Leave to Pursue Derivative Actions

From 9 July 2018, derivative actions commenced in Bermuda may not be continued without leave of the Supreme Court. The requirement comes by way of amendments to the Rules of the Supreme Court 1985.

One question to which the new provision gives rise is whether it applies to any proceedings in the name of a Bermudian company, wherever commenced.

Conflicts of law principles dictate that in cases relating to the constitution and internal management of a company, matters of procedure are governed by the law of the forum, whereas matters of substantive law are governed by the law of the place of incorporation.

The new Bermudian provision is identical to Order 15, Rule 12A in the Cayman Islands’ Grand Court Rules. That rule provides that where a defendant in a derivative action has given notice of intention to defend, the plaintiff must apply to the Grant Court for leave to continue the action. (Rule 12A(1) provides that the rule applies to “every action begun by writ by one or more shareholders of a company where the cause of action is vested in the company and relief is accordingly sought on its behalf”. In Renova Resources Private Equity Limited v Gilbertson and Others [2009] CILR 268, leave was given to pursue a double derivative action.) Rule 12A also contains a number of provisions regulating the way a claim must proceed, such as by allowing the Court hearing the application to make directions as to the joinder of parties, the filing of further evidence, discovery and cross-examination of deponents.

The Rule was considered in Charles Zhi v SRK Consulting Ltd [2015] HKCFI 1547, where a shareholder brought a common law derivative action in Hong Kong on behalf of a Cayman company. The plaintiff did not file evidence or appear at the hearing of the defendant’s application to strike out the statement of claim. Judge Le Pichon granted that application on the basis that leave under Rule 12A had not been obtained. She found support for her decision in three previous Hong Kong cases (Wong Ming Bun v Wang Ming Fan [2014] 1 HKLRD 1108; East Asia Satellite Television (Holdings) Ltd v New Cotai LLC [2011] HKCA 128; Waddington Ltd v Chan Chun Hoo Thomas [2009] 2 BCLC 82.). However, none of those cases were about Cayman companies. Two of them (the Wong Ming Bun and East Asia Satellite cases as mentioned above) involved BVI companies and a consideration of Section 184C of the BVI Business Companies Act 2004 which, as we shall see below, the courts have tended to view differently. The third, Waddington Ltd v Chan Chun Hoo Thomas [2009] 2 BCLC 82, does not appear to support a finding that leave of the Cayman Court was required (in fact, Lord Millett stated in that case that “[t]he question whether the leave of the court is required is a procedural question governed by the lex fori”).

Later decisions have taken a different view of the effect of Rule 12A. In Top Jet Enterprises Limited v Sino Jet Holding Limited [FSD 106 of 2017 (NSJ)], a shareholder of a Cayman company issued derivative proceedings in Missouri and sought the Cayman Court’s permission to continue them. Justice Segal declared that as Rule 12A was inherently procedural it did not apply to proceedings commenced overseas. The same finding was made by the New York Court of Appeals in Davis v Scottish Re Group Limited, No. 111 (N.Y. Nov. 20, 2017).

The position in respect of BVI companies appears to be different. The requirement for leave to bring proceedings in the name of a BVI company found in Section 184C of the BVI Business Companies Act 2004 was held to be a substantive one in Wong Ming Bun v Wang Ming Fan [2014] 1 HKLRD 1108 and Novatrust Limited v Kea Investments Limited [2014] EWHC 4061 (Ch).

Whether the company concerned is domiciled in Bermuda, Cayman, BVI or elsewhere, resolving the question of whether leave is required, and from whom, is not the end of the matter. Standing to bring a derivative claim is decided according to the law of the place of incorporation incorporation (Konamaneni v. Rolls Royce Industrial Power (India) Limited and others [2002] 1 WLR 1269). The same law will also determine the merits of the claim itself if it relates to the constitution or internal management of a company. All parties to derivative claims brought outside the place of incorporation must therefore consider the extent to which expert evidence of foreign law will be required.