do we define corporate social responsibility through the public law process? There are real dangers with treating corporate social responsibility as a matter of positive law and state determination. Consider that Google may not be a good corporate citizen if you look through the lens of the Chinese government. They are violating Chinese law. That of course is an extreme, rhetorical example. But there is a deep concern though that by implicating public law or government intervention – however light and well-intentioned -- in the core purposes of corporations we are slouching towards treating corporations as a plaything of the state rather than as a potential check on government power. Which is the role many lauded Google for playing.

So the Google victory poses several questions for advocates of corporate social responsibility, including how do we know what is corporate social responsibility, who decides, and are we comfortable that we can draw principled distinctions that will ensure the public does not subsume the private? Are corporate social responsibility advocates putting great faith in the political process to check abuses?

Citizens United: spheres unseparated

Meanwhile, Google and all other corporations received a huge boost to their political power and their ability to check and shape government regulation by virtue of the Supreme Court’s landmark decision in Citizens United. I won’t pretend to be a public law scholar, but the sweeping aside of restrictions on corporate political speech clearly represents the culmination of a centuries long evolution of case law -- running from Dartmouth College to Bellotti – that has given corporations more and more of the constitutional rights of natural persons. If last week’s Supreme Court decision means anything, it is a clear refutation of the ancient idea that corporations are creatures of the state.

But in this victory too lies a deep intellectual challenge for the victors. In the precursor of the current debate on social responsibility, Berle espoused a view of corporations and government as existing in “separate spheres” a view that echoed 19th century political thought and was in turned echoed later by Milton Friedman and others who later argued against corporate social responsibility. To render a fine idea into a quick sausage: governments should set the rules of the game for corporations then stay out, and corporations play by the rules.

From a pure descriptive standpoint, after the Citizens United decision, it seems impossible to argue that these spheres can be neatly separated. Corporations are not just playing by the rules, they have the right to participate in setting them. Moreover, they may be the 800 lb gorilla in the room. One interesting morsel in reading through the dissent was to see Justice Stevens grappling, even briefly, with corporate law scholarship questioning whether shareholders have the realistic ability to control corporate speech through corporate governance.

More deeply, do we now need to worry more that corporate law rules are not merely the product of competition and economic efficiency but set through management’s use of the political process. (For an interesting comparative study of the intersection of politics and corporate governance, see Peter A. Gourevitch & James Shinn, Political Power & Corporate Control (Princeton 2005). There seems to be a danger of management using the political process to hardwire not only management entrenchment but the political preferences of those in control of corporations. Aren't those who laud Citizens United placing great faith in the capacity of markets and the competition for corporate control to prevent agglomerations of political power? If the Google/China standoff lays bare for the need for the separation of corporations from state control, Citizens United raises the question of how we ensure that governments can retain sufficient independence from corporate control.

Strange constellations: the alignment of corporate law scholars after the financial crisis

I don’t think these concerns about corporations capturing the government or the government overreaching into the private sector are just dystopian constructs. The bailouts during the financial crisis reveal that these concerns are festering. There is plenty in the bailout for people across the political spectrum to lament. Progressives lament that bailing out AIG and other firms represents government capture and the socialization of loss and the privatization of profit. Conservatives lament the government interference in the discipline of the marketplace and now government using its leverage from the bailouts to justify interventions such as in executive compensation.

In the wake of the financial crisis, is government becoming the plaything of corporations? Are corporations becoming the playthings of government? Or is the reality some complex and perverted mix of both? Forgive the metaphor, but we seem to be stuck in bad remake of some scene from Eyes Wide Shut. It’s not clear from the tangle and the masks who is in control, but it’s clear it is not G-rated.

Problems of power and the dangers of a lack of clarity between public and private power point to a reason to ask tough questions of New Governance – which I admit to being only at the beginning of understanding. Cindy Williams politely told me that there are different versions of New Governance. At its core, New Governance seems to look to public/private partnership in regulation. But blurring the lines between public and private, even in experiments, has dangers. Progressives should fear regulatory capture. Libertarians should fear government co-opting the private sector.

