What Good Can “Obiter Dicta” Accomplish? – On the Privy Council’s Dicta on Voidness Versus Voidability of Share Issuances for Improper Purposes in Tianrui v China Shanshui

*This article was originally published in Issue 4, Volume 2026, International Company and Commercial Law Review, published by Sweet & Maxwell.

Hundreds of companies incorporated in “offshore” jurisdictions such as the Cayman Islands are listed on United States (US) stock exchanges. As foreign private issuers under US securities rules, they are exempt from most domestic US corporate governance requirements. Overseeing their corporate governance standards falls upon offshore courts and the Privy Council. The Privy Council affirmed in Tianrui v China Shanshui a shareholder’s standing to bring personal claim against directors who had issued company shares to dilute the shareholder. Most commentators overlooked that the Tianrui decision contained a statement that improper share issuances are voidable but not void. Such a statement, if followed literally, would defeat a century of case law protecting shareholder voting rights, render Tianrui’s own ruling circular and self-defeating, and leave corporate governance of foreign private issuers in “no man zone.” This analysis establishes that the Privy Council’s statement in Tianrui on void and voidability should be treated as dicta and disregarded, to safeguard more than a century of case law development protecting shareholder franchise.

 

How Dicta Matter

The distinction between “ratio decidendi” and “obiter dictum” is vexing for first year law students. The “ratio”, or “rationale,” of a case is the “holding” of that particular court on what the law says as applied to the facts of that case, and “ratio” binds courts of inferior jurisdiction to make similar decisions in cases involving similar facts. Any other statements are “obiter dicta” which do not form part of the court’s holding and is therefore not binding.¹ While straightforward upon first sight, it is artificial and open-ended. Ratio is binding because it is a “ruling on a point of law expressly or impliedly treated by the judge as a necessary step in reaching his conclusion.”² (emphasis added). Dicta are not, because it is “[a]n opinion given in Court….not necessary to the judgment given of record[.]”³ This is open-ended, because reasonable people can disagree on whether the court “impliedly” relied upon anything. Judicial reasoning consists of reason by analogy, and reason by analogy is not an exact science.⁴

If certainty is what users of legal system value, then judges ought to be as terse as possible, and avoid making statements that could be interpreted as dicta. But open-endedness too has its value, because it invites future courts and parties to develop new legal principles and unveils hitherto obscure legal rationales.

 

Recent Trend of Offshore Court Decisions Strengths Shareholder Voting Rights

Since 2020, courts in offshore jurisdictions, such as Cayman Islands, handed down a series of judgments strengthening shareholders’ right to elect directors.5 They are critical in improving rights of shareholders of listed companies across the world. Many US listed companies (foreign private issuers) were incorporated in offshore jurisdictions. As foreign private issuers, they are exempt from majority of US corporate governance requirements (including director independence) under the theory that they will instead follow their home jurisdictions’ rules (home country exemption).⁶ Home country exemption does not leave foreign private issuers in legal “no man land” only if offshore courts enforce corporate governance standards and protect shareholder rights. These recent court decisions thus strengthen the corporate governance standards of hundreds of foreign private issuers.⁷

Among these cases, Tianrui (International) Holding Company Ltd v China Shanshui Cement Group Ltd is very prominently reported and commented upon. Upon closer analysis, almost all of the commentaries focused solely on what commentators perceive to be Tianrui’s ratio decidendi - that shareholders harmed by issuance of shares for improper purposes have personal standing to sue the directors, and disregarded a very important statement that such issuances are “voidable” but not “void”.⁸ If treated as binding, this would neutralise the Tianrui decision, and this note will outline the implication and make recommendations.

 

Background and Ratio of Tianrui

China Shanshui is a China-based construction products company incorporated in Cayman Islands. Its major shareholders included Tianrui, Asia Cement Corporation (ACC) and China National Building Materials Co. Ltd (CNBM).

China Shanshui has been experiencing financial difficulties. In 2018, China Shanshui issued convertible bonds to investors. Directors claimed that the proceeds were used to repay existing debts. At a subsequent general meeting, majority of shareholders (including ACC and CNBM) resolved to authorize the directors to allot and issue new shares to the convertible bondholders. This reduced Tianrui’s shareholding from 28.16% to 21.75%, thereby relinquishing Tianrui’s “negative control” right to block certain major actions of the company, including its takeover.

Tianrui sued in Cayman, alleging that ACC and CNBM acted in concert with the bondholders to take over China Shanshui, and that they used the share issuance to deprive Tianrui of its ability to block their takeover attempt. The issuances were thus for an improper purpose and invalid. China Shanshui sought to strike out Tianrui’s claim on the ground that shareholders do not have personal standing to sue directors for claims arising out of breach of fiduciary duties that the directors owed to the company and not individual shareholders.

