1. INTRODUCTION
The BVI has for many years been the leading offshore domicile for business companies. However, until the BVI Business Companies Act 2004 (Act) came into force, BVI company law was relatively weak in the manner in which minority shareholders were protected. It was perhaps felt that the rights of shareholders could be included in a BVI company's memorandum of association (memorandum) and articles of association (articles), rather than necessarily be articulated through statutory provisions. The overall impression was that while BVI company law facilitated flexible corporate governance, it largely ignored shareholder rights.
The Act was important for, among other things, injecting greater robustness into the area of statutory shareholder rights. The Act not only clarified and codified some existing common law remedies (including the derivative action), but also introduced a significant new remedy for minority shareholders (the unfair prejudice remedy). As a result, protection of minority shareholders is now a strong point, rather than perhaps a shortcoming, of BVI company law. Indeed, BVI law has moved in the direction of many leading onshore jurisdictions (including the US and UK) which have recently enhanced the accountability to shareholders for the actions of a company's directors and management. This is one of the reasons why the Hong Kong Stock Exchange announced in 2009 that BVI companies could list on the Exchange.
This Guide discusses the key statutory rights available under the Act designed to protect minority shareholders, the remedy of winding up a company on just and equitable grounds (which remains available under the Insolvency Act 2003) and some case law which provides guidance on the scope and operation of these remedies. This Guide focuses on the unfair prejudice remedy, the derivative action and the remedy of winding up the company on just and equitable grounds, but other remedies available under the Act (and principally under Part XA of the Act) are noted.
2. UNFAIR PREJUDICE
Under the Act, a shareholder (or "member")1 of a company may apply to the court if it considers that the affairs of the company have been, are being or are likely to be, conducted in a manner which is, or any act or acts of the company have been, or are likely to be, oppressive, unfairly discriminatory or unfairly prejudicial to the shareholder in its capacity as a shareholder (§184I(1)).
There is some BVI authority at first instance for the proposition that a shareholder for the purposes of §184I includes the beneficial owner of shares in a BVI company, when the registered shareholder is acting as nominee for the beneficial owner2. It must be noted, however, that this is contrary to the definition of member under the Act which requires that the relevant person or entity needs to be recorded on the company's register of shareholders in order to be a member for the purposes of the Act.
If the court agrees with the shareholder, and considers it to be just and equitable that an order be made in relation to the particular conduct, it may make any order that it thinks fit, including an order requiring the company or any other person to acquire the shareholder's shares or to pay compensation to the shareholder; regulating the future conduct of the company's affairs; amending the memorandum or articles of the company; appointing a receiver or liquidator of the company; directing the rectification of the records of the company; and/or setting aside any decision made or action taken by the company or its directors in breach of the Act or the company's memorandum or articles (see generally §184I(2)). The court will take a very wide view of the discretion to make orders under §184I(2)3.
No order may be made against the company, or any other person, under section 184I unless the company or that person is a party to the proceedings in which the application is made (§184I(3)). There is no requirement for a court to come to the view that circumstances exist which would enable a winding up order on just and equitable grounds before using the unfair prejudice remedy.
As noted in section 3 of this Guide, while the unfair prejudice remedy is overall a positive addition to the arsenal available to minority shareholders of BVI companies, some consider it a disadvantage of this remedy that it may limit the ability of shareholders to apply to have a company wound up on just and equitable grounds; under the BVI's Insolvency Act, if a BVI court considers that a shareholder has an alternative remedy available, it has discretion to strike out the winding up application. On this basis, it could be said that the unfair prejudice remedy not only enhances the rights of shareholders, but also provides some degree of protection for the company and its creditors.
3. DERIVATIVE ACTIONS
A derivative action refers to an action initiated by a shareholder to enforce a wrong done to the company, the action being taken in the company's name rather than the shareholder's name. Accordingly, the shareholder obtains no direct benefit if judgment is given in the company's favour.
A derivative action is typically used where no action would otherwise be taken by the company because the wrongdoers are also the company's decision-makers. A minority shareholder may need to resort to a derivative action if, for example, directors of the company have breached their fiduciary duties to the company, if the directors are also the majority shareholders and can control the vote at a general meeting, or because the directors may be able to prevent (or at least delay) a general meeting being convened to vote on whether the company should sue the directors.
