Jonathan Davey KC wins Tax Silk of the Year at Chambers UK Bar Awards 2024
Wilberforce Chambers is delighted to announce that Jonathan Davey KC was awarded Tax Silk of the Year at the 2024 Chambers UK Bar Awards.
A huge thank you to all our clients for your ongoing support of Wilberforce Chambers. Congratulations to the rest of the winners.
The Privy Council confirms that shareholders have a personal claim against a company for improper exercises of power
This article is co-authored by Thomas Lowe KC (Wilberforce), Tara Taylor (Wilberforce), Corey Byrne (Ogier), Gemma Bellfield (Ogier), Oliver Payne (Ogier), and Maria On (Ogier).
Introduction
On 14 November 2024, the Judicial Committee of the Privy Council handed down its decision in Tianrui (International) Holding Company Ltd v China Shanshui Cement Group Ltd [2023] UKPC 36 (Tianrui),[1] and confirmed that a shareholder has a personal claim against a company when the directors of the company exercise their powers for an improper purpose. More specifically, the Board confirmed that such a claim may be brought by a minority shareholder in circumstances where the directors have allotted shares for the improper purpose of diluting that shareholder’s voting power, thereby facilitating a takeover of the company.
This is a landmark decision confirming the rights of shareholders, including minority shareholders, to prevent improper exercises of power and oppression by a company. It confirms a shareholder’s ability to bring a personal claim against the company for declarations or injunctions to prevent conduct in breach of a company’s articles of association, without the need for a derivative action under the rule in Foss v Harbottle. In doing so, the Board finally resolves what Professor Gower once described as “one of the most difficult problems in company law” (Gower: Principles of Modern Company Law (2nd ed, 1954) at 529).
Background to Shareholder Dispute
The background to the appeal involves a prolonged battle for control of the respondent, China Shanshui Cement Group Ltd (China Shanshui), which is a Cayman Islands exempted company whose shares are listed on the Hong Kong Stock Exchange. China Shanshui is engaged in the production, distribution and supply of cement and related construction products in the PRC.
The takeover battle in question was waged between three principal shareholders of China Shanshui, namely the appellant, Tianrui (International) Holding Company Ltd (Tianrui) on one side and Asia Cement Corporation (ACC) and China National Building Materials Co Ltd (CNBM) on the other. China Shanshui, Tianrui, ACC and CNBM are all competitors in the cement production industry in the PRC.
In August and October 2018, without any prior notice, China Shanshui issued convertible bonds to six subscribers in two tranches. At a subsequent general meeting of China Shanshui, a majority of shareholders (including ACC and CNBM) passed a resolution permitting the directors to allot and issue new shares in China Shanshui to the holders of the convertible bonds.
Tianrui alleges that the bondholders are connected to ACC and CNBM by an undisclosed agreement or concert party to take over voting control of China Shanshui, and that the allotment was for the purpose of enabling ACC and CNBM to control China Shanshui by achieving a dilution of Tianrui’s shareholding from 28.16% to 21.75%. This brought Tianrui’s shareholding below 25%, thereby preventing them from exercising ‘negative control’ to block special resolutions of China Shanshui, including merger resolutions. As such, Tianrui argues that the issue of the convertible bonds and the allotment and issue of the new shares were an improper exercise of China Shanshui’s power to allot and issue securities.
Tianrui issued writ proceedings against China Shanshui seeking a declaration that the exercise by its directors of the powers to (i) issue the convertible bonds, (ii) convert the bonds into shares, and (iii) issue the new shares; were each not a valid exercise of the relevant power. China Shanshui sought to strike out Tianrui’s claim as an abuse of process on the basis that Tianrui did not have standing to sue China Shanshui for claims which are based on a breach of fiduciary duty by the directors. It argued that the claim ought to have been brought derivatively under the rule in Foss v Harbottle.
