Latham Secures Court Victory for HollySys in Shareholder Dispute
A global litigation team has secured a victory for HollySys Automation Technologies Ltd (HollySys), a leading provider of automation and control technologies in China, in a dispute filed by the company’s former CEO and Chairman Baiqing Shao, together with another company currently under his control — ACE Lead Profits Limited (ACE Lead).
HollySys is a British Virgin Islands (BVI) incorporated company, which is listed on the US NASDAQ exchange. This litigation success follows ongoing advice to the board to protect the company and its shareholders from opportunistic unsolicited takeover attempts.
In early 2020 HollySys instructed Latham to commence a corporate governance review for the company. As part of this review, Latham assisted HollySys with the renewal of its shareholder rights plan. Later that year, Shao formed a consortium with CPE Fund Management Limited to make an unsolicited offer to acquire all the outstanding shares in the company. Latham advised HollySys’s Board of Directors on its response to the unsolicited offer, together with local BVI counsel.
At a board meeting in January 2021, HollySys’s Board decided to reject the offer, and, at the same meeting, it implemented recommendations from the governance review, as well as amendments to the Memorandum and Articles of Association in order to protect the company and its shareholders from opportunistic unsolicited takeovers and other threats to the long-term interests of the company’s shareholders. The amendments included the first adoption in the Caribbean of US-style advance notice provisions requiring shareholders to provide certain disclosures to the company prior to calling a shareholder meeting or nominating a director candidate.
Following the board meeting, on February 4, 2021, Shao and ACE Lead challenged the amendments to the Articles of Association and brought proceedings in the BVI High Court, part of the Eastern Caribbean Supreme Court, accusing the directors of acting with an improper purpose and contrary to their fiduciary duties and the BVI Business Companies Act 2004.
The litigation was conducted on an expedited basis, with a seven-day trial in July and the judgment rendered on September 22, 2021 – merely 7 months after the action was commenced. In rejecting the claims, the court found that the HollySys directors “all acted for proper motives and that the amendments were not made in breach of their fiduciary duties.” The court also ruled that the claimants must pay HollySys’s costs for the litigation. Amongst the legal decisions made by the court, this was the first time that an advance notice provision has been upheld in the BVI — or anywhere in the Caribbean — and also clarified the extent of a company’s disclosure obligations over lawyer-created work product.
The Latham team successfully collaborated globally across multiple offices, as well as with offshore co-counsel — Mourant in the BVI and Hong Kong — to collate relevant documents and information, conduct witness interviews, prepare witness statements of the company’s directors, and manage the logistical challenges of an online hearing during the COVID-19 pandemic — all within the truncated trial timetable.
The team advising on the litigation was led by Beijing partner Hui Xu and London partner Stuart Alford QC, with London associates Clare Nida, Yasmina Vaziri, Harriet Slater, Duncan Graves, and Callum Rodgers; and Hong Kong associates Chi Ho Kwan and Chris Eng. The corporate team advising on the corporate governance review included Chicago partner Chris Drewry and Hong Kong partner Benjamin Su, with Hong Kong counsel Zheng Wang and associate Mia Gu; Beijing associate Olivia Lai; and wider support from colleagues across our Beijing, Shanghai, Hong Kong, London, and Chicago offices.