British Virgin Islands: Privy Council Hands Down Judgment In BVI Shareholder Rights

The Privy Council has recently handed down the judgment in Staray Capital Limited and another v Cha Yang [2017] UKPC 43, concerning the circumstances in which majority shareholder decisions to amend the Memorandum & Articles of Association (M&A) of a British Virgin Islands Company for reasons that are not in good faith to a company's best interests can be set aside. The case illustrates that the burden of proof is on the minority shareholder seeking to have the amendment set aside to prove bad faith. Moreover, the Privy Council explicitly decided that the fact that an amendment is intended to affect a particular minority shareholder and does affect that shareholder is not sufficient to prove such bad faith.

The Staray judgment is the most recent in a line of cases following the leading case of Citco Banking Corporation N.V. v Pussers Limited and another (the Citco case) in which O'Neal Webster successfully represented the Respondent, Pussers Limited. The Citco case has been followed, not only in cases from the BVI but also in English courts, including the Court of Appeal (see Charterhouse Capital Ltd [2015] EWCA Civ 536).

The Staray case has now confirmed that Cisco remains the leading decision about the limits of shareholder power where the majority seeks to make changes to the constitutional documents of a company.

The M&A of a BVI company takes effect as a statutory contract between the BVI company and its members, and between the members themselves. Section 12 of the BVI Business Companies Act (BVIBCA) confers the power to amend a statutory contract but does not impose any limits on that power. The Citco case illustrates that such limitations will nevertheless arise at common law.

Pussers Limited is a well-known and successful restaurant and pub based in Road Town, Tortola, with branches both within and outside of the BVI. At an extraordinary general meeting in 2004, Pussers resolved (by special resolution) to amend the M&A to create a new class of shares each carrying 50 votes, all of which would be held by its chairman, Mr. Charles Tobias, giving him undisputable control of Pussers Limited.

The Privy Council discussed the test to apply in order to determine whether the amendments made by the majority shareholders to the M&A were in good faith in the interests of the company. The Privy Council ruled that as long as there were grounds upon which a reasonable man could make the same decision, the courts would not interfere in the business decisions of a company and held that the resolution was valid even though it operated to the particular disadvantage of some of the minority shareholders. In Citco, the reasons given for the decision to amend the M&A was that Pussers Limited was hoping to secure investment and its investors were of the view that the commercial fortunes and success of the company depended upon giving Mr. Tobias control over it.

In Staray, the majority shareholder amended the company's M&A to allow for forcible redemption of shares when a shareholder makes misrepresentations in the process of acquiring the shares. Immediately upon amending the M&A, a redemption notice was served on Mr. Cha. It was undisputed that the amendment was intended to target Mr. Cha. The majority shareholder admitted that it had made a threat that if Mr. Cha did not surrender his shares voluntarily, he would use his majority votes to compel the same result.

Mr. Cha brought proceedings seeking to set aside the resolution amending the M&A and the notice of redemption under section 184I of the BVIBCA, which applies where a shareholder of a company considers that the affairs of the company have been, are being, or are likely to be conducted in an oppressive, unfairly discriminatory, or unfairly prejudicial manner to that shareholder.

The Privy Council stated that the relevant principles were found in the Citco case and were undisputable. Therefore, the issue turned on the question of whether the resolution could be attacked as not being in good faith in the interests of Staray Capital Limited. Based on Citco, the Privy Council found that the fact that the majority shareholder wanted Mr. Cha out of Staray Capital Limited did not in itself mean that the resolution was made in bad faith and that "it was open to the judge below to find that the resolution was 'not so oppressive as to cast suspicion on the honesty of those responsible for it or so extravagant that no reasonable men could really consider it for the benefit of the company."' The Privy Council found no grounds on which to disturb the conclusion of the courts below that the resolution was valid.

The Privy Council, therefore, reaffirmed that Citco is the indisputable authority on the limits of shareholder power where the majority seek to amend the M&A of a BVI company. The case is a measure of the increasing importance of jurisprudence from the BVI that English courts, at the highest levels, consider and apply decisions from the jurisdiction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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