Controlling Law For Standing to Bring a Derivative Action

The Law of the Jurisdiction of Incorporation Governs the

Ability to Bring a Derivative Action

      The Delaware Chancery Court recently addressed the law governing the ability to bring a derivative action.  Microsoft Corp v. Vadem, Ltd., No. 6940-VCP (Del. Ch. Apr. 27, 2012). 

      Vadem, Ltd. is a corporation incorporated under the laws of the British Virgin Islands.  Microsoft is a shareholder in Vadem.  On Vadem’s behalf, Microsoft sought to bring a derivative action, which action was filed in the Delaware Chancery Court.  The Court looked to the law of the British Virgin Islands to determine whether Microsoft had standing to bring a derivative claim on Vadem’s behalf.  Under the law of the British Virgin Islands, the bringing of a derivative action requires the consent of the High Court of the British Virgin Islands.  No such consent had been received.  On that basis, the derivative action was dismissed.

      Kentucky has a non-uniform statutory provision that dictates this same result.  KRS § 271B.7-400(6) provides that:

In any derivative proceedings in the right of a foreign corporation, the matters covered by this section shall be governed by the laws of the jurisdiction of incorporation.

A plaintiff seeking, on behalf of a corporation organized in a particular jurisdiction, must be familiar with and in a position to satisfy all of the requirements imposed by the laws of that jurisdiction.  Where those requirements are not satisfied, the suit should be summarily dismissed by the court.