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

Heard on 12 and 13 March 2024

Lord HodgeAND

The issue on this appeal is whether a shareholder, including a minority shareholder, has a personal claim against a company when the directors of the company allot shares for an improper purpose. In particular, does the shareholder have a private right to sue the company for a declaration that the power of the company has been invalidly exercised by the board of directors on the company's behalf?

The allotment of shares can have the effect of altering the balance of voting power between shareholders within the company and the relative economic stakes they have in the company. The allegation in this case is that the allotment was made to reduce the appellant's stake in the company below 25 per cent, thereby removing its negative control so as to assist the other shareholders to consolidate their control over the company. The exercise of the power to issue and allot the shares is alleged to have been in breach of the directors' fiduciary duty owed to the company to exercise their powers for a proper purpose.

It has long been held in cases of high authority, by the Board, the UK Supreme Court, the High Court of Australia and other appellate courts, that in these circumstances proceedings may be brought by shareholders personally, rather than by derivative action on behalf of the company, to challenge such allotments, notwithstanding that the duty of directors to exercise their powers of allotting shares for proper purposes is owed not to shareholders personally but to the company alone. Although it has never previously been doubted that shareholders personally have standing to bring proceedings in these circumstances, the juridical basis for their standing has not been decided, and barely discussed, in most cases. In the present case, the Court of Appeal, reversing decision of the first instance judge, held that the claimant shareholders had no personal standing to bring the present claim.

For the reasons set out below, the Board concludes that a shareholder has a right of action against the company to challenge the allotment of shares by the board of directors on the basis that the allotment was made for an improper purpose in circumstances where the allotment will cause detriment to the shareholder.

The appeal comes before the Board against a successful strike out application by the company. The case has been decided in the courts below on assumed facts. The Board also addresses the appeal on the basis of assumed facts which may not be established at trial.

There has been a prolonged battle for control of the respondent company, China Shanshui Cement Group Ltd (“CSCGL”), which is a Cayman Islands exempted company that is also registered in Hong Kong as a non-Hong Kong company. CSCGL's shares are listed on the Hong Kong Stock Exchange (“HKSE”). CSCGL is a holding company of operating subsidiaries which are registered in Hong Kong and the People's Republic of China (“the PRC”). The group is principally engaged in the production, distribution and supply of cement and related construction products in the PRC. CSCGL's principal subsidiary, Shandong Shanshui Cement Group Co, is the sixth largest cement company in the PRC, measured by annual production capacity.

The principal shareholders in CSCGL are (i) the appellant (“Tianrui”), a company incorporated in the British Virgin Islands with a shareholding of 28.16%, (ii) Asia Cement Corporation (“ACC”), a company incorporated in Taiwan with a shareholding of 26.72%, (iii) China National Building Materials Co Ltd (“CNBM”), a company incorporated in the PRC with a shareholding of 16.67%, and (iv) China Shanshui Investment Company Ltd (“CSI”), a company incorporated in Hong Kong with a shareholding of 25.09%.

Each of CSCGL, Tianrui, ACC and CNBM are competitors in the cement production industry in the PRC.

As recorded in the agreed statement of facts and issues, CSCGL's shares were suspended from trading on the HKSE from April 2015 to 31 October 2018. On 23 October 2017, the HKSE gave notice that CSCGL would be delisted unless by 31 October 2018 (i) CSCGL restored its public float above the 25% minimum threshold required by a rule of the HKSE Main Board Listing Rules, and (ii) CSCGL addressed the facts that its auditors, KPMG, had issued a disclaimer of opinion on CSCGL's accounts on the financial years 2015 and 2016 and that the then board of CSCGL had not been able to publish their report for the financial year 2017.

On or about 23 May 2018 a majority of shareholders of CSCGL, including ACC, CNBM and CSI, voted at an extraordinary general meeting of CSCGL to reconstitute the board of directors. The reconstituted board comprised one director from CNBM (Chang Zhangli), one director from ACC (Wu Ling-Ling) and three independent non-executive directors.

Thereafter, CSCGL issued convertible bonds in two tranches. The first tranche, issued to one subscriber on or about 8 August 2018, involved bonds for a total value of US$210,900,000 at a conversion price of HK$6.29 per share. The second tranche was issued to seven subscribers on or about 3 September 2018 for a total of US$320,700,000 at a conversion price of HK$6.29 per share.

CSCGL claims that the proceeds of the bonds were primarily used to repay US$500 million loan notes that were repayable in March 2020 and were fully repaid on 28 November 2018.

After the first bond issue and before the second bond issue, on 30 August 2018, Tianrui filed in the Grand Court of the Cayman Islands a petition to wind up CSCGL on the ground that it would be just and equitable to do so. One of Tianrui's complaints was the improper issue of the shares described below. CSCGL's attempt to strike out that petition failed in the Court of Appeal, which, in a judgment dated 5 April 2019, held that, if Tianrui's allegations in the petition were true, they were capable of establishing that it would be just and equitable to wind up CSCGL.

On or about 6 October 2018 CSCGL (i) entered into deeds of amendment with each of the subscribers of the bonds to accelerate the conversion of US$456,600,000 in principal amount of the first and second bond issues into shares at a reduced “Early Conversion Price” of HK$4.20 per share, and (ii) agreed with the holders of bonds the allotment of 888,980,352 new shares in exchange for some of the bonds.

CSCGL held an adjourned annual general meeting and an extraordinary general meeting of shareholders on 30 October 2018. At the extraordinary general meeting a majority of the shareholders passed a resolution mandating the directors to allot and issue 1,067,830,759 shares, comprised of the new shares in para 14 above and a further 93,004,771 shares, representing shares relating to the bonds held by persons who had not already agreed to the share conversion referred to in para 14 above. The new shares were issued on 30 October 2018, and restored the public float of CSCGL to 25%. As a result, trading in CSCGL's shares on the HKSE resumed on the following day.

Tianrui does not dispute this brief account of events which, on its face, may appear to be a rational response to the notice which the HKSE gave and which is referred to in para 9 above. But Tianrui says that that is not the whole story. Tianrui pleads in its writ in these proceedings that the bondholders were connected with ACC and CNBM by an undisclosed agreement or concert party to take over voting control of CSCGL. Tianrui pleads that the issue of the bonds and the allotment and issue of the new shares were an improper exercise of CSCGL's power to allot and issue securities. It is alleged that the shares were issued for the purpose of enabling ACC and CNBM to control CSCGL and achieving a dilution of Tianrui's shareholding to under 25% (in fact 21.85%) with the result that Tianrui could no longer block special resolutions. Mr Thomas Lowe KC for Tianrui submits that if the share issues are valid, Tianrui cannot prevent the merger of CSCGL with another company and it might have to have its shares bought out under section 238 of the Companies Act.

Tianrui's pleadings are made before discovery and before the administration of interrogatories. It explains that the PRC government had imposed restrictions on cement production capacity in 2014 with the result that cement producers could only expand their market shares through taking over other producers and that CSCGL had become a target for takeover. It asserts that in a series of meetings in person in 2015 attended by the directors of ACC and CNBM and telephone conversations it had been agreed that ACC and CNBM would form an alliance to take over CSCGL, that they would make a joint offer for CSCGL's shares and that they would oppose Tianrui's attempts to obtain a greater interest in CSCGL. ACC and CNBM then made a joint offer to purchase the shares of CSCGL on 12 August 2015. ACC, CNBM and CSI used their votes to requisition the extraordinary general meeting in May 2018 at which CSCGL's board was removed and replaced by a board entirely nominated by ACC. It avers that the bond issues and share conversion were concluded in secret, that they were not arm's length transactions and...