In the recent decision of David Xiaoying Gao v China Biologic Products, the Cayman Islands Grand Court considered the following issues:
- The propriety of issuing new shares to dilute voting power of existing shareholders;
- The extent to which it is possible for a beneficial owner of shares to enforce rights attaching to those shares;
- Whether a registered shareholder is able to assert an equitable claim in respect of impropriety which occurred before he became a registered shareholder;
- Whether the right to pursue a claim is assignable independently of the shares themselves.
In August 2018, the Defendant issued shares to four groups of investors and the Plaintiff (former CEO) perceived this to be a ‘coup’. Three days later, he responded with a writ. A flurry of pleadings ensued and before the Plaintiff had leave to issue the third iteration of his Statement of Claim, the Defendant sought to have the claim struck out pursuant to the Grand Court Rules. The Defendant claimed that the Plaintiff lacked standing because he was not a registered owner at the time the shares were issued.
Justice Kawaley confirmed the general rule that minority shareholders do not (absent special circumstances) have standing to pursue a personal action to set aside or restrain an improperly motivated allotment of shares which would dilute their voting power. Any such breach of fiduciary duty would be actionable by or derivatively on behalf of the company. Aside from a statutory right, there is no right for a minority to bring an action against the company for a director’s breach of duty in respect of an improperly allotted share issuance. The common law does not assist in this context. He therefore rejected the argument that the dilution of share voting rights constitutes a freestanding exception to the rule in Foss v Harbottle quoting with approval Justice Mummery in Peskin v Anderson:
“The fiduciary duties owed to the company arise from the legal relationship between the directors and the company… The fiduciary duties owed to the shareholders do not arise from that legal relationship…”
The Plaintiff’s contention that, as beneficial owner of the shares, he possessed standing to assert a personal claim for breach of fiduciary duty was given short shrift. The Court found that even a registered shareholder cannot complain of a wrong which was committed before he acquired legal title to the shares, pointing to a derivative claim as a more appropriate remedy.
The Plaintiff won a Pyrrhic victory in successfully arguing that he had standing to pursue a personal equitable claim to impugn an allotment of shares authorised by the directors of the company prior to his becoming a registered shareholder, the Court accepting that there is no general prohibition on doing so.
The Plaintiff contended that the right to pursue a claim is assignable independently of the shares themselves, pursuant to Cayman Islands statute. The Court found the speech of Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society irresistible:
“…what is assigned is the chose, the thing…that does not mean that the remedies are properties themselves, capable of assignment separately from the chose…”
The Defendant was comprehensively successful in its assertion that the Plaintiff lacked standing to bring the proceedings.