Rationale and Framework Design for the Exercise of Parent Company Shareholders’ Pass-through Rights

Abstract

The "shareholders’ rights pass-through" in the context of a parent-subsidiary corporate framework refers to allowing shareholders of the parent company to bypass the legal entity barriers between the parent and subsidiary companies, thereby exercising the right to inspect the subsidiary’s books. This system is also known as the "parent company shareholders’ book inspection regime". In the face of global economic integration, the trend toward corporate group structures is inevitable. Traditional corporate law, centered around individual corporations, is ill-equipped to address the complexities of corporate groups. As a result, insiders of a corporation might exploit the parent-subsidiary structure to unjustly deprive parent company shareholders of their rightful information access, thereby illicitly consuming corporate assets. This paper examines the theories and practices of corporate law in the United States, Japan, and other countries, aiming to explore the potential adoption of the shareholders’ rights pass-through system in China. We argue that in designing this system and the exercise of such rights in China, several issues should be considered: under what parent-subsidiary company structures should parent company shareholders be allowed to inspect subsidiary books; what grounds might subsidiaries have to deny such pass-through information rights; whether court permission is a prerequisite; and whether there should be specific shareholding requirements for the parent company’s shareholders.