Full download test bank at ebook textbookfull.

com

A Comparative Study of Funding

Shareholder Litigation 1st Edition

CLICK LINK TO DOWLOAD

https://textbookfull.com/product/a-
comparative-study-of-funding-shareholder-
litigation-1st-edition-wenjing-chen-auth/

textbookfull
More products digital (pdf, epub, mobi) instant
download maybe you interests ...

A Study of Criminal Proceeding Conventions in Tang

Dynasty Chen

https://textbookfull.com/product/a-study-of-criminal-proceeding-
conventions-in-tang-dynasty-chen/

The Mediated Politics of Europe: A Comparative Study of

Discourse 1st Edition Mats Ekström

https://textbookfull.com/product/the-mediated-politics-of-europe-
a-comparative-study-of-discourse-1st-edition-mats-ekstrom/

A Comparative Study of Korean Literature: Literary

Migration 1st Edition Sangjin Park (Auth.)

https://textbookfull.com/product/a-comparative-study-of-korean-
literature-literary-migration-1st-edition-sangjin-park-auth/

Islamic Development in Palestine A Comparative Study

1st Edition Stephen Royle

https://textbookfull.com/product/islamic-development-in-
palestine-a-comparative-study-1st-edition-stephen-royle/
The Good Society A Comparative Study of Denmark and
Switzerland 1st Edition Henrik Christoffersen

https://textbookfull.com/product/the-good-society-a-comparative-
study-of-denmark-and-switzerland-1st-edition-henrik-
christoffersen/

The Geometry of Urban Layouts: A Global Comparative

Study 1st Edition Mahbub Rashid (Auth.)

https://textbookfull.com/product/the-geometry-of-urban-layouts-a-
global-comparative-study-1st-edition-mahbub-rashid-auth/

Measuring Police Subcultural Perceptions A Study of

Frontline Police Officers in China 1st Edition Zheng
Chen (Auth.)

https://textbookfull.com/product/measuring-police-subcultural-
perceptions-a-study-of-frontline-police-officers-in-china-1st-
edition-zheng-chen-auth/

Estimating the Impacts of Urban Growth on Future Flood

Risk: A Comparative Study 1st Edition William Verbeek

https://textbookfull.com/product/estimating-the-impacts-of-urban-
growth-on-future-flood-risk-a-comparative-study-1st-edition-
william-verbeek/

A J Appasamy and his Reading of Ra ma nuja a

Comparative Study in Divine Embodiment 1st Edition Dunn

https://textbookfull.com/product/a-j-appasamy-and-his-reading-of-
ra-ma-nuja-a-comparative-study-in-divine-embodiment-1st-edition-
dunn/
Wenjing Chen

A Comparative
Study of Funding
Shareholder
Litigation
A Comparative Study of Funding Shareholder
Litigation
Wenjing Chen

A Comparative Study
of Funding Shareholder
Litigation

123
Wenjing Chen
East China University of Political Science
and Law (ECUPL)
Shanghai
China

ISBN 978-981-10-3622-4 ISBN 978-981-10-3623-1 (eBook)

DOI 10.1007/978-981-10-3623-1
Library of Congress Control Number: 2017937116

© Springer Nature Singapore Pte Ltd. 2017

This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part
of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations,
recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission
or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar
methodology now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publication does not imply, even in the absence of a specific statement, that such names are exempt from
the relevant protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information in this
book are believed to be true and accurate at the date of publication. Neither the publisher nor the
authors or the editors give a warranty, express or implied, with respect to the material contained herein or
for any errors or omissions that may have been made. The publisher remains neutral with regard to
jurisdictional claims in published maps and institutional affiliations.

Printed on acid-free paper

This Springer imprint is published by Springer Nature

The registered company is Springer Nature Singapore Pte Ltd.
The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore
Acknowledgements

This book is mainly based on research conducted in Financial Law Institute,

Ghent University, where it took shape under the guidance of my Ph.D. promoter
Prof. Dr. Hans De Wulf. I would like to express my gratitude to Prof. Hans De Wulf
for the guidance and support throughout the whole course of my research. I would
also like to thank other members of my guidance committee, Prof. Stefaan Voet
from KUL and Prof. Alain François from VUB for their insightful comments on my
research. My sincere appreciation also goes to members of the Financial Law
Institute for such great atmosphere for academic research. I would also like to
acknowledge the funding provided by the China Scholarship Council to financially
support my research in Ghent. Last but not least, my deepest gratitude goes to my
family, especially to my husband Dr. Tiancheng Jiang who supported and
encouraged me during my days in Ghent. The completion of this book would not
have been possible without love and support from my family.

v
Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 1
1.1 A General Evaluation of Shareholder Litigation:
Pros and Cons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 1
1.1.1 Positive Externalities Brought by Shareholder
Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 1
1.1.2 Potential Drawbacks of Shareholder Litigation . . . . . . .... 3
1.2 The Proposal of ‘Funding Shareholder Litigation’ . . . . . . . . . .... 4
1.2.1 What Is the Funding Problem with Shareholder
Litigation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 4
1.2.2 Why Funding Issue Is Crucial for Shareholder
Litigation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 5
1.2.3 How Will This Book Investigate Funding Issue
of Shareholder Litigation? . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.3 The Structure of the Comparative Study . . . . . . . . . . . . . . . . . . . . . 6
1.3.1 The Structure of the Book . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.3.2 The Countries Chosen for the Comparative Study . . . . . . . 9
1.4 The Scope of the Comparative Study . . . . . . . . . . . . . . . . . . . . . . . 11
1.4.1 Public Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.4.2 Third Party Litigation Funding (TPLF) . . . . . . . . . . . . . . . . 11
1.4.3 Lawyer’s Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.4.4 Company’s Funding (Indemnity Cost Orders, ICO) . . . . . . 13
2 An Overview of Shareholder Litigation . . . . . . . . . . . . . . . . . . . . . . . . 15
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2 Shareholder Direct Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.3 Shareholder Derivative Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.3.1 Shareholder Derivative Actions in China . . . . . . . . . . . . . . 18
2.3.2 Shareholder Derivative Actions
in the United Kingdom . . . . . . . . . . . . . . . ............. 32
2.3.3 Shareholder Derivative Actions
in the United States . . . . . . . . . . . . . . . . . . ............. 41

vii
viii Contents

2.4 Shareholder Class Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

2.4.1 Class Actions in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
2.4.2 Class Actions in the United Kingdom . . . . . . . . . . . . . . . . . 57
2.4.3 Class Actions in the United States . . . . . . . . . . . . . . . . . . . 58
3 Rules on the Costs and Funding of Shareholder Litigation . . . . . . . . 67
3.1 General Rules on the Costs of Shareholder Litigation . . . . . . . . . . 67
3.1.1 Costs Arising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.1.2 The Cost-Shifting Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
3.1.3 Shareholder Litigation Is Expensive and It Lacks
Incentives for Litigants . . . . . . . . . . . . . . . . . . . . . . . . .... 78
3.2 How to Fund Shareholder Litigation: General Funding
Techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
3.2.1 Funding Regimes in General . . . . . . . . . . . . . . . . . . . . . . . . 79
3.2.2 Self-funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3.2.3 Legal Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3.2.4 Funding by Lawyers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
3.2.5 Public Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
3.2.6 Third Party Litigation Funding (TPLF) . . . . . . . . . . . . . . . . 85
3.2.7 Legal Expenses Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 89
4 Funding Shareholder Litigation: Public Funding . . . . . . . . . . . . . . . . 91
4.1 An Overview of Public Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
4.1.1 The Analysis of ‘Public Interest’ Element . . . . . . . . . . . . . . 91
4.2 Public Funding of Derivative Actions: The Israeli Case . . . . . . . . . 97
4.2.1 Statutory Provisions Under the Israeli Law . . . . . . . . . . . . . 97
4.2.2 Rethinking Section 205A . . . . . . . . . . . . . . . . . . . . . . . . . . 98
4.2.3 Dilemmas in Public Funding of Derivative Actions . . . . . . 101
4.3 Public Funding of Class Actions: The Canadian Case . . . . . . . . . . 107
4.3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
4.3.2 Ontario Class Proceeding Fund . . . . . . . . . . . . . . . . . . . . . . 108
4.3.3 The Quebec Fonds D’aide Aux Recours
Colleftifs (the Quebec Fonds) and Its Comparison
with the Ontario Class Proceedings Fund . . . . . . . . . . .... 114
4.4 The Potential for Public Funding in China . . . . . . . . . . . . . . . .... 116
4.4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 116
4.4.2 Shareholder Litigation in China: How Does
It Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 116
4.4.3 Typical Characteristics of Chinese Judicial System . . . .... 125
4.4.4 The Selection of an Authority Taking Charge
of Public Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 128
4.4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 134
4.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 135
Contents ix

5 Third Party Litigation Funding (TPLF) of Shareholder

Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
5.1 An Overview of TPLF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
5.1.1 The Traditional Avoidance of Champerty
and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
5.1.2 The Economic Analysis of TPLF . . . . . . . . . . . . . . . . . . . . 141
5.1.3 Ethical Issues in TPLF . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
5.1.4 Externalities Brought by the Use of TPLF . . . . . . . . . . . . . 147
5.2 Third Party Litigation Funding: The Australian Case . . . . . . . . . . . 150
5.2.1 Statutory Exceptions and Access to Justice . . . . . . . . . . . . . 150
5.2.2 Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
5.2.3 Regulations on TPLF in Australia . . . . . . . . . . . . . . . . . . . . 154
5.2.4 Current Practice and the Way Forward . . . . . . . . . . . . . . . . 155
5.3 Third Party Litigation Funding: The English Case . . . . . . . . . . . . . 157
5.3.1 The Origins of TPLF in England . . . . . . . . . . . . . . . . . . . . 157
5.3.2 Rules Regarding TPLF . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
5.4 Third Party Litigation Funding: The American Case . . . . . . . . . . . 164
5.4.1 The Traditional Prohibition of Champerty
and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
5.4.2 Ethical Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
5.5 Concerns and Policy Arguments Brought by the Use
of TPLF for Shareholder Litigation . . . . . . . . . . . . . . . . . . . . . . . . 173
5.5.1 The Third Party Funder’s Financial Adequacy . . . . . . . . . . 173
5.5.2 The Opt-in and Opt-out Dilemma in Funded Class
Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
5.5.3 The Termination of Third Party Litigation Funding . . . . . . 178
5.5.4 The Risk of Refusal to Share . . . . . . . . . . . . . . . . . . . . . . . 179
5.6 The Potential for TPLF in China . . . . . . . . . . . . . . . . . . . . . . . . . . 180
5.6.1 The Current Approach to Fund Shareholder Litigation
in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
5.6.2 Why Does China Need TPLF? . . . . . . . . . . . . . . . . . . . . . . 181
5.6.3 The Legal Basis for TPLF Under the Current Legal
System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
5.6.4 Potential Problems Brought by the Introduction
of TPLF in China: From the Perspective of Current
Legal System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
5.7 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
6 Funding Alternatives Through Fee or Cost Arrangements . . . . .... 189
6.1 Funding by the Company (Indemnity Cost Orders ‘ICO’
in Shareholder Derivative Actions) . . . . . . . . . . . . . . . . . . . . . . . . . 189
6.1.1 The Origin and Working Mechanism of ICO . . . . . . . . . . . 190
6.1.2 Problems with ICO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
6.1.3 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
x Contents

