Multiple Derivative Actions in the BVI: Tried but not tested?

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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.

______________________
1 BVIHCVAP2013/0007
2 2013] 3 WLR 164.
3 (2) FACV No.15 of 2007 (Civil)

Topics:  BVI Business Companies, Derivative Suit, Double Derivative Claims, Microsoft, Microsoft v Vadem Ltd

Published In: Business Organization Updates, Civil Procedure Updates, International Trade Updates, Science, Computers & Technology Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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