New York Appellate Court Ruling Eases Hurdle to Bringing Derivative Suits Against UK Companies in the New York Courts

On Nov. 14, 2018, a New York appellate court held that in a derivative action brought in a New York court against a company incorporated in the United Kingdom, the plaintiff need not comply with U.K. Companies Act § 261(1), a provision of English law requiring that a plaintiff obtain permission from the English High Court before pursuing a derivative claim. In Mason-Mahon v. Flint, case number 602052/2014, the Appellate Division, Second Department — which reviews trial court decisions from ten counties including Brooklyn, Queens, Westchester, Nassau and Suffolk — reversed the judgment of the court below, and allowed a derivative suit to proceed in New York even though the plaintiff had not first received permission to bring the case, as would be required if the matter had been filed in an English court.

A derivative action is a lawsuit brought by a shareholder that seeks recovery on behalf of the corporation itself, typically for mismanagement or malfeasance of some kind. Here, Michael Mason-Mahon, a shareholder in HSBC Holdings, PLC (HSBC), a global financial institution organized under the laws of the U.K. and headquartered in London, brought a derivative action against the company and related individuals and entities in a New York court. The complaint alleged that director misconduct was responsible for the company’s failure to implement certain anti-money laundering measures, which failure ultimately resulted in HSBC agreeing to a settlement of more than $1.5 billion with state and federal prosecutors in December 2012.     

The trial court had dismissed the complaint, reasoning that the plaintiff lacked standing to pursue the derivative claim for failure to seek permission from the English High Court pursuant to § 261(1) of the U.K. Companies Act. While the plaintiff was appealing that dismissal, the New York Court of Appeals — New York’s highest court — decided Davis v. Scottish Re Grp. Ltd., 30 N.Y.3d 247 (N.Y. Nov. 20, 2017), which considered a similar Cayman Islands court rule requiring plaintiffs in derivative actions to first apply to the Cayman Islands Grand Court for leave to bring the action. The Court of Appeals held that the Cayman Islands court rule did not apply to derivative actions brought in New York courts on the ground that it is a procedural, rather than a substantive, rule. See https://www.kramerlevin.com/en/perspectives-search/court-of-appeals-ruling-eases-the-way-for-shareholders-to-bring-derivative-suits-against-cayman-islands-companies-in-the-new-york-courts.html.

That distinction matters because in a derivative action, a New York court generally applies the substantive law of the jurisdiction in which the company is incorporated, but the procedural rules of the New York courts. In Davis, the Court of Appeals parsed the language of the Cayman Islands court rule and concluded that it was intended to apply only to actions brought in the Cayman Islands courts, pointing out that the rule purports to apply only to “action[s] begun by writ” and only after the defendant has “given notice of intention to defend” the derivative action. The Court of Appeals noted that these are references to procedural aspects of Cayman Islands litigation that do not take place in New York courts, where derivative actions are not begun by writ and defendants do not serve notices of intention to defend.

In Mason-Mahon v. Flint, the Second Department conducted a similar analysis and concluded that the U.K. law is best read as a procedural rule designed to shepherd derivative actions through the U.K. court system, and not as a substantive rule of law that should be applied in derivative actions around the world. The court pointed out that § 261(1) of the U.K. Companies Act, by its own terms, provides that “[t]his Chapter applies to proceedings in England and Wales or Northern Ireland[.]”

The court’s opinion in Mason-Mahon v. Flint, closely following the Court of Appeals’ reasoning in Davis, distinguished the procedural provision at hand from the many substantive “gate-keeper” provisions that exist in the corporate law of various other jurisdictions, such as the British Virgin Islands and Canada. The court reasoned: “The UK Companies Act is not analogous to the judicial-permission requirements in the British Virgin Islands’ (BVI) Business Companies Act and the Canada Business Corporation Act, which the Court of Appeals in Davis described as substantive. Unlike the UK Companies Act, the British Virgin Islands’ (BVI) Business Companies Act ‘requires that any shareholder intending to commence a derivative action on behalf of a BVI-incorporated company, first obtain leave from a BVI court.’ ‘Likewise, the Canada Business Corporations Act requires any shareholder seeking to commence a derivative action on behalf of a Canadian corporation to obtain leave from a Canadian court’” (emphasis in original) (citations omitted).

Having found that the U.K. rule is procedural in nature and therefore not binding on New York courts, the Second Department proceeded to reject the defendants’ alternative arguments for dismissal based on failure to make a demand and forum non conveniens, and sent the revived derivative action back to the trial court. Like Davis, the Mason-Mahon v. Flint decision will ease the way for shareholders of a company incorporated in a foreign jurisdiction — here, the U.K. — to bring derivative actions in the New York courts, assuming personal jurisdiction exists over the defendants and other substantive requirements have been met.