Paul Davis, Appellant,v.Scottish Re Group Limited, et al., Respondents, et al., Defendants.BriefN.Y.October 10, 2017APL-2016-00146 New York County Clerk’s Index No. 654027/13 Court of Appeals STATE OF NEW YORK PAUL DAVIS, Plaintiff-Appellant, against SCOTTISH RE GROUP LIMITED, SCOTTISH RE (US), INC., SRGL ACQUISITION, LDC, BENTON STREET PARTNERS I, L.P., BENTON STREET PARTNERS II, L.P., BENTON STREET PARTNERS III, L.P., MASSMUTUAL INSURANCE, CERBERUS CAPITAL, LLC, JEFFREY HUGHES, LARRY PORT, and RAYMOND WECHSLER, Defendants-Respondents, and JONATHAN BLOOMER, BRETT ADAMCZYK, JAMES BUTLER, JAMES CHAPMAN, THOMAS FINKE, ROBERT JOYAL, MICHAEL ROLLINGS, MEREDITH ALICIA RATAJCZAK, MICHAEL STEVEN BAUMSTEIN, and DANIEL RYAN ROTH, Defendants. >> >> Debra J. Guzov David J. Kaplan GUZOV, LLC 805 Third Avenue, 8th Floor New York, New York 10022 212-371-8008 (phone) 212-901-2122 (facsimile) Eric Brenner BOIES, SCHILLER & FLEXNER LLP 575 Lexington Avenue, 7th Floor New York, New York 10022 212-446-2300 (phone) 212-446-2350 (facsimile) Silvia Bolatti BOLATTI & ASSOCIATES 70 Little West Street, Suite 7A New York, New York 10004 212-732-4929 (phone) 646-417-7115 (facsmile) Attorneys for Plaintiff-Appellant Paul Davis Date Completed: September 26, 2016 BRIEF FOR PLAINTIFF-APPELLANT To Be Argued By: Eric Brenner Time Requested: 20 Minutes i Status of Related Litigation This appeal concerns a March 10, 2016 Decision and Order issued by the New York State Supreme Court, Appellate Division, First Department (the “March 10 Order”). The March 10 Order affirmed the dismissal of, inter alia, the Seventh, Ninth, and Tenth Causes of Action in Appellant’s original complaint in this action (the “Derivative Causes of Action”). This appeal will control the disposition of the Derivative Causes of Action, while related litigation proceeds in the trial court concerning Appellant’s direct causes of action. Specifically, the March 10 Order granted Appellant leave to replead certain causes of action other than the Derivative Causes of Action. Thereafter, on May 3, 2016, Appellant filed and served a First Amended Complaint. Defendants moved to dismiss. These motions are now fully briefed and oral argument is scheduled for November 7, 2016. Separately, on July 11, 2016, the trial court issued a Decision and Order resolving a motion to dismiss two breach of contract claims in Appellant’s original complaint against Respondent Scottish Re Group Limited (“Scottish Re” or the “Company”). The trial court held that it had personal jurisdiction over Scottish Re with respect to one of these contract claims, but lacked it with regard to the other. Litigation continues with respect to the allowed contract claim. ii Table of Contents Status of Related Litigation ....................................................................................... i Table of Cases and Authorities ................................................................................ iv Preliminary Statement ................................................................................................ 1 Questions Presented ................................................................................................... 6 Statement of Jurisdiction ............................................................................................ 6 Statement of the Case ................................................................................................. 8 A. Relevant Allegations of the Original Complaint ................................... 8 B. The Derivative Causes of Action ........................................................12 C. The Trial Court’s Dismissal Order ......................................................13 D. The Appellate Division’s March 10 Order..........................................15 Argument..................................................................................................................17 I. The March 10 Order should be reversed because New York courts have the authority to employ New York procedures to decide whether a New York plaintiff has standing to bring a derivative claim against a Cayman company. .........................................................................................17 A. The Appellate Division’s recognition that Rule 12A governs a “remedy” and not a “right” requires reversal under Tanges. ..............19 B. Rule 12A is a “procedural mechanism” that does not set forth substantive principles of Cayman law. ................................................20 C. The Appellate Division’s interpretation of Rule 12A will close the doors of the New York courts to significant claims that bear on New York’s status as a financial center. ......................................................26 II. The March 10 Order should be reversed because Davis has standing under Cayman law to pursue derivative claims that Scottish Re would