Internal affairs: the New York Supreme Court applies Cayman Islands law on derivative actions
In a recent judgment in Matter of Renren, Inc. Derivative Litigation v 67X, the Supreme Court of New York rejected an application by the defendants to dismiss claims brought in New York by the minority shareholders of a Cayman Islands company on the basis that those minority shareholders lacked standing to bring the claims on the company’s behalf.
In Renren, the minority shareholder plaintiffs alleged that certain of the company’s directors and officers, along with its majority shareholders, perpetrated a scheme to defraud the company, and brought a claim in New York on the company’s behalf against those wrongdoers and various others. The defendants sought dismissal of the action on the basis that the minority shareholders lacked standing to bring a claim derivatively on the company’s behalf.
Applying the “internal affairs” doctrine, the Supreme Court of New York looked to the laws of the Cayman Islands (being the laws of the place of the company’s incorporation that govern the company’s “internal affairs”) to determine whether the minority shareholders were entitled to bring the claim derivatively on the company’s behalf.
Under Cayman Islands law, the general position is that the appropriate plaintiff in respect of wrongs committed against a company is the company itself. This general rule is subject to four narrow exceptions, including that the wrong complained of comprises a fraud on the minority shareholders. The relevant inquiry is whether the alleged wrongdoers have the power to stop the company from bringing a claim against them.
In Renren, the Supreme Court was satisfied that the combined voting power of certain of the defendants had the effect of impeding the company from pursuing claims in respect of the fraud complained of, and consequently refused to dismiss the action on that basis.