A recent judgment in the matter of David (Xiaoying) Gao v China Biologic Products Holdings, Inc, has provided guidance regarding the standing of shareholders to commence certain proceedings against Cayman Islands companies.
Mr Gao - a beneficial (but not registered) shareholder and the former Chairman and CEO of China Biologic Products Holdings, Inc. - commenced proceedings against the company alleging inter alia that the directors of the company had, in breach of their duties, caused it to improperly issue certain shares. In response, the company applied to strike out the proceedings on bases including that Mr Gao lacked standing (i.e. sufficient proximity to the subject of the complaint).
At the hearing of the company's strike out application, the Court was required to consider whether a shareholder has a personal right of action in respect of an alleged improper issue of shares, or whether the correct course of action would be for the shareholder to commence derivative proceedings on behalf of the company. The Court categorically held that the proper course of action would have been for Mr Gao to commence derivative proceedings on behalf of the company and accordingly had no hesitation in striking out the claim. In finding that a minority shareholder lacks standing to assert a personal claim for breach of fiduciary duty by the Directors even where the complaint is that their voting power has been diluted by a share allotment approved by the directors for an improper purpose (which certain Australian authorities and text books had suggested was an exception to the ordinary rule that such claims typically vest only in the company), the decision is an important one for the jurisdiction as it limits the relief open to minority shareholders. It will be interesting to see whether the decision is followed in future cases.
Having found against Mr Gao on this key issue, the Court went on to note that:
- since Mr Gao was the beneficial, but not the legal, owner of shares in the company, he did not have standing to sue the company qua shareholder;
- the purported assignment by the registered shareholder of Mr Gao's shares, of rights to commence proceedings against the company to Mr Gao, did not afford standing to Mr Gao; and
- had Mr Gao been found to have had standing to bring proceedings against the company, he would have had the ability to bring proceedings in respect of breaches which occurred prior to his acquisition of his shares. Justice Kawaley described this finding as a "pyrrhic victory" for Mr Gao in the circumstances.
The application by Mr Gao to join the relevant registered shareholder to the proceedings as co-plaintiff, as a means of curing any deficiencies regarding standing, was also dismissed given that the key issue had been determined in favour of the company.
While the facts of this case were quite specific, the judgment will be of interest for stakeholders in Cayman Islands companies and practitioners alike.
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