never itself litigate. ........................................................................................31 iii A. Davis satisfies the fraud on the minority exception to Foss v. Harbottle. ............................................................................................34 1. The Original Complaint alleges wrongdoer control. .................34 2. The Original Complaint alleges wrongdoer benefit. ..................41 B. Davis satisfies the interests of justice exception. ................................46 Conclusion ...............................................................................................................49 Rule 500.13(c) Certificate of Compliance ...............................................................51 iv Table of Cases and Authorities Cases Page(s) ARC Capital, LLC v. Kalra, No. 652931/2012, 2013 N.Y. Misc. LEXIS 2600 (N.Y. Cty. Sup. Ct. June 18, 2013) ......................................................................24 Bernhardt v. Polygraphed Co., 350 U.S. 198 (1956) .............................................................................................46 Biala Pty Ltd. v. Mallina Holdings Ltd., [1993] ACSR 785 .................................................................................... 33, 47, 48 Burke v. Crosson, 85 N.Y.2d 10 (1995) ............................................................................................... 7 Burland v. Earle, [1902] AC 83 ........................................................................................................32 CMIA Partners Equity Ltd. v. O’Neill, 920 N.Y.S.2d 240 (N.Y. Cty. Sup. Ct. 2010) .......................................................24 Connolly v. Seskin Properties Ltd., [2012] I.E.H.C. 332 ..............................................................................................33 Curtis, Mallet-Prevost, Colt & Mosle, LLP v. Garza-Morales, 308 A.D.2d 261 (1st Dep’t 2003) .........................................................................28 Daniels v. Daniels, [1978] Ch 406 ......................................................................................... 43, 44, 45 Davis v. Scottish Re Group Ltd., N.Y. Slip Op. 31313(U), 2016 WL 3688466 (N.Y. Cty. Sup. Ct. July 11, 2016) .......................................................................29 Estmanco (Kilner House) Ltd. v. Greater London Council, [1982] 1 W.L.R. 2 ................................................................................................46 v Foss v. Harbottle, [1843] 2 Hare 461 ......................................................................................... passim Feiner Family Trust v. VBI Corp., No. 07 CIV. 1914 (RPP), 2007 WL 2615448 (S.D.N.Y. Sept. 11, 2007) ...........24 Glynn v. Owen, [2007] I.E.H.C. 328 ..............................................................................................33 Hausman v. Buckley, 299 F.2d 696 (2d Cir. 1962) .................................................................................25 Hayat v. Al-Mazeedi, 28 Mass. L. Rep. 243 (Mass. Sup. Ct. 2011)........................................................23 Heyting v. Dupont, [1964] 1 W.L.R. 843 (CA) ...................................................................................46 Howe v. Bank of New York Mellon, 783 F. Supp. 2d 466 (S.D.N.Y. 2011) ..................................................................24 In re Harbinger Capital Partners Funds Inv’r Litig., No. 12 CIV. 1244 (AJN), 2013 WL 5441754 (S.D.N.Y. Sept. 30, 2013) ...........24 In re Tyco Intern., 340 F. Supp. 2d 94 (D.N.H. 2004) ................................................................ 34, 35 Leon v. Martinez, 84 N.Y.2d 83 (1994) ...................................................................................... 17, 36 Lewis v. Dicker, 118 Misc. 2d 28 (Kings Cty. Sup. Ct. 1982) ........................................................25 Locals 302 and 612 of Int’l Union of Operating Eng’r-Employers Constr. Indus. Ret. Trust v. Blanchard, No. 04 CIV. 5954 (LAP), 2005 WL 2063852 (S.D.N.Y. Aug. 25, 2005) .............................................................................. 21, 25 Messinger v. United Canso Oil & Gas Ltd., 486 F. Supp. 788 (D. Conn. 1980) ................................................................ 