Cayman Court Finds That Arbitration Clauses In Shareholders' Agreements Will Apply To Disputes Over A Company's Articles

• Law Firm: Carey Olsen
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Arbitration & Dispute Resolution, Shareholders
• Author: Mr James Noble and Nicholas Lee
• Published date: 26 April 2023

In the matter of Ren Ci & Ors (FSD 210 of 2022), the Grand Court of the Cayman Islands granted a stay of proceedings in favour of a HKIAC arbitration pursuant to section 4 of the Foreign Arbitral Awards Enforcement Act. In so doing, the Court then held that:

• an arbitration clause contained in a shareholders' agreement would apply even if the pleaded case was not based on a breach of the relevant contracts, but rather, on a breach of the articles of association; and
• an application for injunctive relief which contains an appropriate reservation of rights to arbitrate does not constitute a voluntary submission to the court's jurisdiction.

THE BACKGROUND

This was a joint venture comprising two groups of investors led by Ren Ci (the "Plaintiff") and Wang Yanzhi (the "Defendant") respectively. The investors' relationship was governed by a Share Purchase Agreement, Shareholders' Agreement, and Share Restriction Agreement (the "Shareholders' Agreements"), each of which contained an arbitration clause providing for arbitration administered by the HKIAC.

Disputes arose over the management and ownership of the joint venture company (the "JVC"). The Defendant had procured the JVC to take action following the alleged discovery of financial misconduct by the Plaintiff - including, passing resolutions to remove the Plaintiff as director of the JVC and to repurchase the Plaintiff's shares in the JVC. In response, the Plaintiff claimed that the resolutions passed were in breach of the Articles of Association (the "Articles"), and sought inter alia rectification in respect of the JVC's register of directors and members.

The Defendant applied to stay the proceedings. There were two key issues for the Grand Court.

• Did the arbitration clauses cover the disputes concerning the validity of the resolutions passed which would otherwise be the subject of court proceedings? (the "Scope Issue")
• Did the Defendant lose the right to apply for a stay as a result of his application for injunctive relief? (the "Waiver Issue")

THE SCOPE ISSUE

It was the Plaintiff's case that the dispute fell outside of the scope of the arbitration agreement as it arose in connection with a breach of the Articles, and in contravention of any provisions of the Shareholders' Agreements. The Plaintiff sought to distinguish between disputes arising out of the company's articles and those which flowed from the shareholders' agreements.

• Articles are "governed by recourse to the courts in accordance with the...