Lawyers for public companies across the world may not have expected this, but a recent UK appellate decision on an Antigua and Barbuda company greatly enhanced global shareholder rights. The reason is straightforward – Antigua is one of a handful of offshore jurisdictions for company incorporation, and the company in this case is one of more than 850 non-U.S. companies publicly listed in the United States (“foreign private issuers” or “FPIs”).[1] Since the total number of companies listed in the United States is less than 6,000, foreign private issuers account for a substantial percentage of them.[2]
U.S. securities laws and exchange rules exempt FPIs from many corporate governance requirements, including director independence, under the theory that they will instead follow their home jurisdiction’s rules (the “home country exemption”).[3] Founders often incorporate non-U.S. companies in offshore jurisdictions with the understanding that the governance standards are looser there than in more traditional jurisdictions like Delaware or England and Wales, and by way of the home country exemption they will be held to far lower standards.[4] Now the tide has turned.
On January 16, 2025, in 1Globe Capital LLC v. Sinovac Biotech Ltd. (Antigua and Barbuda)[5], the Judicial Committee of the Privy Council (“JCPC”) struck down Sinovac’s “poison pill” rights agreement, declared invalid the incumbent directors’ “re-election,” and installed the new directors elected by activist shareholders led by 1Globe Capital at Sinovac’s AGM without giving advanced public notice. Sinovac was a major COVID vaccine developer in China and a foreign private issuer. Since the JCPC is the court of final appeal for many offshore jurisdictions, including not only Antigua but also the Cayman Islands, British Virgin Islands and Bermuda, 1Globe Capital is a landmark decision with global implications that fills the void left open by the home country exemption.
Background
Sinovac is U.S.-listed and Antigua-incorporated. Its business operations are carried out in China. All meetings of Sinovac’s directors and shareholders occur in China. 1Globe owns a substantial equity stake in Sinovac.
In early 2016, Sinovac received competing privatization offers from two consortia of prospective buyers. The first (the “Management Consortium”) was led by Sinovac’s CEO and included some of the incumbent directors. The second (the “Sinobioway Consortium”) was sponsored by Sinobioway Group.
Shortly after its receipt of the Sinobioway Consortium offer, Sinovac’s board announced adoption of a rights agreement (“poison pill”) without shareholder approval. The poison pill was a typical “flip in” pill giving directors broad discretion to decide whether any triggering event existed.
In June 2017, the Management Consortium gave a final offer of $7 per share, which was accepted by the incumbent directors. Two days later, the Sinobioway Consortium upped its offer to $8 per share. The incumbent directors did not accept this higher offer or even disclose it until five months later.
In December 2017, Sinovac gave notice to shareholders of its next annual general meeting (“AGM”), in which “re-election” of the incumbent directors would be voted on. Ballot papers included only a “For All” option, thus effectively allowing shareholders to choose between “re-electing” the incumbents and not voting at all. This was not the usual practice, where shareholders could vote “for” or “against” any director or slate of directors.
On 31 January 2018, Sinobioway published an online press release, addressed to all Sinovac shareholders, recommending that they attend the AGM and vote against the “re-election” of the incumbents. The press release did not nominate an alternative slate of directors.
The AGM took place in Beijing on February 6, 2018. At the AGM, shareholders led by 1Globe attending in person proposed to remove the incumbent directors and appoint a new slate of directors. The chair of the AGM (the CEO) did not adjourn the AGM and allowed voting and tabulation to take place. 55.16 percent of all shares voted were against the “re-election” of the incumbents and in favor of the election of the new directors. The incumbent board refused to step down and announced its “re-election” despite the results.
1Globe sued in Antigua, seeking to replace the incumbent directors with the new ones. The Antigua High Court held for the incumbents, ruling that the activists’ votes were invalid because the nomination of the replacement directors from the AGM floor was a “pre-planned ambush.” The court held that “requirements of basic fairness and transparency” called for “prior notice of the proposal for replacement of directors,” both to enable incumbent directors to respond, and to enable other shareholders to decide how they would vote. The court also held that Antiguan law allows poison pills to be adopted without shareholder consent. The Court of Appeal upheld the Antigua High Court. 1Globe further appealed.