Further afield, experimentation to insulate government decision-making from the political process has again become a constitutional issue as revealed by the Supreme Court taking up the challenge to the Public Company Accounting Oversight Board. This case – about an obscure and odd agency duckling created in the wake of the Enron scandal to insulate the regulation of the accounting profession from the political influence of the accounting profession – brought together strange constellations of law professors to support and oppose the constitutionality of the agency. If you look at the professors who filed briefs as amici, you might seem some striking lineups. I don’t presume to place scholars in political pigeonholes, but their previous scholarship suggests we have seen truly strange alliances of professors with very different political beliefs. And within the various alliances, the professors likely have very different opinions on the relative risks of state versus corporate power. I am sorry I missed the AALS Hot Topic Panel on the case, because I hear it cast a sharp spotlight on the strangeness of these political constellations.

Is this a one-off phenomenon, or are we seeing an ideological realignments in the legal academy? If you are outside the academy, you might ask: who care what we eggheads think on this technical topic? It sounds trite, but ideas matter and will spill over into the political arena -- perhaps after years of gestation. Perhaps the gestation period will be much shorter; the political arena seems ripe for a tectonic shift. We already see stark examples of strange political bedfellows – the Kuciniches of the left and the Pauls of the right -- in Congressional opposition to bailouts and to the political independence of the Federal Reserve itself.

Unchecked Power – Public and Private

So in debating the risks of concentrated corporate power versus concentrated government power, we are likely revisiting the same debates we had at the turn of the last century. History didn’t end. Nor does it repeat. It rhymes and samples. Indeed, to sample from my favorite poem, “All the new thinking is about concentrated power. In this it resembles all the old thinking…”

We are also likely to hear some familiar motifs in the political noise – such as calls to break apart corporate conglomerates to reduce perceived threats to democratic values. Is this perhaps an unspoken aim of the Volcker plan to limit the size of financial institutions. Will we return to trust busting?

If we are concerned about democratic values, we need to pay attention to agglomerations of control in the media. Without a critical and independent media, we will have no way of gauging how corporate and state powers are intersecting. But we may come to find a genie let out of the bottle during the Clinton presidency when few were watching closely. If few really understood what the repeal of Glass Steagall would mean for the consolidation of power in the financial sector, are we considering enough what the Telecommunications Act of 1996 means for the consolidation of power in the media industry? Do we understand how competition and consolidation among broadcast, cable, phone, internet, newspaper, radio corporations will play out in terms of concentrations of political power? I certainly don’t because communications law and the economics of those industries lie far outside my understanding.

When historians look back to the Clinton era, they will likely see the most radical shifting in economic and political control since FDR – all the more radical because its magnitude was obscured by its technicality and by the fact that the President who squired it cast himself as part of some “Third Wave” in politics. Beware those selling easy ways to transcend and triangulate across political divides. Here is a third example of a statute passed during the Clinton years that will have far reaching consequences for concentrations of political power: cyberlaw scholars have been trying to get us for years to pay attention to what the Digital Millenium Copyright Act of 1996 means for who holds the power over the intellectual commons.

Looking for checks

Cyberlaw scholars first made their mark by alerting us to the subtle and far-reaching consequences of seemingly technical questions on how both the state and corporations could use the internet as a means of social control. So we are now full circle to the conflict between Google and China. One of those scholars, Larry Lessig advocated making the “code” of the internet “open” to allow civil society to check these subtle forms of control. This last fall, Lessig notably balked at a broadbrush application of these same open source ideas to making politics more transparent.

Indeed, citizens would have trouble making sense of raw government transparency – in terms of the volume of information and the complexity of issues. This is not because people are stupid, but no individually has time to master complex issue and process reems of raw data. We need to rely on experts to edit and filter information for us. The forms of political, economic, and technological control are subtler and potential threats to democratic value harder to grasp.

