On November 20, 2017, the New York State Court of Appeals reversed the dismissal of derivative claims brought by a shareholder of Scottish Re Group, Limited (“Scottish Re”)—a Cayman Islands company—against the company, its directors, and various other entities. Davis v. Scottish Re Grp. Ltd., No. 111 (N.Y. Nov. 20, 2017). The New York State Appellate Division had previously affirmed the dismissal of those derivative claims for lack of standing because plaintiff had not sought leave of the Cayman Islands Grand Court to commence a derivative action, as required under Rule 12A of the Rules of the Grand Court of the Cayman Islands. Reversing and remanding, the Court of Appeals held that “Rule 12A is procedural, and therefore does not apply where, as here, a plaintiff seeks to litigate his derivative claims in New York.”
Plaintiff, a Scottish Re shareholder, asserted both direct and derivative claims for breach of fiduciary duty, as well as certain other claims, against the company’s directors and various other defendants. Rule 12A of the Cayman Islands Grand Court Rules provides that it applies to derivative actions “begun by writ by one or more shareholders of a company” when the defendant has “given notice of intention to defend,” and requires the plaintiff to “apply to the [Cayman Islands Grand] Court for leave to continue the action.” Plaintiff filed suit in New York State court and did not make any such application to the Cayman Islands Grand Court. The trial court dismissed the derivative claims for two reasons: (i) plaintiff failed to comply with Rule 12A; and (ii) plaintiff also did not have standing to bring his derivative claims under Cayman Islands common law. The Appellate Division affirmed based on plaintiff’s Rule 12A noncompliance, without reaching the alternative ground for dismissal.
The Court of Appeals, however, reversed the dismissal of the derivative claims. In so deciding, the Court explained that the dispositive issue was whether Rule 12A is “a substantive rule and therefore applies under our choice of law principles” or a procedural rule, which therefore has no application to litigation in New York courts.
Evaluating that question, the Court noted that Rule 12A, by its terms, applies to derivative actions “commenced by writ” and where defendant gives “notice of intention to defend,” which reflect two procedural elements that are irrelevant in New York courts. The Court also highlighted that the rule appears to apply to derivative actions brought in the Cayman Islands on behalf of “any corporation, no matter where incorporated,” as opposed to those specifically brought on behalf of Cayman Islands companies. Moreover, the rule “has no provision that would suggest that it applies . . . in derivative actions brought on behalf of Cayman Island companies commenced outside the Cayman Islands.” The Court contrasted this with provisions in the British Virgin Islands and Canada that specifically apply to derivative actions on behalf of BVI-incorporated companies and Canadian corporations, respectively, and require plaintiffs to obtain leave of court in those jurisdictions to maintain such actions. The Court therefore found that Rule 12A is procedural and inapplicable to litigation in New York courts. Accordingly, the Court reversed and remanded the matter for consideration of whether plaintiff has standing under Cayman substantive law.
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