6.2 Funding by Lawyers: The First Option (Conditional Fee

Agreements, CFAs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
6.2.1 The Nature of CFA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
6.2.2 Funding Derivative Actions with a CFA . . . . . . . . . . . . . . . 196
6.3 Funding by Lawyers: The Second Option (Contingency
Fee Arrangements, CGFAs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
6.3.1 The Conflict of Interests and the Agency Problem
Under a CGFA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
6.3.2 CGFAs and Shareholder Derivative Actions in the US:
A Potential Rise in Case Volume . . . . . . . . . . . . . . . . . . . . 201
6.3.3 Information Asymmetry in CGFAs . . . . . . . . . . . . . . . . . . . 203
6.3.4 Lawyers’ Ethical Issues in CGFAs . . . . . . . . . . . . . . . . . . . 204
6.3.5 The Potential for CGFAs: The English Experience . . . . . . . 208
6.4 Legal Practice of Funding Alternatives (ICOs, CFAs
and CGFAs) in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
6.4.1 Legal Practice of CGFAs in China and Its Potential
to Fund Shareholder Litigation . . . . . . . . . . . . . . . . . . . . . . 210
6.4.2 Potential for CFAs to Fund Shareholder Litigation
in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
6.4.3 The Potential for ICOs to Fund Shareholder Derivative
Actions in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
6.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
7 Policy Proposals for Solving Funding Problems with Shareholder
Litigation in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
7.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
7.2 Option 1—Public Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
7.3 Option 2—Third Party Litigation Funding (TPLF) . . . . . . . . . . . . . 222
7.4 Option 3—Reformed Indemnity Cost Orders . . . . . . . . . . . . . . . . . 224
8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
8.1 The Problem of Funding Shareholder Litigation . . . . . . . . . . . . . . . 227
8.2 Public Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
8.2.1 From the Social and Political Perspectives . . . . . . . . . . . . . 231
8.2.2 From the Perspective of Chinese Judicial System . . . . . . . . 232
8.2.3 The Selection of Regulatory Authority
of Public Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
8.3 Third Party Litigation Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
8.3.1 Positive Externalities Brought by the Use of TPLF . . . . . . . 234
8.3.2 Concerns Brought by the Use of TPLF . . . . . . . . . . . . . . . . 235
8.3.3 Concerns and Policy Arguments in the Special Context
of Shareholder Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . 236
8.3.4 Proposals for China Regarding the Use of TPLF . . . . . . . . 238
Contents xi

8.4 Funding Alternatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238

8.4.1 Indemnity Cost Orders (ICOs) . . . . . . . . . . . . . . . . . . . . . . 238
8.4.2 Lawyers’ Funding—Contingency Fee Arrangements. . . . . . 239
8.4.3 Lawyers’ Funding—Conditional Fee Agreements . . . . . . . . 240
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
List of Selected Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
List of Selected Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261
Abbreviations

ABA The American Bar Association

AFSL Australian Financial Services Licence
ALF The Association of Litigation Funders
ALI The American Law Institute
ASIC The Australian Securities and Investment Commission
ATE After-the-Event insurance
ATLA The American Trial Lawyers Association
BTE Before-the-Event insurance
CA 2006 Companies Act 2006 of the United Kingdom
CCL Chinese Contract Law
CFA Conditional Fee Agreement
CGFA Contingency Fee Arrangement
CJC The Civil Justice Council
CL Company Law of the People’s Republic of China
CPL Civil Procedure Law of the People’s Republic of China
CSRC The China Securities Regulatory Commission
CWDF The China Women’s Development Foundation
DBA Damages Based Agreement
FCA Act The Federal Court of Australia Act
FRCP Federal Rules of Civil Procedure
GDP Gross Domestic Product
GPCL The General Principle of the Civil Law of the People’s
Republic of China
ICJ Institute for Civil Justice
ICL The Israeli Company Law
ICO Indemnity Cost Order
ISA The Israel Securities Authority
JSLC Joint Stock Limited Company
LEI Legal Expenses Insurance
LFO The Law Foundation of Ontario

xiii
xiv Abbreviations

LLC Limited Liability Company

MALF The Measures for the Administration of Lawyer’s Fees of the
People’s Republic of China
MBCA The Model Business Corporation Act
MPLC Measures for the Payment of Litigation Costs of the People’s
Republic of China
NPO Non-Profit Organization
PIOB Public Interest Oversight Board
PRC The People’s Republic of China
RCSC The Red Cross Society of China
SOE State Owned Enterprise
SPC The Supreme People’s Court of the People’s Republic
of China
The PSLRA 1995 The Private Securities Litigation Reform Act 1995
TPLF Third Party Litigation Funding
UK The United Kingdom
US The United States
U.S.C. United States Code
Summary

Litigation is costly. The concern of high litigation costs would be greater than
average in the context of shareholder litigation, where shareholder claimants would
bear high financial risk when accessing to justice. In a collective lawsuit like
shareholder litigation, litigation costs paid by shareholder claimants is highly likely
to exceed benefits brought by a successful claim since proceeds must be distributed
among group members, making such claims under-valued. To ensure the sound
functioning of shareholder litigation and facilitate injured shareholders’ claim for
damages before the court, the study on how to remove funding obstacles with
shareholder litigation is of importance. Shareholders’ disincentives as a conse-
quence of funding difficulties would, to a certain extent, negatively affect the
functioning of shareholder litigation and further lead to a ‘failure’ on judicial
approach to redress remedies.
Shareholder litigation in China is a good case to clarify the importance of
funding issues for the functioning of shareholder litigation and the implementation
of shareholders’ right to sue. China introduced shareholder derivative litigation in
2006 but empirical research (2006–2013) suggests that the functioning of it is not
good as expected. Shareholder class actions have similar problems. Through a
comparative study, this book considers that funding difficulties confronted with
potential shareholder claimants contribute to the ‘failure’ of shareholder litigation.
Neither in China, nor has it been specified, in statutory provisions or case law of
some other countries where shareholder litigation is adopted, how such actions
should be properly funded. As a matter of fact, funding problems with shareholder
lawsuits may largely discourage potential shareholder litigants who bear high
financial risk in pursuing such a claim, while they may not have much to gain. In
consideration of the lacks of incentives for shareholder claimants, effective funding
techniques should be in place to avoid the ‘death’ of shareholder litigation. This
book concentrates on examining, in a functionally comparative way, whether there
are proper financing methods for shareholder plaintiffs to overcome financial
obstacles, and also presents an in-depth analysis on how they work.
There are two main research questions this book will address: (1) how share-
holder litigation is funded in selected countries; (2) which funding technique(s) is

xv
xvi Summary

(are) applicable in China to finance shareholder litigation. This book attempts to,
through a comparative way, investigate funding techniques in selected countries,
including lawyer’s funding (contingency fee arrangements and conditional fee
agreements), company’s funding (indemnity costs orders for shareholder derivative
litigation in England and Wales), public funding (funding of private litigation by
public authorities notably in Israel and Canada) and third party litigation funding.
The aim of the book is to examine whether funding techniques investigated above
are workable in financing shareholder litigation, potential problems caused in each
technique, proper solution to such problems, and the potential of those funding
methods for China in the context of its legal and social background.
In terms of funding techniques in selected countries, Chap. 4 contains an
insightful analysis on public funding uniquely adopted by Israeli and Canadian
(mainly in Ontario and Quebec) legal regime. Main finding in this regard is that
public funding could be used to support shareholder litigant to pursue a lawsuit if
several practical dilemmas, such as, the selection of a proper public authority
administering public funding, designing a reimbursement system based on the gains
of previous applicants, are solved. When public funding’s potential for China is
considered, it is extremely important to associate this issue with China’s social and
legal background. For instance, the concern of ‘inside system’ might largely con-
tribute to the infeasibility of public funding in China. The interplay between the
government and public authorities administering public funding might negatively
affect the independent functioning of public funding, which is precisely the core
requirement of this approach. A conclusion is drawn in this respect that public
funding is not suitable to finance shareholder litigation in China currently, while it
might be appropriate for China in the future in consideration of reforms on the
political and judicial system that is likely to be conducted in the future or are
already ongoing now.
Chapter 5 of this book mainly presents a comprehensive study on third party
litigation funding (TPLF) and its potential for China. Cores issues in relation to the
use of TPLF are analysed through a comparative study of the US, the UK and
Australia, three countries where there already is some experience with this mech-
anism. The use of TPLF creates positive externalities, such as, facilitating the access
to justice; indirectly deterring potential wrongdoers. On the other hand, concerns,
such as the confusion of lawyer’s duty of loyalty, are raised. In order to regulate the
proper use of TPLF and meanwhile prevent negative effects brought by it, regu-
lations should be adopted. The study of the practice of TPLF in Australia, the UK
and the US demonstrates that codes on certain aspects, such as the funder’s ethical
issues, could be imposed to ensure the proper use of TPLF. This chapter then
analyses its potential for China and reaches a conclusion that TPLF could be
adopted to fund shareholder litigation in China, but with cautious. Reforms on PRC
Contract law need to be carried out for solving potential problems brought by the
use of TPLF.
Lawyers’ funding (contingency fee arrangements, CGFAs and conditional fee
agreements, CFAs) and company’s funding (indemnity cost orders, ICOs) are
investigated in Chap. 6 of this book. The main problem with ICOs lies in its
Summary xvii

procedural uncertainties. For instance, whether the eligibility of an ICO application

contains the assessment of the applicant’s financial capacity; under what circum-
stances could an ICO be awarded to the applicant. Since statutory rules do not set
clear standards in relation to issues indicated above, ICO’s practice in England
generally refers to case law such as Wallersteiner v. Moir (No 2) and Smith v. Croft,
which, however, easily make the procedure develop into a costly mini-trial. In terms
of ICO’s potential for China, this book proposes a reformed approach under which
an ICO could be awarded if the court allows the claim to proceed as a derivative
lawsuit. Two forms of lawyers’ funding studied in this book are all based on the ‘no
win, no fees’ principle, while CGFAs are associated with the damages granted by a
successful suit and CFAs are only in relation to the outcome of a case (win or lose).
Both of these two funding techniques have a common concern about lawyer’s
moral hazard, mainly referring to a condition where the lawyer’s interests and
clients’ are divergent from each other. In addition, the risk of refusal to pay law-
yer’s fees was typically revealed in the Grandall v. Weiguan 2012 case. In China,
lawyers might be further discouraged to conclude either a CGFA or a CFA with
shareholder claimants to finance shareholder litigation considering the fact that
Chinese courts are resistant to mass litigation. With regards to lawyers’ funding,
this book, in summary, argues that CGFAs and CFAs are not suitable to finance
shareholder litigation in China.
Based on the functionally comparative studies on existing funding techniques,
the principal conclusion of this book is reached that a reformed indemnity cost
order and third party litigation funding could be used to finance shareholder liti-
gation in consideration of China’s existing legal and social context, while certain
reforms should be carried out firstly to ensure the sound functioning of those
funding mechanisms. Policy proposals about the potential use of indemnity cost
orders and third party litigation funding are then specifically presented in Chap. 7 of
this book.
Chapter 1
Introduction

In the very beginning of this book, a general evaluation of shareholder litigation

would be presented to demonstrate the value of shareholder litigation and to prove
why funding techniques should be adopted to make this mechanism functions.

