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

• Jurisdiction: Cayman Islands
• Judge: (Segal, J.)
• Judgment Date: 06 April 2020
• Court: Grand Court (Cayman Islands)

TIANRUI (INTERNATIONAL) HOLDING COMPANY LIMITED

and

CHINA SHANSHUI CEMENT GROUP LIMITED

(Segal, J.)

Grand Court, Financial Services Division (Cayman Islands)

Companies — compulsory winding up — petition — striking out — petition for winding up on just and equitable ground not struck out because petitioner also bringing writ action seeking additional and alternative relief

Companies — legal proceedings — improper dilution of voting rights — shareholder has personal right to be protected against dilution of his voting rights in company by improper action by directors — action may be properly constituted as personal claim

Held, ordering as follows:

(1) The petition strike-out application would be dismissed. The court did not accept the company’s characterization of the position adopted by Tianrui on the applications before the Court of Appeal (or the Grand Court). Instead, the court accepted Tianrui’s submissions on this issue, highlighting the following points. It seemed that Tianrui had asserted that it could bring a direct claim and had not represented or implied that it would never commence a writ action. Tianrui should not, by commencing the Cayman writ action, be treated as having decided that the writ action was a complete and preferred remedy for the matters of which it complained. It was not an abuse or improper for Tianrui to bring the amended petition and the Cayman writ action in parallel, subject to case management orders to avoid unnecessary duplication and expense. The commencement of the Cayman writ action was merely a procedural device to permit additional and alternative relief to be granted after the trial of the amended petition if the claims made in the Cayman writ action were made out. If Tianrui was unsuccessful on the amended petition it might be able to obtain the alternative relief that could properly be granted in the Cayman writ action. It did not follow from the proposition that the amended petition provided the principal relief sought by Tianrui that could not be provided by the writ action, that a writ action was inconsistent with the application for a winding up or that by commencing such an action Tianrui must be taken to have abandoned the proceeding that would provide it with the principal relief sought. Tianrui was not seeking inconsistent remedies. Nor was it acting in bad faith or improperly. It could not fairly be said that Tianrui misled the Court of Appeal nor that it was misusing the court’s procedures by commencing the Cayman writ action. The Court of Appeal considered that it was legitimate for Tianrui to exercise its statutory right to petition for awinding up order and have the question of alternative remedies decided after its complaints had been considered at the trial of the amended petition. It was consistent with this approach to allow the amended petition and Cayman writ action to proceed in tandem. There was no evidence that Tianrui’s real object was only to obtain the relief sought in the Cayman writ action and to use the amended petition as a means of putting the maximum pressure on the company to assent to the relief so sought (para. 81).

(2) It followed that the first writ strike-out application would be dismissed. Tianrui was not seeking inconsistent remedies nor was there any abuse of process in bringing the Cayman writ action at the same time as the amended petition. Tianrui had agreed that the Cayman writ action and the petition be heard together; that the evidence filed in relation to the petition stood as evidence in the Cayman writ action; and that no orders for (further) discovery be made in the Cayman writ action (para. 12; para. 82).

(3) The second writ strike-out application would be dismissed. The company’s claim to strike out the Cayman writ action on the basis that it was not properly constituted as a personal claim failed. Tianrui had standing to bring the claim set out in the Cayman writ action against the company (in its capacity as shareholder, on its own or as a representative of all shareholders) for relief in respect of the alleged abuse and improper exercise of the directors’ powers and the company’s breach of the statutory contract in the articles. However, the declaratory relief available in the action (as Tianrui now accepted) could only properly relate to the validity of the directors’ exercise of their powers and could not seek to affect the rights or position of third parties. Relief against or affecting third parties including a declaration that the issue by the company of the convertible bonds and new shares challenged by Tianrui be set aside would require a derivative claim to which such third parties were joined. The statement of claim in the Cayman writ action required amendment and Tianrui needed to make a suitable application. A shareholder had a personal right to be protected against dilution of his voting rights in the company by improper action on the part of the directors. A shareholder’s cause of action in the case of an improper allotment of shares was based on the statutory contract and was to be treated as a personal right because the true basis of the action was not the wrong to the company but an alleged infringement of the petitioner’s individual rights as a shareholder. Where the shareholders who had suffered from the improper allotment had control rights, even negative control rights, because they had sufficient standing to block special resolutions, the position was a fortiori. An interference with a shareholder’s right to block special resolutions (to exercise negative control) by dilution of his shareholding affected a core entitlement granted by the corporate constitution to the shareholder and the constitutional balance of power between shareholders thereby affecting fundamental rules regulating corporate governance. Animproper allotment in order to dilute the shareholding of a shareholder with negative control also seemed to result in a breach of the corporate constitution and the articles. There were strong indications in the authorities, at least in the cases where the dilution had the effect of destroying an existing majority and creating a new one, of the recognition of a personal right in a shareholder. It followed from the characterization of the claim as being based on a personal right of the shareholder that, as a matter of principle, ratification was not available. If the shareholder had a personal claim, it could not be defeated by ratification. However even if ratification might be available in some circumstances, it was strongly arguable that it was not in cases of a fraud on the minority coming within the exception to the rule in Foss v. Harbottle. Tianrui’s case was based on serious allegations of wrongdoing by and involving a conspiracy between CNBM, ACC and their representatives on the board. Further, it seemed wrong to say that the rights of shareholders damaged by an improper allotment of shares designed to dilute their shareholding were not to be regarded as sufficiently important to justify a personal claim because the shareholders had other avenues of redress via a derivative action. There might be good reasons why a shareholder wished to make his claim against the company (for a declaration of invalidity) rather than bring a derivative claim against the directors (for compensation or other relief). In the absence of an independent unfair prejudice remedy in this jurisdiction, the court should be slow to limit shareholder remedies for breach of constitutional rights in the context of alleged minority oppression. Therefore, the company had failed to show that Tianrui’s claim against it for relief from the alleged improper exercise of the board’s powers was improperly constituted as a personal claim. Amendment to the Cayman writ action was required to confine the relief sought to declarations concerning the actions of the board (and the abuse of power by the directors) (para. 12; paras. 100–112).

(4) The stay of the petition and writ action application would be dismissed. A case management stay involved the exercise of the court’s inherent jurisdiction and case management powers to control and manage the conduct of litigation to promote the overriding objective and the efficient, fair and cost-effective disposal of the proceedings. The court must consider what would be most likely to further the interests of justice in the particular case. In particular, the purpose of the stay was to manage the order in which proceedings were to be heard to avoid inconsistent decisions and because the outcome of one set of proceedings might have an important effect on the conduct of the other. It was necessary to identify the benefits to the defendant or respondent which were likely to result from imposing a temporary stay and the disadvantages likely to result to the plaintiff, and then decide whether the former clearly outweighed the latter and provided very strong reasons for the stay. There was a very real burden on an applicant for a case management stay to satisfy the court that the ends of justice would be served by granting astay. Ultimately, the decision whether to grant a case management stay required an assessment of the facts of the present case. The question was whether the benefits which were likely to result from imposing the temporary stay so clearly outweighed any disadvantage to Tianrui that this was one of those cases in which rare and compelling circumstances provided very strong reasons that justified doing so. After a careful assessment and balancing of all the factors, neither a stay of the amended petition or the Cayman writ action to await the conclusion of the Hong Kong proceedings was justified in this case. The prejudice to Tianrui resulting from the delay to the disposal of the amended petition would be substantial. The likely delay was difficult to measure but was likely to be a number of years. In the meantime, Tianrui would be required to remain in the company...