Key Facts
- •Tianrui (28.16% shareholder) appealed a Cayman Islands Court of Appeal decision that it lacked standing to sue China Shanshui Cement Group Ltd (CSCGL) over an allegedly improper share allotment.
- •The share allotment diluted Tianrui's stake below 25%, removing its negative control and allegedly benefiting other shareholders (ACC, CNBM, CSI).
- •The allotment aimed to restore CSCGL's public float to meet Hong Kong Stock Exchange requirements after a trading suspension.
- •Tianrui alleged the bondholders were connected to ACC and CNBM, forming a concert party to seize control of CSCGL.
- •The case was decided on assumed facts before discovery and trial.
Legal Principles
Rule in Foss v Harbottle: Generally, only a company can sue for wrongs done to it, and the majority shareholder's will prevails.
Foss v Harbottle (1843) 2 Hare 461
Exception to Foss v Harbottle: 'Fraud on the minority' allows minority shareholders to sue when wrongdoers control the company and engage in dishonest conduct.
Various cases including Edwards v Halliwell and Prudential Assurance Co Ltd v Newman Industries Ltd
Shareholders have personal rights against a company, enforceable through personal action, beyond derivative actions.
Pender v Lushington, Edwards v Halliwell
Directors owe fiduciary duties to the company, including exercising powers for proper purposes. Improper purpose (e.g., solely to alter voting power) renders share allotments voidable.
Various cases including Fraser v Whalley, Punt v Symons & Co Ltd, Howard Smith Ltd v Ampol Petroleum Ltd, Hogg v Cramphorn Ltd, Bamford v Bamford, Mills v Mills, Ngurli Ltd v McCann, Residues Treatment & Trading Co Ltd v Southern Resources Ltd
A shareholder has a personal right of action against a company to challenge a share allotment made for an improper purpose causing detriment to the shareholder.
This judgment
Shareholder's claim based on implied term in articles of association: directors must exercise power to allot shares in accordance with fiduciary duties.
This judgment
Majority shareholders cannot ratify director actions that constitute oppression of the minority.
Allen v Gold Reefs, Cook v Deeks, Greenhalgh v Arderne Cinemas, Peters’ American Delicacy Co v Heath, Ashburton Oil NL v Alpha Minerals NL
Outcomes
Appeal allowed; the Court of Appeal's decision striking out Tianrui's writ was overturned.
The Privy Council held that a shareholder has a personal right of action against a company to challenge a share allotment made for an improper purpose if that allotment causes detriment to the shareholder. The Court found the lower court’s reasoning in Gao wrongly decided and that the theoretical possibility of ratification by a majority shareholder does not preclude such an action.