Bermuda: When Is A Shareholder Actually A Shareholder?

Last Updated: 24 August 2016
Article by Sedgwick Chudleigh

It is extremely common for shares in offshore companies (both privately held companies and publicly listed companies) to be registered in the name of one person, but held for the benefit of another. The registered shareholder might be a trustee, a nominee, a custodian, a broker, a bank or an agent for another.
There are a variety of commercial and legal reasons for separating the registered and legal title to, and the beneficial interest in, company shares.
Many such reasons are valid and legitimate (such as taking security for loan finance, estate planning, promoting increased efficiencies for clearing and settlement of sales of such shares, or promoting economies of scale for the purpose of collective investment or employee share schemes). Others, occasionally, might be less so (tax evasion,  creditor evasion or hostile takeovers).
Whether or not the ultimate beneficial owner of the shares will actually be known to the company, or to any third parties, will, of course, depend on a variety of commercial, legal, KYC and other regulatory considerations, which vary from one jurisdiction to another.
A common theme in most offshore jurisdictions with legal systems modelled on English law, however, is that only a registered shareholder can properly assert rights, claims or interests against the company, or its directors and officers, with respect to its shares.
This is because a company is generally under no obligation to recognise or have regard to any trusts or beneficial interests in its shares, whether it is made aware of such a trust or not. This is generally made clear in each company's Articles of Association or Bye-Laws, and it is also reflected in a specific statutory provision in most countries' companies' legislation. It is a historic legal principle which has also been considered and upheld by the United Kingdom Supreme Court on a number of occasions, most recently in 2011, in the case of Enviroco Ltd v Farstad Supply A/S [2011] UKSC 16.
However, there have been a large number of reported court decisions from offshore courts in recent months and years, in which the courts have had to re-examine the 'registered shareholder' requirement in the context of different types of shareholder complaint, including:

  • derivative actions, whether brought against directors, officers or professional service providers;
  • minority oppression petitions;
  • winding up petitions;
  • applications for court sanction of schemes of arrangement;
  • applications to enforce shareholder rights, such as voting, redemption, dividend payment or pre-emption rights;
  • claims to enforce 'side letters' between fund investors and fund managers; and
  • applications to rectify the company's share register in circumstances where there is a pending ownership dispute between a registered shareholder and a non-registered shareholder.

The recent Bermuda cases include Ng Pui Lung v CY Foundation Group Ltd [2011] Bda LR 24, Re Full Apex Holdings Ltd [2012] Bda LR 9, Nitin T Mehta v Viking River Cruises Limited et al [2014] SC (Bda) 86 Com, [2014] CA (Bda) 1 Civ, Pulido v UST Holdings Ltd [2015] SC Bda 67 Com, and The Majuro Investment Corporation v Timis et al [2015] SC Bda 87 Civ.
The latter case (The Majuro Investment Corporation v Timis et al [2015] SC Bda 87 Civ) is of particular interest in the offshore D&O liability insurance context, since the Bermuda Supreme Court held that, so far as a purported shareholder derivative action is concerned, 'the almost invariable rule is that the derivative claimant must be a registered shareholder', although the Court did recognise that 'in exceptional circumstances, for instance where the wrongdoer is preventing beneficial owners from registering their shares, a beneficial owner may have sufficient standing to maintain a derivative claim'.
The recent Cayman Islands cases include Hannoun v R Ltd [2009] CILR 124 and Re Lancelot Investors Fund, KBC Investments Ltd v Varga, Cayman Islands Court of Appeal, unreported 27 April 2015, and the recent BVI cases include Nilon Limited v Royal Westminster Investments SA [2015] UKPC 2, a decision of the Privy Council, whose reasoning is binding not only on the BVI and Eastern Caribbean courts, but also on the Cayman Islands, Bermuda, Isle of Man and Channel Islands courts as well.  
The clear judicial trend, reflected in these recent reported authorities, is for the courts to insist (in the interests of legal and commercial certainty) that shareholder rights and shareholder claims should be enforced by the registered holder of such shares, rather than the beneficial owner. However, the courts have also recognised that there might, in certain very limited and exceptional circumstances, be an equitable jurisdiction to allow beneficial owners to bring certain types of claims or applications in their own name — subject to argument on the facts of each case.
In the future, there still remains scope for creative legal argument as regards the rights of beneficial owners to assert claims in their own names.
In many cases, the evidence as to who is a registered shareholder or a beneficial owner of a company is often controversial (whether due to inaccuracies or delays in the maintenance of company share registers, missing or inaccurate share certificates, incomplete share transfer documentation, incomplete performance of share sale transactions, and in light of the various methods by which publicly listed shares can be traded in electronic form, both over the counter and on public exchanges).
Furthermore, an increasing number of offshore jurisdictions have started to enact legislation designed to confer contractual rights on third parties, which might, in certain circumstances, extend to investors with the economic or beneficial interest in mutual fund companies, even if they are not registered shareholders (bearing in mind that the contract for investment may overlap with the statutory contract between the registered shareholder and the fund company): see, for example, the Cayman Islands' Contracts (Rights of Third Parties) Law 2014, and the Hong Kong Contracts (Rights of Third Parties) Ordinance 2014 (with similar draft legislation also under consideration in Bermuda).
Finally, a variety of offshore courts have also recognised, so far as creditor rights are concerned, that the court might look to the real economic interests (in the context, for example, of taking a headcount of creditors voting on a creditors' scheme of arrangement), as in Re Titan Petrochemicals Group Ltd [2014] Bda LR 107, subject, of course, to the precise statutory context (as illustrated by Re Bio-Treat Technology Limited [2009] Bda LR 29, a winding up petition, and Re Petroplus Finance 2 Ltd [2014] Bda LR 107, an application to appoint a committee of inspection made up of a single creditor).

Originally published in February 2016

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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