Bermuda: The Appleby 2012 Offshore Round-Up: Company Law

Welcome to Appleby's review of the key company law decisions handed down in the leading offshore jurisdictions during 2012, compiled by members of our Litigation & Insolvency Practice Group in Bermuda, the British Virgin Islands, the Cayman Islands, Jersey, Guernsey and the Isle of Man. Equivalent updates are available in the areas of insolvency & restructuring, fund disputes, civil procedure and trust litigation. Copies may be obtained from our website or from your usual Appleby contact.

2012 saw interesting decisions from Jersey on when a minority shareholder can invoke unfair prejudice remedies and when a derivative action is appropriate, from Bermuda on cross-border issues arising in offshore companies that are listed elsewhere and from BVI on derivative actions, as well as a stern message from the Guernsey Court to directors who turn a blind eye to financial crime.

Derivative Actions – Authorized and Unauthorised

In the BVI, on the issue of shareholder disputes, 2012 began with an oral decision of the Court of Appeal in Liao v. Upbeat Global BVICVAP 2011/0034. After striking out an appeal brought in the name of a company by a person without the authority of the board to bring it, the Court decided that it had an inherent jurisdiction to make costs orders against persons outside of the jurisdiction in cases where it was necessary to do so to protect the integrity of the processes of the Court from abuse.

The year also saw the first two reported decisions of the Court in relation to the power under section 184C of the BVI Business Companies Act 2004 to give leave to commence derivative proceedings. In Nigel Gray v. Leddra BVI HCM 2011/79, Bannister J decided that it was an abuse of the process to purport to bring derivative proceedings, without the permission of the Court first being obtained, and struck out those parts of the claim which were brought derivatively. In November 2012, Bannister J decided in Microsoft Corporation v. Vadem BVI HCM 2012/0048 that the jurisdiction under section 184C permitted only single, not double derivative claims to be brought. An argument that a foreign law could be relied upon, which permitted the bringing of double derivative proceedings, was rejected.

In the Cayman Islands, where there is authority that double derivative actions are permitted, on 6 November 2012, Foster J delivered an extensive judgment in respect of what is believed to be the first derivative action in the jurisdiction that has proceeded to trial, Renova Resources Private Equity Ltd v. Gilbertson and others. The claim was brought by an entity of Viktor Vekselberg's Renova group against South African businessman Brian Gilbertson. It was alleged that Mr Gilbertson had breached the fiduciary duty he owed to a Cayman exempt limited company, established as part of a joint venture investment fund between Mr Vekselberg and Mr Gilbertson, by diverting a business opportunity relating to the rights in the Fabergé brand in January 2007. The case largely turns on its own detailed facts and is not of particular legal significance, although it contains an extensive discussion of the law on fiduciary duties and brings Cayman law into line with the law of England and Wales in relation to claims in knowing receipt. In the event, the plaintiff prevailed on liability but was awarded no relief against Mr Gilbertson.

Minority Shareholder Remedies

The Bermuda Court dealt with a series of cases that required an examination of the role of Bermuda minority oppression remedies in the context of foreign listed/regulated Bermuda companies.

In Kingboard Copper Foil Holdings [2012] SC (Bda) 5 Com (16 January 2012) the Court considered an application to strike out an unfair prejudice petition filed in Bermuda against a SGX listed, Bermuda incorporated company. While the Court was clear that it would not tolerate the Bermuda statutory framework being used to assert improper pressure on foreign listed companies, it emphasized that primary responsibility to adjudicate corporate governance complaints asserted against Bermuda incorporated companies remained with the Bermuda Court. In refusing to strike out the petition, the Court found that there was a case to answer in respect of the petitioner's argument that it was oppressive for the company to respond to the minority's legitimate refusal to approve the terms of a transaction with a party connected to the majority by rearranging the Company's operations, without the minority's assent, so that such approval was no longer required.

The concise judgment in Annuity & Life et al v Full Apex Holdings Ltd. et al [2012] SC (Bda) 9 Com (6 February 2012) addressed a number of issues common to companies that are listed overseas. Full Apex concerned an application to strike out an oppressive/prejudicial conduct petition filed in Bermuda against another SGX listed, Bermuda incorporated company.