1.1 A General Evaluation of Shareholder Litigation:

Pros and Cons

1.1.1 Positive Externalities Brought by Shareholder

Litigation

Shareholder litigation plays an important role in enforcing corporate law.1 Its

beneficial effects could be summarized in three aspects:
(a) Creating compensation
For shareholders, successful shareholder litigation creates monetary compensation.
For instance, a security fraud action could be launched by shareholders who

1
This position has been widely indicated and confirmed in a wide range of legal literatures. For
example, Roberta Romano, ‘The Shareholder Suit: Litigation without Foundation?’, The Journal
of Law, Economics and Organization, (1991), Volume 7(1), 55; Jill E. Fisch, ‘Teaching Corporate
Governance through Shareholder Litigation’, Georgia Law Review, (2000), volume 34, 745;
Robert B. Thompson and Randall S. Thomas, ‘The New Look of Shareholder Litigation:
Acquisition-oriented Class Actions’, Vanderbilt Law Review, (2004), Volume 57(1), 134; Ian
Ramsay, ‘Corporate Governance, Shareholder Litigation and the Prospects for a Statutory
Derivative Action’, University of New South Wales Law Journal, (1992), Volume 15(1), 149.

© Springer Nature Singapore Pte Ltd. 2017 1

W. Chen, A Comparative Study of Funding Shareholder Litigation,
DOI 10.1007/978-981-10-3623-1_1
2 1 Introduction

suffered losses caused by the company’s misstatements.2 A shareholder direct

action could be commenced by shareholders to redress damage if their interests
were infringed.3
A shareholder derivative lawsuit is initiated by shareholders on behalf of the
company to redress remedies for the company’s interests. For instance, if a director
misappropriates the company’s assets, a derivative claim can be commenced
against the wrongdoer. Any damages brought by a successful derivative action
belong to the company, which means that the company is compensated through the
court’s order.
(b) Deterrence effects
The deterrence effects are created by shareholder litigation indirectly. Potential
wrongdoers might be deterred after being aware that they will be ‘punished’ if they
engage in wrongdoing. At the same time, the court’s judgment in a successful
shareholder claim could guide company’s directors (and other senior officers) on
how to perform their legal obligations (i.e. fiduciary duties owed to the company).
(c) Public significance
Some court cases involving shareholder litigation may have effects on other parties
than the litigants and company involved: precedents may be created, or (legal)
problems that had not been noticed before could come to the surface. This may be
called the public significance of certain cases. In fact, in terminology of law and
economics, the production of a judgement in one case may have positive exter-
nalities in other cases or for society in general.
Some cases may have public significance even when they are not successful
from the plaintiff’s perspective. For instance, in a security fraud action involving a
large number of investors, the court’s decision might create an interesting precedent
with wide influence even if this case is finally lost.4 Such cases might drive leg-
islators, legal scholars and legal practitioners to reconsider the problems under the
current system.5

2
For instance, the US securities fraud action, see infra 2.3.3; in China, collective litigation arising
from securities fraud, see infra 2.3.1.
3
See infra 2.2.
4
For instance, ***shareholders v. HUANG Guangyu (2012) in Beijing second intermediate court
attracted wide public attention because it is the first securities fraud litigation alleging the
defendant’s inside-dealing behaviour. But, unfortunately, the plaintiff shareholders did not win the
case because the causation between the investor’s losses and inside dealing was not proved.
However, this case was of significant importance (see http://finance.people.com.cn/stock/GB/
217390/230095/index.html in Chinese, accessed on 24 July 2016).
5
After the HUANG Guangyu case, many discussions about whether the security market should be
better regulated were raised. http://www.360doc.com/content/08/1128/08/142_2009259.shtml (in
Chinese, accessed on 16 July 2016).
1.1 A General Evaluation of Shareholder Litigation: Pros and Cons 3

1.1.2 Potential Drawbacks of Shareholder Litigation

(a) Negative effects of frivolous or unmeritorious litigation

Negative effects of frivolous or unmeritorious claims include two aspects. First,
such claims may negatively affect the company’s reputation. Second, for listed
companies, the share price might by reduced because of the ongoing court
proceeding.
(b) Chilling effects on the directors’ business behaviour
Even though the directors’ business activities could be protected by the business
judgment rule (like in the US), this rule is not applied uniformly in practice, and is
largely unknown in its “hard” form outside the US. The business judgment rule is
regarded as ‘one of the least understood concepts in the entire corporate field’.6 It
means that in practice under what circumstances the director’s business decisions
which cause a bad outcome for the corporation could be protected by the business
judgment rule is vague.7 Being afraid of being sued, directors might be more
‘conservative’ in making business decision than is optimal if they are to engage in
‘optimal’ levels of risk-taking on behalf of the company.
This book tries to solve funding difficulties with shareholder litigation, and
several funding approaches will be investigated to figure out whether they could be
used to fund shareholder litigation. The problem here is if shareholder litigation can
be effectively financed, will those potential drawbacks of shareholder litigation
become big concerns? It might be possible that with effective funding ways, the
amount of shareholder litigation would increase. A similar finding in Australia
shows that after the introduction of third party litigation funding, the number of
lawsuits indeed did increase.8 But there is no solid evidence demonstrating that the
number of frivolous litigation increases.9 In fact, it has been indicated that, for
example, in China the current problem is not the abuse of the shareholder litigation
mechanism.10 The real concern is that the function of shareholder litigation is

6
See Henry G. Manne, ‘Our two corporation systems: law and economics’, Virginia Law Review,
(1967), Volume 53(2), 259, p. 270.
7
Xiaoning Li, A Comparative study of shareholders’ derivative actions: England, the United
States, Germany and China (Kluwer, 2007), p. 146.
8
See David S. Abrams and Daniel L. Chen, ‘A Market for Justice: A First Empirical Look at Third
Party Litigation Funding’, University of Pennsylvania Journal of Business Law, (2013), Volume
15, 1075, p. 1090.
9
Ibid.
10
See Guanghua Yu and Junhai Liu, ‘Legislation and the enforcement of law’, (in Chinese), (理性
立法和法律实施), commercial law forum no. 330, the minute of this forum could be available at
(in Chinese) http://www.civillaw.com.cn/article/default.asp?id=43662 (accessed on 10 August
2016).
4 1 Introduction

limited.11 Also in the United Kingdom, one of the major obstacles in the path of
commencing shareholder derivative litigation is the expensive litigation costs and
the lack of effective funding ways.12 Until now, no empirical evidence reveals that
the mechanism of shareholder litigation has been abused due to the advent of
effective funding methods. In fact, the American shareholder class actions were
criticized for often being abused.13 However, the reason for that is mainly because
the existence of ‘professional plaintiffs’ who consistently ‘purchase a few shares in
troubled companies’ in order to ‘pursue a lawsuit’,14 but has nothing to with
funding mechanisms.15

1.2 The Proposal of ‘Funding Shareholder Litigation’

1.2.1 What Is the Funding Problem with Shareholder

Litigation?

Litigation is expensive.16 Costs created in accessing justice may make potential

litigants face funding problems. Particularly, the concern of high litigation costs
may be greater than average in shareholder litigation17 which often involves high
monetary value. The shareholder plaintiffs would be confronted with even higher

11
Ibid.
12
See Arad Reisberg, Derivative Actions and Corporate Governance: theory and operation,
(Oxford University Press 2007), pp. 222–223.
13
See the House of Congress Report, Securities Litigation Reform, (No. 104-369), (1995),
pp. 32–33.
14
See John F. Olson, David C. Mahaffey and Brian E. Casy, ‘Pleading Reform, Plaintiff
Qualification and Discovery Stays Under the Reform Act’, Business Lawyer (1996), Volume 51,
1101, p. 1105.
15
The most common funding method for the American class actions is the ‘common fund’ which
means that attorneys in a successful class action could collect reasonablefees from the entire
monetary remedies after the court’s discretion. If the action is lost (no common fund is generated),
the class counsel get no fees.
16
This conclusion is clearly supported by many authors. See for example, Christopher Hodges,
Stefan Vogenauer and Magdalena Tulibacka, The Cost and funding of Civil Litigation, (Hart
Publishing, 2010); Lord Jackson’s Preliminary Report on Civil litigation (May, 2009); Lord
Jackson’s Final Report on Civil Litigation (December, 2009); James S. Kakalik and Nicholas M.
Pace, Costs and compensation paid in tort litigation, (Rand Corporation, 1986); Craig Osborne,
Civil Litigation, (Oxford University Press, 2004); Steven Shavell, Foundations of Economic
Analysis of Law, (Harvard University Press, 2004), Part IV; And see articles, for instance,
David M. Trubek, Austin Sarat, William L.F. Felstiner and Herbert M. Kritzer, ‘The Costs of
Ordinary Litigation’, UCLA Law Review, (1984), Volume 31, 72; Leo Kevin and Denise Collier,
‘Containing the Cost of Litigation’, Rutgers Law Review, (1985), volume 37, 219.
17
The term of ‘shareholder litigation’ in this book mainly covers four types of lawsuit: shareholder
derivative actions, shareholder direct actions, shareholder class actions (this typically refers to
securities fraud actions) and unfair prejudice remedies (under the British law).
1.2 The Proposal of ‘Funding Shareholder Litigation’ 5

financial risk when filing such a suit, which could result in the difficult imple-
mentation of shareholder protection through the judicial way.

1.2.2 Why Funding Issue Is Crucial for Shareholder

Litigation?

Many countries where shareholder litigation is being used do not have clear
statutory provisions or rules from case law regarding how such action should be
funded properly.18 Shareholder litigation is a procedural device to enable the court
to do justice to compensate losses suffered by shareholder plaintiffs, however,
without funding, how can a lawsuit be brought? The lack of funding may, to certain
degree, make the device fail to function. Except for the function of wrongdoing
correction, shareholder litigation also potentially exerts deterrence effects against
potential wrongdoers.19 But such effects may be weakened if injurers are aware of
the fact that there is a lack of effective funding techniques to finance shareholder
litigation.20

1.2.3 How Will This Book Investigate Funding Issue

of Shareholder Litigation?

