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UNDER CAYMAN ISLANDS LAW, THE SHAREHOLDER’S DERIVATIVE CAUSES OF ACTION WERE PROPERLY DISMISSED (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Acosta, in a case sent back by the Court of Appeals, affirmed Supreme Court’s dismissal of the shareholder’s derivative causes of action. The derivative action was initially dismissed for failure to comply with a Cayman Islands rule. The Court of Appeals held that the rule was procedural and did not apply in New York courts. The First Department determined the derivative causes of action must be dismissed because plaintiff does not have standing pursuant to Foss v Harbottle, 67 Eng Rep 189 (1843), as interpreted under Cayman Islands law:

Under Cayman Islands law interpreting Foss, “derivative claims are owned and controlled by the company, not its shareholders” … . Thus, “a shareholder is not permitted to bring a derivative action on behalf of that company” … .

Cayman Islands law recognizes only four narrow exceptions to the Foss rule: “(1) if the conduct infringed on the shareholder’s personal rights; (2) if the conduct would require a special majority to ratify; (3) if the conduct qualifies as a fraud on the minority; or (4) if the conduct consists of ultra vires acts … . Here, the only exception at issue is the “fraud on the minority” exception. In order to invoke that exception, plaintiff must plead and prove that the alleged wrongdoers controlled a majority of the stock with voting rights and that those wrongdoers committed fraud … . Control may be sufficiently pleaded by showing that the wrongdoers own a majority of the corporation’s voting shares or have acquired de facto control of those voting shares … .

We agree with the motion court that the complaint is devoid of any allegations establishing either form of control. Davis v Scottish Re Group Ltd., 2018 NY Slip Op 01889, First Dept 3-20-18

CORPORATION LAW (SHAREHOLDER’S DERIVATIVE ACTION, UNDER CAYMAN ISLANDS LAW, THE SHAREHOLDER’S DERIVATIVE CAUSES OF ACTION WERE PROPERLY DISMISSED (FIRST DEPT))/SHAREHOLDER’S DERIVATIVE ACTION (UNDER CAYMAN ISLANDS LAW, THE SHAREHOLDER’S DERIVATIVE CAUSES OF ACTION WERE PROPERLY DISMISSED (FIRST DEPT))/CAYMAN ISLANDS (CORPORATION LAW,  UNDER CAYMAN ISLANDS LAW, THE SHAREHOLDER’S DERIVATIVE CAUSES OF ACTION WERE PROPERLY DISMISSED (FIRST DEPT))

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