British Virgin Islands: Guiding You Through... Shareholder Rights In The British Virgin Islands

Introduction

As a shareholder of a BVI company, your rights are not limited to those detailed in the company's constitution. The BVI Business Companies Act 2004 ('BCA 2004'), not only sets out additional rights you are entitled to exercise as a shareholder, but also, with the introduction of Part XA in January 2006, provides various remedies available in the event that your shareholder rights are breached. These remedies are particularly valuable to minority shareholders, whose only previous recourse was to apply to the Court under s162 of the Insolvency Act 2003 ('IA 2003') for the company to be wound up on just and equitable grounds. Whilst this remedy remains, the BVI courts see it as a draconian remedy, only to be used as a last resort.

Shareholder disputes

This guide sets out the remedies that may be available to shareholders, regardless of the amount of shares held, in the event that a shareholder's rights are breached. It also provides useful information regarding shareholder disputes and shareholder litigation involving the company or its directors. This guide provides an overview of some of the issues and does not provide definitive advice on the law. You are recommended to seek legal advice on your specific circumstances.

It is not only registered shareholders who have the benefit of the various rights under the BCA 2004. BVI common law suggests that if a nominee relationship between a beneficial owner of the shares and the registered shareholder can be established, the beneficial owner may also be entitled to bring a claim under the BCA 2004, in the event their rights have been infringed1.

Rights as a shareholder

Litigation, whilst a useful tool, should be viewed as a last resort, as it can be costly and time consuming. If you believe that your shareholder rights are being infringed, or that the company is being managed incorrectly, you should first seek legal advice to avoid the situation escalating. We can fulfil a useful role in managing and resolving a difficult issue before it becomes more serious.

It is helpful to check your company's constitution to ascertain whether there is anything you can achieve without going to Court (for example, exercising your voting rights, taking advantage of an available pre-emption clause, requesting information from the directors regarding the management of the company). There are also additional rights contained in the BCA 20042, which you may be able to exercise, including:

  • any decision by the directors to dispose of 50% or more of company's assets (not in the day-to-day running of the company) must be approved by the directors and shareholders3.
  • in the event that you own, or together with another shareholder/s own 30% of the voting rights in respect of a particular matter involving the company, you have the ability to requisition a special meeting of the shareholders in relation to that matter4.
  • the right to receive fair value for your shares in the event you decide to sell them following your dissent from the company's decision to carry out certain actions including any merger or consolidation with a constituent company, disposition of more than 50% of the value of the assets or business of the company, forced redemption of shares or entering into an arrangement5.

Minority shareholders

Of course, if you are a minority shareholder, you may not hold the requisite number of shares to exercise these rights or to prevent a decision which you disagree with. In these circumstances, applying to Court for a remedy may be your only option.

Remedies under Part XA BCA 2004

The main actions for shareholders whose rights have been breached are found in Part XA BCA 2004. There are various options (listed below) that you as a shareholder may be able to take advantage of depending on the type of breach complained of.

1. Apply for a Restraining or Compliance Order6

If the company or its directors are in the process of, or are intending to carry out an action which is now or would be in contravention of the company's constitution or the BCA 2004, you can apply to Court to obtain an Order restraining them from carrying out that action.

2. Bring an action due to Unfair Prejudice7

If you believe that the affairs of the company have been, are being or are likely to be conducted in a manner that is or any act or acts of the company have been or are, likely to be oppressive, unfairly discriminatory or unfairly prejudicial to you as a shareholder, you may be able to apply to the Court for a wide range of remedies8. You may suffer unfair prejudice at the hands of a majority shareholder, who is manipulating the affairs of the company for his own benefit and to your detriment. An example would be where a majority shareholder obtains unjustified financial benefits from the company at the expense of a minority shareholder.

In determining whether an action has been unfairly prejudicial, it is necessary to consider whether a breach of the terms on which you as a shareholder have agreed that the affairs of the company should be conducted has occurred. Or, put another way, whether your legitimate expectations held at the time of your share purchase have not been met. In addition to the breach of the rights described above, other examples of this may include: the distribution of dividends in a way contrary to the method they were understood to be paid; or in the case of a quasi-partnership, being excluded from management.

If the Court considers it just or equitable to do so, it will use its very wide discretion9 and can make an order against a company and/or person who is a party to the proceedings:

  • Requiring the company or a third party to acquire your shares;
  • Requiring the company or another person to pay you compensation;
  • Regulating the future conduct of the company's affairs;
  • Amending the company's constitution;
  • Appointing a receiver of the company;
  • Appointing a liquidator of the company (under s162 IA 2003 – see below);
  • Directing that the records of the company are rectified; or
  • Setting aside any decision of the company or its directors in breach of the company's constitution or the BCA 2004.

3. Bring a personal action for breach of duty10

If a duty owed to you as a shareholder has been breached (for example, a breach of a duty owed to you by a person involved in the affairs of the company such as a director, another shareholder or an auditor of the company), you can bring a personal action against the company in your name. This is in contrast to bringing an unfair prejudice claim which may involve the actions of a majority shareholder, or a derivative action (described below), where action is taken for the benefit of the company, rather than for personal benefit.

The usual remedy in these circumstances is an injunction or declaratory judgment to protect the shareholder's rights.

