A Brief Summary of the Remedies Available in the British Virgin Islands and the Cayman Islands
In the prevailing and often challenging economic climate, we are seeing an increased level of scrutiny from investors looking at potential remedies against directors and others who may have misused their management control of offshore structures.
In a recent Bulletin we looked at the broader remedies available to minority shareholders in the British Virgin Islands ("BVI") and the Cayman Islands. This month, we provide a high level overview of the rights a shareholder might have to bring an action in the name of the offshore company against a director who has made decisions that, whilst benefitting the director in question or the companies associated with him, are questionable and considered to have caused loss to the company.
The terminology employed in this scenario is a "derivative" claim or action.
In both BVI and the Cayman Islands, the rule in Foss v. Harbottle (1843) 2 Hare 461 and the general principles developed in the case law over the last 170 years from that landmark decision provide a common starting point, such that, as in England and Wales, and subject to certain exceptions, the proper claimant in an action for the recovery of loss suffered by a BVI or Cayman Islands company, whether caused by third parties or by the directors, is the company itself.
On the face of the legislation, therefore, it might appear that the BVI has an advantage in that, unlike the Cayman Islands, it provides a shareholder with a direct statutory unfair prejudice remedy; there is a specific part of the Act that assists prejudiced members in that regard. However, whilst a different approach is taken in the BVI and the Cayman Islands to minority shareholder claims because of the parameters of the local statutes, in practice, the respective legislation can and often does lead an aggrieved shareholder to the same destination (for example, an order that one shareholder buys out another or that the company's affairs be regulated in a particular way) albeit by a different route.
It should also be noted that, whilst clear patterns in the manner in which proceedings progress, being the product of the applicable local substantive and procedural law, are obviously discernible in each jurisdiction, every claim is different and will present a unique legal and factual matrix within which the best strategy will need to be considered and developed.
British Virgin Islands
The BVI Business Companies Act, 2004 (the "BVI Act") prescribes the basic duties of a director such that, in performing his function, a director is obliged to act honestly and in good faith and in what he believes to be in the best interests of the company. Among other things, he is obliged by statute to exercise his powers for a proper purpose and is held to a standard of care requiring him to exercise reasonable care, diligence and skill in the performance of his duties.
If a director has failed to act in a manner which meets that standard and, as a result, has caused loss to the members, an aggrieved shareholder may, through the provisions of the BVI Act, bring a derivative action against the director in question in order to recover its loss.
The difficulty a minority shareholder often faces in this context is that the majority has effective control of the management decision making processes of the company through its own directors and the board of the company accordingly will not agree to take any steps against the director or directors in question. This provides the legal rationale for the statutory derivative action. Before proceedings can be commenced, the aggrieved shareholder will need to apply for leave of the BVI Court to bring the derivative action. On any such application, the BVI Court is required to be satisfied that the company itself does not intend to pursue the action or otherwise that it is in the interests of the company that the conduct of the proceedings should not be left to the directors or generally to the shareholders as a whole.
The BVI Act also sets out the other matters which the BVI Court will need to take into account when deciding whether or not to grant leave, including: (a) whether the shareholder is acting in good faith; (b) whether the derivative action is in the interest of the company (taking into account the views of the company's directors on commercial matters); (c) whether the proceedings are likely to succeed; (d) the costs of the proceedings relative to the relief likely to be obtained; and (e) whether an alternative remedy to a derivative claim is available to the shareholder.
Whilst there are specific reporting and other statutory obligations that the director of a Cayman Islands company needs to be mindful of, the Cayman Islands' Companies Law (as amended), unlike the BVI Act, does not specify the general or fiduciary duties of directors. Rather, the common law imports those duties such that a director of a Cayman Islands company, as in the BVI, has duties, among other things, to act bona fide in the best interests of the company, to exercise his powers for the purposes for which they are conferred, not to make secret profits and to act with reasonable skill, care and diligence in the performance of his duties.
In the Cayman Islands, the ability of a shareholder to bring a derivative action is taken from common law rather than statute. Where such an action is commenced, and the defendant to the action has given notice of his intention to defend, the Plaintiff shareholder, as in the BVI, must apply to the Court for leave to continue the action. Similar factors to those looked at by the BVI Court will be considered by the Grand Court of the Cayman Islands in deciding whether or not to grant leave, although those factors are not prescribed by the legislation of the Cayman Islands.
If the structure in question is an exempted partnership structure rather than a corporate one, section 13(2) of the Exempted Limited Partnership Law (2013 Revision) similarly permits a limited partner to bring an action on behalf of an exempted limited partnership if any one or more of the general partners (with authority to do so) has first refused to institute such proceedings without good cause.
Multiple Derivative actions
A multiple derivative action involves a shareholder of one entity, which in turn holds the shares of another entity, bringing an action against the subsidiary entity notwithstanding the absence of any direct equity interest. There are notable differences in the manner in which the BVI and Cayman Islands Courts respectively have approached such actions.
In the BVI, given the decision in Microsoft Corporation and Vadem Ltd, BVIHC (COM) 2012/048, there is currently little scope for a successful leave application to prosecute a double derivative action, regardless of whether there is, as a matter of fact, any distinction in the management of the holding company and its subsidiary. Following the judgment in Renova Resources Private Equity Ltd v. Gilbertson and Others  CILR 268, in the Cayman Islands, on the other hand, there is greater scope for a shareholder to obtain leave for a multiple derivative action, where, for example, it wishes to claim on behalf of a subsidiary that has also suffered loss.
The statutory and common law position in both BVI and the Cayman Islands is such that, where a director has acted either fraudulently or negligently in breach of his fiduciary and other duties to the company, a shareholder who has suffered loss as result has standing and the ability to bring a derivative action against the director. In each jurisdiction, leave of the Court to continue a derivative action is required, but where there is good evidence in support of the claim, where the costs are likely to be proportionate, where there is no sensible alternative remedy available and where the shareholder is able to show he is acting in good faith and in the interests of the company, the shareholder is likely to be given permission to proceed.
The facts in every instance of course will differ and specific legal advice on the merits of any action should be sought in every case.
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.