Microsoft v Vadem: The Scope of Derivative Permission in the BVI
18 Oct 2013
The Court of Appeal has, for the first time, considered the proper scope of the derivative permission that may be granted under section 184C of the BVI Business Companies Act, 2004 ("BCA"). In doing so, it (i) overturned the restrictive approach taken at first instance, and (ii) usefully clarified the law in relation to what decisions of a Judge are appealable.
The BVI has an entirely statutory scheme for derivative claims. In contrast to Hong Kong, where the common law is expressly preserved, or England, where the common law has recently 1 been found to co-exist with the statutory scheme, section 184C (6) BCA states:
"Except as provided in this section, a member is not entitled to bring or intervene in any proceedings in the name of or on behalf of a company."
Section 184C (1) BCA states that:
"Subject to subsection (3) [gateways before the discretion is triggered], the Court may, on the application of a member of a company, grant leave to that member to:
(a) Bring proceedings in the name of and on behalf of that company; or…"
Microsoft Corporation ("Microsoft") owns 11.8% of the shares in a BVI registered company, Vadem Limited ("Vadem BVI"), which in turn has a wholly owned Californian subsidiary, Vadem Inc. ("Vadem California").
Microsoft initially brought a derivative claim in Delaware, on behalf of Vadem BVI, asserting wrongdoing (by the CEO of both Vadem BVI and Vadem California, amongst others) in relation to the transfer of intellectual property from Vadem California to a New Co at an undervalue. That claim was dismissed, without prejudice, in order for Microsoft first to obtain the permission of the BVI Court.
Vadem BVI argued that the proprietary claims that were sought to be brought in Delaware were causes of action vested in Vadem California and so amounted to a double derivative action, which was not permitted under BVI law, and which, accordingly, could not be authorised to be brought in Delaware.
Microsoft argued that (i) it was not a requirement of BVI law that the cause of action be vested in the company that the applicant is a member of2, and (ii) whether the causes of action were available to be brought by Vadem BVI was a matter for the Court of Chancery in Delaware.
Microsoft's primary position was that, under the law of Delaware or California, its claims were single derivative claims. In the circumstances of this case the alter ego doctrine in those jurisdictions would operate so as to make causes of action formally vested in Vadem California available to Vadem BVI to pursue in Delaware. Even if Vadem BVI would not be able to bring such a claim in the BVI, that did not mean that the BVI Court could not authorise the claim to be brought elsewhere.
The Learned Judge rightly considered that it was a matter of construction of section 184C (1)(a) BCA. He concluded that:
(a) the shareholder in (only) a parent company could not be authorised to bring a claim in the name of and on behalf of a subsidiary, because the applicant is not a member of "that company", as required by section 184C(1)(a); and
(b) the proceedings that the parent company could be authorised to bring were limited to causes of action vested in the parent company.
Accordingly, he concluded that:
"Microsoft has no authority and cannot be authorized to prosecute, here or anywhere else, causes of caution vested in Vadem California."
Court of Appeal
Scope of Derivative Permission
The Court of Appeal agreed with the Learned Judge that a shareholder can only be authorised to bring proceedings in the name of and on behalf of the company in which it is a member. The BVI Court could not authorise Microsoft to bring - in the BVI or in Delaware - a claim in the name of and on behalf of Vadem California.
However, the Court of Appeal agreed with Microsoft that the Learned Judge's construction of section 184C(1)(a) was otherwise wrong: the Court was not entitled to limit the scope of the permission to causes of action vested in Vadem BVI, or to prohibit it pursuing causes of action vested in Vadem California.
The proper permission is the wording of the statute without embellishment: "the court can and should simply give leave to Microsoft to bring proceedings in the name of and on behalf of Vadem BVI."
The question of what causes of action fall within the scope of that permission is a matter to be determined by the lex fori.
Court of Appeal's Jurisdiction
Although the judgment at first instance concluded with permission being given to Microsoft to pursue only causes of action vested in Vadem BVI and not those vested in Vadem California, this limitation was not included in the terms of the order that the Learned Judge made.
It is well known that appeals do not lie from reasons or analysis in a judgment: Lake v Lake 3. It is often said that appeals lie from orders and not judgments4, and it is precisely that which was argued as a preliminary point on the appeal by Vadem BVI. The contention was that Microsoft was bound by the restriction on the permission granted, but could not appeal that restriction. In rejecting that argument, the Court of Appeal usefully explained what is properly appealable:
"It is a correct statement of the law that it is the order arrived at by the judge and not the analysis and reasoning which informed it that is appealable. Where however a written judgment delivered by a judge (with analysis and reasoning included) contains conclusions bearing on the relief sought by a party to the proceedings, which conclusions are not reflected in the order settled by the court, the party seeking the relief must have recourse to the appellate jurisdiction of the court if the conclusions reached by the judge in the written judgment are wholly or partly inconsistence with the relief which the party is seeking."
The Court of Appeal has confirmed that there can be no restriction on proceedings brought derivatively other than that they be in the name of and on behalf of the company in which the applicant is a member. What causes of action fall within that restriction is a matter for the lex fori and so a shareholder may be able to pursue in other jurisdictions claims that would not be open to it in the BVI. Given the stark difference in approach to separate corporate identity taken in the BVI (in particular, post-Petrodel 5) compared to jurisdictions such as Delaware, careful consideration of potential fora is required by the shareholder of a BVI parent when its subsidiary has suffered a loss.
1 Universal Project Management Services Ltd v Fort Gilkicker Ltd & ors  All Er (D) 313.
2 It is a requirement of section 260 of the UK Companies Act 2006.
3  2 All ER 538
4 Notwithstanding the express terms of section 30(1)(b) of the Eastern Caribbean Supreme Court Act that "an appeal shall lie to the Court of Appeal, and the Court of Appeal shall have jurisdiction to hear and determine the appeal, from any judgment or order of the High Court…".
5 Prest v Petrodel Corp  UKSC 34
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