The trial judge held that Tianrui had standing to bring a personal claim against the directors. The Court of Appeal reversed and held that Tianrui only had derivative, not personal, claim. The Judicial Committee of the Privy Council (JCPC) reversed and affirmed Tianrui’s personal standing to sue the directors.⁹

 

The Devil in the Details: The JCPC’s Dicta on Void vs Voidability

The JCPC’s opinion was non-linear, and divided into seven parts. Parts 1 and 2 set out the history. Part 3 sets out four key issues raised. These were: (1) given that the duty of the directors alleged to have breached is owed to the company and not to its shareholders, what is the shareholder’s cause of action?; (2) what distinctive aspects of the shareholder’s cause of action mean that it may be pursued notwithstanding prior case law requiring shareholders to bring derivative action?; (3) was the share issuance void or voidable?; (4) was the alleged breach of duty capable of being ratified by a majority of the company’s shareholders?

Instead of answering these questions in a clear and sequential manner, the opinion proceeds to discuss relevant provisions of China Shanshui’s constitutional documents (pt 4), case law and legal basis regarding shareholders’ standing to bring personal claims (pts 5 and 6), and conclusion (pt 7). Discussions of the four issues were dispersed throughout the opinion.

Paragraph 74 of the opinion is of particular interest:

“74. It is correct to say that the constraint which requires the directors to exercise their power to allot and issue shares only for proper purposes is of equitable origin, because it is an aspect of the conduct which equity requires of directors as fiduciaries. This is for example the reason why the exercise of the directors’ power to allot and issue shares is only rendered voidable (rather than void) by an equitable impropriety in its exercise, and why a challenge to its exercise may be ineffective against a bona fide purchaser of the issued shares without notice of the impropriety[.]”

Are these ratio or dicta? It is obscure at two levels.

Firstly, the JCPC cited as conventional wisdom that improper issuances are voidable but not void, as part of its exercise to explain something else, that the requirement upon directors to exercise their power to allot and issue shares only for proper purposes had its origin in equity. The JCPC did not present “voidability” as a legal conclusion supported by reasoning. This does not answer the issue raised by the JCPC in part 3 head on, unlike typical judicial writing where a question presented is answered in the affirmative or negative by a universal statement from the court, and supported by reasoning.

Secondly, even if we cross out the words “This is, for example, why” and treat the JCPC’s statement as the logical equivalent of the universal statement “[T]he exercise of the directors’ power to allot and issue shares is only rendered voidable (rather than void)”, the statement played no role in producing Tianrui’s holding. Tianrui’s holding is that a shareholder has personal, and not only derivative, standing to bring claims against directors for improper issuance of shares. Whether such issuance is void or voidable did not play any part in producing that conclusion.

Under the classic construct in Bole, these are dicta.

Most commentators have not picked up on this point. A minority of commentators believed that the JCPC “held” that “the exercise of the directors’ power to allot and issue shares is only voidable, rather than void.” (hereinafter referred to as the “Pro-Voidability Argument”). However, they said, as “the relevant directors and shareholders all had notice of the alleged conspiracy to assume control of China Shanshui and remove Tianrui’s ‘negative control’,” the void versus voidable point was moot.¹⁰

For reasons below, JCPC’s statements should be treated as dicta and not ratio, and improper share issuances should be treated as void, not voidable, when they are done after a shareholders meeting has already been requisitioned but not yet held.

 

Toward a Coherent and Rational Position: Treating Improper Share Issuances as Void and Not Voidable when Shareholders Meeting is Pending

The Pro-Voidability Argument is illogical and defeats recent offshore case law protecting shareholder rights.¹¹ This note will start with the typical scenario of improper issuance.

The typical scenario, which formed the factual basis for a century of case law from Piercy v S. Mills & Co. Ltd down to the recent Iszo Capital case, is where shareholders requisition a general meeting with the stated purpose of replacing the directors.¹² To save their jobs, the incumbent directors then issue voting shares to friendly parties, citing the need to provide liquidity to an otherwise financially distressed company, or some other seemingly legitimate purposes. The new shares would dilute the requisitioning shareholders’ voting power, thereby neutralizing their ability to remove the directors. If a court, after the shareholders meeting has already taken place, finds the share issuance to be improper and yet treat their issuance merely as voidable but not void, it would reach a logically circular and self-defeating outcome. The court would effectively be ruling, because at the time when the shareholders meeting took place, votes by parties friendly to the directors had not yet been voided by the court, those votes would have been valid and the directors’ improper purpose would have been accomplished, even though the court subsequently acknowledges that such issuance should have been voided.