In order to bridge the funding gap in shareholder litigation, this book attempts to
explore efficient funding ways for impecunious shareholder plaintiffs. Several
funding techniques in civil litigation will be analysed from a functional and com-
parative perspective. Their potential for shareholder litigation will be examined. In
addition to that, a focus will particularly rest on the discussion about whether
shareholder litigation in China could be effectively financed through the funding
methods examined in this book, considering the specific social and judicial context
of China.

18
For instance, shareholder derivative actions, shareholder direct actions and securities fraud
actions are permitted in China but how should these claims be financed is not mentioned in current
Chinese law. The absence of effective funding ways of shareholder litigation can also be found in
other countries, including the US, the UK (only indemnity cost orders but practically problematic).
19
See for example, Tom Baker and Sean J. Griffith, Ensuring Corporate Misconduct, How
Liability Insurance Underminies Shareholder Litigation, (The University of Chicago Press, 2011),
pp. 7–9; and see William B. Rubenstein, ‘Why Enable Litigation? A Positive Externalities Theory
of the Small Claims Class Action’, UMLC Law Review, Volume 74, 709; and see Steven Shavell,
‘The Social Versus the Private Incentive to Bring Suit in a Costly Legal System’, Journal of Legal
Studies, (1982), Volume 11, 333.
20
The deterrence effects of litigation will be analysed in Sect. 4.1.1.2.
6 1 Introduction

In order to conduct a more concrete investigation, the shareholder derivative

action will be chosen as the main research topic in this book to elaborate the
funding problems and how it could be funded in a proper way.21

1.3 The Structure of the Comparative Study

1.3.1 The Structure of the Book

The main research question of this book

The main research question of this book is how to fund shareholder litigation.
Based on this research question, this book investigates (almost) all funding
approaches being currently used worldwide, including lawyer’s funding (contin-
gency fee arrangements and conditional fee agreements), company’s funding (in-
demnity costs order for shareholder litigation), public funding,22 and third party
litigation funding.23 Based on the examination of these funding techniques, the
sub-questions come down to whether they are workable in funding shareholder
litigation, potential problems caused by the use of them, possible solutions, and the
potential of these funding methods for China in the context of its legal and social
background.
The structure of the book
The first chapter of this book basically discusses the research question and the
methodology (functionally comparative study) adopted by this book. Theoretical as
well as practical analysis will be delivered in a selection of countries, including,
among others, China, the US, the UK, Israel and Canada. The scope of the com-
parative study and the reason why those countries are chosen will also be illustrated
in the first chapter of this book. Chapter 2 briefly studies ‘what is shareholder
litigation and several sorts of shareholder litigation’. In general, shareholder liti-
gation is perceived to compensate infringed shareholders, and to deter managerial

21
‘Shareholder litigation’ is not a concept defined in statute or elsewhere in the law. In fact,
‘shareholder litigation’ is a technical term used in academic research rather than a real legal
concept applied in law; it generally refers to a sort of lawsuit involving shareholder litigants, and
the filing of such an action is usually caused by the issue relevant to ‘shareholder’, ‘company’,
‘director’, or the relationship between these parties. For instance, shareholder derivative litigation
is an action brought by shareholders on behalf of the company to redress losses caused by
misbehaviours done by wrongdoers. The shareholder class action (securities fraud actions) per-
mitted in the US and in China is brought to seek remedies caused by the misleading information
about business profitability disclosed by the company.
22
Legal aid is excluded.
23
‘Third party litigation funding’ particularly refers to funding provided by professional litigation
funders (not includes lawyers).
1.3 The Structure of the Comparative Study 7

misconducts.24 The term ‘shareholder litigation’ comprises all civil actions brought
by shareholders against managerial wrongdoings within corporations in order to
recover economic losses caused by them.25 Almost in all countries, no law clearly
provides what shareholder litigation is, therefore, the scope of it varies. This Part
selects four sorts of actions to generally illustrate the nature and features of
shareholder litigation, including shareholder derivative actions, shareholder direct
actions and shareholder class actions (securities fraud litigation notably applied in
the US).26 A focus will particularly lie with the overview of shareholder derivative
actions in China (my home country where derivative actions were introduced in
2006), the US (where derivative actions were flourished)27 and the UK (where
derivative actions were originated).28
Chapter 3 will present an introduction with regards to the general costs rules in
civil litigation and general funding mechanisms applied to finance it. Through the
investigation of the cost rules, the fact that litigation is expensive would be
proved.29 The concern of excessive litigation costs will be enhanced in the filing of
shareholder litigation because of the high monetary value involved. Since a
shareholder lawsuit is usually regarded as a ‘property case’, the court charges are
calculated on an incremental basis in proportion to monetary value at stake. Under
this circumstance, funding techniques financially supporting bona fide litigants
need to be explored. The latter part of this chapter will examine several funding
approaches of civil litigation in a general way.
Chapter 4 studies public funding (funding of private litigation by public
authorities) notably used in Israel and Canada (Ontario and Quebec) to fund
derivative actions and class actions respectively.30 The working mechanism of

24
See Paul Weitzel, ‘The End of Shareholder Litigation? Allowing Shareholders to Customize
Enforcement through Arbitration Provisions in Charters and Bylaws’, Brigham Young University
Law Review (2013), Issue 1, 65; and see Federico Pastre, How Shareholder Litigations Deter
Directors and Officers: US and Italy, a Comparative Analysis (GRIN Verlag, 2013); See
Patrick M. Garry, Candice Spurlin, Debra A. Owen, William A. Williams and Lindsay J. Efting,
‘The Irrationality of Shareholder Class Action Lawsuits: A Proposal for Reform’, South Dakota
Law Review, (2004), Volume 49(2), 275.
25
For instance, a shareholder derivative action is filed against wrongdoers (i.e. directors) on behalf
of the company to redress remedies.
26
And its counterpart in China—private securities litigation, but they are not entirely identical with
respect to practical procedure and requirements.
27
Xiaoning Li, A Comparative Study of Shareholders’ Derivative Actions, (Kluwer, 2007), pp. 89–
91 and 96–100; Robert B. Thompson and Randall S. Thomas, ‘The Public and Private Faces of
Derivative Lawsuits’, Vanderbilt Law Review, (2004), Volume 57, 1747, pp. 1049–1051.
28
Paul L. Davies, Gower and Davies’ Principles of Modern Company Law, (Sweet&Maxwell, 7th
edition, 2003), Part 4; Victor Joffe, David Drake and Giles Richardson, Minority Shareholders:
Law. Practice and Procedure, (Oxford University Press, 2011), pp. 29–87.
29
Christopher Hodges, Stefan Vogeauer and Magdalena Tulibacka, The Cost and funding of Civil
Litigation, (Hart Publishing, 2010), pp. 11–29.
30
Israel public funding of derivative actions (article 205A of Israeli Companies Law 1999);
Ontario Class Proceedings Fund [Law Society Act (Ontario), s 59.1]; Quebec Fonds d’aide aux
recours collectifs (section 23 of An Act Respecting the Class Action, RSQ, c R-2.1).
8 1 Introduction

public funding will be investigated in detail, including what are the selection cri-
terion before public funding is granted, how the public funding is financed (by the
government or by the applicant who wins the funded case), which authority will
take charge of public funding, and the relationship between the committee’s
decision on public funding and the court’s permission for a case to proceed.
Following that, the potential of public funding for China to fund shareholder liti-
gation (mainly refers to shareholder derivative actions) will be examined in the
context of China’s legal and social background.
Chapter 5 will mainly focus on the discussion of third party litigation funding
(TPLF), which is the most recent development in litigation funding industry. To
conduct a comparative research in this respect, the use of TPLF in Australia (where
it was originated),31 the US and the UK (where it is being widely applied)32 will be
investigated respectively. Several concerns regarding TPLF, such as, the third party
funder’s moral hazard, the complicated lawyer-litigant-funder relationship, the
traditional common law prohibition on champerty and maintenance, will be
examined based on the empirical studies in those countries.33 Subsequent to the
comparative research, this chapter will switch to study whether TPLF could be
introduced into China to fund shareholder litigation and what kind of reform on
Chinese law should be carried out to facilitate the proper use of TPLF.
Chapter 6 will concentrate on analysing funding alternatives through fee or cost
arrangements (other than public funding and TPLF) for shareholder litigation,
including contingency fee arrangements (CGFAs), conditional fee agreements
(CFAs) and indemnity cost orders (being used in England and Wales to fund
derivative actions). The in-depth investigation mainly contains the discussion on the
ethical concerns about the lawyer’s role in CGFAs and CFAs, and the procedural
requirements in indemnity cost orders. Following that, their potential for China will
be examined also.
Chapter 7—Based on the investigations on several funding techniques, this
chapter will, concretely, formulate a proposal for China regarding how to fund
shareholder litigation, and how to design relevant statutory rules (or reform current
law) to regulate the proper use of certain funding methods.

31
Camille Cameron, ‘The Costs and Funding of Civil Litigation: a National Report in Australia’, in
The Cost and funding of Civil Litigation, Christopher Hodges et al (eds), (Hart Publishing, 2010),
195, pp. 212–214; and see Marco de Morpurgo, ‘A comparative legal and economic approach to
third-party litigation funding’, Cardozo Journal of International and Comparative Law Review,
(2011), Volume 19, 343, pp. 390–393.
32
Lord Jackson’s Final Report on Civil Litigation (December, 2009), pp. 117–125; Vicki Waye,
Trading in Legal Claims, (Presidian Legal Publications, 2008); Cento Veljanovski, ‘Third Party
Litigation Funding in Europe’, Journal of Law, Economics and Policy, (2012), Volume 8, 405;
Susan L. Martin, ‘The Litigation Financing Industry: the Wild West of Finance Should be Tamed
not Outlawed’, Fordham Journal of Corporate & Financial Law, (2004), Volume 10(1), 55.
33
Percy H. Winfield, ‘History of Maintenance and Champerty’, Law Quarterly Review, (1919),
Volume 35, 50; Max Radin, ‘Maintenance by Champerty’, California Law Review, (1935),
Volume 24(1), 48.
1.3 The Structure of the Comparative Study 9

Chapter 8 of this book is ‘conclusion’, where main findings of the research

question and proposals will be summarized.

1.3.2 The Countries Chosen for the Comparative Study

1.3.2.1 China

In my home country China where shareholder derivative actions were introduced in

2006, funding obstacles for minority shareholders who intends to commence a
derivative lawsuit is observed. An empirical study shows that from 1 January 2006
to 30 August 2013, only 103 derivative actions were brought before Chinese
courts.34 Compared to the large number of registered companies in China
(approximately 7.1 million in 2009), this relatively small figure (only 103 cases) is
hardly to prove that the shareholder derivative action runs as a useful tool to
discipline corporate management.35 And also, considering the fact that there is no
effective alternatives (for instance, unfair prejudice remedy is widely used to protect
shareholders’ interests in the UK) to redress misconduct and seek remedies,
derivative actions ought to play a key role in discipline corporate management in
China.36 It has been rightly indicated that practical difficulties hamper the func-
tioning of derivative actions. For instance, financial obstacles faced by shareholder
litigants, namely, how a derivative lawsuit could be financed and whether there are
incentives for potential shareholder claimants to bring such an action. That is why I
chose the research topic ‘funding shareholder litigation’. And also, comparative
study regarding how to finance shareholder litigation is addressed in order to
investigate whether funding problems with shareholder litigation in China could be
solved through transplanting certain funding techniques being used in other
countries and what kinds of reforms should be carried out in order to make it/them
fits for China’s context.

