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BVI Commercial Court: NY shareholder activist wins private placement attack

01 Apr 2021

In the recent decision of IsZo Capital LP v Nam Tai Property Inc, Justice Jack of the BVI Commercial Court held that a private placement was made for an improper purpose; principally to defeat a validly issued requisition for a shareholders’ meeting. The Court held that the placement was void, and ordered re-institution of the shares to their pre-placement value.

The company was in the real estate business in China and is listed on the New York Stock Exchange. The claimant was a New York based fund which publicly issued critical letters regarding the financial management of the company as a means of lobbying the minority shareholders with a view to displacing the board. Having gained the support of some of the minority shareholders, the claimant issued a requisition. In response, the company organized a private placement by which it sought to raise funds for what it described as an "imminent liquidity crisis"; issuing new shares to its majority shareholder, and others. The effect of the placement was an alteration of the shareholding in the company such that the requisition for the removal of the board, led by the claimant, would likely be defeated.The first issue for the Court was whether the requisition was valid. The Court found that it was. The second issue was the purpose for which the board of directors approved the placement and whether the directors acted in the company’s best interests. The Court found that the directors' purpose in approving the placement was to give one party de facto control of the company and to defeat the requisition. This was found to be an “improper purpose” within the meaning of s121 of the BVI Business Companies Act 2004. It followed that the directors did not act bona fide in order to save the Company for the benefit of all the shareholders. On the contrary, they acted for the benefit of a third party.

The Court also criticised the company’s lawyers for taking the deliberate decision to generate no paper trail of the conferences so that the advice would not be discoverable by the shareholders.

This judgment concurs with the Swiss Forfaiting principles that an alteration of shareholdings in the face of a dispute will likely be found to be for an improper purpose.

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