The JCPC reversed. It struck down the poison pill, terminated the incumbent directors and installed the new directors.
Analysis
The JCPC, through Lord Briggs, ruled on two groups of substantive issues.
The AGM Issue
The Antigua High Court’s ruling that “ambushes” by shareholders on the floor of AGM without serving advanced notice violated “a minimum standard of basic fairness” was anchored in its reading of section 71 of the International Business Corporations Act of Antigua (“IBCA”). Section 71 gave directors a statutory right to reply to a proposal to remove or replace them. From that statutory right, the trial court deduced that there was an “implied an obligation” on the proponent of such removal or replacement to give advanced notice to the company and other shareholders.
The JCPC held that requiring such “implied obligation” was an unjustifiable “intervention” by “supervening equitable principles” into the affairs of the company and relations among the shareholders. Citing Tianrui (International) Holding Co. Ltd. v. China Shanshui Cement Group Ltd. (Cayman Islands)[6], what is fair or unfair ought to be governed by the “bargain between the company and the shareholders, and between the shareholders inter se,” which is “laid down by their company’s constitution and by statute,” not supervening equitable principles pronounced by a court after the fact.
The JCPC found that the IBCA makes a very clear distinction between “special business” and “ordinary business” that may be transacted at an AGM. Section 109(2) requires advanced notice for shareholders meetings in which “special business is to be transacted.” However, the IBCA contains no such notice requirement if “ordinary business” is to be transacted. Further, section 109(1) of the IBCA specifically excludes “the election of directors” from “special business,” making the election of directors “ordinary business.” While the Sinovac incumbents called their election a “re-election” and expressly disallowed the possibility of their removal or replacement on the ballot papers they prepared, the JCPC noted it is “common ground that the phrase ‘the election of directors’ includes the replacement of directors.”
In so holding, the JCPC noted that while shareholder democracy requires shareholders to be informed in advance of any special business, it more fundamentally allows shareholders to “retain the freedom to elect whom they choose as directors at an AGM, without that being subject to a requirement for prior notice.” Advanced notice is irrelevant when it comes to elections of directors, because as long as shareholders already are on notice that an AGM’s business is to include the election of directors, shareholders are deemed to have acknowledged and agreed that any appointment of directors might be made, including new directors whose names are first proposed on the floor of that AGM.
Regarding Section 71’s statutory requirement that incumbent directors be given an opportunity to reply to their proposed removal, the JCPC (without ruling on the issue) stated that a “possible solution” is to have the shareholder meeting adjourned to a later date so that incumbents can offer their reply. Since Sinovac’s chair failed to adjourn the meeting, this issue of adjournment was not put to the test, and votes taken were legal and valid.
The Poison Pill Issues
Sinovac argued that the poison pill was valid and that a triggering event had occurred before the AGM, meaning the shares voted by 1Globe and other allied shareholders would already have been massively diluted before the AGM. 1Globe countered that the poison pill was invalid because it “added rights” in respect of “all or any” of Sinovac’s shares.
1Globe’s argument was textual. Section 161(1)(e) of the IBCA provides that a company may “add, change or remove any rights, privileges, restrictions and conditions…in respect of all or any of its shares” only with a special resolution of shareholders. Because the poison pill purported to grant “flip in” rights to shareholders and was never approved by shareholders special resolution, it was not valid.
The JCPC agreed. Sinovac argued that the poison pill conferred “share options” to shareholders, which the company may grant under section 35 of the IBCA. The JCPC held that while the “rights” conferred under the pill have some of the characteristics of share options, section 35 did not say directors can issue such options without a shareholder resolution, and thus does not detract from section 161(1)(e)’s requirement that the “flip in” rights must be backed by shareholders special resolution.
Comments
While Antigua and Barbuda does not appear at first blush a key jurisdiction for corporate law development, it is part of a group of favorite offshore jurisdictions that include the Cayman Islands, British Virgin Islands, Bermuda, Mauritius, and Seychelles.
To attract American capital, many companies, especially in China, opt to list outside of the country of their primary business operations. They do so by injecting onshore business assets into offshore entities and listing these entitles in the United States.[7] Sinovac is a good example. While it is one of the two major COVID vaccine manufacturers in China, it is listed on NASDAQ through an Antiguan holding company. Many other leading Chinese companies like Alibaba and Tencent are similarly structured.
