138 A.D.3d 230
N.Y. App. Div.2016Background
- Plaintiff (Mexican resident) held ~48% of noncumulative perpetual preferred shares (PPS) and formerly ~20% of common shares of Scottish Re, a Cayman Islands company; he challenges a 2011 merger and dividend practices.
- Defendants include Scottish Re, its U.S. subsidiary (SRUS), certain directors, and majority investors (MassMutual/Benton and Cerberus) who acquired control and proposed the cash-out merger.
- Plaintiff alleges defendants: pursued an oppressive dividend policy favoring the Investors, coerced minority ordinary shareholders into approving an undervalued merger, and used misinformation/undisclosed conflicts to effect the buyout.
- Supreme Court dismissed causes 4, 6, 7, 9, 10 for lack of standing and dismissed Benton defendants for lack of jurisdiction; plaintiff appealed.
- The Appellate Division applied Cayman (internal affairs) law on whether claims are derivative or direct and on standing prerequisites for derivative suits under the Grand Court Rules; it allowed limited leave to replead claims 4 and 6 against directors only, and otherwise affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the fourth cause (dividend policy) is direct or derivative | Andrews: dividend policy was discriminatory and caused individual harm to minority PPS holders (direct) | Defs: harms are reflective of corporate loss — derivative claim | Court: as pleaded it was derivative but granted leave to replead vs directors to allege discriminatory (Brinckerhoff) direct harm |
| Whether the sixth cause (merger coercion/undervaluation) is direct or derivative | Andrews: directors induced plaintiff to part with common shares at undervalue — direct for him; alternatively seeks corporate relief | Defs: alleged harm is to the company and thus derivative; merger rescission is derivative relief | Court: claim conflates direct and derivative harms; allowed repleading to separate a possible direct claim (undue inducement) from derivative allegations and to plead special circumstances under Cayman law |
| Whether derivative claims (7,9,10) may proceed without complying with Cayman Grand Court Rules (order 15, rule 12A) | Andrews: proceeded in NY court without Grand Court leave | Defs: Grand Court Rule is substantive; plaintiff failed to apply for leave so derivative claims are barred | Court: applied Cayman law; dismissed derivative causes for failure to seek leave under Grand Court Rule; plaintiff barred from those derivative suits |
| Whether plaintiff can enforce merger agreement forum-selection clause against Benton (nonsignatory) | Andrews: seeks to enforce clause to obtain jurisdiction over Benton | Benton: plaintiff is a nonsignatory and incidental beneficiary; clause precludes third-party enforcement | Court: plaintiff may not enforce the forum-selection clause against Benton; dismissal for lack of jurisdiction affirmed |
Key Cases Cited
- Johnson v. Gore Wood & Co., 2 A.C. 1 (House of Lords 2002) (losses that merely reflect corporate loss are recoverable only by the company)
- Peskin v. Anderson, 1 B.C.L.C. 372 (Ch. 2001) (directors ordinarily owe fiduciary duties to the company, but special factual relationships can create duties to individual shareholders)
- Foss v. Harbottle, 67 Eng. Rep. 189 (Ch. 1843) (derivative suit rule: wrongs to the company generally must be sued by the company)
- Abrams v. Donati, 66 N.Y.2d 951 (N.Y. 1985) (pleading must not conflate derivative and individual rights)
- Brinckerhoff v. JAC Holding Corp., 10 A.D.3d 520 (1st Dep't 2004) (discriminatory distributions may support an individual claim when some shareholders receive lesser benefit)
- Tanges v. Heidelberg N. Am., 93 N.Y.2d 48 (N.Y. 1999) (forum applies internal affairs doctrine; derivative suit prerequisites governed by law of incorporation)