At first instance, Segal J concluded that Tianrui had standing to bring a personal claim against China Shanshui in respect of the improper dilution. However, the Cayman Islands Court of Appeal allowed an appeal on the basis of the earlier Cayman decision of Kawaley J in Gao v China Biologic Products Holdings, Inc [2018 (2) CILR 591] which Segal J had declined to follow and found that the proper plaintiff for the claim pleaded by Tianrui was the company and, therefore, the appropriate course was for Tianrui to bring a breach of duty claim on behalf of the company against the directors as a derivative action.
The Board’s Conclusions as to the availability of a direct shareholder claim
As the Board recognised, courts have long allowed shareholders to make personal claims against the company in which they are invested for a wrong done to them qua shareholder and to enforce those rights via a personal action (for example claims to enforce personal rights to vote on resolutions put to the company in general meeting). This includes cases where directors have exercised their powers improperly, such as Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71.
The limit to those cases was always thought to be whether or not the contravention of a shareholder’s rights was capable of ratification by the company in general meeting. If it was, then in accordance with the rule in Foss v Harbottle (as applied in McDougal v Gardiner (1875) 1 Ch D 13, a case about general meetings conducted in breach of the articles of association), there would be no cause of action. That principle was always controversial not least because similar direct claims were allowed in other cases such as Pender v Lushington (1877) 6 Ch D 70. In a seminal article in 1957, Professor Wedderburn suggested, on the basis of the House of Lords decision in Quin & Axtens Limited v Salmon [1909] AC 442, that a shareholder should always have a direct claim for breach of the articles, as if were a breach of contract. Such a breach was incapable of ratification by a simple majority of members because it would be tantamount to amendment of the articles. The question before the Board was more nuanced because it concerned the improper exercise of a power conferred by the articles, the exercise of which may, by its nature, be capable of shareholder approval.
The Board reviewed a long line of English and Australian decisions of high authority on share issues, including Fraser v Whalley (1864) 2 H & M 10; Punt v Symons & Co Ltd [1903] 2 Ch 506; Hogg v Cramphorn Ltd [1967] Ch 254; Bamford v Bamford [1970] Ch 212; Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 and Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1988) 6 ACLC 1160, in which the Courts recognised that shareholders may bring a personal claim in relation to improper share dilution. However, the Board noted that none of these cases explained the jurisprudential basis for a shareholder’s standing to bring a personal claim. For instance, in the well-known Privy Council decision of Howard Smith Ltd v Ampol Petroleum , the relevant question for the Board was whether the impugned share allotment was valid and there is no suggestion in the judgment that the standing of the minority shareholder plaintiff to bring the claim had been questioned. Outside of the Cayman Islands, a plaintiff’s standing was challenged in only one case in Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1988) 6 ACLC 1160, although the South Australian Supreme Court dismissed the challenge.
Given the lack of principled consideration in most of the cases, the Board ultimately approached the matter from ‘first principles’ and found as follows:
1. The availability of a direct action depended on the statutory contract constituted by the memorandum and articles of association. As an intrinsic feature of the contract between shareholders and the company, it is implicit that when directors are exercising their fiduciary powers on behalf of a company, they will be exercised for proper purposes. The conferment upon directors of the power to allot and issue shares is an important part of that statutory contract. As a consequence, the power is subject to the constraint that it will be exercised for a proper purpose which is (at [72])
“as much a part of that corporate contract as if it had been spelt out word for word in the articles. It is a term of the corporate contract that, if the exercise of the power to allot and issue new shares by the directors as agents for the company is to be valid and binding as between the individual shareholder and the company, it should comply with all conditions necessary to make it a proper exercise. These include compliance with the directors’ fiduciary duty owed to the company. This is a constraint implied by law as inherent in the relationship between the shareholder and the company.” (emphasis added)
2. An allotment of shares which eliminates a shareholder’s right of control or their right of ‘negative control’ 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. As such, where such an allotment is deliberately aimed at altering the balance of power, this constitutes the improper use of the power to issue and allot shares. Accordingly, the shareholder has a personal right to challenge the allotment based on a breach of an implied term of the corporate constitution.