31, 32 vi Microsoft Corp. v. Vadem, CIVA 6940-VCP, 2012 WL 1564155 (Del. Ch. Apr. 27, 2012) .........................22 Prudential Assurance Co. Ltd. v. Newman Industries Ltd., (No. 2) [1982] Ch 204 .................................................................................. passim Randall v. Arabian Am. Oil Co., 778 F.2d 1146 (5th Cir. 1985) ..............................................................................30 Russell v. Wakefield Waterworks Co., (1875) LR 20 Eq 474 ............................................................................................37 Sachs v. Adeli, 26 A.D.3d 52 (1st Dep’t 2005) .............................................................................30 Schultz v. Reynolds & Newport Ltd., [1992-93] C.I.L.R. 59 ................................................................................... passim Shenwick v. HM Ruby Fund, L.P., 106 A.D.3d 638 (1st Dep’t 2013) .........................................................................24 Smith v. Croft, (No. 2) [1988] Ch 114 ..........................................................................................34 Tanges v. Heidelberg N. Am., Inc., 93 N.Y.2d 48 (1999) ..................................................................................... passim Telaro v. Telaro, 25 N.Y.2d 433 (1969) .........................................................................................7, 8 Tennessee Coal, Iron & R. Co. v. George, 233 U.S. 354 (1914) .............................................................................................30 Winn v. Schafer, 499 F. Supp. 2d 390 (S.D.N.Y. 2007) .......................................................... passim vii Statutes, Rules and Other Authorities CPLR 3211 ........................................................................................................ 22, 23 CPLR 4511 ...............................................................................................................17 CPLR § 5602 .............................................................................................................. 6 CPLR § 603 ..............................................................................................................23 Order 15, rule 12A of the Rules of the Grand Court of the Cayman Islands ................................................... passim Siegel, N.Y. Prac. § 34 (2d ed. 1991) ......................................................................19 U.K. Companies Act of 2006 ...................................................................................32 Preliminary Statement This appeal raises an issue of first impression regarding the authority of the New York courts to apply the procedural mechanisms available under the CPLR to adjudicate the substantive question of whether a shareholder derivative plaintiff who has filed suit in New York has standing to bring claims on behalf of a company incorporated in the Cayman Islands. New York courts have routinely decided this substantive issue. Now, the Appellate Division has erroneously concluded that they are prohibited from doing so. Plaintiff-Appellant Paul Davis is an investor who during the relevant time period was a large minority shareholder of Defendant-Respondent Scottish Re, a reinsurance company incorporated in the Cayman Islands. Davis alleges that Scottish Re’s controlling shareholders, the private equity firm Cerberus Capital Management L.P. (“Cerberus”) and the financial firm Massachusetts Mutual Life Insurance Company (“MassMutual”), worked in concert with Scottish Re directors that were beholden to them to implement a series of transactions that enriched themselves while causing harm to minority shareholders like Davis, and to the Company. The transactions Davis challenges include: a merger that allowed Cerberus and MassMutual to obtain absolute control over Scottish Re while paying minority shareholders like Davis just $0.30 per ordinary share, even when valuations 2 undertaken by management and financial advisors to the Company in connection with the merger showed minority shareholders had a stake in Scottish Re worth vastly more; a Scottish Re affiliate’s buyback of hundreds of millions of dollars of notes from Cerberus, resulting in profits for Cerberus and a decline in Scottish Re’s book value of approximately $150 million; and a windfall dividend payment to Cerberus and MassMutual following the merger that dwarfed what other Scottish Re stakeholders received. Davis’s causes of action based on the harm he suffered directly as an ordinary and preferred shareholder as a result of this alleged wrongdoing are being litigated in the trial court. On this interlocutory appeal, Davis seeks the right to proceed with three derivative causes of action seeking redress for harm that was caused to Scottish Re itself. There is no question that New York courts are capable of deciding whether Davis has standing under Cayman law to bring these shareholder derivative claims. Numerous New York courts have done so. Indeed, in an unrelated prior case also involving Scottish Re, a federal district court sitting in the Southern District of New York had no trouble reviewing and applying the relevant Cayman legal principles. Winn v. Schafer, 499 F. Supp. 2d 390 (S.D.N.Y. 2007). The Appellate Division nonetheless concluded that only a Cayman court had authority to determine the question of Davis’s standing to bring a claim on behalf of a Cayman 3 company. Thus, it affirmed the