A recent decision by the Supreme Court of New York Appellate Division has affirmed a first-instance decision of the Supreme Court(1) that the law of the Cayman Islands applied(2) on the question of the law applicable to derivative claims brought by a shareholder of a Cayman Islands company in the New York jurisdiction. In Davis v Scottish Re Group Ltd this conclusion proved fatal to the plaintiff shareholder's derivative claims because he had not sought the leave of the Cayman Islands courts, as required by the applicable rules in the Cayman Islands. The appellate division upheld the lower court's decision that the relevant rule was a substantive rule and not merely a procedural one because the underlying remedy would be extinguished if the procedural requirements were not observed.
The relevant rule requires the plaintiff to "seek the leave of the Cayman Islands Court to continue that claim where the defendant has given notice of an intention to defend". This means that any shareholder of a Cayman Islands company that wishes to bring a derivative action is obliged to commence the action in the Cayman Islands, even if none of the parties or the assets are located in the Cayman Islands.
The plaintiff was a shareholder of a company incorporated in the Cayman Islands. He sought to litigate a number of claims in the New York Supreme Court in respect of, among other things, certain transactions that the company had entered into. Some of the claims were derivative in nature (ie, claims that the plaintiff sought to bring on behalf of the company in respect of loss sustained by the company) and one was double derivative in nature (ie, a claim that the plaintiff sought to bring on behalf of a subsidiary of the company in respect of a loss sustained by the subsidiary).
The defendants applied to strike out the derivative claims on the basis that the laws of the Cayman Islands applied to those claims and as a result (and among other consequences that were unfavourable, if not fatal, to the plaintiff's claims), that the plaintiff ought to have sought the leave of the Cayman Islands courts, as required by the applicable rules in the Cayman Islands.
The defendants argued that the law of the Cayman Islands applied to the derivative claims under the internal affairs doctrine, whereby claims concerning the relationship between a corporation, its directors and shareholders are governed by the substantive law of the place of incorporation of that entity.
The plaintiff contended that the New York choice of law rules mandate that the court conduct an 'interest analysis' to determine the applicable body of law, and that the internal affairs doctrine was only one aspect of that analysis.
While the court at the first instance agreed that an interest analysis should be applied, it found that the Cayman Islands had the greater interest in the outcome of the dispute on the basis that the plaintiff's claims were of the kind to which the courts had historically applied the internal affairs doctrine. Accordingly, the substantive law of the Cayman Islands governed the claim.
This reasoning indicates that the internal affairs doctrine is one of the factors to be considered in a broader interest analysis. However, the appellate division engaged only in an application of the internal affairs doctrine, without reference to the interest analysis. It thus appears settled that a derivative shareholder claim brought in New York will be governed by the law of the place of incorporation, regardless of whatever other factors weigh in favour of the application of the laws of another jurisdiction.
The applicable Grand Court Rules provide that a plaintiff shareholder that commences a derivative claim (by writ) must seek the leave of the Cayman Islands courts to continue that claim where the defendant has given notice of intention to defend.
The plaintiff, who had not sought leave, argued that:
- the relevant rule was procedural, not substantive, and so did not apply in New York; and
- even if the relevant rule was substantive, the obligation to seek leave had not been triggered because the claim was not commenced by a writ and the defendant had not served a notice of intention to defend, which is a particular form specific to the Cayman Islands.
The court at first instance rejected both arguments. Justice Sherwood noted that he was not bound to adopt the substantive or procedural categorisation used by the Cayman Islands. He held that, because the underlying remedy would be extinguished if the plaintiff failed to file an application to continue the derivative action, the relevant rule was substantive in nature and must be applied. The court held that the plaintiff could not fault the defendant for the plaintiff's own failure to commence his claim by a Cayman Islands writ or the defendant's not completing the notice of intention to defend, which was a form that was not available in New York. Failure to comply with the relevant rule meant that the plaintiff lacked standing to bring the derivative actions.
?The court also held that the plaintiff lacked standing to bring a derivative claim on the basis that none of the recognised exceptions to the English common law doctrine established in Foss v Harbottle(3) ? which forms part of the laws of the Cayman Islands ? applied in this case.
The appellate division held that the court at first instance had correctly dismissed the derivative actions on the basis of the failure to comply with the relevant rule, and so considered it unnecessary to deal with whether the plaintiff had standing under one of the exceptions to Foss v Harbottle.
For further information on this topic please contact Marc Kish or Lachlan Greig at Harney Westwood & Riegels by telephone (+1 345 949 8599) or email (firstname.lastname@example.org or email@example.com). The Harneys website can be accessed at www.harneys.com.
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