Gao v China Biologic Products Holdings Incorporated

• Jurisdiction: Cayman Islands
• Judge: (Kawaley, J.)
• Judgment Date: 10 December 2018
• Court: Grand Court (Cayman Islands)
• Date: 10 December 2018

GAO

and

CHINA BIOLOGIC PRODUCTS HOLDINGS INCORPORATED

(Kawaley, J.)

Grand Court, Financial Services Division (Cayman Islands)

Companies — minority shareholders — right to bring action — no standing to bring personal claim for breach of fiduciary duty against company for improperly motivated allotment of shares, which diluted voting rights — directors owe duty to company not shareholders, unless special factual circumstances give rise to individual right of action (e.g. contractual right to receive dividends or redemption proceeds) — dilution of voting rights not freestanding exception to rule in Foss v. Harbottle

Companies — shares — beneficial owner — no standing to bring personal claim to set aside improperly motivated allotment of shares approved by directors which diluted voting rights, except in special circumstances

Held, ruling as follows:

(1) The plaintiff lacked standing to bring a personal claim as registered shareholder. Individual minority shareholders ordinarily had no standing to sue for breach of fiduciary duty in relation to a complaint that their voting power had been diluted by a share allotment approved by the directors for an improper purpose. Ordinarily, directors only owed a duty to the company in the exercise of their powers, and the company in general meeting could validate any defects in such exercise. Shareholders ordinarily acquired their shares on the explicit basis that their only means of controlling the management of the company was by way of successfully passing resolutions in general meetings. It would be inconsistent with this fundamental rule and potentially expose companies to limitless litigation if individual shareholders were permitted to enforce duties that were not owed to them. It would amount to permitting individual shareholders to participate in the management of the company by intruding into the company’s proper sphere of supervising the conduct of directors. The position was different with regard to ultra vires acts because the company itself was not competent to ratify ultra vires acts. Section 28 of the Companies Law, for example, expressly permitted shareholders to set aside ultra vires acts. The position was also different when special circumstances gave rise to an individual right of action by a particular shareholder against the company in respect of a transaction which affected that shareholder in its own right, e.g. where the shareholder asserted a personal contractual right to receive dividends or redemption proceeds. Share allotments usually affected all shareholders of the affected class in the same way and there was therefore no identifiable principled basis upon which to treat this category of breach of an equitable duty as a sui generis one giving rise to concurrent duties owed to the company and individualshareholders. The dilution of share voting rights did not constitute a freestanding exception to the rule in Foss v. Harbottle that claims for damage caused to a company must ordinarily be brought by or on behalf of the company. Minority shareholders could challenge intra vires share allotments which they considered to improperly dilute their voting rights by means of a derivative action or a general meeting (majority shareholders could express the will of the company in general meeting and ratify or set aside any share allotment which would dilute a majority shareholding) (paras. 29–48).

(2) The plaintiff had no standing as a beneficial owner of shares to pursue a personal claim to set aside an improperly motivated share allotment. The preponderance of relevant authority clearly pointed to the conclusion that a beneficial owner of shares ordinarily lacked standing to pursue legal or equitable claims in relation to the relevant shares. Section 38 of the Companies Law provided that a “member” of a company was, by statutory definition, a registered member, though the Law did not state that the company was not required to take notice of any trusts. Article 12 of the company’s amended articles stated, however, that the company was not bound by or compelled to recognize in any way any equitable, contingent, future or partial interest in any share. Companies were, in general, both entitled and obliged to deal only with those who were registered as having legal ownership of shares. The suggestion that an equitable shareholder should in principle be permitted to advance an equitable claim must therefore be rejected. The standing rule was not an absolute one and did admit the possibility that exceptions might be made in special circumstances, though the plaintiff in the present case had not advanced a case based on special circumstances (paras. 53–60).

(3) A shareholder would have standing to pursue a personal equitable claim to impugn an allotment of shares authorized by the directors prior to his becoming a registered shareholder, assuming that he had standing to pursue such a personal claim at all. It would be surprising if the rights which indubitably did pass with shares (essentially the statutory contract embodied in the articles) were not also accompanied on a transfer of legal ownership by legal and/or equitable rights of action which had not been exhausted by the transferor prior to a share transfer of title. Equitable claims could be attached to and assignable with shares. There was no general prohibition on a new shareholder complaining about a continuing wrong which first occurred before he became a shareholder. This finding most accorded with justice, broadly conceived, because it ought in principle to be possible for a new shareholder (especially a former beneficial owner) to seek to put matters right. To put it another way, if a shareholder had a personal equitable claim against the company in his capacity as such which had not been finally settled before legal title was transferred, it was difficult to see why as a matter of principle that claim would not be attached to the relevant shares. The right to challenge a continuing dilution of the voting power attached to the shares seemedquite clearly to be a right which should be viewed as attaching to the shares rather than to the legal owner. The court repeated, however, that a personal right of action would only exist at all if there were special circumstances giving rise to a personal shareholder right of action in relation to a breach of fiduciary duty, which would ordinarily only be actionable by the company (paras. 73–78).

