By Ben Bedell, From New York Law Journal
A minority shareholder’s $40 million fiduciary breach claims against the directors of a Cayman Islands company were revived Thursday by a Manhattan appeals court, which held that he should be allowed to replead the claims under New York law.
A three-judge majority of the Appellate Division, First Department, said plaintiff Paul Davis should have had the opportunity to recast the claims under the First Department’s precedent set in Brinckerhoff v. JAC Holding Corp., 10 AD3d 520 (1st Dept 2004).
Commercial Division Justice O. Peter Sherwood had applied Cayman Islands law which, unlike U.S. law, holds that directors who represent majority shareholders do not owe a fiduciary duty to the minority, except under special circumstances. Caymans law also bars most derivative claims brought by shareholders on behalf of the company.
In an opinion by Justice Richard Andrias, the majority said Sherwood’s October 2014 ruling had been correct to apply Cayman Islands law, because “under the internal affairs doctrine, claims concerning the relationship between the corporation, its directors, and a shareholder are governed by the substantive law of the state or country of incorporation, in this case the Cayman Islands.”
But because Davis “asserts unequal treatment in the form of an intentional, premeditated plan,” his claims would be permissible under Brinckerhoff.
Davis alleged two U.S. investment funds, which gained control of the company in 2007, paid themselves a “huge windfall dividend while freezing out minority shareholders in order to induce them to sell their shares to the investors at a steep discount.”
Andrias said Davis should also be allowed to show the derivative claims could have fit into the exceptions permitted by Caymans law.
Justices Rolando Acosta and Sallie Manzanet-Daniels joined in the opinion in Davis v. Scottish Re Group Limited, 654027/13.
A partial dissent by Justice Karla Moskowitz and joined by Justice Peter Tom, said all of Davis’ claims were barred by Caymans law disfavoring derivative and fiduciary breach claims by minority shareholders.
The dispute arose when a multi-billion dollar distressed-company fund, Cerberus Capital, together with funds controlled by insurance giant Massachusetts Mutual Life Insurance Company, bought a controlling interest in Scottish Re, which was experiencing steep losses.
Davis owned almost 20 percent of the company and nearly half a class of preferred securities issued by Scottish Re. But after the Cerberus group gained control by buying a 34 percent voting stake, they paid themselves dividends of $100 million while Davis received $1 million, he claimed.
The Cerberus investors also caused Scottish Re to cease writing new insurance policies, and had it delisted as a public company in the United States.
In 2011, they made an offer for all the outstanding Scottish Re shares they did not own on terms Davis said were “coercive,” effectively telling the minority there was no market for their shares and they could become worthless.
Davis alleged the minority shareholders were deprived of material information, and the “fairness opinion” and its approval by the special committee of ostensibly disinterested board members was flawed because two of the four members had significant yet undisclosed ties to Cerberus and MassMutual.
Moskowitz noted in her dissent that Davis had the right to challenge the buyout in a Cayman Islands court, but chose not to do so. Brinckerhoff did not apply, she said, because Davis “cannot plead that any of the defendants owed a fiduciary duty to him personally.”
“The gravamen of the wrong alleged is the merger price per share suffered by all of the shareholders, not just plaintiff individually,” Moskowitz said.
Guzov LLC partners David Kaplan, Debra Guzov and Silvia Bolatti argued for Davis.
Guzov said the decision “will help clarify the sometimes murky line separating claims which must be brought derivatively on behalf of a corporation and claims which can brought directly by shareholders.”
Mayer Brown partner Jean Marie Atamian and associate James Ancone represented Scottish Re and certain of its directors.
Schulte Roth & Zabel partner Howard Godnick and associate Andrew Gladstein argued for Cerberus.
Quinn Emanuel Urquhart & Sullivan counsel Joshua Margolin, partner Jennifer Barrett and associate Jennifer Swearingen represented MassMutual.
None of the defendant attorneys responded to requests for comment.
IMAGE: The Appellate Division, First Department, at 27 Madison Ave. NYLJ/Rick Kopstein
For more on this story go to: http://www.newyorklawjournal.com/id=1202752044013/Panel-Reinstates-NY-Claims-Alleging-Caymans-Breach#ixzz42hcrJBF5