The Judicial Committee of the Privy Council held that a shareholder had a valid claim against a company following an improper allotment of shares.
Background:
There has been a prolonged battle for the control of China Shanshui Cement Group Ltd. (CSCGL), a Cayman Islands-exempt company whose shares are listed on the Hong Kong Stock Exchange (HKSE). China Shanshui is engaged in the production, distribution and supply of cement and related construction products in the People’s Republic of China (PRC). CSCGL’s principal subsidiary is the Shandong Shanshui Cement Group Company.
The principal shareholders in CSCGL are Tianrui, a company incorporated in the British Virgin Islands with a shareholding of 28.16%; Asia Cement Corporation, a company incorporated in Taiwan with a shareholding of 26.72%; and, China National Building Materials Co Ltd (“CNBM”), a company incorporated in the PRC with a shareholding of 16.67%.
Between April 2015 and October 2018, CSCGL’s shares were suspended from trading on the HKSE. In 2018, the Board of Directors converted bonds into a new issue of share capital which had the effect of diluting Tianrui’s stake in the company from 28.16% to 21.85% to bring the company’s free float back into compliance with HKSE rules.
While Tianrui accepted that there were proper reasons for the transactions, it also claimed that there were other motives. Tianrui’s case was that this exercise of the power to issue and allot the shares was in breach of the directors’ fiduciary duty owed to the company to exercise their powers for a proper purpose.
Decision:
The Judicial Committee of the Privy Council overturned the decision of the Court of Appeal of the Cayman Islands. The Council was particularly concerned with the question of whether Tianrui enjoyed a private right to sue the company for a declaration that the power of the company had been invalidly exercised by the Board of Directors on the company’s behalf. It clarified the juridical basis on which a shareholder might sue to hold a Board of Directors to the company’s constitution without resorting to derivative action following an allotment of shares.
The Council applied the ruling in Foss v Harbottle (1843) which established the concept of the ‘proper plaintiff’ and the ‘majority rule’. There is, however, a notable exception, specifically the ‘fraud on the minority’ principle, but there also exists an exception grounded in rights personal to shareholders such as the right to vote. the Privy Council viewed this case as being about a shareholder’s right to exercise power as a shareholder, even though it did not amount to a complete removal of the right to vote.
Implications:
This landmark decision is relevant for international and offshore companies but could be used as persuasive in English judgement. This judgement does not change the existing position in England and Wales but rather reaffirms the personal rights of a shareholder to bring direct legal action against a company to prevent improper exercises of power and oppression by a company.
This decision also clarifies that aggrieved shareholders can either seek damages, a declaration that a share allotment is invalid, or an injunction if the allotment has not yet happened. To bring such a claim, the shareholder must first demonstrate that they suffered some interference with their rights as shareholders.
