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

• Jurisdiction: Cayman Islands
• Judge: Martin JA
• Judgment Date: 05 April 2019
• Court: Court of Appeal (Cayman Islands)
• Docket Number: CICA (CIVIL) 26 of 2018

BETWEEN:

Tianrui (international) Holding Company Limited

Appellant

and

China Shanshui Cement Group Limited

Respondent

BEFORE:

The Hon John Martin, Justice of Appeal

The Hon Sir George Newman, Justice of Appeal

The Rt. Hon Sir Alan Moses, Justice of Appeal

CICA (CIVIL) 26 of 2018

FSD 161 of 2018 (IMJ)

IN THE COURT OF APPEAL OF THE CAYMAN ISLANDS

Mr. Tom Lowe QC instructed by Ms. Gemma Lardner of Ogier for the Appellant

Mr. Vernon Flynn QC instructed by Mr. James Eldridge of Maples and Calder for the Respondent

REASONS FOR DECISION

Martin JA

1 This is an appeal against an order of Mangatal J dated 19 October 2018. By that order, she struck out a petition for the winding up of China Shanshui Cement Group Limited (“the Company”) brought on the just and equitable ground by Tianrui (International) Holding Company Limited (“Tianrui”). The main grounds on which the petition was struck out were that there were alternative remedies available to Tianrui that it was unreasonable for it not to pursue, and that the petition was brought for an improper collateral purpose. Tianrui brings the appeal with leave of this court, the judge having refused leave.

2 At the conclusion of the oral hearing, we allowed the appeal and stated that we would give our reasons later. These are the Court's reasons.

Background

3 The background may be summarised as follows. The Company is a Cayman Islands exempted company. It is the holding company of a corporate group engaged in the production, supply and distribution of cement and related construction products in the People's Republic of China (“the PRC”). Its principal subsidiary is Shandong Shanshui Cement Group Company (“Shandong Shanshui”), a wholly foreign-owned enterprise established in the PRC. Measured by annual production capacity, the Company (through Shandong Shanshui) is the sixth largest cement company in the PRC. It is listed on the Hong Kong stock exchange, although trading in its shares was suspended between 16 April 2015 and 31 October 2018 because it had insufficient public investors to comply with the listing requirements. The company has four significant shareholders: Tianrui, whose shareholding at the date of presentation of the petition on 4 September 2018 amounted to 28.16% of the issued share capital; Asia Cement Corporation (“ACC”) (26.72%); China Shanshui Investment Company (“CSI”) (25.09%); and China National Building Materials Co Ltd (“CNBM”) (16.67%). CNBM is reputed to be the largest cement producer in the world; it is also the largest cement producer in China, and the PRC has a significant shareholding in it. ACC is a Taiwanese company, and in 2016 was the tenth largest cement company in the PRC. Tianrui is a BVI company that in 2016 was the ninth largest cement company in the PRC. These three companies are competitors of the Company and of each other in the Chinese cement market. The fourth shareholder, CSI, is an informal benefit trust holding its shares in the Company for employees of the Company.

4 In November 2014 the PRC prohibited any expansion of capacity or development of new projects in the cement industry. This meant that cement producers could not expand through the development of new projects; they could only do so by acquiring or merging with other existing producers. This appears to have caused CNBM, ACC and Tianrui to acquire or expand their shareholdings in the Company, and to have been the genesis of a battle for control of the Board of Directors of the Company between Tianrui on the one hand and CNBM and ACC on the other. This battle for control has given rise to what the judge described as “a complex and voluminous history” of shareholder disputes and takeover battles. The ability to pass ordinary resolutions to appoint and remove directors, and thus control the board, has depended on obtaining the voting support of CSI. Prior to 1 December 2015 CNBM and ACC had nominees on the board; thereafter until 23 May 2018 Tianrui had nominees on the board; and since then CNBM and ACC have again had nominees on the board.

5 On 4 March 2015, when nominees of CNBM and ACC were on the board, the Company issued US$500 million in loan notes at an interest rate of 7.5%. These notes (“the 2020 Notes”) were due for repayment in 2020. In August and September 2018, again when nominees of CNBM and ACC were on the board, the Company made two issues of convertible bonds. The first issue, made on 8 August 2018, was in consideration of a payment of US $210,900,000 at an interest rate of 20%; and on conversion the bondholders would receive shares in the Company, resulting in the dilution of the shareholdings of all the then current shareholders. In Tianrui's case, the effect of conversion would be that its percentage of shares would drop from 28.16% to 26.13%. The second issue of convertible bonds was made on 3 September 2018, in consideration of payments totalling US $320,700,000, again at an interest rate of 20%; and the effect of conversion into shares in the Company would be that the percentage of shares held by Tianrui would fall from 26.13% to 23.56%.