But how do we trust those experts? Trust throughout society has long been thought to have been declining for decades, and perhaps accelerating in an age of political polarization. Moreover, we also decry how the digital age has left us with shorter attention spans. We also live famously  in an age of irony. It is often remarked now that some of our most intelligent commentators on public affairs are fake newscasters. This irony may lead to a particularly unfunny kind of political paralysis (“Ha ha – that’s really funny what Colbert said about our country going to hell. LOL ;-).”)

It’s not easy to make sense of the new dangers of concentrations of political power. Bolshevism and trusts were simple compared to understanding interconnections between complex corporate ownership structures, telecommunications regulations, and how the technology of the internet functions.

Understanding this landscape requires the involvement of scholars who are independent of corporate and government power. Which is why sources of university financing during an age of budget cuts looms as so large an issue.

All the New Thinking: cross pollination in legal scholarship and public law in the business law curriculum

If legal scholars must play a valuable role in sorting through the risks of concentrating political power, it suggests that faculties need to foster greater dialogue among private and public law scholars. Understanding new constellations of power might require minds in corporate law, constitutional law, cyberlaw, communications law …

Integrating scholarship in corporate law with public law is not a new idea. In fact, this essay has clearly trampled all over ground covered by many scholars who’ve looked at the intersection of public law and corporate law -- Kent Greenfield, Larry Mitchell, Lyman Johnson, Lynn Stout, Cindy Williams, Margaret Blair, Lynn Dallas. Not to mention our own Lisa and Gordon and our guest Rachel. I’m likely making enemies galore by the dozens of scholars I am leaving out including scholars -- like Bainbridge -- critical of corporate social responsibility.

There is also a question of whether we corporate law scholars need to build a bigger public law component into basic business law courses. This is also not a novel idea. I admit being resistant to doing this; law students need to learn the nuts and bolts in order to get a job and have the intellectual tools to practice as effective lawyers. But I am reconsidering, because law students also need a set of intellectual tools to exercise their duties as citizens.

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As my two-week guest blogging stint is now over, I want to thank Gordon for inviting me and hope that readers found some of this stuff interesting. If you did, I invite you to continue reading over at my regular blog, the Chinese Law Prof Blog. My final post here will be on an interesting aspect of Chinese tort law: the absence of a direct tie between lost income and tort damages for wrongful death.

If you tortiously injure someone in China, the damages are as you might expect: medical expenses, lost income due to missed working time, and maybe even something for emotional distress. (Article 119, General Principles of Civil Law.) Thus, given identical injuries and identical fault, you pay more for punching a doctor than for punching a taxi driver. (I mention these only as examples of high-income and low-income professions, and mean no disrespect to taxi drivers.)

If you go a bit further and end up killing the person, however, in which case they will (if young) have a lot of missed working time, the calculation of damages changes completely. Lost income drops entirely out of the picture, and there is no attempt even to estimate it. Instead, the law switches to an attempt at a need-based standard. The tortfeasor is to pay medical expenses, funeral expenses, "necessary living expenses of the deceased dependents," and "compensation for the victim's death."

These last two terms were specifically defined in an interpretation issued in 2003 by the Supreme People's Court (which has the power to interpret and clarify laws by general rulemaking). "Necessary living expenses" are "calculated on the basis of the average consumption expenditure of those living in the city where the court is located, or the average cost of living for rural residents where the court is located, as the case may be." Clearly, this calculation takes no account of the actual lost income of the decedent; instead, it tries to estimate what the dependents will need to survive at a relatively decent standard of living until they can fend for themselves. Thus, compensation is not apparently paid to adults who have the capacity to work; it is paid only to minors on the basis of the number of years until the minor turns 18, and to other adults unable to work and with no other source of income on the basis of 20 years.