At common law, a shareholder could only pursue an action on behalf of the company if the circumstances giving rise to the claim fell within one of the exceptions to "the rule in Foss v Harbottle"4. This common law rule provides that where a wrong has been done to a company, only the company may sue for the damage caused to it.
The exceptions to the rule, which provide an avenue for a minority shareholder to take action on behalf of the company, are where the conduct complained of:
- is ultra vires (i.e. beyond the capacity of) the company or illegal;
- constitutes a "fraud on the minority", with the wrongdoers themselves being in control of the company, and thus refraining from causing the company to bring an action;
- is an irregularity in the passing of a resolution which requires a special or extraordinary majority of the shareholders; or
- infringes the personal rights of an individual shareholder (e.g. the right to vote, pre-emption rights etc.).
With the enactment of the Act, the right of shareholders of a BVI company to bring a derivative action was placed on a statutory footing. A shareholder seeking to bring an action on behalf of a company must satisfy the requirements set out in the Act which makes it clear (in §184C(6)) that a shareholder is not entitled to bring or intervene in any proceedings in the name of or on behalf of a company unless such action is taken pursuant to the Act's derivative action provisions.
Under the Act, upon the application of a shareholder of the company, the court may grant leave to the shareholder to bring proceedings in the name and on behalf of the company, or intervene in proceedings (in which the company is a party) already underway with the purpose of continuing, defending or discontinuing the proceedings on the company's behalf: §184C(1). The court may grant such interim relief as it considers appropriate pending the determination of an application under §184C(1): §184C(5).
In determining whether to grant leave for a derivative action, the Act states that the court must take into account five matters (§184C(2):
- whether the shareholder is acting in good faith;
- whether the derivative action is in the interests of the company taking into account the views of the company's directors on commercial matters;
- whether the proceedings are likely to succeed;
- the costs of the proceedings in relation to the relief likely to be obtained; and
- whether an alternative remedy to the derivative action is available.
Furthermore, leave to bring or intervene in proceedings may only be granted if the court is satisfied that the company does not intend to bring, diligently continue or defend, or discontinue the proceedings (as the case may be), or it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole: §184C(3).
Unless the court orders otherwise, not less than 28 days' notice of an application for leave must be served on the company, with the company being entitled to appear and be heard at the hearing of the application: §184C(4). Accordingly, an ex parte application will not be available.
Importantly, where a court grants leave to a shareholder to bring or intervene in proceedings on behalf of the company, upon application by the shareholder, the court shall order that the whole of the reasonable costs of bringing or intervening in the proceedings must be met by the company: §184D(1). The court will not do so, however, if it considers that it would be unjust or inequitable for the company to bear those costs. In that case, the court can order that the company pay a proportion of the costs that it considers to be reasonable, or order that the company not bear any costs: §184D(2). This provision provides a degree of assurance for shareholders initiating a derivative action that it is highly likely that their reasonable costs will be met by the company (with the issue of costs otherwise being a potential deterrent to a shareholder wishing to pursue an action on behalf of the company).
At any time after granting a shareholder leave to take action on behalf of the company, or to intervene in existing proceedings to which the company is a party, the court can make any orders that it considers appropriate in relation to the proceedings, including:
- an order authorising the shareholder (or any other person) to control the proceedings;
- an order giving directions for how the proceedings are to be conducted;
- an order that the company or any of its directors provide information or assistance in relation to the proceedings; and
- an order that an amount ordered to be paid by a defendant in the proceedings be paid in whole or in part to former or present shareholders of the company, rather than to the company: §184E.
Thus, while the conduct of the proceedings is generally up to the parties, the court has overall control of the proceedings to make sure that the proceedings are conducted in the interests of the particular company.
The Act also states that no derivative proceedings may be settled, compromised or discontinued without the approval of the court: §184F.
To read this article in full please click here.
Footnotes
1 This Guide uses the term "shareholder", whereas the Act commonly uses the term "member", defined in section 2 of the Act to include (a) a shareholder, (b) a guarantee member, or (c) a member of an unlimited company who is not a shareholder.
2 Headstart Class F Holdings Limited and Citco Global Custody NV v Y2K Finance Inc [2008] Claim No BVIHCV2007/0278. The decision was not disturbed in Citco Global Custody NV v Y2K Finance Inc [2008] HCVAP 2008/022 (Court of Appeal).
3 Headstart Class F Holdings Limited, supra.
4 The name derived from the classic case of Foss v Harbottle (1843) 2 Hare 461.