4. Be appointed to represent all the shareholders in the action11

Where there are other shareholders who have the same or substantially the same interest in the action you are bringing against the company, the Court can appoint one of the shareholders to represent all or some of the shareholders with the same interest. The Court can make any order it sees fit, including an order as to the control and conduct of the proceedings and/or the costs of the proceedings. Also, as with derivative action proceedings, the Court can direct that any amount ordered to be paid by a defendant in the proceedings is paid directly to the shareholders rather than to the company.

5. Bring a derivative action12

It may be possible for a shareholder to apply to Court to bring legal proceedings (a so called derivative action) in the name of and on behalf of the company.

It may also be possible to do this and intervene for the purposes of continuing, defending or discontinuing existing proceedings in which the company is involved, if the proceedings are being conducted in an inappropriate manner.

In order to bring a derivative action, the shareholder first needs permission of the Court. In doing so, you would be taking action in the name of the company for the company's benefit, rather than for yourself.

If successful, the Court can order any interim remedy it deems appropriate, including; authorising a shareholder or any other person to control the proceedings, ordering the company or its directors to provide information or assistance in relation to the proceedings and ordering that any relief is paid directly to the shareholders (past and present), rather than to the company13.

A derivative action may not necessarily be a costly course of action, as the Court has the power to order that the costs14 are to be covered by the company, unless it considers that it would be unjust or inequitable to do so15.

It is important to note however that a derivative order can be difficult to obtain. The Court will only grant permission for such an action if it is satisfied that: the company does not intend to bring, diligently continue or defend, or discontinue the proceedings as the case may be; or it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of shareholders or members as a whole16.

Furthermore, in determining whether to grant permission, the Court must consider whether: the shareholder is acting in good faith; the derivative action is in the interests of the company taking account of the views of the company's directors on commercial matters; the proceedings are likely to succeed; the costs of the proceedings in relation to the relief likely to be obtained; and whether an alternative to the derivative claim is available17.

Despite the Court's discretion to order that a shareholder can take control of the proceedings, the Court maintains full control over the proceedings, as the action cannot be settled, compromised or discontinued without approval from the Court18.

Winding the company up on just and equitable grounds19

There are some instances where the remedies under Part XA of the BCA 2004 discussed above would not be appropriate, as it is clear that the company cannot continue to function in its present state and with its present management. There may also be suspicion of fraud committed by the directors. In circumstances such as these, where there is no alternative remedy available you may, as a shareholder, be able to apply to Court to wind up the company on the ground that it is 'just and equitable' to do so, or if the company is otherwise insolvent. By doing so, you may also be able to retain some control over the proceedings, as you are able propose an eligible insolvency practitioner20. You may also be able to take control of winding up proceedings that have already commenced due to the action of a creditor, should you disagree with the way the creditor is dealing with them. If the Court believes that the creditor is not proceeding with the application diligently, or (if satisfied) for any other reason, the Court may appoint you as a shareholder to take the place of the creditor21.

As it is a remedy of last resort, the Court will only exercise its discretionary power to wind up the company on this ground if it believes that no reasonable alternative remedy or relief is available to you, the shareholder.

BVI and English case law has provided guidance as to what the Court would consider to be 'just and equitable'. Such instances include where:

  • The company is unable to function due to deadlock in the management;
  • The shareholders have lost confidence in the directors' ability to manage the company's affairs due to a lack of probity or fair conduct on the directors' behalf22;
  • The company cannot function in accordance with the purpose for which it was created (it has lost its 'substratum')23;
  • The directors have breached their fiduciary duties;
  • There has been misappropriation of the company's assets. Mere suspicion of misappropriation is not enough, there must be cogent evidence to prove it has occurred;
  • The directors have committed fraud; and
  • (in the case of a quasi-partnership), there has been a breakdown in the mutual trust and confidence between the shareholders24.

Upon hearing the application, the Court can, appoint a liquidator, dismiss the application, adjourn the hearing conditionally or unconditionally or make any interim order that it sees fit.25

Actions where you suspect fraud

If you suspect that the company, any of its affiliates or its directors have carried out fraudulent activities, or if the company has been formed for a fraudulent purpose, or is to be dissolved for a fraudulent or unlawful purpose you may be able to apply to Court for an investigation order . This application may be without notice and could result in the Court conducting an investigation into the company and its affiliates and directors.

If satisfied, the Court would make an order appointing an inspector to investigate the company.

Footnotes

1 Headstart Class F Holdings Limited and Citco Global Custody NV v Y2K Finance Inc [2008] BVIHCV2007/0278

2 These rights may in some cases be restricted or amended by the company's memorandum and articles of association.

3 S175 BCA 2004

4 S82(2) BCA 2004

5 S179 BCA 2004

6 S184B BCA 2004

7 S184I BCA 2004

8 S184I(2) BCA 2004

9 Headstart Class F Holdings Limited and Citco Global Custody NV v Y2K Finance Inc [2008] BVIHCV2007/0278

10 S184G BCA 2004

11 S184H BCA 2004

12 S184C BCA 2004

13 S184E BCA 2004

14 Subject to a condition of reasonableness

15 S184D BCA 2004

16 S184C(3) BCA 2004

17 S184C(2) BCA 2004

18 S184F BCA 2004

19 S162 IA 2003

20 S162(7) IA 2003

21 S166(2) IA 2003

22 Loch v Blackwood [1924] AC 783

23 Citco Global Custody NV v Y2K Finance Inc BVIHCV 2009/0020A (25 November 2009)

24 Fifth Avenue Capital Inc v Julian Lee et al Claim No. BVIHCV2004/175 ( unreported)

25 S167 IA 2003

26 S223 BCA 2003

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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