Vol 12 (2015) - Issue 1

Article preview

Onshore Derivative Litigation and Offshore Companies: ARC Capital; a Temporary Blip?

Recent cases in the United States, Hong Kong, BVI and England have considered the law applicable to derivative claims brought in onshore courts by offshore plaintiff companies incorporated in common law jurisdictions. An important issue has been the effect on onshore litigation of domestic offshore requirements to obtain court approval to issue or continue derivative litigation. The cases have settled on a common and correct approach towards BVI incorporated companies. The same cannot be said for Cayman entities.
This article considers the permission requirements under BVI and Cayman law in respect of derivative actions, and the application of those requirements to onshore disputes. It then sets out principles that would help practitioners identify whether permission of the 'home' court is needed to allow onshore litigation to proceed in cases involving companies from other offshore jurisdictions. It also suggests that recent New York case law which practically bars Cayman shareholders ever bringing derivative actions is based upon a fundamental misunderstanding of Cayman law.

Why do offshore shareholders bring derivative claims in onshore courts?
There are many good reasons why a shareholder in an offshore company would want to bring derivative proceedings in onshore jurisdictions. The target of the substantive claim of the company may be resident onshore or have assets amenable to enforcement onshore. This is particularly true for offshore companies, as their domestic corporate statutes require that the business of the companies be conducted, or largely conducted, somewhere other than in the place of incorporation. This has been recognised in leading cases in both the England and the United States. In the English decision of Konamaneni v Rolls Royce Industrial Power (India) Collins J. stated 'it may be wholly unjust to require recourse to an offshore haven to pursue fraudulent directors in a case which has no connection with the jurisdiction other than that is the place of incorporation'. Similar sentiments were expressed in the Californian decision of Vaughn v LJ International Inc.
A derivative action is merely a means to allow the underlying claim of the company to be litigated when ordinary corporate processes would produce unjust results. Often the subject matter of the underlying claim is most suitably determined in the onshore jurisdiction, or indeed in may have to be litigated in that jurisdiction, for example when the disputes involve real estate, intellectual property or there are operative jurisdiction selection clauses. Derivative claims are commonly brought in parallel with other personal claims. It is often difficult for a court at interim stages to delineate between claims that are personal and derivative, particularly given the common interaction of the principle of reflective loss in such disputes. Litigation funding may be more readily available for claims onshore. Of course, litigants will perceive tactical advantages in suing in a ‘home’ court, just as defendants commonly see merits in shifting claims to other jurisdictions.

Conflict of laws issues – General points
There is considerable congruence between the approaches of the English law based common law jurisdictions and the majority of jurisdictions in the United States as to the application of conflict of laws principles to derivative proceedings.
In general terms, the core common propositions are:

– The internal management of a corporation is governed by the law of the place of incorporation.
– The entitlement of a shareholder to bring a derivative action is an issue governed by the law of incorporation rather that the procedural law of the lex fori.