On 8 August 2013, the Court of Appeal issued its ruling in the
case of Microsoft Corporation v Vadem Ltd1 . The
judgment at first blush appears quite definitive, that
"BVI law does not permit double derivative
proceedings".
The manner in which the case was presented however and recent
developments in English case law suggest that, whilst the BVI
Business Companies Act 2004 does not provide for double derivative
actions, at common law the jurisdiction may well live on.
Background
At first instance, Microsoft made an application for leave under
section 184C to bring a derivative claim in Delaware in the name of
and on behalf of Vadem Ltd ("Vadem
BVI"). Microsoft held just under 12% of Vadem BVI.
Vadem BVI itself had a wholly owned subsidiary, Vadem Inc
("Vadem California"), which was the
owner of certain patents that were subsequently transferred to
another company called Amphus.
Microsoft commenced claims in Delaware against Amphus which were
struck out on the basis that inter alia Microsoft had not obtained
the leave of the BVI court under s184C to bring those claims
derivatively in the name of Vadem BVI.
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.
At first instance, Bannister J. held that the question was one of
pure construction, and the section could not be read as enabling
the Court to give the member leave to bring proceedings in the name
of 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 was expressly restricted to enable it to
prosecute causes of action belonging to Vadem BVI but not
those belonging to Vadem California.
Bannister J. specifically rejected Microsoft's submission that
the forum in which it 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 BVI company only. It had no
authority to prosecute claims vested in a third party.
Appeal
Microsoft appealed. The Appeal Court agreed that the question as
to whether Microsoft could bring claims on behalf of Vadem
California was a matter for the lex fori (California) to determine
and accordingly Bannister J. should not have stated that Microsoft
was not authorised to prosecute claims vested in Vadem
California.
The Court of Appeal was however strident in its judgment that the
court cannot give leave to bring claims involving causes of action
vested in Vadem California, "since BVI law does not permit
double derivative proceedings."
What now?
Between the BVI decisions however, the Chancery Division of the
High Court of England and Wales handed down judgment in
Universal Project Management Services Ltd v Fort Gilkicker
Ltd2. The decision confirmed that
the English statutory regime had not abolished the ability to bring
a multiple derivative action (MDA) at common law.
The judgment of Briggs J. analysed the provenance of the multiple
derivative claim and the statutory interpretation of s260 of the
English Companies Act 2006. Focusing on the requirement to
remedy a wrong, he opined that
"Once it is recognised that the derivative action is merely a
procedural device designed to prevent a wrong going without a
remedy ...then it is unsurprising to find the court extending locus
standi to members of the wronged company's holding company,
where the holding company is itself in the same wrongdoer
control."
The reasoning is resonant of Lord Millett in Waddington Ltd v
Chan Chun Hoo Thomas et al3,
"The very same reasons which justify the single derivative
action also justify the multiple derivative action. To put the same
point another way, if wrongdoers must not be allowed to defraud a
parent company with impunity, they must not be allowed to defraud
its subsidiary with impunity."
Microsoft did not pursue their action at common law and the BVI
courts did not have the benefit of the analysis put before the
Chancery Division nor the subsequent judgment in Universal.
Conclusion
Given the widespread utilisation of BVI companies as holding
vehicles the question is key to the jurisdiction and the
relationship that shareholders in BVI companies have with entities
held "downstream".
The important question then remains open as to whether the BVI
will, in future, follow the English position and confirm that
Multiple Derivative Actions are available to shareholders and
survive at common law.
Footnotes
1 BVIHCVAP2013/0007
2 2013] 3 WLR 164.
3 (2) FACV No.15 of 2007 (Civil)
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