The improper dilution of shareholders’ rights – the latest instalment in the Tianrui v China Shansui dispute
In the recent case of Tianrui (International) Holding Company Limited (Tianrui) v China Shansui Cement Group Limited (the Company), the Grand Court gave judgment on the defendant’s applications to strike out a contributory’s winding up petition for abuse of process and an application to strike out a subsequent writ action by the petitioner.
The case is the latest in a long running multi-jurisdictional dispute relating to the control and management of the Company. The underlying dispute arises out of a bitter and prolonged battle for control of the Company between two groups of shareholders – Tianrui, a BVI company on one side, and China National Building Material Holding Co. Limited (CNBM) and Asia Cement Corporation (ACC) on the other. It was also alleged that a father and son team, as directors of the Company, controlled the composition of the Company’s board and were party to an unlawful means conspiracy with CNBM and ACC to damage Tianrui and the Company.
Tianrui presented a winding up petition and subsequently commenced proceedings by writ against the Company in the Cayman Islands. Tianrui alleged that in carrying out the alleged conspiracy, CNBM and ACC sought to dilute its shareholding in the Company by procuring the issue of convertible bonds and improperly allotting new shares to their associates. The Company sought a validation order to permit the transfer of some of those new shares to the operator of the Hong Kong central clearing and settlement system. The order sought was granted in the Grand Court but overturned on appeal.
Central to the Court’s deliberations was whether, as a matter of law, Tianrui’s complaint was properly brought as derivative claim through the Company, or was a personal claim that could be brought on its behalf as a shareholder.
Justice Segal, in a detailed analysis of the merits of the competing views and the academic arguments declined to follow the recent decision of Justice Kawaley in David Xiaoying Gao v China Biologic Holdings (previously blogged here). Instead, Justice Segal held that Tianrui’s claim was personal and could be brought directly by the shareholder. Further, that as a result, the alleged breach of duty of the directors could not be ratified so as to expunge the right of Tianrui to bring the claim.
This issue has long exercised judicial and academic minds in England and other jurisdictions, with widespread disagreement. It is likely that each case will be determined on its particular facts. Nonetheless, this dispute provides valuable insight, given by the Courts of the Cayman Islands, for practitioners in the common law world at large.
The judgment of Justice Segal also carried out a detailed analysis of the principles and authorities relating to stays in these circumstances, paying particular attention to Reichold Norway ASA v Goldman Sachs International and in AHAB v Saad. We will blog separately on this aspect of the judgment.