6 On 7 October 2018, after service of the petition on 4 September 2018, the Company announced that it had agreed with some of the bondholders to vary the terms so that conversion would occur immediately at a lower price in return for more shares. The effect of conversion into shares would be that Tianrui's shareholding would fall to 21.40%.

7 On 30 October 2018 an EGM of the Company was held at which the shareholders voted by a majority to authorise the issue of new shares to the bondholders on conversion. The Company claims that the resolution at the EGM is a complete answer to the petition. The shares were issued on the same day. The issue of the shares allowed the Company to represent to the Hong Kong stock exchange that there were enough public investors to satisfy the listing requirements, with the result that the suspension of the Company's listing was revoked and trading in its shares resumed on 31 October 2018.

8 The petition, which is dated 30 August 2018, was issued on 4 September 2018. The complaints made in the petition are identified under three headings: “ Control of Shandong Shanshui”; “Improper Share Issue”; and “Loss of Listing”. Of these three headings, the last has been overtaken by events, since the Company's listing has been restored. The second heading relates to the first bond issue, neither the second bond issue nor the issue of shares having occurred at the date of the petition.

9 The first heading requires examination in more detail. The central allegation made in it is that in the period between 1 December 2015 and 23 May 2018, when Tianrui was in control of the Company's board of directors, CNBM and ACC conspired to prevent the Company having control of Shandong Shanshui. Paragraph 33 of the petition asserts that the new board appointed in December 2015 discovered that the books and records, electronic data, company stamps and computers belonging to the Company and its major subsidiaries had been removed from the Group's office in Hong Kong; that Shandong Shanshui's chop (an official seal, said to be an absolute requirement for conducting business in the PRC) had also been removed from the group's Hong Kong office; and that Shandong Shanshui's articles of association had been unlawfully altered in a way tantamount to misappropriation of the Company's most valuable asset, namely Shandong Shanshui, and for the improper purpose of entrenching then existing management and removing financial oversight, thereby causing substantial damage to the Company. Paragraph 35 states that the new board was in consequence unable to take full physical and/or legal control of all of Shandong Shanshui's assets or fully ascertain Shandong Shanshui's financial position. Paragraph 35 of the petition sets out certain steps taken by the Company under the control of the new Board to regain full physical and/or legal control of all of Shandong Shanshui's assets, including the institution of proceedings in Hong Kong against, among others, CNBM and ACC for breach of fiduciary duties and conspiracy to injure the Company. In those proceedings, an injunction was obtained against former directors of the Company requiring them to return books and records of Shandong Shanshui; but the directors failed to comply, and were committed for contempt of court. Also, at the beginning of 2016, new directors were appointed to the board of Shandong Shanshui; but they also failed to cooperate with the Company and were dismissed. When the Company tried to obtain possession of Shandong Shanshui's operational headquarters, the dismissed directors refused to allow entry and barricaded themselves inside. Paragraph 37 of the petition asserts that “ Mr Chang [a director and the vice-president of CNBM] and/or Ms Wu [formerly ACC's chief financial officer, and its executive vice-president] conspired with the dismissed Shandong Shanshui Directors such that the dismissed Shandong Shanshui Directors would oppose the Board appointed on 1 December 2015 and in return Mr Chang and Ms Wu would cause support from ACC and CNBM to become re-elected to the Board and then provide necessary support to the dismissed Shandong Shanshui Directors”. Paragraph 38 of the petition states that, since the change of control of the Board in May 2018, the Company has taken no proper steps to advance the Hong Kong proceedings in which claims are made by the Company to recover unlawful payments. Finally under this heading, paragraph 39 of the Petition is in the following terms:

“In the respects aforesaid ACC and/or CNBM have acted unfairly and/or oppressively towards the Petitioner and/or the affairs of the Company have been conducted with a lack of probity and the Petitioner has justifiably lost confidence in the management of the Company”. Paragraph 46 of the Petition is in identical terms to...