dismissal of Davis’s derivative claims on the basis that he had not obtained leave of the Cayman courts to proceed with these claims. According to the Appellate Division, this dismissal was justified by New York choice of law principles, which supposedly compel the conclusion that the relevant Cayman legal provision, Order 15, rule 12A (“Rule 12A”) of the Rules of the Grand Court of the Cayman Islands, is “substantive” rather than “procedural.” This holding was reversible error. Rule 12A says nothing about the substantive rules for shareholder derivative claims against Cayman companies, and it does not mandate that only Cayman courts have authority to grant leave to proceed with such claims. By its terms, Rule 12A applies to any derivative claim filed in the Cayman courts regardless of whether a Cayman company is involved. And, as a procedural mechanism applicable to derivative claims involving any jurisdiction, Rule 12A is agnostic about the substantive law the Cayman court should apply when confronted with a shareholder derivative claim. There is simply no substantive policy of Cayman law implicated by Rule 12A, and there is no reason why New York courts should be divested of the authority to apply the ample procedural mechanisms available under the CPLR to assess shareholder derivative standing for themselves—especially in a case like this one where Scottish Re lacks any employees or business in the Cayman Islands and was controlled during the relevant period by a New York-based investment firm 4 working with New York financial and legal advisors to solicit shareholders and negotiate, document, and close the transactions at issue. The implications of the contrary rule adopted by the Appellate Division are draconian. The Appellate Division’s analysis contemplates a proceeding in the Cayman courts as a condition precedent to merits litigation in a New York court assuming standing has been established. But Rule 12A does not apply to shareholder derivative claims brought outside the courts of the Cayman Islands. Further, the record shows there is no alternative mechanism for a shareholder derivative plaintiff like Davis to bring a Cayman proceeding to obtain a threshold standing determination in connection with a New York case. Appellant’s Cayman law expert made this point in the proceedings below, and Respondents’ expert never tried to claim otherwise. A July 2016 briefing by a leading Cayman law firm analyzing the Appellate Division’s decision in this case has similarly noted that “actions brought merely to seek leave to continue could, under Cayman Islands’ procedural rules, be deemed an abuse of process.”1 1 See Mourant Ozannes, “Is it the end of road for NY derivative claims against Cayman companies? Whether GCR Order 15, rule 12A is a substantive or procedural requirement” (July 2016) (available at https://www.mourantozannes .com/media/1661925/is-it-the-end-of-the-road-for-ny-derivative-claims-against- cayman-companies.pdf (accessed September 20, 2016)) (“Mourant Ozannes Briefing”). 5 In other words, the Appellate Division’s “condition precedent” is a requirement that a plaintiff in a New York lawsuit could never be expected to satisfy. Thus, as a matter of practice, the Appellate Division has effectively closed the doors of the New York courts to derivative claims against Cayman companies. This point was also recognized in the aforementioned Cayman law firm briefing, which was titled “Is it the end of road for NY derivative claims against Cayman companies?” But nothing in Rule 12A requires divesting the New York judiciary of its authority in this way. And failing to reverse the Appellate Division will have broad implications beyond this case, given the significance of the Cayman Islands as a corporate domicile for innumerable financial firms, including many with strong New York connections to the New York financial markets and otherwise. Finally, assuming this Court agrees that the New York courts have authority to reach the issue, Davis’s complaint alleged facts that established his standing to bring derivative claims on behalf of Scottish Re under the so-called rule of Foss v. Harbottle. Given the nature of the wrongdoing involved—a conspiracy between and among Scottish Re’s controlling shareholders and their handpicked directors on the Scottish Re board—this is a paradigmatic case where those who control Scottish Re would never be expected to allow Scottish Re to itself bring the derivative claims at issue. Thus, absent a derivative suit that holds the alleged wrongdoers to account for the harm they have caused the Company, no remedy 6 would ever lie. The Appellate Division did not reach this issue because its holding regarding Rule 12A was an independently sufficient ground to affirm the dismissal of Davis’s derivative claims. If this Court now chooses to address the merits question of Davis’s standing under