A long-running dispute between shareholders of a Cayman Islands joint venture company that facilitated the expansion of Japanese convenience store brand FamilyMart into China has reached the Judicial Committee of the Privy Council this week.
It is the first time the UK’s highest court of appeal is holding hearings in Cayman.
The parent company of FamilyMart sued its Taiwanese partner, food conglomerate Ting Hsin, in 2018 over contractual disputes.
The partners launched the first of their 7-Eleven-type convenience stores under the FamilyMart brand in Shanghai in 2004. Today, there are around 3,000 FamilyMart stores in mainland China.
While Ting Hsin’s founders are Taiwanese, the company has been in China since the 1980s and is considered a local entity.
The Japanese 40% shareholder of the joint venture alleges that majority shareholder Ting Hsin, from 2012, had ceased to disclose related party transactions and connected financial information. It further claims Ting Hsin tried to reduce royalty fees and withheld payments for using the FamilyMart brand for several months, resulting in a breakdown of the relationship between the partners.
That relationship is governed by a shareholder agreement under Cayman law which contains provisions that disputes in connection with the agreement should be resolved by arbitration in Beijing.
On Tuesday, 15 Nov., the Privy Council heard an independent analysis by Deloitte had shown an increasing share of related party transactions between the Taiwanese partner and the Chinese FamilyMart chain operators amounting to between $161 million and $706 million for the years 2011 to 2017, and an “anemic profit margin” in one year of $5 million profit on $1 billion in revenue.
Although FamilyMart had no discovery at this stage of the related party transactions, its lawyer said, “the company is gravely concerned that these transactions are shifting profits”.
Legally, the case is important to determine if and when increasingly common arbitration agreements take precedence over the Cayman court’s ability to decide a winding-up petition.
Winding-up application
In 2018, FamilyMart filed an application to either have the Cayman holding company wound up or for an order enabling it to buy out the majority shareholder.
Ting Hsin’s shareholding subsidiary, Ting Chuan, applied to have the petition struck out or stayed for arbitration in China.
In the first instance, the Cayman Islands Grand Court decided the winding up petition was badly drafted, lacked in detail and was “a tactical pleading” to sidestep arbitration. But the court did not strike out the petition in its entirety and granted a stay until the underlying matters had been arbitrated.
Ting Chuan appealed the strike out decision and FamilyMart appealed the stay of the petition.
Stay overturned
The Court of Appeal disagreed that the petition had been badly drafted but that, in fact, it had included all that is required under the law, namely a concise statement explaining why the petitioner is entitled to a winding up order.
It also found that Ting Chuan’s arguments came nowhere near the criteria to have the case struck out without a hearing.
FamilyMart’s appeal against the stay hinged on the question whether the issues raised could be resolved by arbitration.
In examining case law, the Court of Appeal concluded that the court has exclusive jurisdiction to determine whether to wind up a company under the law and only then decides whether alternative remedies like arbitration are appropriate.
Only when distinct issues can be identified that do not encroach on the exclusive jurisdiction of the court, can a petition be stayed for arbitration.
In the case, the Court of Appeal overturned the Grand Court decision because, in this context, no part of the winding up petition was suitable for arbitration.
Ting Chuan is now appealing to the Judicial Committee of the Privy Council the dismissal of the stay application.
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