First, the Court considered whether section 163(1)(a) of the Companies Act 1981 (which requires a petitioning shareholder to have held the shares for at least six months before presenting a petition for winding up) applied to petitions for the alternative remedy based on unfair prejudice contained in section 111 of the Act. The Court held that it did not and declined to strike out the petition on the ground that the petitioner had been a shareholder for a lesser period. Secondly, the Court held that section 111(1) of that Act, as read with section 19(2), contained a strict requirement that a petitioning member's name appears on the share register. A beneficial owner of shares through the SGX Exchange framework does not have standing to engage the minority oppression protections in the Bermuda Act. Thirdly, the Court rejected an argument that a petitioner could not rely on complaints about events occurring before he became a member, citing the Privy Council decision in Bermuda Cablevision Ltd. v. Colica Trust Co. Ltd [1998] A.C. 198. Finally, the Court held that the discretion to grant a remedy under section 111 existed in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders. If the matters complained of have already been put right and cured and cannot recur, the Court could not properly grant relief. On this basis, the Court found that a delisting proposal certain other proposals that had in the event been blocked at a special meeting held under SGX rules could not constitute actionable heads of unfair prejudice. Accordingly, the Court declined to strike-out the petition, ruling that the company had a case to answer.

In the case of Joliet 2010 Ltd et al v Goji Ltd et al [2012] SC (Bda) 69 Com (5 December 2012) the Bermuda Court decided that a foreign court was not competent to adjudicate a minority oppression action in respect of a Bermuda incorporated company and continued its anti-suit injunction against the foreign proceedings. Hellman J noted that "the Bermuda Courts will not hesitate to protect their exclusive jurisdiction over the internal governance of companies incorporated or continued in this jurisdiction".

The Full Apex litigation mentioned above produced the final decision of relevance in 2012 in this context, Re Apex [2012] SC (Bda) 73 Com (14 December 2012). The Court considered an application by the SGX listed company seeking an order authorizing it to take an active role and expend company funds in a dispute between its shareholders. The company relied on the fact that the allegations in the unfair prejudice petition had the potential to adversely affect the company's SGX listing status and argued that it had distinctive role to play in advancing the argument that it has acted in accordance with the letter and spirit of the listing rules. The Court held that the test was whether the proposed involvement is in the interests of the company as a whole, having regard to the nature of the allegations raised and their impact (if any) on interests other than those of the disputing shareholders. In granting the company's application, the Court remarked that in the case of a publicly listed company where public shareholders are not before the Court, a shareholder dispute which impugns the integrity of the company's decision-making processes will often engage such wider interests and justify the active participation of the company.

Unfair prejudice actions also have recently been examined by the Royal Court in Jersey in two cases. The first was Prestigic (Wisley) Nominees Limited v. JTC Management Limited & Others [2012] JRC 097. In this case, the second respondent was a Jersey company, Wharf Land Investment Limited, which had been incorporated to acquire the freehold interest in a substantial site in England for development purposes. Prestigic was an investor in the company and held 2.84% of its shares. JTC, a Jersey trust company, provided directors and company administration services to the company.

Prestigic alleged that the company's affairs were being conducted in a manner which was prejudicial both to its interests and the interests of the members generally and applied for an order under Jersey's unfair prejudice provisions, Article 141(1) and 143 of the Companies (Jersey) Law 1991(as amended). The complaints centred on certain payments made by the company, the fees charged by JTC, and the lack of an audit. Prestigic sought an order under Article 143 that it be authorised to bring proceedings against JTC in the name of the company seeking an enquiry as to the sums lost as a result of the directors breach of statutory/fiduciary duty and the taking of unauthorised fees by JTC.

After the commencement of Prestigic's application, a meeting of shareholders was held in which various resolutions were approved by more than 75% of the members. They opposed Prestigic's application and approved the various payments which had been made on the basis that they were in the best interests of the company.

The Court examined the developing line of authority which distinguished between proceedings where the essence of the complaint was of unfairly prejudicial conduct of the company's affairs, and where the essence of the complaint was in relation to breaches of duty or other misconduct which were actionable by the company. The Court referred to the case of Re Charnley Davis Ltd. (No.2) [1990] BCC 605 in which Millet J made clear that if the complaint centred on unlawfulness of the acts/omissions, the proper remedy was that for the misconduct. If the gist of the complaint was not unlawfulness per se, but prejudicial mismanagement, then if proven, the remedies for misconduct would not provide sufficient redress, and the unfair prejudice remedies would apply. The Court accepted that developing line of authority and concluded that it was only mismanagement (as opposed to misconduct) which could fall within the ambit of the unfair prejudice provisions. It further noted that it had been held that where the complaint is misconduct, the use of these provisions to circumvent the rule in Foss v. Harbottle (that the proper plaintiff in relation to an action for a wrong done to a company is the company itself), was an abuse of process.