A foreign private issuer is subject to two sets of rules: the securities laws and regulations of the jurisdiction in which it is listed (most frequently the United States), plus the corporate laws of the jurisdiction in which its listing vehicle was incorporated (e.g., Antigua and Barbuda).[8] While securities rules contain provisions requiring proper corporate governance, they usually allow foreign private issuers to rely on the home country exemption and not comply with the bulk of the securities rules on shareholder rights and director independence.[9]
Such absence of oversight from securities regulators is premised upon the assumption that offshore “home country” courts are enforcing corporate governance standards and directors’ duties and protecting shareholder rights.[10]
The JCPC’s decision thus strengthens the corporate governance of hundreds of foreign private issuers. Unless offshore courts uphold good governance, the universe of foreign private issuers could become a no man’s land with no clear standards for director and manager behavior. .
The JCPC took a “back to first principles” approach in determining shareholder and director rights and duties. It held that courts should not read wider “supervening equitable principles” like “basic fairness and transparency” into a company’s code of conduct when the company’s organizational documents and statutory law are clear on the subject. Companies and shareholders must look to the literal words of their bargain with each other to understand what they are and are not entitled to.
The JCPC also adopted a textual approach. While the judicial committee did not curtail shareholder rights based on “supervening equitable principles,” it precluded the application of “supervening equitable principles” to expand shareholder rights. Shareholders therefore can only look to the literal words of their company’s organizational documents for protection. The proper drafting of organizational documents thus becomes of paramount importance. Investors and directors in current markets do not seem to realize this. Paragraph 86 of the JCPC’s decision rather dismissively observed that a “reading of the translation of the Chinese transcript of the AGM suggests that all those present, 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.”
The JCPC noted that the right to elect directors is so fundamental to the proper working of a company that, while it is possible for the chairman to adjourn a shareholders meeting without holding a vote (and this is a point the JCPC did not rule on), advanced notice or other procedural hurdles should not frustrate the shareholders’ right to appoint whoever they wish to the board.
Finally, the JCPC expressed dissatisfaction that the parties had framed their objectives as binary choices. “Options available to the court may be limited by the way in which the parties have chosen to identify and litigate the issues in the proceedings.” Since the parties had decided to “go for broke,” the court had to pick one side. Applying principles set out above, the JCPC held for the shareholders. This has practical implications for litigation. Even for a textualist court, there are different ways to skin a cat. Had the incumbent directors taken other alternatives into consideration, such as by requesting a new AGM, the outcome of this case could have become different.
ENDNOTES
[1] Paul M. Dudek, The Unique Impact of Recent SEC Rules on Foreign Private Issuers, 55 Rev. of Sec. & Commod. Regul. 227 (Sept. 2023).
[2] Securities Industry and Financial Markets Association, Primer: Capital Formation and Listing Exchanges: Analyzing the IPO Process and the Listing Exchanges Landscape 4 (September 2024).
[3] US Securities and Exchange Commission, Accessing the U.S. Capital Markets – A Brief Overview for Foreign Private Issuers, 13 February 2013. http://www.sec.gov.
[4] Examples abound. Directors of NYSE or NASDAQ-listed offshore issuers have: issued shares to friends without shareholder approval to dilute unfriendly shareholders, IsZo Capital LP v Nam Tai Property Inc., BVIHC (COM) 2020/016, BVI High Court; BVIHCMAP2021/0010, Eastern Caribbean Court of Appeal; issued shares to affiliates and associates to buy a small company with no substance owned by them, resulting in dilution of existing shareholders by more than half, and transferred out valuable company assets when caught, Global Cord Blood Corporation (In Provisional Liquidation), Cause No. FSD 108 of 2022; or just never bothered to hold any annual shareholders meeting, Annual Report on Form 20-F of HollySys Automation Technologies, Ltd. 39 (“We follow home country practice with respect to annual shareholders meetings and are not obligated to hold annual meetings of shareholders.”).
[5] [2025] UKPC 3.
This post comes to us from James Chang and Sidney Burke, partners in the law firm of DLA Piper.