Enyo recently acted, alongside Ogier (Cayman) LLP,  for Tianrui (International) Holding Company Ltd  in the company’s successful appeal before the Judicial Committee of the Privy Council: Tianrui (International) Holding Company Ltd v China Shanshui Cement Group Ltd [2024] UKPC 36.

The case addressed the question of whether a shareholder can personally bring a claim against a company when its directors issue shares for the improper purpose of diluting the shareholding of a minority shareholder. The Board ultimately held that a shareholder would have standing to bring such a cause of action and discussed the juridical basis on which such claims could be pursued.

Background Facts

The Appellant, Tianrui International Holding Company Ltd (“Tianrui“), is a shareholder of the Respondent, China Shanshui Cement Group Ltd (“Shanshui“), a Cayman Islands company listed on the Hong Kong Stock Exchange. Prior to events, Tianrui held 28.16% of Shanshui’s shares, giving it a form of ‘negative control’ over Shanshui – specifically the ability to block special resolutions.

In April 2015, Shanshui’s shares were suspended from trading on the Hong Kong Stock Exchange. The company was later warned that it would be delisted unless it restored its public float above the required 25% minimum threshold. In response, the majority shareholders voted to reconstitute the board of directors. Thereafter, Shanshui issued convertible bonds to multiple subscribers, purportedly to repay outstanding loans. A shareholder resolution was then passed, mandating the conversion of these bonds into shares. This restored Shanshui’s public float, but crucially, it also diluted Tianrui’s shareholding to below 25%, thereby eliminating its negative control.

In pursuing its claim, Tianrui contended that the bondholders were, in fact, connected to its rival shareholders and that they had all acted in concert to seize voting control of Shanshui. It alleged that the issuance of bonds and subsequent share allotment constituted an improper exercise of the company’s power. Tianrui therefore sought declarations that these actions were invalid.

Proceedings to date

Shanshui applied to strike out Tianrui’s claim, arguing that Tianrui lacked standing as the allegations essentially arose out of directors’ alleged breaches of their fiduciary duties – claims that should be pursued by the company, not individual shareholders.

The Cayman Grand Court ruled in Tianrui’s favour, holding that a minority shareholder could bring a personal claim against the company and that an appropriate remedy was a declaration that the share allotment was unlawful.

On appeal to the Cayman Court of Appeal, the decision was overturned, with the Court holding that a shareholder did not have a personal right of action against the company in the circumstances. It reasoned that Tianrui lacked standing as: (i) directors owe their duties to the company, not its shareholders; and (ii) the damage suffered was to the company, not to the aggrieved shareholder.

Tianrui consequently challenged the Cayman Court of Appeal’s decision before the Judicial Committee of the Privy Council.

The Board’s Decision

The Board allowed Tianrui’s appeal. Although there was already substantial English authority supporting a shareholder’s right to challenge the improper allotment of shares by a company’s directors, in allowing the appeal the Board overturned Cayman authority that refused a minority shareholder’s action against a company for lack of standing, bringing the Cayman Islands in line with other common law jurisdictions.

The Board held that although the power to allot shares lies with a company, the power to cause the company to exercise this power is conferred upon the company’s director by the articles of association.

Whilst it is a given that the directors owe fiduciary duties to a company and so must exercise their power to allot shares for a proper purpose, the Board opined that the directors’ actions are also subject to an implied term within a company’s articles. In this contract between the company and its shareholders, where the power to allot shares is conferred upon the directors, there lies an implied term which constrains the directors to exercise their power to allot shares in accordance with their directors’ duties – i.e. when a director allots shares in accordance with their power to do so, they must exercise the power for a proper purpose.

By allotting shares for an improper purpose, the directors had failed to act in accordance with their fiduciary duties owed to Shanshui. By its directors’ actions, Shanshui itself had then breached the implied term in its articles. Therefore, whilst Shanshui may have a cause of action for breach of fiduciary duty, Tianrui, also had a personal cause of action against the company for breach of contract.

The Board acknowledged that, in some cases, a shareholder’s claim could be defeated if the majority ratified the share allotment. However, it also recognised that equity could intervene if the majority shareholders were seeking to oppress the minority through such ratification.

Whilst English claimants have been able to seek a wide range of discretionary relief for unfair prejudice under sections 994 and 996 of the Companies Act 2006, through its judgment, the Privy Council has now provided detailed legal analysis of the underlying principles, and why such a claim can be brought by a shareholder.

Enyo regularly acts in Privy Council cases. For more information, please contact lucinda.orr@enyolaw.com.