Tianrui (International) Holding Company Ltd v China Shanshui Cement Group Ltd (Cayman Islands)

A shareholder, including a minority shareholder, may sue the company personally to challenge an allotment of shares made by directors for an improper purpose where it causes detriment by altering the shareholder’s voting position. The cause of action is contractual: the memorandum and articles contain an implied term that directors exercising delegated powers will comply with their fiduciary duties. The rule in Foss v Harbottle does not apply because the complaint concerns interference with the shareholder’s own rights, although the company may also have a claim. A proper business purpose, such as genuinely raising capital, remains permissible even if dilution follows incidentally. Deliberately changing the balance of power between shareholders is not a proper purpose. Majority ratification may defeat the claim only subject to the equitable constraint against oppression; the mere possibility of future ratification does not justify striking out the action.

Tianrui held shares in CSCGL and alleged that the directors had issued convertible bonds and allotted shares to persons connected with other shareholders, diluting its holding below 25% and consolidating control. CSCGL applied to strike out Tianrui’s writ on the ground that Tianrui lacked personal standing because the alleged fiduciary duty was owed to the company.

Segal J rejected the challenge in 2020 (2) CILR 6. The Court of Appeal reversed that decision in 2022 (2) CILR 28. The central issues before the Privy Council were whether a shareholder had a personal cause of action, whether the rule in Foss v Harbottle applied, whether the allotment was void or voidable, and whether possible ratification affected the claim.

Appeal allowed. The Board advised that the writ should not have been struck out.

1. Personal cause of action. A shareholder whose rights are adversely affected by an improper allotment of shares may sue the company personally. This remains so although the directors’ fiduciary duty to exercise their powers for proper purposes is owed to the company. The complaint concerns interference with the shareholder’s own rights and the value of the rights attached to the shares.
2. Corporate contract. The cause of action arises from the corporate contract constituted by the memorandum and articles. The contract contains an implied term that directors exercising the company’s delegated power to allot and issue shares will comply with their fiduciary duties. The Board preferred the contractual analysis of In re a Company (No 005136 of 1986) (Sherborne Park) [1987] BCLC 82 to the equity-based analysis in Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1988) 6 ACLC 1160.
3. Proper purpose. The power to allot and issue shares is fiduciary. Raising capital genuinely considered to be in the company’s best interests may be a proper purpose. Deliberately altering the balance of power between shareholders, so as to advance one shareholder or group at another’s expense, is not a proper purpose, even though a valid issue may incidentally dilute existing holdings. The rule applies irrespective of whether the claimant is a majority or minority shareholder.
4. Ratification. Shareholders acting unanimously may ratify an act within the company’s capacity. Majority ratification is constrained by the equitable rule against oppression of a dissenting minority. The possibility of ratification does not itself remove the cause of action or justify striking out the claim. The allotment is ordinarily voidable rather than void, and the rights of bona fide purchasers without notice may require separate consideration.
5. Application. On the assumed facts, the alleged issue was capable of being an improper attempt to consolidate control and deprive Tianrui of negative control. The alleged ratification by the same majority could itself be vitiated by an intention to oppress Tianrui. The appeal was therefore allowed.

• Privy Council allowed the appeal and advised that the writ should not have been struck out: [2024] UKPC 36.
• Court of Appeal of the Cayman Islands reversed Segal J and held that an aggrieved shareholder had no personal right of action against the company: 2022 (2) CILR 28.
• Grand Court of the Cayman Islands rejected CSCGL’s standing challenge and held that the shareholder had a personal claim: 2020 (2) CILR 6.