(4) The plaintiff did not have standing to pursue a personal claim based on the Cede & Co. assignment. The assignment was not effective to transfer the right to pursue a claim of equitable breach of fiduciary duty in respect of the 200,000 shares still registered in the nominee’s name. Cede & Co. was not the registered owner on the date it was purportedly executed of the shares described therein. More fundamentally, an equitable claim which personally belonged to a shareholder arising out of rights attached to shares was not an independent assignable chose in action. The traditional common law rule was that the “bare right to litigate” was not assignable. The Property (Miscellaneous Provisions) Law (2017 Revision), s.5 did not change that position in relation to a “mere equity” such as the personal equitable claim in the present case. Section 5(1) expressly contemplated that an assignment would pass the legal right to a debt or thing in action and all legal and other remedies for the same. The wording of s.5 was a clear indicator that the statute did not contemplate the assignment of remedies designed to enforce property rights separately from an assignment of the relevant legal right or chose in action. Accordingly, the assignment was not effective to pass to the plaintiff, while the purported assignor retained title to the shares, any personal equitable right of action in relation to an improper dilution of the voting power of the shares (paras. 87–95).

Cases cited:

(1)A Company, Re, [1987] BCLC 82, considered.

(2)Antow Holdings Ltd. v. Best Nations Invs. Ltd., Eastern Caribbean Supreme Ct. (C.A.), Case No. BVI HCMAP 2017/0010, September 21st, 2018, unreported, considered.

(3)Argentine Holdings (Cayman) Ltd. v. Buenos Aires Hotel Corp. S.A., 1997 CILR 90, followed.

(4)Artan Invs. Ltd. v. Bank of East Asia Ltd., Hong Kong Ct. of First Instance, HCMP 125/2015, June 5th, 2015, unreported, distinguished.

(5)Ashburton Oil N.L. v. Alpha Minerals N.L., [1971] HCA 5; (1971), 123 CLR 614, considered.

(6)Bamford v. Bamford, [1970] Ch. 212; [1969] 2 W.L.R. 1107; [1969] 1 All E.R. 969, applied.

(7)Bermuda Cablevision Ltd. v. Colica Trust Co., [1998] A.C. 198; [1998] 2 W.L.R. 82; [1998] 1 BCLC 1; [1997] BCC 982, distinguished.

(8)Binney v. Ince Hall Coal & Channel Co. (1866), 35 L.J. Ch. 363; 14 L.T. 392, considered.

(9)Eclairs Group Ltd. v. JKX Oil & Gas plc, [2014] EWCA Civ 640; [2014] 4 All E.R. 463; [2014] 2 All E.R. (Comm) 1018; [2014] 2 BCLC 164; [2015] BCC 821; [2014] Bus. L.R. 835; on appeal, [2015] UKSC 71; [2015] W.L.R. (D.) 497; [2016] 3 All E.R. 641; [2016] 2 All E.R. (Comm) 413; [2015] Bus. L.R. 1395, distinguished.

(10)Ellis v. Torrington, [1920] 1 K.B. 399, referred to.

(11)Emlen Pty. Ltd. v. St. Barbara Mines Ltd. (1997), 24 ACSR 303, considered.

(12)Fitzroy v. Cave, [1905] 2 K.B. 364, considered.

(13)Foss v. Harbottle (1843), 2 Hare 461; 67 E.R. 189, referred to.

(14)Gross v. Lewis Hillman Ltd., [1970] Ch. 445; [1969] 3 W.L.R. 787; [1969] 3 All E.R. 1476, distinguished.

(15)Hannoun v. R Ltd., 2009 CILR 124, referred to.

(16)Hogg v. Cramphorn Ltd., [1967] Ch. 254; [1966] 3 W.L.R. 995; [1966] 3 All E.R. 420, dicta of Buckley, J. considered.

(17)Hooker Invs. Pty. Ltd. v. Email Ltd. (1986), 10 ACLR 443, considered.

(18)Howard Smith Ltd. v. Ampol Petroleum Ltd., [1974] A.C. 821; [1974] 2 W.L.R. 689; [1974] 1 All E.R. 1126, considered.

(19)Independent Asset Management Co. Ltd. v. Swiss Forfaiting Ltd., Eastern Caribbean Supreme Ct. (C.A.), Case No. BVI HCMAP...