By Nick Herrod Maples and Calder From Mondaq

Derivative actions on behalf of companies in foreign courts can raise difficult conflict of laws and company law issues.

In an important decision, the Grand Court of the Cayman Islands has addressed certain previously unresolved issues where minority shareholders sue derivatively on behalf of a Cayman Islands company (“Cayco”) in a foreign court against a third party for breach of contract.

In summary, it has decided that as a matter of Cayman Islands law derivative actions are not limited to claims against the directors of a Cayco for breach of their fiduciary duties. Derivative actions may also include claims against third parties who have contracted with a Cayco where the third party is effectively an insider closely associated with the majority shareholder. That decision widens the scope of derivative actions under Cayman Islands law.

It has also decided that if a minority shareholder of a Cayco commences a derivative action in a foreign court, the Grand Court does not have jurisdiction to grant permission to maintain that action. That decision helps resolve conflicting US decisions on the point which had been decided on the basis of only expert evidence of Cayman Islands law.

Finally, it decided that in appropriate circumstances, it may grant declarations regarding the maintainability under Cayman Islands company law of the foreign derivative proceedings. Such declarations may be of significant assistance to the foreign court.

Colin McKie QC and Paul Smith of Maples and Calder acted for the successful Plaintiff in these proceedings.

Click here for the judgment.

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