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07 February 2013
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 Delaware Court of Chancery in the name of a BVI company, Vadem Limited. Microsoft held just under 12% of Vadem Limited. Vadem Limited itself had a wholly owned subsidiary, Vadem California, which owned 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 Section 184C to bring those claims derivatively in the name of Vadem Limited and Vadem California.
It was argued against Microsoft that although it could seek leave in the British Virgin Islands to bring a derivative claim in the name of Vadem Limited, it could not seek leave to bring such a claim in the name of Vadem California – in effect, a "double derivative" action.
Judge Bannister 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 was 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 Limited but not those belonging to Vadem California.
Bannister 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 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 also rejected an argument mounted by Microsoft based on the alter ego doctrine – that is, that Vadem Limited and Vadem California were one and the same based on commonality of staff, property and administration. The judge affirmed that the British Virgin Islands recognise no alter ego doctrine based on carelessness or indifference in corporate administration.
Guidance on interaction between unfair prejudice and derivative actions
In Gray v Leddra (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 Business Companies Act. It was argued on behalf of Mr Leddra that the relief sought under Section 184I was ahead 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 act. Counsel for 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 (Leddra) repay to the company certain sums found to have been received by him, and to return assets to the company that had been taken by him.
The judge agreed with this submission. In his view, the position regarding derivative claims in the British Virgin Islands was clear. A derivative action requires permission under Section 184C and is subject to certain conditions, including that:
These conditions were, in Bannister's opinion, so stringent that it would be an abuse to attempt to mount a derivative claim without the consent of the court under Section 184C. 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. However, to attempt to bring such a claim without permission was an abuse. Accordingly, the relevant sections of the claim were struck out.
A separate claim was made for an order requiring the relevant individual to pay compensation to the claimant for missing out on bonuses or dividends. This was, in Bannister's opinion, not dependent on any derivative claim. In so finding, Bannister 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.
For further information on this topic please contact Phillip Kite, Andrew Thorp or Claire Robey at Harney Westwood & Riegels by telephone (+1 284 494 2233), fax (+1 284 494 3547) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
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