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14 January 2014
On August 8 2013 the Court of Appeal issued its ruling in Microsoft Corporation v Vadem Ltd.(1) The judgment initially appears quite definitive – that "BVI law does not permit double derivative proceedings". However, the manner in which the case was presented and recent developments in English case law suggest that, while the BVI Business Companies Act 2004 does not provide for double derivative actions, at common law the jurisdiction may well live on.
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, among other things, Microsoft had not obtained the leave of the BVI court under Section 184C to bring those claims derivatively in the name of Vadem BVI.
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 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 the court 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 cannot be brought "on behalf of" a company unless they are 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.
The court 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 the court'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. Microsoft appealed.
The Court of Appeal agreed that the question as to whether Microsoft could bring claims on behalf of Vadem California was a matter for the lex fori (law of the forum) – California – to determine and accordingly the first-instance court should not have stated that Microsoft was not authorised to prosecute claims vested in Vadem California.
However, the Court of Appeal was strident in its judgment that the court could not give leave to bring claims involving causes of action vested in Vadem California, "since BVI law does not permit double derivative proceedings".
Between the BVI decisions the Chancery Division of the High Court of England and Wales handed down judgment in Universal Project Management Services Ltd v Fort Gilkicker Ltd.(2) The decision confirmed that the English statutory regime has not abolished the ability to bring a multiple derivative action at common law.
The judgment analysed the provenance of the multiple derivative claim and the statutory interpretation of Section 260 of the English Companies Act 2006. Focusing on the requirement to remedy a wrong, the court 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 that in Waddington Ltd v Chan Chun Hoo Thomas:(3)
"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 its action at common law and the BVI courts did not have the benefit of the analysis put before the Chancery Division or the subsequent judgment in Universal.
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 British Virgin Islands will, in future, follow the English position and confirm that multiple derivative actions are available to shareholders and survive at common law.
For further information on this topic please contact Andrew Thorp at Harney Westwood & Riegels by telephone (+1 284 494 2233), fax (+1 284 494 3547) or email (email@example.com). The Harney Westwood & Riegels website can be accessed at www.harneys.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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