Shareholder Remedies: The Case Of Tianrui v China Shanshui

In the landmark decision of the Privy Council in Tianrui (International) Holding Company Ltd v China Shanshui Cement Group Ltd (Cayman Islands) [2024] UKPC 36, the Privy Council confirmed that shareholders can bring personal claims against a company for improper exercise of power, and more specifically, where directors of the company allot shares for the improper purpose of diluting their shareholding.

Although it has never previously been doubted that shareholders personally have standing to bring proceedings to challenge such allotments, the juridical basis for their standing remained unclear. Furthermore, in certain circumstances, such claims may be crushed by ratification of the allotment by a majority of the shareholders at a general meeting.

Background and the Privy Council's decision

The Respondent company, China Shanshui Cement Group Ltd (CSCGL) was registered in Hong Kong and in the Cayman Islands. The principal shareholders of CSCGL were Tianrui (the Appellant), as well as Asia Cement Corporation (ACC), China National Building Materials (CNBM), and China Shanshui Investment Company Ltd.

Following an ongoing dispute over the control of the Respondent, the Appellant alleged that the directors of the Respondent, in breach of their fiduciary duties, allotted shares to third parties with close connection to ACC and CNBM, reducing the Appellant's shareholding in the Respondent below 25%. This act led to the removal of the Appellant's negative control, assisting ACC and CNBM to consolidate their control over the company.

The Appellant applied for a court declaration that the issuance and allotment of the new shares was invalid. The Respondent sought to have that application struck out. The Grand Court of the Cayman Islands ruled in favour of the Appellant, but the Court of Appeal of the Cayman Islands allowed the Respondent's appeal, striking out the Appellant's original application. The Appellant appealed to the Judicial Committee of the Privy Council to reinstate the case.

The Privy Council, held, allowing the appeal, that an exercise of a fiduciary power for an improper purpose is a breach of the duty owed by the directors to the company. Although the duty is owed to the company, and not to shareholders personally, shareholders whose personal rights are adversely affected by the directors' exercise of the power, are entitled to bring a personal action against the company to remedy the wrong done to them.

In reaching its conclusion the Privy Council clarified that a shareholder's cause of action following an improper issuance and allotment of shares, is a contractual claim against the company for breach of an implied term in the company's articles of association, that the directors shall exercise their powers in accordance with their fiduciary duties, for a proper purpose.

Importance of the Privy Council's decision and likely future implications

The allotment of shares can have the effect of altering the balance of voting power between shareholders within the company thereby assisting other shareholders to consolidate their control over the company at the expense of other shareholders. This was, in the Board's view, the basis of the shareholder's right to bring an action against the company.

The adverse shift in the balance of power among the shareholders constitutes an actionable harm exactly because the improper exercise of the power to alter violates the corporate contract between the individual shareholder and the company, even if the breached fiduciary duty by the directors is not owed directly to the individual shareholder.

While the decision pertains to Cayman Island companies, it offers persuasive authority that could influence other common law jurisdictions, including the Cypriot Courts.

The decision affirms shareholders' rights, including minority shareholders, to personally challenge breaches of a company's articles of association without requiring a derivative claim under Foss v Harbottle, where leave of the court to proceed under the new CPR Rules 2023 is also now required.

Lastly, the actionable right identified by the Board is expected to extend more broadly to encompass other improper exercises of power that infringe a shareholder's rights, thereby providing an additional mechanism for shareholder protection.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Phoebe Papageorgi
George Z. Georgiou & Associates LLC
1 Iras Street
Nicosia
1060
CYPRUS
Tel: [phone]
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URL: www.gzg.com.cy

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