1.3.2.2 The United States

The comparative study covers the discussion of ‘funding shareholder litigation’ in

the US. The reason why the US was chosen is that (1) shareholder litigation is very
flourished in the US and the functioning of it does not seem to be hampered by

34
See Shaowei Lin, “Derivative Actions in China: Case Analysis”, (2014), Hong Kong Law
Journal, Volume 44, 621, p. 638.
35
An official report indicates that until the end of 2009, the number of enterprises in China was
7.1 million. See National Economic Census 2009 (No. 2), (in Chinese), available at http://www.ce.
cn/macro/more/200912/25/t20091225_20689923.shtml (accessed on 16 May 2016).
36
See Shaowei Lin, “Derivative Actions in China: Case Analysis”, (2014), Hong Kong Law
Journal, Volume 44, 621, p. 640.
10 1 Introduction

funding difficulties confronted by potential shareholder litigants; (2) funding

techniques, such as contingency fee arrangements, third party litigation funding, are
widely used in the US; Therefore, to study how shareholder litigation is financed in
the US might be helpful to seek for solutions to funding problems with shareholder
litigation in China.

1.3.2.3 The United Kingdom

Shareholder derivative actions were originated since the establishment of the

exceptions to Foss rule in the UK. Even though derivative actions are, in fact,
relatively rarely initiated before the courts, this country has far more experience
with this mechanism than other countries. The UK is also an interesting example in
this regard because in 2006 the derivative action was fundamentally reformed after
long debates, and because an important exercise was performed in thinking about
litigation costs and litigation funding of the whole civil justice system (Lord
Jackson’s report). Since the enactment of the Access to Justice Act 1999, litigation
funding market began to grow in the UK. A typical example in this respect is the
development of third party litigation funding. And also, since April 2013, damages
based agreements (identical with the US style contingency fee arrangements) were
legally confirmed in the UK in order to providing the general public with more
litigation financing approaches and facilitate the access to justice.

1.3.2.4 Canada (Ontario and Quebec)

Ontario and Quebec are probably unique in having a public funding mechanism for
civil litigation (mainly refers to class actions). Ontario Class Proceeding Fund and
Quebec Class Action Assistance Fund (Fonds d’aide aux recours collectifs) are, in
nature, funding provided by public authorities to facilitate the access to justice for
individuals having financial difficulties in bringing certain actions before the courts.
The study of the Canadian case in this book intends to explore the working
mechanism of public funding and to examine common problems when public
funding is used through the empirical research.

1.3.2.5 Israel

Like Canada, Israel is also unique in having public funding particularly for
financing shareholder class actions and shareholder derivative actions. Public
funding (introduced in Israeli Company Law since 2011) in Israel is provided by
Israel Securities Authority (ISA) to fund certain cases ‘reveal public interest and
importance’. The main practical problems regarding the functioning of Israel public
1.3 The Structure of the Comparative Study 11

funding is the relationship between the decision made by the ISA and the court’s
judgment in the funded case.

1.3.2.6 Australia

The reason why this book chooses Australia as a case study is because third party
litigation funding was originated in Australia in 2006 through the Fostif case before
the Australian High Court. In fact, the growth and evolution of TPLF has been one
of the most significant developments in the litigation market since its legal con-
firmation in 2006. The examination of the Australian case in TPLF could help to
understand and analyse the evolution of TPLF industry, and try to observe practical
problems when this technique is applied. For instance, how to regulate third party
litigation funder.

1.4 The Scope of the Comparative Study

This book covers all of the typical techniques being used in financing shareholder
litigation in the current world, including public funding, third party litigation
funding, lawyer’s funding (contingency fee arrangements and conditional fee
agreements) and company’s funding (indemnity cost orders).

1.4.1 Public Funding

The term of public funding in this book excludes the traditional ‘legal aid’. In this
book, ‘public funding’ refers to a sort of funding provided by a public authority to
finance civil litigation meeting given requirements laid down by the authority. First
of all, it should be indicated that public funding is not a widely-used technique
across the world. Typical examples are found in Israel (Israel public funding) and
Canada (Ontario Class Proceeding Fund and Quebec Class Action Assistance
Fund). The examination of public funding in this book aims at analysing its
working mechanism, its function in facilitating the access to justice for potential
claimants in shareholder litigation and whether this technique could be introduced
to China in consideration of Chinese social and legal background.

1.4.2 Third Party Litigation Funding (TPLF)

Third party litigation funding (TPLF), since for the first time, legally approved by
Australian High Court in Campbells Cash and Carry Pty Ltd v Fostif [2006], the
12 1 Introduction

industry of TPLF has grown rapidly with a number of funders entering into the
market of litigation financing in many countries, such as, United States, New
Zealand, Singapore. Along with its development, however, concerns are raised. For
example, the challenge to the privileged lawyer-and-client relationship, the funder’s
moral risk and whether TPLF encourages frivolous and unmeritorious claims. With
regards to TPLF, this book will firstly investigate current practice of it in Australia,
the US and the UK where this technique is flourished. Following that, the potential
for TPLF in China to finance shareholder litigation will be studied and policy
advice with regards to the introduction of TPLF will also be given.

1.4.3 Lawyer’s Funding

Lawyer’s funding in this book mainly refers to contingency fee arrangements

(CGFA) and conditional fee agreements (CFAs).

1.4.3.1 Contingency Fee Arrangements (CGFAs)

A contingency fee arrangement (CGFA) is, in nature, based on the ‘no win, no fee’
basis, where the litigant shares damages granted by the court with the lawyer. This
technique is allowed to use in many countries, while it is banned in many countries,
particularly, in continental Europe. CGFA is quite frequently used in the US to
finance civil litigation, and the UK formally adopted CGFA in April 2013. In
China, CGFAs were allowed to use since 2006, and the contingent rate should be
capped at 30% of the damages. But CGFA is not allowed to fund mass litigation in
China. This book will study the practice of CGFA mainly in the US, the UK and
China respectively, and it is then concluded that using CGFAs to fund shareholder
litigation is probably not feasible.

1.4.3.2 Conditional Fee Agreements (CFAs)

Like the CGFA, the nature of a CFA is also ‘no win, no fee’. Lawyers are paid both
normal fees and an amount of success fees only if the case is won. CFAs are
typically used in the UK, where the success fee is allowed to be 100% of the basic
fee in commercial cases. Both CFAs and CGFAs are based on the same principle,
however, the success fee in a CFA is determined in the contract up front, while the
amount of contingent fee varies in each case depending on the amount of damages
granted in a favourable outcome. A common concern regarding the use of CFA is
the conflict of interests between lawyers and funded litigants. This book will study
the working mechanism of CFAs and further investigate whether it could be used to
fund shareholder litigation in China.
1.4 The Scope of the Comparative Study 13

1.4.4 Company’s Funding (Indemnity Cost Orders, ICO)

Indemnity cost orders was originated in the UK. It is, essentially, a sort of litigation
funding provided by the company to finance a derivative lawsuit. It refers to such a
case that the court may order a company to indemnify the claimant against the
liability for costs incurred in a derivative lawsuit which was brought on the name of
the company. In China, the Fourth Judicial Interpretation of the Supreme People’s
Court on Some Issues Regarding the Application of PRC Company Law,
Consultation Paper 2016 proposed a model under which the shareholder plaintiffs
could be indemnified by the company if the case is won under the court’s discre-
tion. However, under what circumstances the court could order the company to
indemnify the claimant are not stated in this consultation paper. The study of the
practice of indemnity cost order in the UK might be help to illustrate certain
practical aspects that have not been mentioned in the consultation paper.
Chapter 2
An Overview of Shareholder Litigation

2.1 Introduction

Shareholder litigation is traditionally perceived as being about compensating

shareholders for infringements of their rights or for losses they suffered as a result
of negligent behaviour by the company and its directors, or by third parties. For a
long time now, an additional function of shareholder litigation has been put for-
ward: to deter managerial misconduct.1 The term ‘shareholder litigation’ comprises
all civil actions brought by shareholders against managerial wrongdoings within
companies in order to recover economic losses caused by them.2 Plaintiffs in
shareholder litigation are obviously shareholders of a company. But defendants
vary depending on different forms of shareholder litigation; they include compa-
nies, majority shareholders, directors, other senior managers in companies and third
parties that are involved with the company (suppliers, bankers and other creditors,
government agencies…).3 With regards to the causes of actions, as indicated before,

1
See Paul Weitzel, ‘The End of Shareholder Litigation? Allowing Shareholders to Customize
Enforcement through Arbitration Provisions in Charters and Bylaws’, Brigham Young University
Law Review (2013), Issue 1, 65, pp. 67–68; And see Federico Pastre, How Shareholder Litigations
Deter Directors and Officers: U.S. and Italy, a Comparative Analysis (GRIN Verlag, 2013),
pp. 3–4.
2
See Patrick M. Garry, Candice Spurlin, Debra A. Owen, William A. Williams and
Lindsay J. Efting, ‘The Irrationality of Shareholder Class Action Lawsuits: A Proposal for
Reform’, South Dakota Law Review, (2004), Volume 49(2), 275, pp. 276–277.
3
For example, in a shareholder derivative action, the nominal defendant is the company where the
misconduct occurs. In a shareholder direct action, the defendants are generally the wrongdoers. In
an unfair prejudice remedy, the defendants are the members of the company who commit
wrongdoings (they can include majority shareholder, directors, or other members).

