British Virgin Islands: BVI Case Notes: Derivatives, Double Derivatives And Unfair Prejudice

Harneys continues to provide a regular roundup of recent case notes from the British Virgin Islands Commercial Court. In this edition we report on recent court guidance on leave to bring derivative proceedings and double derivative actions, and the interaction between unfair prejudice and derivative actions.

Court provides guidance on leave to bring derivative proceedings and double derivative actions

In a recent decision concerning sections 184C and D of the BVI Business Companies Act 2004, Microsoft made an application for leave under section 184C to bring a derivative claim in the Court of Chancery of the State of Delaware in the name of a BVI company, Vadem Limited ("Vadem BVI"). Microsoft held just under 12% of Vadem. Vadem BVI itself had a wholly owned subsidiary, Vadem California, which was the owner of certain patents subsequently transferred to another company called Amphus. Microsoft commenced claims in Delaware against Amphus which were struck out, on the basis that Microsoft had not obtained the leave of the BVI court under s184C to bring those claims derivatively in the name of Vadem BVI, and Vadem California.

It was argued against Microsoft that although it could seek leave in the BVI to bring a derivative claim in the name of Vadem BVI, it could not seek leave to bring such a claim in the name of Vadem California, in effect, a "double derivative" action. 

Bannister J. held that the question was one of pure construction, and section 184(1)(a) could not be read as enabling the Court to give the member leave to bring proceedings in the name and on behalf of some other company. Proceedings could not be brought "on behalf of" a company unless they were proceedings which the company itself is in a position to bring. In other words, leave given to Microsoft to commence derivative proceedings in Delaware would enable it to prosecute causes of action belonging to Vadem BVI but not causes of action belonging to Vadem California.

Bannister J. specifically rejected the submission made on behalf of Microsoft that the forum in which Microsoft intended to prosecute the proceedings (Delaware) recognised the right to a double derivative claim. In His Lordship's view, the member's right to sue was limited to causes of action vested in the company only. It had no authority to prosecute claims vested in a third party.

Bannister J. also rejected an argument mounted by Microsoft based on the alter ego doctrine, i.e. that Vadem BVI and Vadem California were one and the same, based on commonality of staff, property and administration. The learned Judge affirmed that the BVI recognises no alter ego doctrine based on carelessness or indifference in corporate administration.

Court provides guidance on interaction between unfair prejudice and derivative actions

In Gray v Leddra and another, BVI HC (Com) 79 of 2011 the BVI High Court Commercial Division considered the issue of the interaction of sections 184C and 184I of the BVI BC Act.  It was argued on behalf of Mr. Leddra that the relief sought under s184I was a head of relief claimable only by the company itself in proceedings brought for that purpose, or in a derivative action properly brought under section 184C of the BC Act. Counsel for Mr. Leddra argued that it would be wrong in principle to introduce into an unfair prejudice action, which asserts a personal claim by a shareholder, what was in truth an unauthorised derivative claim seeking to assert a right vested in the company in question. The claim in question was for an order that the relevant individual (Mr. Leddra) repay to the Company certain sums found to have been received by him, and to return assets to the Company taken by him.

The learned Judge agreed with this submission. In his view, the position regarding derivative claims in the BVI was clear. A derivative action requires permission under section 184C and is subject to certain conditions, including (i) that it is satisfied that the company does not intend to bring the claim and (ii) that it is in the interests of the company that leave be granted. These conditions were, in Bannister J's opinion, so stringent that it would be an abuse to attempt to mount a derivative claim without the consent of the Court under s184C. If that permission is granted it is then a matter of case management whether the derivative claim is prosecuted as part of unfair prejudice proceedings, or is tried together with them or separately, but to attempt to bring such a claim without permission was an abuse. Accordingly, the relevant sections of the claim were struck out.

However, separately claimed was an order requiring the relevant individual to pay compensation to the claimant for missing out on bonuses or dividends. This was, in Bannister J's opinion, not attendant upon any derivative claim.  In so finding, Bannister J. noted that unfair prejudice relief is not restricted to the enforcement of legal liabilities. On the contrary, it is granted precisely because strictly legal remedies are not available to the applicant shareholder.

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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