"Compensation for the victim’s death" is, according to the interpretation, "calculated on the basis of 20 times the previous year's average net income of urban residents in the city where the court is located, or the average net income of rural residents where the court is located." As with "necessary living expenses," the actual lost income of the decedent has nothing to do with the amount awarded under the Interpretation.

This system has been criticized in China on the grounds that it discriminates against rural residents by valuing their lives more cheaply than that of urbanites; all lives, say the critics, should be valued equally. To be sure, China does indeed have official discrimination against rural residents; they are explicitly intended to be underrepresented in the National People's Congress, for example. But the problem with this rule is not that it values lives unequally; it is that it values lost income equally: at zero for everyone. Thus, the compensation for lost income is the same (nothing) for wrongful death where the victim is a doctor and where the victim is a taxi driver.

I have heard it argued that this is due to cultural differences: that Chinese (and some civil law jurisdictions) simply view it as wrong to give different amounts of compensation for death. But this misses the point: giving equal compensation for the death itself - in which case there is an argument for treating all lives equally - does not preclude also giving compensation for lost income. And civilian lawyers I have questioned assure me that killing a doctor in their countries does cost more than killing a taxi driver.

Thus, far from being too inegalitarian, the rule in China can be seen as too egalitarian: the dependents of the deceased Shanghai doctor get exactly what the dependents of the deceased Shanghai taxi driver get, even though they have been deprived of much more money. And of course, you get equally inappropriate results when the dependents of urbanites with small earning capacity get more than the dependents of wealthy rural entrepreneurs, for example.

A recent case brought out the importance of location, as well as some of the ambiguities associated with it. A migrant worker living in Beijing was killed in a traffic accident, and because of his rural domicile registration (something that's not easy to change, even though geographical mobility itself has increased greatly in the last several years), the award to his family included only 70,000 yuan (about $9,764) as compensation for death. They appealed, asserting that he should be treated as an urbanite because he was actually living and working in Beijing. The higher court agreed, awarding 170,000 yuan ($23,713), in addition to enhanced amounts under other heads. The case was welcomed by many as an example of "same life, same price," but of course it was just an application of the existing rule, not a negation of it. It showed a willingness to be flexible about which standard to use, but it didn't suggest that the rural-urban distinction was in any way illegitimate.

Although it's not my place to give advice to China's legislators, it seems to me that this problem could be solved relatively easily by allowing courts to include an estimate of lost income in damages for wrongful death - just as they now do in damages for injuries short of death - while separately stipulating another amount to be paid as compensation for the loss of life per se, just to make it clear that the former amount is not compensating for the lost life, and thus carries no offensive implications in being different for different people.

For the time being, though, the moral of this story is: don't pull your punches.

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To continue from yesterday's post on problems with bringing securities-related lawsuits: In addition to the standing and cause-of-action problems, there are other obstacles peculiar to China and its political situation: specifically, the government's fear and distrust of large groups, especially organized ones, that are not under state control. (All social organizations, for example, must be approved by and registered with the state; even fishing clubs and associations for the study of antique furniture have been disbanded for failure to get official recognition.) Securities litigation, of course, is often possible only if the claims of small shareholders can be aggregated through the class action or some other form of group litigation. While Chinese civil procedure does not provide for class actions in the American sense (where non-participants without notice can be bound by the result), it does provide for various forms of group litigation. But the system makes it difficult for plaintiffs in securities litigation to use these forms.

First, one of the criteria for the professional assessment of Chinese judges is the number of cases they handle. Thus, they have every incentive not to aggregate claims, but rather to disaggregate them. Securities plaintiffs coming to court as one group have on occasion been instructed to split up into several smaller groups - based not on any common characteristics, but simply on numbers.

Second, the system of court fees also contributes to the incentive to split up cases. Court fees are a progressively declining multiple of the amount in controversy: the percentage charged for lower amounts is smaller than the percentage charged for higher amounts. Thus, a court earns more hearing 10 claims of $X than hearing one claim of $10X.

