Corporate Disputes – Avoiding Board Authority Uncertainty With Disastrous Consequences: lessons from the Privy Council

A group of shareholders is dissatisfied with the management of the company and wish to replace the directors with their own nominees. It is a familiar enough scenario. However, in deciding how they might proceed, how the incumbent directors might respond, and the effect of board decisions in the meantime, four questions loom large: which rules apply, what actions may be taken, who may take those actions, and how may they validly be taken?

These importance of these questions was addressed by the Privy Council in its judgment in 1Globe Capital LLC v Sinovac Biotech Ltd [2025] UKPC 3. The case concerns a battle for control of a company, Sinovac, which operates in China but incorporated in Antigua and Barbuda. The stakes were high: it is listed on the Nasdaq, with a market capitalisation of over USD $600 million, and was involved in the development of one of Covid vaccines.

The dispute played out against the backdrop of Antiguan law but its general principles will also apply to English companies.

Which rules apply?

In 2018, dissenting shareholders of Sinovac had sought to remove the incumbent directors at the shareholders’ annual general meeting. They had not given advance notice of their intention to do so; it was simply raised on the ‘floor’ of the virtual AGM. The vote went ahead and the incumbents were voted out.

The incumbent directors argued that the dissenting shareholders were subject to a duty of fairness which obliged them to provide advanced notice of their intention, and that the vote was invalid in the absence of such notice. The courts in the Caribbean agreed.

The Privy Council did not, holding that the applicable rules are set out in the constitutional documents of the company (the Articles and By-laws) and Antiguan corporate legislation. Under those, particularly the legislation, the replacement of directors was ordinary business which could be transacted at an AGM without notice. Although equitable considerations imposing a duty of fairness may be implied in the case of small, informal, partnership-like close businesses, to the Privy Council, there was no role for the implication of such duties in a large, impersonal, widely-held company like Sinovac.

Had Sinovac been an English company, special notice of an intention to remove directors would in fact have been required. Other than that, the general statement of corporate law also applies to English companies. In particular, when considering which rules apply, directors and shareholders ought to consider whether the company is one to which the sorts of implied equitable obligations argued for by the incumbent directors may apply. If they do, the obligations on participants in the business may be both unwritten and wide-ranging.

What actions may be taken and by whom?

Prior to the AGM, the incumbent directors had sought to protect their position by adopting a ‘rights agreement’, purportedly governed by the pro-management laws of Delaware. The rights agreement provided for a ‘poison pill’, meaning that, in the event of a takeover attempt, shareholders (other than the protestors) would be given the right to receive further shares, which would have the effect of diluting the shareholding of the protestors. Shares were purportedly issued under the ‘rights agreement’.

The Privy Council found that whatever Delaware law provided for, as a matter of Antiguan law, the rights agreement could only be entered into validly by a special resolution of the shareholders, and not by the board. It was therefore invalid.

When it comes to matters of how a company is internally organised, it is generally the law of the place of incorporation that governs. When putting in place instruments developed in another jurisdiction, one must therefore consider their conformity with the applicable law. Any action taken without lawfully authority will generally be invalid and of no effect from inception.

How might actions validly be taken?

The case had come before the Caribbean courts on the application of the new slate of directors, who sought to be declared the lawful directors of the company. As mentioned, the Caribbean courts had rejected that application on the basis that their actions had been unlawful. Seven years after the original AGM, the Privy Council, having found that the vote which put them in power was in fact effective, then considered whether it ought nonetheless to refuse the relief which the new directors sought, pursuant to the discretion afforded by Antiguan corporate legislation. After all, a lot of water had passed under the bridge.

The Privy Council felt itself constrained by the fact that the vote for replacement of the directors had simply gone ahead, and that the Chair had not sought to adjourn the meeting to inform non-attending shareholders (who comprised approximately 17% of the shareholders) of the attempt. Having proceeded with the vote, the parties then conducted the litigation in a ‘binary’ manner: simply, they argued whether the takeover bid was legally valid or not. No attempt was made to evidence or argue that non-attending shareholders would have supported the incumbent directors and, given the passage of time since the meeting, the Privy Council felt that a further meeting on the basis of the old shareholding would have been artificial and probably impossible. In the circumstances, there seemed to the Privy Council no basis to decline to grant the relief sought by the new directors.

It is important for the person chairing a meeting, particularly one as important as a shareholders’ AGM, to be fully cognisant of his powers. The Privy Council noted that the various parties were “for the most part Chinese businessmen with no training in the company law of Antigua” and that “all those present [at the AGM], including the chair, were acting out parts prepared for them by their various lawyers, rather than thinking for themselves what really needed to be done”. One inference is that a Chair more familiar with Antiguan corporate law and practice might have responded more effectively to the unexpected development of the takeover attempt.

Conclusion

As Sinovac indicates, corporate disputes (whether the business is domestic or international) can raise complex questions of law and procedure which require careful consideration and preparation by all stakeholders.

If you are involved in a corporate dispute and would like advice, please do not hesitate to contact Alex Shirtcliff and Fred Sheppard of the Commercial Disputes team.