3. Although the personal claim involves a breach of fiduciary duty by the directors which is, in theory a breach of its duty to the company, the wrong done to the company is not the substance of the complaint. The basis of the complaint is an alleged infringement of the plaintiff’s rights as a shareholder under the articles and these two causes of action are not mutually exclusive and may co-exist together.
4. The right of the shareholder to sue the company is not dependent upon their status as a minority or majority shareholder. Although Tianrui was a minority shareholder, a majority shareholder may sue the company on the same basis, for instance, when shares are allotted by the company to a favoured outsider depriving that shareholder of majority control.
5. The fact that the offending exercise of power could theoretically be approved in advance or ratified by members in general meeting was not a sufficient rationale to deprive a shareholder of their cause of action. In particular, the Board noted that ratification by the general meeting is constrained by minority oppression principles and a breach by directors having an improper purpose of assisting an existing majority can hardly be ratified by the majority itself without falling foul of these principles.
Based on the above considerations, the Board allowed the appeal and confirmed that the direct cause of action pleaded by Tianrui had a proper basis in law and there was a strong case on the assumed facts for the availability of such a claim.
Clarification of Shareholder Rights
Tianrui is a watershed decision confirming the rights of shareholders in common law jurisdictions. The Board has clarified decades of judicial uncertainty regarding the circumstances in which shareholders can bring personal claims against a company for an improper exercise of power.
Unlike most common law jurisdictions, the Cayman Islands has no statutory remedy for unfair prejudice or oppression and shareholder disputes involving such conduct are usually resolved via just and equitable winding up petitions or derivative actions, each of which present their own difficulties. Accordingly, the decision in Tianrui is particularly significant for shareholders of Cayman Islands companies, providing them with a important remedy in cases where the directors of a company are exercising their powers improperly.
More broadly, even in jurisdictions where the statutory unfair prejudice or oppression remedy exists, the personal claim identified by the Board in Tianrui is likely to apply more widely to improper exercises of power, including to the exercise of any other powers by directors which infringe a shareholder’s rights. This provides disenfranchised shareholders with another important tool in their arsenal against majority oppression and unfair prejudice.
[1] Ogier (Cayman) LLP together with Tom Lowe KC and Tara Taylor of Wilberforce Chambers (who co-authored this article), acted on behalf of Tianrui, the successful appellant.
Receiver restored – an interim remedy in shareholder disputes
Nikki Singla KC acted successfully for the respondent Cloud Innovation in the case of AFRINIC v Cloud Innovation in the Court of Civil Appeal in Mauritius [2024] SCJ 473. AFRINIC is trying to oust Cloud Innovation as a member and to forfeit its valuable internet resources. AFRINIC (through a former director) sought to remove the Official Receiver that had been appointed by the Commercial Court to manage and supervise the company AFRINIC pending the determination of Cloud’s Innovation’s shareholder oppression claim. Cloud Innovation successfully opposed the removal application arguing that AFRINIC had no lawfully appointed director in place, an election to appoint directors required to be held and in all the circumstances it was just for the Official Receiver to continue in his role.
Blower v GH Canfields – claimant fails to establish case on negligence or causation
On 4 November 2024, the High Court dismissed the claim made in Blower v GH Canfields LLP [2024] EWHC 2763 (Ch), a professional negligence claim also involving trusts and insolvency issues.
Jonathan Seitler KC and Lemuel Lucan-Wilson (instructed by Womble Bond Dickinson) acted for the successful defendant, which was alleged to have been negligent in their conduct of a mediation of claims brought by a trustee in bankruptcy against family members of the bankrupt. The defendant had acted for the family members, and was said to have “over-settled” the claims on the basis that those claims would have been unsuccessful and/or the claimant could have set-off against them.
His Honour Judge Paul Matthews KC found that the defendant firm had at all times provided the correct advice regarding the strength of the claims which the claimant had been facing, noting that the set-off now claimed could not have operated on the facts in any event, nor could the trust interests have operated as the claimant submitted at trial. The Court also found that the claimant had failed to set-off her case on causation in the pleadings – simply stating what she would not have done, but then not setting out what she would have done or what would have happened (the claimant expressly rejecting the application of the loss of a chance doctrine).