Third, there are two recent rules explicitly aimed at putting the lid on group litigation - probably aimed at social discontent, not securities lawsuits, but nevertheless putting a crimp in the latter. The first rule, issued in the name of the All-China Lawyers Association [PDF here], requires lawyers handling any case involving ten or more plaintiffs to report to the local government for instructions and imposes various other burdens on representation. The second rule, issued in 2006, relaxes the previous (spottily enforced) ban on contingency fees, but keeps it for specific types of cases, including - you guessed it - lawsuits involving multiple plaintiffs (which normally means 10 or more).

Finally, there are special rules governing holders of shares listed on stock exchanges outside the PRC mainland, such as Hong Kong and New York. The China Securities Regulatory Commission requires Chinese companies listing outside of China to include in their articles of association a provision stating that all disputes between holders of non-mainland-listed shares and the company or its high-level management shall be resolved through arbitration. Interestingly, this may well have been intended as a shareholder-friendly measure, on the theory often held in Chinese officialdom that you should require people to do what you think is good for them. We don't see such arbitration clauses in the certificates of incorporation or bylaws of American public companies, and (perhaps because nobody wants to be a test case) it's not at all clear that a federal court would accept such a clause as valid grounds for dismissal of a claim arising out of federal securities law. (My information may be out of date or just wrong; I'm interested in this question, so please add a comment if you know something to the contrary.) But there is little doubt it would be effective in China. Interestingly, this arbitration clause does appear in Article 181 of the Articles of Association of PetroChina, a Chinese company listed (among other places) on the New York Stock Exchange. Do investors generally know it's there? Did the SEC? Does anyone care?

Bottom line: don't look to the Chinese legal system to protect your interests as a small shareholder. (The story is a bit better for holders of significant minority stakes.) There are, of course, other institutions out there that might do the job: for example, equity markets, banks, various gatekeepers, and the financial press. In China I don't think they do the job very well. But that's exactly the paper I'm working on now, and it's a lot more than can be contained in a blog entry.

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In my first post, I mentioned that one question one must always ask about corporate governance rules in Chinese law is: do they matter? One reason the rules often don't matter is because there is no practical method of enforcing them. In this post I propose to look briefly at the obstacles to shareholder litigation against companies and their management.

As I mentioned in my first post, although the Company Law and the Securities Law provide that companies and their directors and officers have certain duties, the court system is not always willing to grant a private right of action if the duty is violated. Very often courts may take the view that the problem is one for administrative agencies to deal with. Sometimes the courts' reluctance to take cases is based not on a legal analysis of whether there exists a private right of action, but on a practical analysis of whether the court system has the capacity to handle such cases. Thus, from 2001 to 2003, the Supreme People's Court (SPC) issued three sets of rules instructing lower courts not to accept shareholder lawsuits under the Securities Law unless (a) the suit was for misleading disclosures, and (b) an administrative or criminal punishment had already been imposed on the defendant(s) for the act complained of. (The rules also provided a set of procedures for hearing such cases.) In effect, a disgruntled shareholder must get a key to the courthouse from a government body, and cannot sue at all for losses from insider trading or market manipulation, even though both are equally prohibited in the Securities Law.

The justification for the key-to-the-courthouse rule offered by the SPC was that this was favorable to plaintiffs: a previous finding against the defendants would reduce their evidentiary burden. I have discussed this rationale with a number of academics in China, and have never really gotten a satisfactory answer to my objection that that rationale justifies allowing plaintiffs to bring in a previous finding as evidence, but not requiring them to do so.

A few months ago I read an article in Caijing, a Chinese business magazine, stating that the "spirit'" of a recent SPC document meant that plaintiffs could now sue for insider trading and market manipulation, but the article did not mention the name or source of this document. I e-mailed the author requesting further details, but got no response. When I was in China in December, I questioned a securities litigator about it, and discovered that the article was referring to a speech by a particular SPC official in which he said that such lawsuits should now be allowed to go forward. Does a speech by an SPC official give standing where an official document says otherwise? I guess if local courts think it does, then it does.