© Springer Nature Singapore Pte Ltd. 2017 15

W. Chen, A Comparative Study of Funding Shareholder Litigation,
DOI 10.1007/978-981-10-3623-1_2
Another random document with
no related content on Scribd:
his head—a kind of go-devil on wheels he called it—but now he is
useless, and I want you to help me out.”
Bertram showed no surprise. In fact no development of this
strange adventure, in which he found himself cast, could surprise
him. He looked the pile of machinery over carefully.
“There are the wheels and frame of a hayrake,” said Hoog. “And
there are a couple of road scrapers. Take the bottoms of those
scrapers and fasten them to the hayrake frame, and you’ve got
something that you could walk right up to a nest of rifles with. Ain’t
that right, Bertram?”
The young Texan nodded. “I reckon it might work out that way,” he
replied, “but I didn’t know that you were accustomed to getting your
men from behind things like that, Hoog.”
The gunman darted a murderous glance at Bertram, and his
hands moved toward his hips, but Swingley stepped quickly between
the two men.
“Hyar! No fussin’!” he commanded. “We ain’t got more’n two hours
start of the gang, and we’ll have to work fast. Let’s have that go-devil
fixed ’fore the boys git here.”
Bertram knew that to refuse outright would be equivalent to a
declaration of war. Yet he was far from having so detached a
viewpoint regarding the expedition as he had at the start. Previous to
his meeting with the girl he had been ready for most any adventure.
As an alien gunman—a Hessian in cowboy traps, as he bitterly
called himself—he would have cared little about any harm he might
bring to those concerned in this range war, so remote from his home.
Cattle interests or rustlers—it had made no difference to him until he
had met Alma Caldwell. Since then a growing distaste for the whole
business had come upon him. Yet he could not very well drop out.
He would be a marked man in a strange country, and somebody
would be certain to slay him as one of the invaders.
Working so leisurely that he made Asa Swingley curse fervently
under his breath, and deepened the glitter of hate in Tom Hoog’s
eyes, Bertram started the forge fire and performed the comparatively
simple task of attaching the scraper bottoms to the wheels.
 When the work was completed Swingley crouched behind the
contraption and pushed it about with an enthusiasm that was almost
boyish.
“You’ve been slow enough about it, Milt,” he said to the young
Texan, who stood with bare arms folded over the leather apron
Swingley had provided, looking at the cattleman in undisguised
contempt. “But it’s a good job, all right. If anybody holes up in front of
us, they ain’t goin’ to stay holed up very long, now that we’ve got this
go-devil.”
It was as Swingley said. The machine would afford protection for
two men, who might push it with their hands under the very muzzles
of rifles and revolvers. Bullets might rattle against that thick shield of
iron, but the men behind it would be safe.
“Old Jim had the right idea!” exclaimed Swingley, “and you’ve
worked it out in good shape, Milt. It’s time for the crowd to be comin’
up, and, if I ain’t mistaken, you can see this go-devil tried out, purty
quick after daylight.”
As Swingley spoke, the advance guard of the command could be
heard coming, and soon the road by the blacksmith shop was filled
with mounted men, none too good-humored at being routed out
before sunup and without breakfast.
“There’ll be plenty to eat after a little work that’s mapped out first,”
said Swingley, haranguing the crowd. “The first rustlers we’ve got to
git are not more’n a mile ahead of us, in a cabin to the left of the
road, toward the foothills. You can’t miss the place. I want it
surrounded. If any man from the cabin shows his face after
daybreak, he’s to be shot—and shot dead. But I don’t want any noise
and no firin’ till you see somethin’ to shoot at. Tom Hoog will take half
the men this side of the cabin, and I’ll take half around on the other
side. Be careful shootin’ across, so we don’t hit each other.”
Hoog and his division started up the road. The moon was
beginning to pale, and there were bird noises from the prairie,
indicating that dawn was not far away.
Bertram had not put on his coat, but still stood in his leather
apron, a sledge hammer in his hand.
 “That’s right, Milt,” said Swingley, reining his horse beside the
young Texan, “you stay here and be ready to bring up this go-devil
when I send for it. Arch Beam, you stay here with him.”
Bertram knew that Swingley was suspicious, that he had detailed
Beam as his guard. He smiled grimly, as the leader of the expedition
clattered away at the head of his half of the command.
“Arch,” said Bertram, as the last echo of hoofs died away, “let’s
see your gun.”
“Sure,” said the cowboy, handing over his six-shooter, with a grin.
Bertram put the weapon in his own belt, beneath the blacksmith’s
apron. Then he stepped to the cowboy’s horse, which was standing
riderless in the doorway. Drawing Beam’s rifle from its scabbard
Bertram extracted the cartridges from the magazine. Then he put the
weapon back where he had found it.
“Now Arch,” said Bertram calmly, “consider yourself held up. Both
guns are useless, and I’ll ask you to step back in the shop and not
move, while I undo a little piece of work I’ve had to do for Swingley.”
“Sure,” replied the imperturbable Arch, with a grin, “I’ve seen so
many queer things on this queer picnic that nothin’ is goin’ to
surprise me—I’ll give you warnin’ of that.”
Bertram swung the sledge and with half a dozen strokes
destroyed the wheels of the go-devil, past all fixing. Then he flung
the hammer into one corner of the smithy and, rolling down his
sleeves, put on his coat.
“Arch,” he said, “I’m quitting this expedition right here. Want to
desert with me?”
“I don’t guess I do,” replied Arch, surprised in spite of himself.
“The people in this country will scalp you alive when they learn that
you came in here with this gang. You’d better stay on and chance it
with us, Milt.”
“I’d have to fight Swingley when he saw that,” replied Bertram,
pointing grimly to the destroyed go-devil. “Between the two camps of
enemies I seem to have made, there’s nothing for me to do but take
to the brush. Good-by, Arch, and sorry to have had to hold you up.”
Bertram flung down the cowboy’s empty gun and, swinging into
his own saddle, cantered down the road, with a backward wave of
his hand to the puzzled cowboy in the doorway of the blacksmith
shop.
 CHAPTER IV
A BATTLE AND A BULLET.