Court rejects application for Norwich Pharmacal order in the Magomedov litigation
The Commercial Court has rejected an application by the Claimants in the Magomedov litigation – a $14 billion claim concerning alleged unlawful means conspiracies and bribery – for a Norwich Pharmacal order against three financial services companies, following the hearing of jurisdiction challenges and of the Claimants’ substantive application for Norwich Pharmacal relief, at a two-day hearing before Jacobs J.
In the case of the First Respondent, the Court held that an order for alternative service by email in Liechtenstein should be set aside as being positively contrary to Liechtenstein law. Although the Court did uphold a separate order for alternative service in the UK, the substantive application failed because of the likelihood that the provision of information would be contrary to Liechtenstein law, with the Court concluding that the First Respondent “as a third party which is not alleged to have been a wrongdoer, should not be subject to speculative and unprecedented litigation” in Liechtenstein.
As against the Second and Third Respondents, the Court concluded that they had not been mixed up in the wrongdoing and so the Norwich Pharmacal applications against them failed for this reason.
Bobby Friedman and Rachael Earle acted for the successful First Respondent, instructed by Sue Thackeray, Laurence Clarke and Phoebe Alexander of Kingsley Napley.
Court of Appeal hands down Judgment in Important Costs Case
On 22 October 2024 the Court of Appeal handed down judgment in an important case concerning the jurisdiction to award costs in proceedings in the First Tier Tribunal (Property Chamber) (‘F-tT’) and the Upper Tribunal.
Under Rule 13 of the relevant Tribunal Rules, costs can, essentially, only be awarded against another party where that party has ‘acted unreasonably in bringing, defending or conducting proceedings’. There is an equivalent rule for the Upper Tribunal, which is identically worded.
The case of Lea and Others v GP Ilfracombe Management Co Ltd now becomes the definitive ruling as to what ‘unreasonably’ means in this context.
The Court of Appeal allowed the appeal from the Upper Tribunal (‘UT’). The UT had itself dismissed an appeal against the ruling of the F-tT – which had refused to order costs to the successful appellant tenants, following the total failure of the respondent landlord’s service charge application. That substantive application related to service charge demands which the respondent had served on the appellants, totalling around £2.4M. In dismissing the proceedings entirely, the F-tT had found that the demands had been served without any genuine belief that the sums were correct. Yet the F-tT had refused to award costs in the tenants’ favour, despite this finding. The UT upheld their decision, agreeing that the ‘unreasonableness’ threshold had not been crossed.
The Court of Appeal, in allowing the appeal, made clear that ‘unreasonably’ in Rule 13 was not to be equated only with ‘vexatious’ or ‘harassing’ behaviour. Such an interpretation was much too restrictive. UT and F-tT decisions, suggesting that this was the threshold test, were wrong. Unreasonable behaviour includes vexatious, abusive and harassing behaviour but is not limited only to such behaviour.
The Court of Appeal further clarified that the UT had not intended, in the Willow Court case (which, until now, has been the leading case on Rule 13 costs) to state a threshold test which confined the rule only to abusive/harassing behaviour. Affirming Willow Court, the Court of Appeal stated that: ‘a good practical rule is for the tribunal to ask: would a reasonable person acting reasonably have acted in this way? Is there a reasonable explanation for the conduct in issue?’. The Court also made clear that further guidance on the threshold test, or its application, would not be helpful.
Martin Hutchings KC acted for the successful appellants – instructed by Michael Green and Harriet Muffett of Trowers & Hamlins LLP.
“The set as a whole is the pinnacle of the London Bar” – Wilberforce excels in the 2025 rankings
We are delighted to announce our continued success in the latest editions of Chambers & Partners and Legal 500, highlighting collective strength across our core practice areas and the expertise and experience of members of Chambers and staff.
