On 14/11/2024, the Privy Council delivered a pivotal judgment in Tianrui (International) Holding Company Ltd v China Shanshui Cement Group Ltd [2023] UKPC 36.

The judgment reinforces and clarifies the rights of shareholders to challenge decisions that impact their personal interests within a company, even when such decisions fall within the directors’ fiduciary powers.

The Core Issue

At the heart of the dispute was whether a minority shareholder, Tianrui, could challenge the allotment of shares by the board of China Shanshui Cement Group Ltd (CSCGL).

The allegation centered on an improper exercise of the directors’ fiduciary powers to issue and allot shares with the intention of diluting Tianrui’s shareholding below 25%.

This effectively removed Tianrui's "negative control," a crucial power to veto special resolutions and safeguard its investment.

Tianrui argued that the allotment served no genuine corporate purpose and was instead a calculated move to consolidate control among other major shareholders—Asia Cement Corporation and China National Building Materials Co Ltd.

The Decision

• The Privy Council reversed the earlier Cayman Islands Court of Appeal ruling that Tianrui lacked standing to bring the claim. Drawing on established jurisprudence from jurisdictions like the UK and Australia, the Privy Council upheld the principle that shareholders possess a personal right to protect their voting power from improper interference.
• Crucially, the court emphasized that this right is intrinsic to the corporate contract encapsulated in the company’s articles of association.
• The decision aligns with previous rulings, including Howard Smith Ltd v Ampol Petroleum Ltd and Eclairs Group Ltd v JKX Oil & Gas plc, which affirmed the importance of directors exercising powers solely for proper corporate purposes.
• In the present case, the Privy Council concluded that shareholders’ claims are not merely derivative of the company’s rights but are grounded in their contractual entitlements as members of the company.

Implications for Directors’ Powers and Shareholders’ Rights

This ruling solidifies several critical principles:

• Fiduciary Duties and Proper Purpose: Directors’ fiduciary powers, while owed to the company, are constrained by an implicit requirement to act in good faith for a proper purpose. Actions like share allotments intended to alter shareholder voting dynamics breach these duties.
• Personal vs. Derivative Actions: Shareholders can bring personal claims when their individual rights—such as proportional voting power—are directly affected, independent of the company’s broader interests.
• Ratification and Its Limits: The Privy Council noted that while shareholders in general meeting may ratify directors' actions, such ratification cannot validate decisions taken with an improper purpose or aimed at oppressing minority shareholders.

Conclusion

The Tianrui judgment underscores the judiciary’s role in maintaining corporate governance’s integrity by affirming the rights of minority shareholders.

For directors, it serves as a stern reminder of the fiduciary limits on their powers, while for shareholders, it offers a robust avenue to contest decisions that threaten their stakes.