More on barriers to litigation tomorrow.

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A recent discussion on the Chinalaw listserv has revealed a fascinating loophole in Chinese real property law: nowhere does it seem to contain a clear prohibition against trespassing. The relevant laws regarding state-prosecuted offenses don't seem to include anything like this; at most, one is forbidden from disturbing order at a workplace, but that doesn't turn on whether one is trespassing or not, and is not an offense against the employer's rights to a particular physical space. On the civil side, one could (if one wished) construct an anti-trespassing norm by combining various provisions in the Property Law: Art. 2, stating that rights in rem include the right to exclude, Art. 32, which says that a rightholder can sue for damages resulting from infringement of his rights, and Art. 35, which says that an aggrieved rightholder may request a court to eliminate an impairment of the right. But whether this amounts to an action against trespassing - in particular, to an action for ejectment, or an injunction against further trespass - doesn't seem clear. A Chinese scholar specializing in real estate law, in his contribution to this discussion, said it does not; according to him, the most Chinese law requires is that someone entering onto the property of another should "restrain [himself]", minimize damage, and compensate for any damage done.

The interesting question, of course, is why this should be so. My hunch is that it's connected to China's pre-reform economy, in which all important urban spaces were under the more or less direct control of a governmental or quasi-governmental entity with access to tools of physical coercion (i.e., people with clubs). Physically as well as politically, pre-reform China was a very closed society - workplaces and apartment buildings were often walled or fenced, with all entrances manned by guards. Trespassing would have been difficult to accomplish simply as a practical matter. Furthermore, much urban land was owned by the state (technically, all of it after 1982), and the particular way of understanding state ownership of land may have contributed. In the US, we have no problem saying that citizens can be trespassers on state-owned land, because the state owns land more or less just like any private party owns land. But in China, state ownership, sometimes called "ownership by the whole people" (the terms are explicitly said to be synonymous) is sometimes and for some purposes interpreted as direct ownership by the citizens of China. Obviously, this couldn't be true in any practical sense - you would need the consent of all joint owners to alienate, for example - but perhaps it's felt just enough to make a notion of trespassing unthinkable.

It's hard to believe - and to the best of my knowledge it's not true - that in China you can simply waltz into someone's living room (provided the door is unlocked) and make yourself comfortable provided you act with restraint and are willing to compensate for any damage you cause. But the legal basis for saying you can't is surprisingly obscure.

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Having taught the first-year property course for eight years and instructed my students in the "bundle of sticks" model of property rights, I was fascinated to run across the following Chinese property law case a couple of days ago. (For those who can read Chinese, it's here.) By way of background, China passed its first comprehensive statute governing rights in rem (the "Property Law") last year, and it came into effect in October. Although it did not (at least in my opinion) fundamentally revolutionize anything - contrary to some breathless reports, private property existed and was protected in China prior to Oct. 1, 2007 - in any case we are now starting to see cases in which courts look to it for guidance.

In the case in question, Husband (H) and Wife (W) divorced by agreement in 2005. Their agreement provided that the 2-bedroom apartment held in W's name (China has a community property regime, so the nominal owner is not necessarily important) should be divided, with ownership over the southern room to H and ownership over the northern room to W. By 2007, W had had second thoughts about this arrangement, and brought suit in January to have the agreement declared invalid. She sought full ownership of the apartment, with a payment to go to H representing the value of his interest.

The Beijing No. 1 Intermediate Court agreed. (I believe the judgment was issued after Oct. 1, and applied the Property Law as the rule of decision.) According to the court, while there can be joint ownership over the same thing, there cannot be separate ownership rights over the same thing, and an apartment is the smallest "thing" you can have in real property law; you can't subdivide it any further.

The news report of the case appends an explanation from the judge who decided it, but it's not very helpful - there's a hint that what's driving the decision is China's property registration system, which doesn't have the capacity to register ownership of separate rooms within an apartment unit. But one also gets the sense that the judge thinks it's just self-evident that you can't own rooms within an apartment; he says specifically that you are not allowed just to make up ownership interests at will.