Chambers and Partners UK
We are recognised as a leading chambers in 12 areas (below), including five top-ranked set rankings. Overall, we have achieved a record 170 barrister rankings, which includes 23 new and improved individual rankings.
Full coverage in the 2025 guide can be found here.
Leading set rankings
- Chancery: Commercial (Band 1)
- Chancery: Traditional (Band 1)
- Charities
- Commercial dispute resolution
- Company
- Fraud: Civil
- Offshore (Band 1)
- Pensions (Band 1)
- Professional negligence
- Real estate litigation (Band 1)
- Restructuring and insolvency
- Tax: Private client
Legal 500
We have two top-tier set rankings and are recommended as a leading set in a further seven practice areas. We have achieved 147 barrister rankings this year including 26 new and improved entries.
Full coverage in the 2025 guide can be found here.
Leading set rankings
- Commercial Litigation
- Company
- Fraud: Civil
- Insolvency
- Pensions (Tier 1)
- Private Client: Trusts and Probate (Tier 1)
- Professional Negligence
- Property Litigation
- Tax: Personal
A big thank you to all our clients for their feedback and ongoing support!
Commercial Court grants Norwich Pharmacal order in Filatona Trading and Oleg Deripaska v Quinn Emanuel Urquhart & Sullivan UK
On 14 October 2024 the Commercial Court handed down judgment in Filatona Trading Limited and Oleg Deripaska v Quinn Emanuel Urquhart & Sullivan UK LLP [2024] EWHC 2573 (Comm). Mr Justice Calver acceded to the Claimants’ application for a Norwich Pharmacal order where the defendant law firm had obtained from an unnamed business consultancy a report which was subsequently deployed in s.68 proceedings against the Claimants with a view to setting aside an arbitration award. The report was subsequently revealed to be a forgery. The judgment contains a very interesting analysis of the circumstances in which a law firm might become amenable to a Norwich Pharmacal order and the extent to which privilege might bar such relief.
Thomas Grant KC led James Sheehan KC of Essex Court Chambers, who were instructed by Mark Hastings, Abigail Healey and Emma Kingstone of Quillon Law.
High Court hands down judgment on Jaffé v Greybull Capital LLP
The High Court handed down judgment on Jaffé v Greybull Capital LLP [2024] EWHC 2534 (Comm), following a 3-week, multimillion-pound Commercial Court fraud claim brought by the insolvency administrator of Wirecard.
The Claimants had sought c. £12m in damages for deceit, alleging that a deliberate oral misrepresentation at a meeting in 2016 led to Wirecard Bank extending credit to Monarch Airlines (which subsequently became insolvent). Mrs Justice Cockerill DBE dismissed the case in its entirety. In her judgment, she considered the conflicting accounts of two “equally patently honest and truthful witnesses”, the inherent probabilities and the surrounding circumstances, and, notwithstanding a near-contemporaneous note of the meeting taken by one of the Claimants’ witnesses, concluded that the alleged misrepresentations had not been made. The Judge agreed with the Defendants that German law applied to the claim and considered and applied the German law of causation, concluding that even if the misrepresentations had been made, they had not been relied upon.
Of particular interest is the Judge’s consideration of “Gestmin” and the matters raised by Popplewell LJ in his 2023 COMBAR lecture “Judging Truth from Memory”.
John Wardell KC, instructed by Andrew Head, Bryan Shacklady and David Young (Forsters LLP) and leading Thomas Elias (Serle Court), acted on behalf of the successful Defendants.
Cayman Grand Court grants case management stay in TFKT True Holdings
On 3 October 2024 the Grand Court of the Cayman Islands (FSD) granted a case management stay of a just and equitable winding up petition in the case of Re TFKT True Holdings pending the resolution of separate proceedings in Hong Kong between the same parties to the petition. The judgment of Hon Justice David Doyle contains a comprehensive survey of the now very well-developed Cayman law on case management stays, which has become a very important aspect of Cayman procedural law.
Thomas Grant KC, instructed by Anna Peccarino, Ian Huskisson and Ray Ng of Travers Thorp Alberga, acted for the successful respondent.