{"id":9063,"date":"2024-11-25T11:51:40","date_gmt":"2024-11-25T16:51:40","guid":{"rendered":"https:\/\/www.campbellslegal.com\/?p=9063"},"modified":"2024-11-25T12:58:49","modified_gmt":"2024-11-25T17:58:49","slug":"privy-council-confirms-shareholders-personal-rights-against-the-company-where-shares-are-allotted-for-an-improper-purpose","status":"publish","type":"post","link":"https:\/\/www.campbellslegal.com\/client-advisory\/privy-council-confirms-shareholders-personal-rights-against-the-company-where-shares-are-allotted-for-an-improper-purpose-9063\/","title":{"rendered":"Privy Council confirms shareholders\u2019 personal rights against the company where shares are allotted for an improper purpose"},"content":{"rendered":"

In the recent judgment of Tianrui (International) Holding Company Ltd (Appellant) v China Shanshui Cement Group Ltd (Respondent)<\/em>,[1]<\/a> delivered on 14 November 2024, the Judicial Committee of the Privy Council (\u201cJCPC<\/strong>\u201d) considered the question of whether a shareholder has a personal claim against a company in circumstances where the directors of the company have exercised their powers for an improper purpose.<\/p>\n

The JCPC ultimately allowed the appeal, finding that a shareholder has a right of action against the company to challenge the allotment of shares by the board of directors on the basis that the allotment was made for an improper purpose in circumstances where the allotment will cause detriment to the shareholder.<\/p>\n

Background<\/strong><\/h3>\n

The background to the dispute concerns a long-standing battle for control of the respondent company, China Shanshui Cement Group Ltd (the \u201cCompany<\/strong>\u201d), a Cayman exempted company registered in Hong Kong as a non-Hong Kong company and listed on the Hong Kong Stock Exchange. The Company is a holding company of operating subsidiaries registered in Hong Kong and the People\u2019s Republic of China (\u201cPRC<\/strong>\u201d), with the group being principally engaged in the production, distribution and supply of cement in the PRC.<\/p>\n

The appellant, Tianrui (International) Holding Company Ltd (\u201cTianrui<\/strong>\u201d) is a company incorporated in the British Virgin Islands with a shareholding of 28.16% of the Company. The other major shareholders of the Company are Asia Cement Corporation (\u201cACC<\/strong>\u201d) with a 26.72% shareholding, China National Building Materials Co Ltd (\u201cCNBM<\/strong>\u201d) with a 16.67% shareholding, and China Shanshui Investment Company Limited (\u201cCSI<\/strong>\u201d) with a 25.09% shareholding.<\/p>\n

In around May 2018, a majority of shareholders of the Company, including ACC, CNBM and CSI, voted at an extraordinary general meeting (\u201cEGM<\/strong>\u201d) of the Company to reconstitute the board of directors, with the reconstituted board comprising one director from CNBM, one director from ACC and three independent non-executive directors.<\/p>\n

In or around August and October 2018, the Company issued convertible bonds in two tranches. At a subsequent EGM, a majority of shareholders passed a resolution mandating the directors to allot and issue new shares in the Company to the holders of the convertible bonds.<\/p>\n

Tianrui alleged that the bondholders were parties connected to or affiliated with ACC and CNBM and that the issuance and allotment of shares was for the purpose of diluting Tianrui\u2019s shareholding and obtaining control of the Company. Tianrui\u2019s shareholding was decreased from 28.16% to 21.75%, with the result that Tianrui could no longer block special resolutions as its shareholding was under 25% and that, if the share issuance was valid, Tianrui could not prevent the merger of the Company and may have to have its shares bought out under s.238 of the Companies Act.<\/p>\n

Tianrui commenced a writ action against the Company, seeking declarations that the exercise by the directors of the Company of the powers (i) to issue the convertible bonds, (ii) to convert the bonds into shares, and (iii) to issue the new shares, were not valid exercises of the relevant powers. The Company sought to strike out Tianrui\u2019s claim as an abuse of process on the basis that Tianrui did not have standing to sue the Company for claims concerning alleged breaches by the directors of their fiduciary duties owed to the Company.<\/p>\n

In the first instance decision in the Grand Court, Segal J rejected the argument that a shareholder did not have a personal claim because the shareholder could obtain redress by a derivative action, declining to follow the Court\u2019s earlier decision in Gao v China Biologic Products Holdings, Inc <\/em>[2018 (2) CILR 591] where the Court struck out a writ by a minority shareholder challenging the exercise of powers by a board of directors on the ground that the plaintiff lacked standing. Segal J held that Tianrui did have standing to bring a claim against the Company for improper dilution.<\/p>\n

The Company appealed to the Court of Appeal, with the central question for the Court of Appeal being whether a minority shareholder had standing to sue the company in which it held shares in the face of two possible obstacles: first, that directors owe their fiduciaries duties to the company which appoints them and not to its shareholders, and secondly, the view that the damage suffered as a result of a breach of fiduciary duty by the directors is damage to the company itself, and not to the shareholder whose voting power has been diminished by the issue of new shares.<\/p>\n

The Court of Appeal allowed the appeal, concluding that it remained Cayman law that an aggrieved shareholder has no personal right of action against the company and must found their claim on a basis that is consistent with the rule in Foss v Harbottle<\/em> or with the fraud on the minority exception to that rule (discussed further below).<\/p>\n

Privy Council decision<\/strong><\/h3>\n

Tianrui then appealed to the JCPC, which heard the appeal in March 2024.<\/p>\n

Issues for determination <\/u><\/p>\n

The central issues for the JCPC\u2019s determination were as follows:<\/p>\n