At first instance the BVI Commercial Court found that a historical understanding between joint venture partners (and eventual shareholders in Green Elite) did not objectively evince an intention to create a binding shareholder agreement. In this case, the proceeds of a sale of shares were paid directly to one of the directors of Green Elite who paid them on to the intended beneficiaries of a share incentive scheme for key employees. The appellants argued that the payments were properly made to implement Green Elite’s agreed purpose to provide an employee share incentive scheme. If the payments would otherwise have constituted breaches of duty, the appellants’ case was that the payments were made with the unanimous approval of the shareholders and therefore duly authorised. They argued that such approval was given when the shareholders agreed that Green Elite would act as the vehicle for the employee share incentive scheme for the intended beneficiaries.

The first instance judge determined that “there was never any meeting of minds on the terms which Mr Fang believed gave him the absolute power to deal with the proceeds of sale of the… shares held by Green Elite” such that the Duomatic  principle could not apply. The Court of Appeal upheld this decision, which has now been followed by the Privy Council.

The Duomatic  principle operates so as to allow the shareholders of a company to approve matters informally which would otherwise require a formal shareholder resolution.

In this case, the shareholders could  have authorised or ratified the director’s actions by unanimous informal consent. However, on the facts, those actions and the breaches of duty involved were not approved. Whilst it was agreed that Green Elite would be used to provide an employee share incentive scheme, all other matters relating to the scheme were to be agreed at a later date and in fact were never agreed. It was impossible to see how the shareholders of Green Elite would have agreed by way of formal resolution to something which lacked critical details; given that there could not have been a formal resolution, the Duomatic  principle could not regard equivalent approval to have been given informally.

The first instance judge had previously couched his finding in the language of contract; but the Privy Council found that assent given in accordance with the Duomatic principle need not have the particular features of a binding contract. It is not a question of creating legal relations, as understood in the law of contract, nor whether the assent is “legally enforceable” or has “legal effect”, but whether the shareholders intended to bind themselves legally “as if they had passed a formal resolution.”

While the judgments of the lower courts had also considered the scope of section 175 of the BVI Business Companies Act, Revised Edition 2020, which applies where there is a disposal of more than 50 per cent of the assets of a company outside the company’s “usual or regular course of business”, the Privy Council found that since a valid Duomatic  assent did not arise, it was unnecessary to consider the issues in relation to section 175.

The Privy Council decision upholds the lower courts’ clarification on the application of the Duomatic  principle in the BVI, building on the landmark decision of the Privy Council in Ciban Management Corp v Citco (BVI) Ltd, and in particular the need for objective certainty and knowledge by the shareholders.

Harneys has represented Green Elite (acting through its liquidators) throughout the proceedings.