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Members Facing Compulsory Redemption of Shares Have 'Residual Rights' - International Law Office

International Law Office

Company & Commercial - British Virgin Islands

Members Facing Compulsory Redemption of Shares Have 'Residual Rights'

July 14 2008

A recent case has established the effect of a redemption notice served by a company on one of its members under the British Virgin Islands (BVI) Business Companies Act. The case is of general interest in the context of the compulsory redemption of shares in BVI companies.

The case concerned Section 176 of the act, which provides that the members of a company holding 90% of the voting shares may give a written instruction to the company directing it to redeem the shares held by the remaining members. Upon receipt of that instruction the company must redeem the shares of the remaining members, giving notice to each member whose shares are to be redeemed and stating a redemption price. Section 179(1)(d) provides that a member is entitled to payment of the fair value for its shares if it disagrees with the redemption price. The act sets out a mechanism for an appraisal if the member and the company fail to agree on a fair value.

In this case there was a prolonged argument between a member and the company (which acted as the manager and investment adviser to an investment fund) about the value of the member's shares and the applicable mechanism under the act - the company eventually argued that the member had lost its right to the appraisal process.

In granting the member's claim for summary judgment, the court held that redemption of the shares was not complete until the shares had been acquired by agreement or following an appraisal of their fair value under the act. The court went on to say that the issuance of a notice to a member commences the process towards redemption rather than completing it. Therefore a member retains 'residual rights' until the redemption process set out in the act is complete. These include the right to apply to court to ensure that the company complies with its obligations under the act.

The company's argument that the member had lost its ability to benefit from the appraisal system and would therefore be limited to the value that the company put forward was rejected. The court stated that where time limits had expired, for example due to failed negotiations, the court would use its inherent jurisdiction to ensure that the matter is dealt with fairly.

The case shows that the courts are likely to take a purposive approach to the new shareholder protections brought in by the act.

For further information on this topic please contact Phillip Kite at Harneys by telephone (+1 284 494 2233) or by fax (+1 284 494 3547) or by email (phillip.kite@harneys.com).

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