Analysis of the recent judgment in the Judicial Committee of the Privy Council: Tianrui (International) Holding Company Ltd v China Shanshui Cement Group Ltd [2024] UKPC 36.
On 14 November 2024, the Judicial Committee of the Privy Council (JCPC) handed down its decision overturning the Court of Appeal, confirming that a shareholder whose holding is diluted by an improper allotment of shares does indeed have a personal claim against a company.[1]
This landmark decision clarifies the rights of shareholders, particularly minority shareholders, to bring a personal claim against the company for breach of directors’ fiduciary duties, without the need to bring a derivative action.
Background to the dispute
The principal shareholders in China Shanshui Cement Group Ltd (CSCGL), a Cayman Islands exempted company that is also registered in Hong Kong as a non-Hong Kong company, were (i) the appellant (Tianrui), a BVI company with a shareholding of 28.16%, (ii) Asia Cement Corporation (ACC), a company incorporated in Taiwan owning 26.72% of the shares, (iii) China National Building Materials Co Ltd (CNBM), a company incorporated in the PRC with a shareholding of 16.67%, and (iv) China Shanshui Investment Company Ltd (CSI), a company incorporated in Hong Kong with a shareholding of 25.09%. CSCGL, Tianrui, ACC and CNBM are all competitors in the cement production industry in the PRC.
CSCGL’s shares were suspended from trading on the Hong Kong Stock Exchange (HKSE) and in 2017 the company was required to increase its public shareholding to meet the 25% minimum standard mandated by the HKSE regulations.
In 2018, a majority of the shareholders of CSCGL voted at an extraordinary general meeting to change the board of directors. The new board was made up of one director from CNBM, one from ACC and three non-executive directors.
Following these changes, CSCGL issued convertible bonds, and issued and allotted new shares. The new shares restored the public shareholding to above the minimum levels required. However, Tianrui claimed that the bondholders were connected with ACC and CNBM by an undisclosed agreement, or concert party, to take over voting control of CSCGL.
It is worth noting that in 2014, the PRC government had imposed restrictions on cement production capacity, preventing cement producers from expanding their market shares unless they took over other producers. Tianrui asserted that ACC and CNBM had agreed to form an alliance to take over CSCGL.
Tianrui alleged that the issue of the bonds, and issue and allotment of the shares, were an improper exercise of CSCGL’s power to allot and issue securities and therefore were invalid. Tianrui claimed that the shares were in fact issued for the purpose of enabling ACC and CNBM to control CSCGL by diluting Tianrui’s shareholding to under 25%, with the effect being that Tianrui could no longer block special resolutions.
CSCGL justified its actions by relying upon the rule of Foss v Harbottle which is made up of two principles:
The proper plaintiff principle which is that where a wrong has been done to a company, only the company (and not a shareholder) can bring an action; and
The majority rule principle which is that the will of the majority of the shareholders of the company should prevail in the running of the company’s business.
Judgments in the Cayman Islands
CSCGL claimed that Tianrui did not have standing to sue for claims arising out of breaches of fiduciary duties by the directors (which were duties owed to the company). The Grand Court in the Cayman Islands concluded that a minority shareholder does have a personal claim against the company.
CSCGL appealed to the Court of Appeal, which held that a shareholder had no personal right of action against the company because:
directors owe their fiduciary duties to the company, not the shareholders; and
damage suffered because of a breach of duty constitutes damage to the company rather than to the shareholder.
Tianrui applied to the JCPC for declarations that the directors’ exercise of their powers was invalid. As such, the JCPC considered the following issues:
whether a shareholder has a cause of action in these circumstances, given that the directors’ duty is to the company (as per the rule in Foss v Harbottle);
how to reconcile a personal action and the company’s cause of action (if applicable); and
whether the possibility of ratification by the majority prevents a personal shareholder claim.
The JCPC decision
Cause of action
The JCPC allowed the appeal. It held that a shareholder whose holding is diluted by an improper allotment of shares by the directors may bring a personal claim against the company (rather than a derivative claim on behalf of the company) challenging the validity of that allotment.
The JCPC provided a helpful analysis of case law in similar circumstances. It held that where the directors have sought deliberately to alter the balance of power between shareholders, and in doing so, failed to exercise their powers bona fide for the benefit of the company as a whole, the shareholder does indeed have a personal cause of action against the directors.
Lord Hodge and Lord Briggs were of the view that the cause of action arises because there has essentially been a breach of an implied term in the contract between the shareholder and the company that the directors will act in accordance with their fiduciary duties, even though the fiduciary duty itself is not owed to the shareholder personally.
It is important to highlight that the JCPC added that the right of the shareholder to sue the company does not just apply to minority shareholders. The right to bring a personal action against the company also applies to majority shareholders or groups with majority control whose shareholding had been improperly diluted.
What about the rule in Foss v Harbottle?
The JCPC took the view that the shareholder’s cause of action against the company co-exists with a cause of action by the company against the directors in respect of the same breach of duty.
The JCPC did note that (although not applicable in this case) the claim might be defeated by ratification of the breach of duty by a majority of the shareholders at a general meeting.[2] However, this theoretical possibility was not enough to defeat the right to bring the claim. The JCPC further noted that even if this option was open, the majority was, in any event restrained by the equitable principle that they may not act in a way to oppress the dissenting minority.
Implications
The judgment is significant, in so far as it reinforces the protection of shareholders against the improper exercise of directors’ powers. It clarifies that all shareholders (not just minority shareholders) are entitled to bring a personal claim against a company to prevent conduct that breaches a company’s articles of association, thereby strengthening corporate governance standards. The ruling also highlights the importance of directors adhering to their fiduciary duties and the potential consequences of failing to do so. By allowing shareholders to bring personal claims, the judgment ensures that directors are held accountable for their actions, promoting fairness and transparency within companies.
What now?
The affirmation of shareholders’ rights may encourage shareholders to challenge decisions they believe to be improper. It would therefore be sensible for companies to review and possibly revise their governance policies to ensure that they can comply with them. Directors are also advised to act with transparency in their decision-making processes wherever possible, especially when it comes to issuing new shares or making any other significant corporate decisions. Directors can expect to be subjected to scrutiny and must be prepared to demonstrate that they are acting for the proper purpose, and in the best interests of the company as a whole.
Sarah Murray
Miranda Joseph