British Virgin Islands: Derivative Actions

A Brief Summary of the Remedies Available in the British Virgin Islands and the Cayman Islands

Introduction

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.

Cayman Islands

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 [2009] 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.

Summary

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions