A derivative action is an action commenced by one or more minority shareholders on behalf of a company in respect of loss or damage which that company itself has suffered. Such a claim amounts to an exception to the Foss v Harbottle (1843) 2 Hare 461 rule and can only be brought in certain circumstances. The rule in Foss v Harbottle states that subject to exceptions, where a wrong has been done to a company, the proper plaintiff is the company itself and an action by a shareholder claiming relief on behalf of the company is not available. The exceptions to the rule are:
- The directors or majority shareholders have caused the company to take Illegal or ultra vires actions;
- The company failed to satisfy a prerequisite special or super majority requirement;
- The directors or majority shareholders have committed fraud on the minority shareholders; and
- The directors or majority shareholders have infringed individual personal rights.
Judicial leave for Bermuda Derivative Actions
Effective from 9 July 2018, Rule 12A under Order 15 of the Rules of the Supreme Court 1985 (the “Bermuda Leave Provision”) requires a plaintiff to obtain leave from the Supreme Court of Bermuda when proceeding with a derivative claim.
As the Bermuda Leave Provision contemplates leave to continue to (as opposed to leave to commence) proceedings, applications should not be sought prior to the commencement of the derivative proceedings. The application for leave, supported by an affidavit verifying the facts of the claim and basis of entitlement, must be issued:
- within 21 days after the later of the date of service of the statement of claim or the date when the first appearance was filed; and
- not less than 10 days before the return day on defendants who entered an appearance.
Bermuda and the Cayman Islands
The Bermuda Leave Provision mirrors Rule 12A of Order 15 of the Cayman Islands Grand Court Rules, 1995 (the “Cayman Leave Provision”), which likewise requires leave from the Court prior to continuance of derivative proceedings. As is the position in Cayman, it is likely that the objective of the Bermuda Leave Provision is to ensure that at an early stage of the proceedings, the derivative claim is not being pursued by the shareholder outside of the well-recognized circumstances under common law in which a shareholder has standing to bring an action on the company’s behalf.
Since the wording of the Bermuda Leave Provision and the Cayman Leave Provision are identical, the Bermuda Supreme Court may well consider the approach taken by the Cayman Grand Court in considering whether to grant leave to continue derivative proceedings. This would include judicial considerations set out in Nedgroup Trust (Jersey) Limited v Renova Industries Limited and ors (Unreported) 2014, specifically whether the company has a viable cause of action; whether the case is brought bona fide; and whether the claim is in the interest of the Company.
The Bermuda Leave Provision raises an important question: how will a foreign transaction with a derivative action continue in its Court in relation to a Bermuda company? The Supreme Court of Bermuda is likely to turn to the Cayman Courts for guidance on this issue. In the context of Cayman Islands, the requirement for leave in a derivative proceeding was described in Paul Davis v Scottish Re Group Limited 2018 NY Slip Op 01867 to be procedural in nature (not substantive) because it did not affect whether an individual has the right to bring a claim on behalf of a company. It was decided in Top Jet Enterprises Limited v Sino Jet Holding Limited and Jet Midwest (Unreported) 2018 that the Cayman Courts have no jurisdiction to continue leave in derivative actions that are commenced in foreign courts because the Cayman Grand Court Rules contemplated actions in the Grand Court only. This is evident from the references to jurisdictional- specific terminology in the Cayman Leave Provision such as writ and notice of intention to defend, which may not be applicable in other countries. By the same token, the Bermuda Supreme Court may well follow the Cayman Islands and decide that it cannot grant leave for overseas derivative proceedings.