In a long-waited judgment delivered on 14 November 2024, the JCPC has allowed an appeal from the Cayman Islands Court of Appeal and held that a shareholder has a personal right of action to challenge an allotment of shares made by the directors of a company, in circumstances where the allotment was made improperly and will cause detriment to the shareholder.

The appeal arose from a prolonged battle for control of China Shanshui, one of the largest cement companies in China. Tianrui, a 28.16 per cent shareholder in the company prior to the alleged dilution, brought proceedings to challenge the validity of the company’s issuance of convertible bonds and subsequent issuance of shares. It alleged that the issuance was made for the improper purpose of enabling other shareholders to gain control of the company and achieving a dilution of its shareholding to under 25 per cent (thereby removing Tianrui’s “negative control”, whereby Tianrui would no longer be able to block special resolutions).

China Shanshui sought to have Tianrui’s claim struck out on the ground that Tianrui lacked standing to sue the company in respect of alleged breaches of director duties, which were owed to the company and not to Tianrui. The Grand Court, departing from an earlier first instance decision of the Grand Court in Gao v China Biologic Products Holdings, Inc, had held that Tianrui did have standing. The Court of Appeal, agreeing with Kawaley J in Gao, held that it did not.

The JCPC, having considered a number of English and Australian authorities, concluded that Tianrui did indeed have standing to bring a personal claim against the company on the basis of an implied term contained in the statutory contract (i.e. articles of association) entered into between the company and its members and between its members amongst themselves. An intrinsic feature of that contract is that it is implicit that when exercising their powers on behalf of the company, the directors must exercise them in accordance with their fiduciary duties, including the duty to exercise powers only for a proper purpose.

• The right of the shareholder to sue the company is not dependent upon the alteration in the balance of power adverse only to a minority (or a majority) of shareholders. The size of the shareholding is, in principle, irrelevant. What matters is that the claiming shareholder has suffered from an interference with its rights as shareholder brought about by the improper issue and allotment.
• It is also irrelevant whether or not the company itself has a cause of action against the directors for the breach of the fiduciary duty owed to it.
• In certain circumstances, a shareholder’s personal claim may be defeated by the ratification of the directors’ breach of duty in the exercise of their power. However, shareholders seeking to use their power to act by a majority are constrained by the equitable principle that they may not do so by way of oppression of the dissenting minority. That being the cases, there will be cases in which ratification is impossible (for example, a case in which the improper purpose for which the directors exercised their power to issue shares, was to assist an existing majority to oppress the minority).

This decision provides welcome clarification to this area of law. As a matter of Cayman Islands law, it is now settled that shareholders aggrieved by an improper issuance of shares will have a personal right to challenge that issuance directly, rather than indirectly (for example, by way of derivative action or a petition for the winding up of the company on just and equitable grounds).