Piercy (decided in 1920) and Iszo Capital (decided a century later in 2020) avoided this logical circularity by declaring any such issuance outright void and not merely voidable. According to the Pro-Voidability Argument, Piercy and Iszo Capital were wrong and going forward courts are bound to recognize improper issuances done to dilute existing shareholder votes.

Furthermore, for foreign private issuers, the Pro-Voidability Argument provides carte blanche for directors to dilute their shareholders. Foreign private issuers are already exempt from US corporate governance requirements, and the Pro-Voidability Argument would put these companies in a corporate governance “no man zone” where they receive oversight from neither securities regulators nor offshore courts. Shareholders now can easily be disenfranchised. Whenever a shareholder declares its wish to replace the directors, directors can simply issue additional shares to their friends to dilute the shareholder, and as long they do this quickly enough before their action can be voided by a court, directors entrench themselves.

Such a nuclear outcome could not have been the JCPC’s intention in Tianrui, and is based on a mistaken view of the nature of the “proper purpose” doctrine in relation to share issuances. As students of corporate governance know, the questions of director’s authority and duty are conceptually distinct.¹³ It is one thing to say a director is acting outside the scope of his authority, and it is something else to say he acts in a way that violates his duty as a director. Practitioners, including judges, often treat “proper purpose” as an element of the directors’ fiduciary duties, instead of the scope of the directors’ authority to bind the company.¹⁴ This was reflected in Tianrui, and poses two distinct but related problems.

Firstly, it affects the remedy available to the shareholders. Secondly, it creates a muddier standard of review of the directors’ conduct.

On remedy, if the court treats “improper purpose” as an improper use of directors’ powers, and therefore a breach of duty, the remedy is to hold the offending act “voidable”.¹⁵ If the court treats the offending act as unauthorised and in excess of the directors’ authority, then remedy is to hold such behaviour “void.”¹⁶ Techniques used by courts to regulate powers held by fiduciaries like directors fall into different categories. For doctrines that define or limit the scope of fiduciary powers, actions that violate them are void. For doctrines that address the behavioural process of the fiduciary, actions that violate them are voidable.¹⁷ Given that case law has long held “good faith” and “proper purpose” to be distinct concepts, as one can easily act in good faith but for improper purpose, the better view should be that “proper purpose” falls under the category of scope of authority and director duty.¹⁸ “Proper purpose” is not a director duty, but a device to delineate the scope of director authority.¹⁹ This is especially relevant for improper share issuances. Company law gives directors the power to manage the affairs of the company. Shareholders do not have the general right to manage the company, but they get to elect the directors. Therefore it “must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist”.²⁰ Any law other than declaring such behaviour void amounts to shareholders disenfranchisement.²¹ Not recognising improper purpose as a question of scope empowers directors to entrench themselves and destroys the balance of powers between shareholders and directors.

Regarding how to review directors’ conduct, treating “proper purpose” as a question of scope allows courts to review director behaviour from an objective standpoint. Whether someone’s behaviour falls outside the scope of their powers is more readily determined by looking at the scope of the initial grant of power and comparing that against what that someone eventually does. Whether that behaviour is an improper use of the powers require assessment of the directors’ intention both subjectively and objectively.²² This creates muddiness, especially in an era where large public companies are increasingly run by “directors … barely aware of their review and trustee functions and are powerless to exercise them in the face of a strong chief executive…”²³ An objective assessment, as embodied in a bright line rule that treats as ultra vires all share issuances completed while a shareholders meeting to remove the directors is pending allows courts to resolve this counter-majoritarian difficulty in a much more straightforward manner.

While there are technical arguments why improper share issuances should not be treated as outright void, they are formalistic and not substantive. For reasons set out above, this note submits that share issuances done while shareholders meeting to remove the directors is pending should be treated as void and not merely voidable.²⁴

*The author gratefully acknowledges research support provided by Mr. Mike Yan, a student with the University of Hong Kong Faculty of Law. The author thanks Mr. Charles Allin and Mr. Jamie Curle of DLA Piper, Mr. Calvin Chow of P.C. Woo & Co., Professor Martin Gelter of Fordham University School of Law, and Dean George Triantis of Stanford Law School, and the I.C.C.L.R. reviewers and editors, for kindly reviewing the manuscript. All opinions expressed and any error made is exclusively the author's own.