Derivative claims are an essential tool in corporate governance, offering minority shareholders a mechanism to enforce a company's rights when those in control fail to do so. In the British Virgin Islands (“the BVI”), the statutory regime governing derivative actions is well-developed, aligning with principles of common law, while providing a structured framework for shareholders to seek redress. This article explores the nature of derivative claims in the BVI, their statutory basis, procedural requirements, and practical considerations.
What Is a Derivative Claim?
A derivative claim is an action brought by a shareholder on behalf of a company to enforce a cause of action that properly belongs to the company. Typically, these claims arise in situations where the company has suffered a wrong (often at the hands of its own directors or controlling shareholders) and the company itself, due to conflicts of interest or control issues, is unwilling or unable to pursue the claim.
Statutory Framework in the BVI
Derivative actions in the BVI are governed by s.184C of the BVI Business Companies Act, 2004 (as amended) (the “Act”). This statutory provision codifies and modifies the common law position, setting out the conditions under which a shareholder may bring a derivative action.
Under s.184C, a shareholder may apply to the BVI High Court for leave to bring proceedings in the name of, or on behalf of, a company if:
- The company has a cause of action;
- The company has not itself brought proceedings; and
- The applicant is acting in good faith and it appears to be in the interests of the company that the claim be brought.
Who Can Bring a Derivative Claim?
Only a member (shareholder) of the company may bring a derivative claim under s.184C. It is first necessary for an intended claimant to apply to the BVI High Court for leave to bring proceedings. The Court has a broad discretion and will consider whether the applicant is acting in good faith. Importantly, the shareholder must demonstrate that allowing the action is in the best interests of the company, not merely in their personal or shareholder interests.
The Court's Discretion
The BVI High Court adopts a cautious and pragmatic approach when exercising discretion under section 184C. In determining whether to grant leave to bring proceedings, the Court will look at several additional factors, including:
- Whether the wrong alleged is serious and credible;
- Whether the applicant has a viable alternative remedy;
- Whether the company's board has considered and rejected taking action (and the reasons for that decision);
- The potential cost to the company and the benefit of the proposed action; and
- Whether the action is likely to succeed.
A derivative claim will generally not be permitted if it is being brought for an ulterior motive or if the applicant is seeking to advance a personal grievance under the guise of acting on the company's behalf.
Procedural Requirements
As set out above to commence a derivative claim, the shareholder must first apply to the BVI High Court for leave. The application must be supported by affidavit evidence outlining:
- The factual basis of the claim;
- Evidence of the company's inaction;
- Reasons why the action is in the company's best interests; and
- The applicant's good faith.
The defendant (often the company or its directors) may oppose the application, and the Court may conduct a preliminary hearing to assess whether leave should be granted.
Costs and Indemnity
One significant concern for claimants is exposure to legal costs. While the company is the nominal plaintiff in a derivative action, the shareholder who brings the claim typically funds the litigation. The BVI High Court has discretion under s.184D to order that the company indemnify the shareholder for costs reasonably incurred, particularly if the claim succeeds or is brought in the company's genuine interests.
Key Case Law and Judicial Insights:
Gray v Leddra (BVIHC (COM) 79 of 2011))
In this seminal case (in which the author acted), Bannister J emphasized the necessity of obtaining court permission before initiating a derivative action. The judge stated:
"A derivative action requires permission under section 184C. In considering whether to grant permission, the Court here is mandated to take into account a number of important considerations. The Court may not give permission unless it is satisfied that the company itself does not intend to make the claim and that it is in the interests of the company that conduct of the proceedings should not be left to the company or to a majority of its board or of its members. These conditions are of so stringent a nature that in my judgment it is an abuse of the process to attempt to mount a derivative claim without the consent of the Court under section 184C."
This underscores the substantive nature of the leave requirement, affirming that initiating a derivative claim without court approval constitutes an abuse of process.
Microsoft Corporation v Vadem Ltd (HC (Com) 2012/0048)
This case addressed the issue of double derivative actions, where a shareholder of a holding company seeks to bring a derivative claim on behalf of a subsidiary. The Court held that s.184C does not permit such claims, reinforcing the principle that derivative actions are confined to the company in which the shareholder holds shares.
Harvest Network Ltd v CHC Investment Holdings Ltd (BVI HCM 2016/0157)
In this matter, the BVI High Court granted leave for a derivative action under Section 184C, holding that it fell upon the claimant to show that it was acting in good faith in bringing the claim and where such good faith was disputed, the Court would look to the predominant purpose of the intended claim. A falling out between shareholders was insufficient to evidence bad faith and neither was the separate commencement of derivative proceedings (which had not been served or pursued further) in a foreign jurisdiction grounds for refusing leave.
Practical Considerations
Derivative claims can be a powerful remedy, but they are not without risk. Shareholders contemplating such actions should consider:
- The strength of the underlying claim;
- The likelihood of obtaining leave;
- The company's financial position and whether it can benefit from the action; and
- The potential personal cost and risk of adverse costs orders.
Legal advice at an early stage is critical, both to assess the merits and to prepare a robust application for leave.
Conclusion
The derivative action regime in the BVI offers shareholders an effective means to protect a company from wrongdoing where those in control refuse to act. However, given the procedural hurdles and judicial scrutiny involved, such claims require careful preparation and strategic foresight. For clients considering a derivative claim, early legal advice and thorough due diligence are essential.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
