On November 14, 2018, the New York State Appellate Division Second Judicial Department reversed the dismissal of a shareholder derivative suit against directors and officers of a U.K. company and certain of its affiliates asserting claims for breaches of fiduciary duties in connection with the companies’ conduct underlying penalties and settlement agreements related to alleged sanctions violations. Michael Mason-Mahon v. Douglas J. Flint
, 602052/14 (N.Y. App. Div. Nov. 14, 2018). The trial court had dismissed the case for lack for standing because the shareholder plaintiff had not sought permission from the English High Court pursuant to the U.K. Companies Act 2006 to file the derivative action involving a company incorporated in England. Reviving the suit, the Appellate Division relied on the recent New York State Court of Appeals decision in Davis v. Scottish Re Grp. Ltd
., No. 111 (N.Y. Nov. 20, 2017) (as we discussed in a prior post
), which reversed the dismissal of derivative claims involving a Cayman Islands company. Specifically, the Appellate Division held that, although the substantive law of the U.K. would govern the merits of the action, the judicial-permission requirement set forth in the U.K. Companies Act is a procedural rule and, therefore, not a basis for dismissal of a case filed in New York. The case was initially filed in 2014 by a shareholder asserting derivative claims that the defendant directors and officers breached their fiduciary duties by failing to prevent allegedly illicit conduct leading to penalties and settlements in connection with alleged violations of U.S. sanctions and anti-money laundering laws. The trial court granted defendants’ motion to dismiss in November 2015, finding that plaintiff — an English citizen — lacked standing because he did not comply with the requirement in the U.K. Companies Act to obtain permission from the English High Court before commencing a derivative action involving an English company. The Appellate Division reversed the dismissal in light of the New York Court of Appeals’ opinion in Scottish Re
, which held that a Cayman Islands court rule requiring a plaintiff in a shareholder derivative action to first apply to the Cayman Islands Grand Court for permission to pursue the action is a procedural rule of the Cayman Islands that does not preclude such actions in New York. Here, the Appellate Division looked to the “plain language” of the judicial-permission requirement set forth in the U.K. Companies Act and highlighted that it expressly “applies to proceedings in England and Wales or Northern Ireland.” The Appellate Division therefore concluded that the rule is procedural and inapplicable to actions filed in New York.
The Appellate Division also rejected an alternative argument for dismissal, finding that the complaint adequately demonstrated that pre-suit demand on the board was excused because plaintiffs alleged with particularity that the board of directors “did not fully inform itself about the challenged transactions to the extent reasonably appropriate under the circumstances.” In this regard, the Court noted that the complaint included specific allegations about a company policy requiring its board to be notified regarding certain compliance issues and alleged facts pertaining to allegedly illegal transactions over a 13-year period involving several billion dollars and resulting in payments exceeding $1.5 billion in fines and penalties to New York state and federal authorities.
Finally, the Appellate Division held that the case was not subject to dismissal on the ground of forum non conveniens
. In reaching this conclusion, the Court noted that there were allegations of wrongdoing in New York, only 21 of the 75 individual defendants live and work outside of New York, and three of the nominal corporate defendants are either incorporated or purportedly headquartered in New York.