Bertram knew that the wagons would soon be coming along,

under guard. Accordingly he turned off toward the foothills, which
were beginning to be touched with pink. At a few rods from the road
he was indistinguishable in the tall sagebrush and scattered groves
of quaking asp and cottonwood. As he neared the foothills the tree
growths became thicker, and soon he was moving in a forest which
was comparatively free from down timber and underbrush.
The loneliness of the country struck Bertram as amazing. They
had passed by no ranch houses on the road during the journey of
the invaders from the railroad terminus. The blacksmith shop was
undoubtedly the first outpost of civilization. All else was given over to
unfenced prairie.
As the light grew stronger, and the bird sounds more pronounced,
Bertram heard the sound of firing from the direction in which the
raiders had gone.
There was a heavy volley, succeeded by firing at irregular
intervals.
Being without any definite purpose in mind Bertram determined to
make his way as close as possible to the firing and observe what
was going on. Sheltered in the trees on the sides of the foothills the
task was not difficult. From one glade he caught a glimpse of the
blacksmith shop and saw that the mess wagons and bed wagons
were grouped about the building. From the smoke he judged that the
cooks were getting breakfast.
Pushing on, but always keeping in the shelter of the trees,
Bertram advanced nearly a mile. The sound of firing grew more
distinct, as he went on. There were no more volleys. Evidently the
men were firing at random, but shooting steadily.
When he judged that he was about opposite the scene of the
combat, Bertram tied his horse in a clump of quaking asp and made
his way cautiously to the edge of a clearing, where he could
command a view of the scene below. Through the binoculars, which
he always carried, he watched with interest the development of a
drama which had already taken the form of tragedy.
In the center of a considerable tract of cleared land stood a cabin.
It was a small cabin, evidently not more than one room, but stoutly
built of logs. There was no porch, but close to the single step,
leading to the front door, lay the figure of a man, evidently dead. A
water bucket, upturned, was near his outstretched hand.
“They didn’t give him a chance, the curs! They must have shot
him as he started to the spring for water,” said Bertram aloud,
noticing the well-worn trail from the door to a small ravine, one
hundred yards or more away.
Sounds of firing came from the ravine and from the clumps of
trees on all sides of the clearing in which the house stood.
Answering shots came from the house. It was evident that the
defense was being put up by one man, an expert marksman.
“He must have hit some of ’em right at the start,” muttered
Bertram, “or they’d have rushed the house.”
The cabin seemed to be liberally provided with loopholes, as
shots came from all sides. The lone defender, plainly enough, was
distributing his shots impartially, keeping a good lookout to see that
no parties gained the shelter of the cabin walls.
The bright sunlight crept down the foothills and flooded the scene
of battle. Still the fight went on. One hour passed—then two. The
man in the cabin seemed to have an unlimited supply of ammunition.
If he could manage to hold out much longer, perhaps the countryside
would be aroused and come to his rescue. Bertram knew from the
talk of Swingley and others that there were many ranches between
this outpost and the county seat, where the invaders had planned to
dispossess the sheriff and strike their heaviest blow. If they were
delayed too long, their surprise march would be futile.
The Texan could imagine how Swingley was fuming at the
unexpected resistance, and how he was urging the cowboys to
renewed efforts to “get” their man. But, in spite of the countless shots
that were directed at the windows and loopholes on all sides of the
cabin, not a bullet seemed to take effect. The return fire came
steadily from the cabin—first from one side and then from another.
Bertram saw two cowboys being led away from the field of battle,
evidently victims of the man who was fighting against such odds.
“Unless they’ve got something up their sleeve,” thought Bertram,
“Swingley’s men might as well move on. This man seems to have
plenty of ammunition, judging from the free and easy way he is firing,
and he can keep up this long-range fighting all day, unless a chance
bullet hits him.”
Hardly had the thought crossed his mind when, under cover of
unusually heavy firing from that side, Bertram saw a two-wheeled
armored device, similar to the one he had recently smashed, being
pushed along the road that led from the highway to the house.
“By the gods, Swingley has had his way in spite of me!” ejaculated
Bertram. “Blacksmith Jim must have come up and told them how to
fit those scraper irons to another pair of wheels.”
Slowly the improvised war engine moved toward the house, under
a concentrated fire of rifles. Bertram, from his elevated position,
could catch a glimpse of the feet of the men behind the armor, as
they pushed the go-devil toward the cabin.
The lone defender of the ranch house sensed the danger to which
he was exposed by this new element in the fight. He fired shot after
shot at the advancing go-devil, but still it came on.
Bertram watched intently. At first he thought it was the intention of
the men to reach a loophole or a window and fire through it, but he
soon saw that such was not their idea.
A bundle of straw was tossed over the top of the go-devil, against
the cabin door. Another bundle followed, and then the go-devil was
slowly backed away from the cabin.
“Burning him out, as if he might be a wolf, without a chance for his
life!” exclaimed Bertram, striking his forehead in anger. “I’ll bet Ace
Swingley himself is behind that go-devil. No one else could think up
such a plan and carry it out.”
Almost as the Texan spoke flames burst from the straw pile at the
cabin door. In a few seconds they had crept up the dry woodwork
and had reached the roof. By the time the men with the go-devil had
reached a place of safety, one side of the cabin and the roof were
ablaze.
Thinking that the defender of the cabin would attempt to escape
by way of the rear door, Swingley brought most of his forces around
on that side. To Bertram’s amazement the front door opened, and a
man, bareheaded and coatless, carrying a rifle in one hand, ran
swiftly toward a gulch in the foothills. The man had a good start
before the besiegers realized how cleverly they had been outwitted.
If there were any riflemen concealed in the growth of timber and
underbrush, toward which the man was making his way, they were
too surprised to shoot. But bullets began flying from the thicket on
the opposite side of the cabin. A few yards from the protecting gulch
the runner stumbled and fell heavily. Animated by a determination
which even his foes must have admired, he, rose slowly to his knees
and then to his feet, using his rifle as a crutch.
The rifle fire had died away, as everybody seemed intent on
watching the next move. Then a single shot was heard, as the
defender of the cabin started to run again, and the man fell and lay
still, his arms outstretched, his face turned to the sky.
The brutality of the killing caused the young Texan to tremble, as if
he had been smitten with ague. He had seen sudden death in many
forms, but this murder of one man by scores of assassins shook his
consciousness to the center. It seemed as if a crime so monstrous
could not go unpunished on the instant. Bertram almost looked for a
lightning bolt to descend from the blue sky and strike down the
riflemen. When the rifle firing had ceased serenity had returned to
the scene. The meadow larks resumed their trilling, and, if it had not
been for the burning cabin and the two still forms in the clearing, one
might imagine that death and destruction could never visit so
peaceful a haunt.
Now that their mission at the cabin was over, the invaders paid no
further attention to their handiwork. Evidently under orders from
Swingley, they swarmed out of the clearing toward the road, ready to
take up the march without further delay.
Through his glasses Bertram saw Swingley approach the body at
the edge of the clearing. The big cattleman appeared to be writing
something. Then he stooped and attached a piece of paper to the
dead man’s breast. Turning hastily aside, Swingley strode across the
clearing, intent on marshaling his forces.
Bertram saw the dust and heard the clatter of hoofs, as the
cavalcade took up its march. Then he could hear the rumble of the
wagons. The roof of the cabin fell in with a crash, and the crackling
of flames began to subside. The young Texan led his horse down the
slope and into the clearing, which had been the center of such
spirited conflict.
The body of the first man still lay where it had fallen, close to the
cabin door, with the water bucket a few feet away. Approaching as
closely as he could, and shielding his eyes from the mass of coals
that had been the cabin, Bertram saw that the man was rather below
medium stature and past middle age. Evidently he was a ranch
helper—a cowboy who had seen his best days.
The man at the edge of the clearing was tall and powerfully built.
As he lay with his arms outstretched, his brawny hand still clutching
the rifle, he made an imposing figure even in death. His features
were aquiline, his nose having the curve of an eagle’s beak. Though
he, too, was past middle age, there was no hint of gray in his hair.
Plainly enough he had been a leader of men, a foeman to be feared.
Bertram, stooping, read the message, scrawled in lead pencil on
the square of paper attached to the dead man’s breast. It said:
NICK CALDWELL
KING OF THE RUSTLERS
LET OTHERS BEWARE
As he read the name Caldwell, Bertram uttered an exclamation. It
was the name of the girl he had met at the start and again at Denver.
Probably he was the girl’s father. In the bitterness of his heart
Bertram cursed Swingley and the expedition. Then, his attention
being attracted by some papers, the edges of which peeped from the
man’s belt, Bertram drew the documents forth.
There were two letters addressed to Nick Caldwell. Glancing
through them in the hope of finding something more concerning the
man’s identity, Bertram gave a whistle of astonishment.
The letters indicated that the recipient, while ostensibly favoring
the cattle rustlers, was in reality working for certain great cattle
interests.
But, if Swingley and this slain man had been associated on the
same side in this great war of the range, how had it come about that
the leader of the expedition had been so determined to kill his
confederate? Was Swingley unaware that Caldwell was really
working for the cattle interests, or had some personal feud arisen
between the two men?
“Probably it’s a case of wheels within wheels,” thought Bertram.
“Maybe this man Caldwell threatened Swingley’s leadership. Or it
may be that Caldwell was not so much on the cattlemen’s side as
these letters indicate, and the word was given to Swingley to get him
first of all.”
Dropping on one knee beside the body Bertram glanced over
another paper, which he had taken out with the letters. It was in the
form of a diary, loosely scrawled on several sheets of paper. It was a
brief account of the fight which had just taken place.
“By George! this Caldwell was a cool one,” thought Bertram. “He
found time to jot down a story of the fight, while he was standing off
that bunch.”
The opening entry said:
Five-forty—The fight’s on. They’ve got Nate Day—shot him, as he
stepped out after water. I can see from the window that he’s stone
dead.
Then followed entries in which the writer told of the fight as it
progressed. He mentioned wounding or killing four men, and he told
of bullets that whistled through the windows and loopholes, yet did
not hit him. The final entries read:
Eight-fifteen—They’re bringing out some kind of a go-devil on
wheels, with an armored front. I can’t see the men behind it, and
bullets don’t go through the iron. I guess I’m done.
Eight-twenty-five—They’ve set fire to the cabin. Throwed straw
out from behind that go-devil. Curse the man that made that,
anyway. I might have had a chance if it hadn’t been for him.
Eight-thirty-five—The roof’s afire. I’ve got to make a run for it. If I
can make the gulch I may get away, but the chance is slim. Good-by
all.
 Bertram did not put the diary in his pocket with the letters. He
thrust the rudely scrawled notes back in the man’s belt, and he left
undisturbed the notice which Swingley had pinned to Caldwell’s
breast.
Still kneeling beside the body, Bertram for the first time thought
about himself. Should he go or stay? No doubt the whole countryside
was being aroused, and men would soon be flocking along the trail
of the invaders. It would not do to be found at the scene of the fight,
but would he be better off anywhere else? He was a stranger in a
hostile land. He had entered the country as one of a band of armed
invaders, and it was not likely that any explanations he might make
would be heeded. Hot-headed men, intent on vengeance, would not
hesitate to shoot him down at sight. He smiled ruefully, as he thought
of Arch Beam’s words: “The people in this country will scalp you
alive!” No doubt Arch was right. But, if he was to be killed, it would
be better to meet death on the open road, rather than at the scene of
a crime so despicable.
As Bertram was about to rise to his feet a rifle cracked from
across the clearing, and a bullet tore through the young Texan’s left
shoulder. Although the shock of the impact spun him half around,
Bertram struggled to his feet. His heavy revolver was drawn with
amazing celerity, and he was about to empty the weapon in the
direction from which the shot had come, when he heard a cry in a
girl’s voice.
At the same time the thicket parted. As the young Texan stood
with feet firmly planted, in spite of the intense pain that racked him,
while his finger almost pressed the trigger, Alma Caldwell came
running toward him.
 CHAPTER V
A RIDE TO SANCTUARY.

