David Xiao Ying Gao v China Biologic Products Holdings, Inc.

• Jurisdiction: Cayman Islands
• Judge: Justice Kawaley
• Judgment Date: 10 December 2018
• Court: Grand Court (Cayman Islands)
• Docket Number: CAUSE NO. FSD 157 OF 2018 (IKJ)
• Date: 10 December 2018

Between:

David Xiaoying Gao

Plaintiff

and

China Biologic Products Holdings, Inc

Defendant

Before:

The Hon. Justice Kawaley

CAUSE NO. FSD 157 OF 2018 (IKJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

HEADNOTE

Application for claim to be disposed of on points of law or struck — out — whether duty to exercise power to issue new shares for a proper purpose owed to company or to individual shareholders — listed company — legal title to shares held by depositary — standing of beneficial owner of shares to assert shareholder claim against company — standing of plaintiff as recently registered legal shareholder to complain of alleged wrong committed before he acquired legal title to shares — whether right to assert shareholder rights through legal action capable of separate assignment without transferring full legal title to shares — failure to join parties to impugned share purchase agreements — whether action liable to be struck — out on abuse of process grounds — Grand Court Rules Order 14A rulel and Order 18 rule 19

Appearances:

Mr Michael Green QC of counsel and Ms Caroline Moran and Mr Lukas Schroeter of Maples and Calder on behalf of the Applicant/Defendant

Mr Nigel Meeson QC and Mr Erik Bodden of Conyers Dill & Pearman, for the Respondent/Plaintiff

Introductory

1 The propriety of the issuance of new shares in circumstances where the voting power of existing shareholders is materially diluted has been the subject of legal challenges for over 100 years. The legal basis for asserting such challenges has been largely consistent and clear: an alleged breach of the directors' equitable duty to use their powers only for proper purposes. On the other hand, in what capacity a shareholder may seek relief, personally or derivatively on behalf of the company, is a question on which different views have been expressed by judges and text writers over the years. This is the first main legal controversy raised by the Defendant's present application.

2 The second main question which falls for determination is the extent to which it is possible for a beneficial owner of shares to enforce rights attaching to the shares. Although this issue has been generated case law for over 150 years, it is raised in the modern context of a listed company where the legal title to all shares is ordinarily registered in the name of a depositary. Two further ancillary and somewhat narrower questions also fall for determination. Firstly, can a registered shareholder assert an equitable claim in respect of impropriety which occurred before he became a registered shareholder? Secondly, is the right to pursue such a claim itself assignable independently of the shares themselves?

3 These questions came before this Court for determination in the following way. On August 24, 2018, the Defendant allotted and issued shares to four groups of investors under share purchase agreements (the “SPAs”) and a Board resolution (the “August 24 Decision”) of the same date. With remarkable speed, the Plaintiff filed a Writ of Summons on August 27, 2018 followed by a Statement of Claim on September 10, 2018. As a result of the Plaintiff taking various somewhat hurried steps to respond to the standing challenges raised by the Defendant, an Amended Statement of Claim was filed on September 20, 2018 and a Re-Amended Statement of Claim was filed pursuant to a Consent Order dated October 31, 2018 (RASC”). However, before leave was granted for the Plaintiff to advance the third iteration of his Statement of Claim, the Defendant by a Summons dated October 4, 2018 (an amended version of which was filed on October 31, 2018) applied for the following relief:

• “1. Pursuant to GCR O. 14A r.l that the Court do determine the following questions of law, namely that:

  • 1.1 The Defendant did not owe any (i) fiduciary duty; and/or (ii) equitable duty; and/or (Hi) contractual duty and/or (iv) any other duty, to the Plaintiff in respect of its ‘directors power to allot/issue shares pursuant to the Share Purchase Agreements dated 24 August 2018 ( ‘Relevant Date’) in circumstances where the Plaintiff was not a registered shareholder of the Defendant at the Relevant Date; and

  • 1.2 The Plaintiff has not taken any valid assignment from Cede and Co. of a right of action against the Defendant and cannot proceed in that capacity; and

  • 1.3 In the circumstances, the Plaintiff has no cause of action against the Defendant and therefore no standing to bring these proceedings.

• 2. Further or in the alternative the Re-Amended Writ of Summons be struck out pursuant to GCR 0.18 r.l9(l) and/or the inherent jurisdiction of the Court on grounds that it does not disclose a reasonable cause of action and/or is an abuse of process..”