Interestingly, though, this is precisely what you pretty much are allowed to do in the US; there is no elementary particle of property rights. In my last post, I talked about the way Chinese law often seems centered around the needs of officialdom. That may go some way toward explaining the different approach to property rights as well. The creation of property rights in the US is highly decentralized and contractual. China is simply not willing to let individuals have this kind of undisciplined power to create property rights that the state is then going to have to protect. The state wants more control over what its coercive machinery is going to be asked to do.

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Many thanks to Gordon for his kind introduction and for inviting me on as a guest blogger. I'm a regular reader of Conglomerate and it's an honor to be asked to join in.

My research interest is in modern Chinese legal institutions generally and corporate governance in particular; recently I've been looking not at the substantive rules of corporate governance, but at the institutions that would make those substantive rules matter, and the extent to which they exist in China.

One can't spend much time studying Chinese law without being struck by the tremendous gap between what the rules say and what actually happens. This goes beyond the usual law-on-the-books versus law-in-practice gap that one can find in any jurisdiction, where the gap is attributable to obsolescence, resource constraints, and political factors such as government unwillingness to enforce certain types of laws. In China it seems to arise sometimes from a different view of law altogether:
essentially a kind of didactic text that regulated parties are supposed to read and obey. If obedience is not forthcoming, the response is to blame the regulated parties for their willfulness. An alternative response would, of course, be to look at the enforcement structure provided by the regulations in question: do regulated parties have any reason to obey? But this response is relatively rare.

Thus, for example, the Chinese Company Law provides that joint-stock companies (more or less the equivalent of the Delaware corporation) shall have both a board of directors and a board of supervisors. The latter is supposed to keep an eye on the former. But it is elected by exactly the same body that elects the board (i.e., the shareholders) and, while it can ask questions of the directors or request explanations of certain acts, it has no real power to do anything if the answers aren't satisfactory. A recent revision to the Company Law (in 2005) gave it the power to call a shareholders' meeting, but that's about it.

Another example is the director's duty of care and loyalty. This is stated in one provision of the 2005 revised Company Law, but there is no right of action clearly attached to it. Where the law does not very clearly provide you with a right of action (and even in some cases where it does), Chinese courts are typically very unwilling to give you one.

This in turn stems from another feature of Chinese law: that it often seems to make sense more as a set of instructions to officials than as a rights-granting instrument. For example, one type of company under the Company Law may dispense with a board of directors if it is "relatively small" and has a "relatively small" number of shareholders. But the law provides no clue as to how we are to know what counts as "relatively small" in each case. If we think of the law as a recipe for entrepreneurs, it's bad drafting. But if we think of it as instructions to officials in the bureaucracy that handles corporate registrations, then it's easier to understand: it's telling them to make a discretionary judgment. The same thinking is behind regulations that look like private law but say that something or other "should normally" be done or "should in principle" be done.

One might reasonably ask, "But is that so different from US (or other Western) law? Surely we have vague terms such as 'due process' and 'reasonable' that we happily give to judges, juries, or administrative agencies to interpret." This is not a bad point. I think the difference, though, is in the fact that in the US system, we now have a pretty good idea of who has the power to interpret what; when people draft legislation, they could probably readily tell you which body would be interpreting which term and under which principles. Very few of these matters are well worked out in the Chinese legal system. Legislation will always have problems, but the courts have very little power and prestige, and thus aren't a good institutional solution to these problems. As a result, while all legal systems generate uncertainty and contradiction, China's is unusual in not having well-understood techniques for resolving that uncertainty and contradiction.

The bottom line is that when one hears that Chinese corporate law requires such-and-such or imposes such-and-such a duty, one has to ask whether there's any reason to think that this alleged requirement or duty is at all meaningful. One doesn't have to be a card-carrying Holmesian realist to wonder whether a duty that is in substance wholly hortatory should really count, and be reported, as a legal duty just like the legal duty to drive carefully, refrain from embezzlement, etc.