The Texan had only a confused idea of the events that followed
immediately after he had been shot. He knew that the wound was
serious, for the impact of the bullet had fairly staggered him. Yet he
managed to find his feet steadily enough, and the young woman,
who ran toward him, had no idea that he was hurt.
To Bertram it seemed as if the girl floated toward him on a
billowing sea of ether, instead of running swiftly, as she did, across
the sparse verdure of the clearing. Also, in the young Texan’s eyes,
she seemed more lovely and more unattainable than before. He had
caught only fleeting glimpses of her during their previous meetings,
and one of those meetings had been under a very poor brand of
artificial light. But now, in the bright Wyoming day, he caught the full
beauty of her youthful color, the regularity of her features and her
grace of movement. Her lithe figure was outlined in all its charm
against the green of the thicket from which she had sprung. She had
dropped her hat and tossed aside her riding gauntlets, and her spurs
jingled at the heels of her small riding boots, as she ran.
“By all the gods!” thought the wounded and dazed Bertram, “this
country up here was made as a background for her.”
Horror and questioning were written on the girl’s features, as she
reached Caldwell’s side and flung herself on her knees beside the
body. One glance told her what had happened, and she buried her
face in her hands.
Meantime Bertram’s wavering attention had been attracted by
another figure, following closely behind the girl. It was the figure of a
youth, hardly taller than Alma Caldwell and nearly as slender. Yet, for
all the newcomer’s youthfulness and slenderness, there was
something so threatening in his attitude, as he approached more
slowly than had the girl, that Bertram half raised his revolver. The
boy, who was carrying a rifle, hesitated a moment, as if to bring the
weapon to his shoulder.
“Stop!” said the girl, looking up. “Jimmy Coyle, put down that gun.
You had no business to fire in the first place, without my telling you.”
“So that’s the person who shot at me, is it?” asked Bertram,
lowering his weapon and turning toward the girl. “I’m glad you’ve
stopped him from doing it any more, as it seems to me there’s been
quite enough shooting around here to-day.”
The spreading crimson stain on the young Texan’s shirt front
caught the girl’s eye. With an exclamation of concern she rose to her
feet.
“It’s nothing worth bothering about,” the Texan said. “You’ve got
sorrow enough on your hands, for I take it this man must have been
your father. I just want to tell you that I don’t—I don’t——”
Bertram intended to say that he did not take her advice about
quitting the expedition in Denver, and he had therefore been
compelled to do so when it was a matter of more personal difficulty,
but the words refused to shape themselves. The young Texan wiped
the cold beads of agony from his forehead. His words came haltingly,
and he swayed and fell in a faint beside the body of the man whom
Swingley had dubbed the “king of the rustlers.”
The touch of cool water on his forehead revived the young Texan.
He was lying on his back, with bis head comfortably pillowed on a
rolled-up blanket. He was in the shade, and the branches of a tree
waved between him and the sky. Then he found himself looking into
the face of Alma Caldwell. He thought it was much pleasanter than
looking at the sky or at trees, and he did not even blink for fear the
vision would vanish.
The girl smiled at him faintly and said: “Your shoulder—how does
it feel? Do you think you can ride?”
Bertram felt of his shoulder. To his surprise it was neatly
bandaged, and the stained part of his shirt had been cut away. The
numb sensation was gone from his side. He sat up.
“I’ll be all right in a minute,” he said. Then he saw that he was
down by the spring, where the first man at the cabin had started to
go when the work of assassination began.
 “How did you get me down here by the spring?” asked the Texan.
“Jimmy carried you down,” replied the girl. “He’s strong. Of course
I had to help him a little.”
The events of the morning rushed into the Texan’s memory. Again
he saw the beleaguered cabin, heard the firing, saw the slain men.
“Your father?” he asked. “What’s become of his body? I must help
you with it. And the other man who was killed?”
“There’s nothing to do. After we brought you down here and fixed
up your shoulder, some men came—men we knew. They took Nate
and my stepfather—for the man you saw killed wasn’t my father, as
you thought—and have arranged for their burial.”
“Why didn’t the men find me?”
“None of them came down here, and we didn’t tell them there was
any one at the spring. They were in a hurry to get on the trail of the
invaders. Other men will be coming from every direction. The whole
countryside is being aroused. The ranchmen are furious, and there
will be more fighting. Oh, why couldn’t I have arrived in time!”
“How could you have stopped it?” asked the Texan.
“Easily enough. I could have had such an army of men at the
railroad that the invaders never would have come this way. I was
visiting near the station, where I first met you. It was my stepfather’s
old home. I received a hint of the invasion when it was being
planned. Finally, a day or two before the invaders started, I learned
the whole truth—that Swingley was raising a body of freebooters
under the guise of punishing rustlers. I wrote, and then I telegraphed.
Then I thought that probably neither my letters nor my telegrams
would be delivered. I determined to come in person, and I expected
to arrive ahead of Swingley’s train, if it were possible.
But every effort was made to stop me. I was robbed of my
transportation, as you know, and I would not have reached Denver if
you had not helped me.”
“They didn’t bother you after you left Denver, did they?” asked the
Texan.
“I was called from the train at a little station, not far from the end of
the line. The station agent said he had a telegram for me. Then he
said he could not find it—that he must have been mistaken.
Meantime the train would have gone on without me, if I had not been
watching for such a move. I frightened the conductor by telling him
that I knew there was a plot to get me off the train. He did not dare
try any more such tricks, and I reached the terminus. The telegraph
agent there did not know about any of my telegrams. The place was
full of strange men, and I saw the wagons there, ready for the use of
the invaders. I tried to get a horse, but the town was practically under
martial law, with one of Swingley’s lieutenants in command.
“I could get nothing in the way of a conveyance. I went to the
hotel, where I had put my hand baggage, and I changed to my riding
dress, thinking that I would be ready when the opportunity came. I
heard the invaders’ train, as it came in, and then the horse train. I
saw the preparations for the start. I knew they were setting out to kill
relatives and friends of mine. I thought I would go out to plead with
Swingley to give up the expedition, but I was stopped at the foot of
the stairs and given to understand that I was a prisoner in the hotel.
Nobody offered to molest me. I saw the men start out—you with
them. When they had gone some time the hotel proprietor brought in
Jimmy, my cousin, who had been concealed in the barn. He found
horses for us, and we followed the trail of the invaders. Evidently
Swingley did not care to detain me further, after he and his men were
on their way.”
“He didn’t think he would be held up here at this cabin so long,”
observed Bertram.
“My stepfather made a great fight,” said the girl, her eyes glowing
with pride. “There was not a better shot in the State than Nick
Caldwell.”
“He was a brave man, too,” said Bertram, “brave and cool. In fact,
he was the gamest man I ever heard of. Did you find the diary that
was in his belt? I glanced through it, just before you came. Any man
who could write that under fire has my admiration.”
“Yes,” responded the girl, “and it shows that they would never
have beaten him if they had not used unfair means. Whoever made
that go-devil was the means of killing my stepfather. I’ll find out who
it was, and that man shall pay and pay!”
The girl’s eyes flashed, and her hands clenched. Bertram did not
tell her that he had been called upon to fashion the go-devil in the
first place, and that he had destroyed it, only to have it refashioned
by some one else. Nor did he say anything about the letters which
he had found on Caldwell’s body, which indicated that the “king of
the rustlers” was identified with both sides in the range war. Those
letters, the Texan made sure, were still in his pocket, undisturbed. He
did not want to destroy the girl’s faith in her stepfather, after her
heroic efforts to save him.
The conversation was interrupted by the youthful Jimmy Coyle,
who, with his rifle still clutched in his right hand, came scrambling
into the hollow from the clearing, his flapping leather chaparajos
looking absurdly wide for his slim and boyish figure.
“We’ve gotta git outa here,” remarked Jimmy, without preliminary
words of any sort. “You can’t tell what side’s goin’ to stray in here
next. The invaders might even be comin’ back.”
“You’re right, son,” replied the Texan, getting to his feet. “It’s
dangerous for you to be here with me. If you’ll just bring my horse
down here where I can get him, I’ll be obliged. Then you folks had
better be riding on.”
“You’re going with us,” replied Alma.
“Where?” asked Bertram. “There’s no place in this part of the
country where they won’t hang my hide on the barn door, after the
thing that’s happened right here.”
“Yes, there is. We’re not all savages here. I don’t dare take you
back to the home ranch, up Powderhorn River, but Jimmy and I have
a hiding place all arranged for you, where it won’t be necessary to
explain things to folks.”
“Yes, I reckon most people here will be inclined to shoot first and
listen to explanations afterward,” said Bertram. “But you can’t afford
to put yourself in a questionable light by sheltering one of Swingley’s
rustlers. I can’t hide the fact that I’m a Texan.”
“Nobody wants you to,” answered the girl with a smile. “Jimmy will
have the horses at the edge of the draw in a moment, and we’ll start
on a nice quiet trail back into the hills, where we won’t meet a soul.”
“But—but I haven’t any claim on you,” stammered Bertram.
“Oh, yes you have—two claims. Didn’t you help me on my way,
once when I started home, and once in Denver?”
 “But those things didn’t amount to anything. And you know I came
in here with this invading crowd that killed your stepfather. How do
you know that I didn’t have a hand in shooting him?”
“Those things can be straightened out later. Right now you’re
badly hurt, and the one thing is to get you cared for.”
“That’s putting it impersonally enough,” ventured Bertram.
“Why should I put it otherwise? I wouldn’t leave even a known
enemy under such circumstances, and I don’t know that you are an
enemy—not yet.”
The young Texan smiled quizzically. “Since you put it on that
basis,” he replied, “I’ll accept your offer. I admit that I’m too wabbly to
put up much of an argument with any man who might stop me, orally
or with a gun.”
Just how “wabbly” Bertram was, he did not comprehend until he
had climbed to the top of the draw, where Jimmy had brought the
horses. Even though Jimmy assisted him on one side and Alma on
the other, he had difficulty in negotiating the steep trail. But he
managed to get into the saddle without aid.
“It’s queer how just the grip of a saddle horn puts life in you,” he
remarked, as they started out of the clearing, with backward glances
at the still smoking cabin. “That’s a right smart gun you’re carrying,
Jimmy. I never got a worse knock in my life.”
“It’s only a .38,” said Jimmy modestly, though a flush of pride
overspread his freckled features at this tribute to his weapon and his
marksmanship. “It’s jest drilled a little hole in you, as far as we could
see when we was bandagin’ you up. Purty quick I’m goin’ to git a .45.
If I’d have been packin’ the gun I want, it would have torn your whole
shoulder off.”
“Well, I’m glad you’re still sticking to small horses,” replied the
Texan genially. “You and I are going to be on a permanent peace
footing before you get that .45. I reckon I’ll take no further chances
with you.”
Jimmy’s reserve and suspicion had melted away before they had
more than caught a last glimpse of the cabin smoke through the
trees on the foothills. He chatted with the Texan, who did not
indicate, by word or facial expression, how much pain the journey
was causing him, even though the horses went no faster than a
walk.
To Bertram’s disappointment Alma Caldwell rode ahead,
apparently with a view of being the first to meet any travelers on the
trail. But the little procession continued on its way for two hours or
more without meeting any one.
“It’s lucky we didn’t go by the main road,” said Jimmy, “or we’d
have been stopped every mile or so. I’ll bet every man in the county
is in the saddle now. But leave it to Alma to find a way out of a
difficulty. She’s a wonder, but”— here Jimmy’s voice sank to a
confidential murmur—“I’m goin’ to skip off and help fight these
invaders, as soon as we git you took care of at Uncle Billy’s.”
“Who is Uncle Billy?”
“Oh, he belongs to the Coyle side of the family—the side that I’m
from. Only he ain’t a fightin’ man like the rest of the Coyles and all
the Caldwells. He jest believes in lettin’ everybody do what they want
—and the animals, too. He’s queer, but everybody likes him, and
you’ll be safe there because nobody bothers Uncle Billy. There’s his
place now.”
The Texan, who was wondering how many rods farther he could
ride without falling from the saddle, looked ahead, past the slim
figure of Alma Caldwell, and saw a tiny cabin nestled in an opening
in the pine forest. In the doorway stood a tall, white-bearded man,
watching from beneath a shading hand.
 CHAPTER VI
SWINGLEY HAS HIS SAY.

The young Texan’s life during the next few days was in striking
contrast with what had gone immediately before. He had a confused
recollection of sinking to rest on a comfortable bed, in a room filled
with the forms of animals—elk, deer, bears and smaller creatures, all
in most lifelike poses. There were even some shaggy buffaloes in a
perfect state of preservation. In small glass cases were groups of
insects, and there were some giant trout on the wall, evidently taken
from near-by lakes, or from the alluring stream which ran close to the
cabin.
Bertram’s recovery, under the ministrations of Uncle Billy and
Alma Caldwell, was rapid. In a few days he was able to walk about
the place. The inflammation left his shoulder and his strength
returned to him, as it always returns to healthy youth in the great
outdoors.
The old naturalist proved a delight to Bertram, and he was both
expert and gentle in applying surgical dressings. Alma accounted for
his skill by explaining that he had studied to be a surgeon.
“But he had no real taste for the profession,” said the girl. “What
he wanted was to live close to the heart of nature, to study wild life at
its source. So he moved here, when the rest of the family came, and,
after a few years of ranching, gave up everything else and settled
down in this little place in the mountains, determined to follow out his
ambition.”
The girl had ridden over to Uncle Billy’s place from the Caldwell
ranch, and she was walking about in the bright sunshine, while the
Texan stood in front of the naturalist’s cabin.
“Well, I can testify that if Uncle Billy had turned surgeon he would
have made a success of his calling,” said Bertram, stretching his
arms above his head, in the joy that a strong man feels when
convalescent. “He’s fixed me up more quickly than I would have
thought possible. Your fighting cousin’s bullet, it seems, just nicked
the top of a lung. Luckily it drilled me clean and did not shatter a
bone, or I might have been on Uncle Billy’s hospital list a long time.”
“This was the only place to bring you,” said Alma. “The one
practicing physician and surgeon in this part of the State lives twenty
miles from where you were hurt, and he had taken his rifle and
joined the men who were opposing the invaders. I couldn’t have
taken you to any ranch house without your presence being known
elsewhere, on account of all this excitement. Neighbors are visiting
everywhere, and any one who had sheltered a stranger at this time
would have come in for general suspicion. But, unless somebody
deliberately sets out to trail you, no one will be likely to know you are
at this place. It is known that Uncle Billy is opposed to the taking of
human life, and that he could not be enlisted in this dispute on either
side.”
“Well, Swingley and Tom Hoog will soon be on my trail,” observed
the Texan. “I’ll not stay here any longer than I can help, on Uncle
Billy’s account. Also on your account,” he added, “as it is not going to
do you any particular good to have it known that you helped one of
the invaders to safety. People are going to grow more bitter than
ever, now that Swingley and Hoog are dominating things in such
high-handed fashion.”
“High-handed is a mild term for what they are doing,” replied the
girl, her eyes flashing. “They are trying to set up a despotism for the
big-cattle interests. After they shot my stepfather and Nate Day, at
our little ranch house on the Powderhorn, and had burned the cabin
they found the settlers opposing them just the way the farmers
opposed the redcoats at Lexington. Things were made so hot for
Swingley and his men that they had to fortify themselves in a ranch
house, several miles from their objective, the county seat at Wild
Horse. They were besieged two days and would have been captured
to the last man, if United States soldiers hadn’t intervened. The
invaders were taken to Wild Horse under military escort, but it wasn’t
ten hours before every one of them was out under bail.”
“There must be bigger men than Swingley mixed up in it,”
observed the Texan.