The Re-Amended Statement of Claim

4 The RASC alleges non-controversially that the Plaintiff was a director from October 6, 2011, Chairman of the Board of Directors of the Defendant from March 30, 2012 and Chief Executive Officer (“CEO”) from May 10, 2012. He was removed as Chairman and CEO on July 1, 2018 and as a director on July 12, 2018. The description of the circumstances of the Plaintiffs removal from office, under the heading “Board Coup”, are said to be that the Plaintiff was removed in an unceremonious manner without being told the reasons for his removal. Although the legality of the removal is not challenged, the August 24 Decision is said to be the final stage of a Board Coup which removed the Plaintiff from the Board and changed control of the Board. Wilting flowers do not ordinarily rise to the top of the corporate tree. This ‘coup’ quite likely would have been experienced by the Plaintiff as humiliating, and so it is perhaps unsurprising that he was keen to seek urgent legal recourse, as he would elect to do.

5 Other background facts are also uncontroversial. On June 11, 2018, the Defendant received an acquisition proposal from CITIC Capital Holdings Limited (“CITIC”) to acquire all of the Defendant's shares (not already owned by CITIC) for $110 per (the “CITIC Proposal”). The Defendant publicized this offer on June 19, 2018.

6 On August 17, 2018, a consortium of which the Plaintiff was part submitted a preliminary non-binding offer to acquire all of the other shares in the Defendant for $118 per share (the “GL Proposal”). On August 24, 2018, the Board announced that the CITIC Proposal had been withdrawn and the GL Proposal rejected. Instead, it had been decided to allot and issue 5,850,000 shares.

7 The RASC (paragraph 23) next alleged that this share issue represented ^{il14.9% of the Company's Ordinary shares post issuance… at a purchase price per Ordinary Share of US$100.90for gross proceeds of approximately US$590 million to a handpicked group of investors”}. The central averments made are the following :

“29. The Share Purchase Agreements and the allotment of shares pursuant thereto, which occurred both before and after the issue of the writ herein, were manifestly for an improper purpose, namely to seek to alter the balance of power between the Incumbent Management consortium and the Plaintiff's Consortium and to seek to thwart any take-over offer by the Plaintiff's Consortium (including the 17 August GL proposal) or others unconnected with the Incumbent Management Consortium or the Board)….

32. Further or alternatively, the conduct of the Board in entering into the Share Purchase Agreements and allotting shares to the Incumbent Management consortium pursuant thereto was in breach of their fiduciary duty to exercise their powers for a proper purpose being the purpose for which such powers were granted”

8 The relief sought included, inter alia, a declaration that the August 24, Board Decision and the SPAs are invalid and unenforceable, together with an order requiring the Defendant to rescind and the SPAs and rectify the register.

9 As regards the Plaintiffs shareholder standing, the key sequence of events is pleaded as follows:

• • at all material times to September 4, 2018: the Plaintiff was the beneficial owner of 417,143 Ordinary Shares, and was disclosed as such in SEC filings;

• • September 4 to date: after transferring beneficial ownership of 200,000 Shares to a Family Trust, the Plaintiff retains beneficial ownership of 217,143 of those Shares;

• • September 14 to date: the Plaintiff is registered owner of 50,000 Shares;

• • October 22, 2018: Cede & Co. as registered owner of the 417,143 Shares as at August 24, 2018 assigned all rights and remedies of the Shares to the Plaintiff;

• • October 24, 2018: notice of the assignment is given to the Defendant pursuant to section 5 of the Property ( Miscellaneous Provisions) Law.

10 By letter dated November 1, 2018, the Plaintiffs attorneys clarified the capacities in which the Plaintiff sued:

• (a) as a beneficial owner of shares in the Company, with sole voting control;

• (b) as a registered member of the Company; and/or

• (c) as assignee from a registered member of a cause of action.

11 Conyers Dill & Pearman also clarified the breaches of duty relied upon:

• (a) the duty to exercise directors' powers for a proper purpose “zs a legal and/or equitable duty owed to an individual shareholder and in respect of which an individual shareholder has a right of action”;

• (b) a shareholder has a “corresponding legal and/or equitable right not have its voting rights diminished except as a consequence of shares being issued for a proper purpose”;

• (c) where a public company and its directors know that the registered shareholder is a nominee and the identity of the controlling beneficial owner is a matter of public record (through SEC filings), the company and its directors owe a legal and/or equitable duty to such persons only to issue new shares for a proper purpose.

12 Next it was explained that in the alternative, the Plaintiffs case was that the relevant duties were owed to Cede & Co....