Prestigic accepted that the application did not come within any of the exceptions to the rule in Foss v. Harbottle. The Court accordingly held that the action complained of was misconduct, not ongoing mismanagement. The remedy was an action by the company and the current application was an abuse of process. The Court also noted that the great majority of shareholders were opposed to the action and had ratified the directors' actions. Thus it was not for the Court to impose a different commercial view on the majority. Prestigic had signed up to being a minority shareholder and in this case it was not unfair that it be bound by a decision of the majority as to what was in the best interests of the company.

Registration of Shares

On 30 July 2012, in Fulcrum Utility Investments Ltd, Quin J in the Cayman Islands handed down a judgment dealing with an administrative error whereby the company inadvertently purported to issue shares at less than par value, without following the procedures set out in section 35 of the Companies Law (2011 Revision) to issue shares lawfully at a discount. The company sought a declaration that the issue of the shares was void for illegality as well as under the doctrine of mistake. Pursuant to section 46 of the Companies Law (2011 Revision), the company was permitted to apply to the Court for an order that the share register be rectified. Quin J found that the subscription letters were a void contract as they amounted to the unlawful issue of shares at a discount. He also confirmed that under Cayman Islands law there is no distinction between mistake of law and mistake of fact. The company had issued, and the investors subscribed for, shares under the mistaken belief that no further amounts were payable. This mistake rendered the contract impossible to perform because a contract for the issue of shares at a discount without following the statutory procedure is unlawful and therefore void. Further, there had been a mutual mistake that resulted in something substantially different from that which the parties intended and thought they had achieved. Accordingly, the application was successful and an order was made to rectify the register of members.

Also on the issue of the share register of a company, in Westminster Oil v. International Investments House Co HCVAP 2009/004, the Court of Appeal in the BVI restated the importance of entry into the register of members as being fundamental to the enjoyment of rights as members. It also applied the principle in Re Duomatic [1969] 2 Ch 365 in deciding that where it could be shown that all shareholders with a right to attend and vote at a general meeting had assented to some matter which a general meeting could carry into effect, the assent was binding as a resolution of a general meeting, even though the formal procedures had not been complied with.

Shareholder Meetings

DRGN Limited v. No Defendant CHP 2012/117 was the first reported decision in the Isle of Man in which an application was made for the Court to exercise its discretion under section 114(2) of the Companies Act 1931, allowing a company to convene an Extraordinary General Meeting upon shorter notice than is provided for under its Articles of Association.

DRGN Limited needed to convene the EGM to address quorum irregularities which meant that there had been no validly appointed board of directors since 2008. The consequences of this were extremely serious for th company and its members as it had caused the suspension of trading in the company's shares on AIM. The company urgently sought to rectify the situation by applying to convene an EGM on less notice than the 21 days provided by its Articles of Association.

The Court granted the application, stating that it was in the company's and shareholders' interests to convene a meeting with seven days notice to the shareholders. The Court said that it was an important consideration that the application was to assist in maintaining the status quo, i.e. to assist in allowing the company to confirm the appointment of the board of directors.

Directors' Duties

The Court of Appeal in the Cayman Islands heard the appeal against Jones J's judgment in Weavering Macro Fixed Income Fund Limited v Stefan Peterson and Hans Ekstrom which of course contained the first detailed judicial commentary in the jurisdiction on the obligations of a fund director during the life cycle of a fund (establishment; ordinary course of business; financial crisis and liquidation). The Court of Appeal's decision is still awaited.

Directors' Disqualification

In Guernsey Financial Services Commission v. Roger Walter Francis Taylor 5/2012 the Royal Court handed down a 13 year disqualification order against a director who had been convicted of money laundering-related offences, having regard to the principles set out in English authorities (Re Westmid Packaging Services Ltd No.3 [1998] 2 All ER 124 and Sevenoaks Stationers Retail Ltd [1991] Ch 164) and what the Guernsey Court of Appeal described as a "blatant series of offences committed ... despite clear warnings of the peril [of paying money from accounts] which he had been warned twice were the product of fraud." In delivering its judgment the Royal Court concluded that the disqualification period should be severe, for the protection of the public. It also commented that the disqualification period should send out a loud and clear deterrent message to remove any "wholly erroneous perception that a jurisdiction such as Guernsey, which is often styled pejoratively as an 'offshore' financial centre, has a legal and regulatory regime less strict than that of major onshore financial centres."

Appleby acted for the respondents in the Court of Appeal in Liao v Upbeat Global in the BVI, the defendants in the Renova litigation in the Cayman Islands and in Bermuda for the petitioner in Kingboard Copper Foil Holdings, the petitioners in the Annuity & Life et al litigation and the Petitioners in Re Apex and in the Full Apex litigation.

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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