The Judicial Committee of the Privy Council (the "JCPC") has handed down its much-anticipated judgment in Tianrui (International) Holding Company Ltd v China Shanshui Cement Group Ltd [2024] UKPC 36, concluding that a shareholder has a right of action by way of a personal claim against a company to challenge the allotment of shares by the board of directors on the basis that the allotment was made for an improper purpose in circumstances where the allotment will cause detriment to the shareholder.
The ruling, which was decided on principle based on assumed facts as alleged by the parties, confirms that a shareholder may bring a personal claim against the company for relief, including declaratory or injunctive relief, without the need for a derivative action, overturning the decision of the Court of Appeal of the Cayman Islands (the "Court of Appeal") which had held that the plaintiff to the claim would be the company itself and the shareholder could only bring a claim derivatively on behalf of the company (and not in its own capacity as shareholder).
The JCPC considered the two related principles that comprise the rule in Foss v Harbottle; namely the "proper plaintiff" principle whereby only the company can take action where a wrong has been done to the company and the "majority rule" principle whereby if a transaction can be made binding by a simple majority of shareholders, such majority can waive any breach of duty or ratify irregular acts of the directors. Under this rule, the shareholder may only bring an action derivatively on behalf of the company if the wrongdoers are guilty of dishonest conduct or misappropriation and has no right under this rule to bring a personal action on the shareholder's own behalf. However, the JCPC recognised this was only part of the picture and it reviewed numerous English and Australian authorities concerning both the separate and distinct right of a shareholder to bring a personal claim and the exercise of a power for an improper purpose, including Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71 and Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821.
Ultimately the JCPC, having reviewed the authorities (including Cayman authorities referred to in the Court of Appeal's judgment), decided to approach the matter "from first principles", as follows:
- The conferment upon the directors of the fiduciary power to allot and issue shares is an important part of the contract between shareholders and the company, constituted by its memorandum and articles.
- The inevitable consequence of the conferral of a power upon fiduciaries is that it must be exercised for proper purposes. Where such a power is conferred by the articles upon fiduciaries, this constraint upon its exercise is as much a part of that corporate contract as if it had been spelt out word for word in the articles.
- If the consequence of a share issue is to alter the balance of power between the company's shareholders and harm the value of the rights embedded in a shareholder's shares, this is an actionable harm because the impropriety in the exercise of the power contravenes the corporate contract binding the shareholder and the company even though the relevant fiduciary duty breached by the directors is not owed to such shareholder.
- The right of the shareholder to sue the company is not dependant on the alteration in the balance of power being adverse to a minority of shareholders.
- As to ratification, ordinarily the shareholders of a company may, acting by majority, ratify any action taken by the directors which falls within the corporate capacity of the company. However, the majority shareholders are constrained by the equitable principle that they may not do so by way of oppression of a dissenting minority
In terms of the interaction between a direct shareholder claim and a derivative action, the JCPC clarified that it is in principle irrelevant to the right of a shareholder to bring a direct claim whether the company itself has a cause of action against the directors for the breach of the fiduciary duty owed to it. The two claims are therefore not mutually exclusive.
This judgment provides welcome clarification to the rights of a shareholder of a Cayman Islands company that has been wronged by the board of such company exercising a power for an improper purpose, notwithstanding whether that wrongful exercise of power is capable of ratification by the company in general meeting.