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Remember that name. She is 25 years old, and she is the richest person in China.

Her father, Yang Guoqiang, is the founder of Country Garden, a real estate development company that went public yesterday in Hong Kong, raising $1.6 billion. Guoqiang gave all of his shares in the company to Huiyan, who is slated to take over leadership of the company in the future.

According to the NYT, Country Garden "is a virtual assembly line of home building for China's raidly growing middle class. Mr. Yang's genius is that he has a created a Wal-Mart approach to housing development for the middle class."

Talk about a growth company!

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Why are executives so enamored of quoting Chinese proverbs?  Daniel Gross over at Slate has the answer.  In a nutshell:

[E]xecutives quote Sun Tzu and Lao Tzu for the same reason they started exchanging their bespoke suits for business-casual khakis: They have to show that they're with it. China represents the future and is the locus of immense growth. Casually tossing Chinese proverbs into conversation shows that you're down with the latest trends, even if you haven't (yet) relocated your manufacturing capacity to Shenzhen.

Read the full story for some amusing uses and misuses.

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Fortune Magazine has a nice piece on the battle for China among the big Western investment banks.  It opens by describing the beauty contest to lead the upcoming $12 billion IPO by the Industrial & Commercial Bank of China, a contest for which Goldman Sachs seemed to have the inside track.  (See here and here for other recent coverage of Goldman).

Goldman Sachs was the hands-down favorite. Its executives had courted ICBC for years. On his many trips to China, CEO Hank Paulson had called regularly on chairman Jiang Jianqing. Jiang's daughter had worked as a summer intern at Goldman in New York City. Earlier this year Paulson had underscored the firm's commitment by pledging to buy a 7% stake in the bank for $2.6 billion.

ICBC hadn't even invited Goldman's archrival, Morgan Stanley, to submit a proposal, allowing Fred Hu, a polished, Harvard-trained economist, to make Goldman's pitch with confidence.

Of course, Goldman got aced out of the offering, which went to a group including Merrill, Credit Suisse, and Deutsche Bank.  The story goes on to describe the increasing sophistication of Chinese leaders in playing I-banks off against one another, and the cutthroat competition among the I-banks not only for deals, but for experienced China hands and strategic partnerships with local firms.

Citigroup has apparently had some tough sledding in China, earning ignominy by having led the only China IPO to date that had to be pulled--the CNOOC IPO in '99 (the same CNOOC--China National Offshore Oil Corp.--that bid for Unocal last year).  So like a good strategic player in China, Citigroup beefed up its guanxi by hiring former Premier Zhao Ziyang's daughter-in-law for a salary in excess of $8MM.  Things didn't work out so well . . . but I'll let you read the rest.

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The WTO's gamble on China seems to have paid off. Import tariffs have fallen dramatically over the past four years, and trade with China has been booming. This interesting article in the IHT quotes Owen Nee, a U.S. lawyer at the Orrick firm, on the effect of WTO requirements on China's internal political situation:

If Beijing tells provincial authorities to do something, they don't listen. But if they are told these are WTO rules then there is more chance of compliance.... You have this very interesting situation post-Tiananmen Square where, in order to stay in power, the Communist Party has to run a capitalist economy, and they are doing it quite well.

The W$J is also covering this story in anticipation of upcoming meetings in Hong Kong, where the U.S. is expected to pressure China for increased reforms, especially with regard to enforcement of intellectual property rights. We are all familiar with this problem, but the W$J points to another issue that could take on increased importance in the near future:

Standards. Beijing has begun to introduce national technology standards for a range of products that foreign firms say erect new nontariff barriers in violation of WTO rules requiring fair competition. They say China is developing standards that diverge from leading international technologies in such areas as Internet protocols, mobile communications and data protection.

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