Foss, this is another reason to reverse. Alternatively, this issue should be remanded for the Appellate Division to consider in the first instance on appeal now that the Foss issue is no longer moot. Questions Presented 1. Under New York choice of law doctrine, does a New York court have authority to use New York procedures to apply substantive principles of Cayman law to assess Appellant’s standing to bring shareholder derivative claims against Respondent Scottish Re? 2. Assuming a New York court has authority to address Appellant’s standing to bring a shareholder derivative claim, do the Derivative Causes of Action allege facts sufficient under Cayman law to satisfy an exception to the rule of Foss v. Harbottle? Statement of Jurisdiction This Court has jurisdiction over this appeal pursuant to CPLR § 5602(b)(1) because the appeal is taken pursuant to the permission of the Appellate Division, First Department, following a non-final order entered by that Court. 7 Specifically, on March 10, 2016, the Appellate Division modified the trial court’s October 7, 2014 Order (as corrected on October 14, 2014, the “Dismissal Order”) dismissing Appellant’s complaint in part. R. 4250-4281. Because the Dismissal Order did not dispose of all the causes of actions between the parties, the Court’s order constitutes a non-final order. See Burke v. Crosson, 85 N.Y.2d 10, 15-16 (1995). The Appellate Division’s order was entered on March 24, 2016. R. 4248- 4249. On April 22, 2016, Davis timely moved the Appellate Division for leave to appeal to this Court the March 10 Order. On July 7, 2016, the Appellate Division granted Davis’s motion and certified the following question: “Was the order of this Court, which modified the order of the Supreme Court, properly made?” R. 4247. The issues raised in this appeal have been preserved for review because they were raised in the trial court below. See Telaro v. Telaro, 25 N.Y.2d 433, 438 (1969). Davis argued to both the trial court and the Appellate Division that a proceeding in the Cayman courts under Order 15, rule 12A of the Grand Court Rules is not a prerequisite to bringing derivative claims against a Cayman company in New York. R. 2060-2079; R. 91-94; see also R. 55-57. He also argued in both courts that his original complaint alleged facts sufficient to establish standing to bring derivative claims on behalf of Scottish Re under one of the 8 exceptions to the rule of Foss v. Harbottle. R. 2091-2097; R. 103-106; see also R. 57-58. Although the Appellate Division did not reach the Foss issue, the trial court’s decision reached the issue, and the Court of Appeals has the discretion either to review this ruling or remand to the Appellate Division for further consideration. See Telaro, 25 N.Y.2d at 438. Statement of the Case A. Relevant Allegations of the Original Complaint During the period relevant to this appeal, Appellant Paul Davis was a large shareholder in Respondent Scottish Re. Until the 2011 merger transaction discussed below, he held more 13,000,000 ordinary shares of Scottish Re. R. 423- 424. He still continues to hold 2.4 million perpetual preferred shares of the Company. R. 423. Respondent Cerberus is a prominent New York based private equity firm. Respondent MassMutual is a prominent financial firm. These two firms,2 acting through their affiliates (collectively, the “Investors”), conceived and executed a plan to maximize their own profits as controlling shareholders of Scottish Re and 2 After the Original Complaint was filed, Respondents indicated that the correct names for these two entities are Cerberus Capital Management, L.P. and Massachusetts Mutual Life Insurance Company, respectively. R. xxiii. The Amended Complaint reflects the correct entity names. 9 its operating subsidiaries at the expense of shareholders like Davis and to the detriment of the Company itself. R. 422-425. In 2007, the Investors acquired control of Scottish Re. R. 428-429, 444. In so doing they agreed to maintain their control through designees on the Company’s board of directors (the “Directors”), who would at all times constitute a majority and whose approval would be required prior to entering into significant corporate transactions. R. 490, 522, 2139. In 2011, acting through these hand-picked affiliated directors, Cerberus and MassMutual exploited their control rights to squeeze out Scottish Re’s Ordinary Shareholders in a merger (the “Merger”) that allowed them to acquire all outstanding ordinary shares of the Company—which were valued in excess of $100 million according to an independent valuation—for just $20.1 million ($0.30 per share). R. 434-440. In connection with the proposed Merger, the Scottish Re board appointed four supposedly disinterested and unaffiliated directors to serve on a special committee (the “Special Committee”), which was to act on behalf of Scottish Re’s Ordinary Shareholders. R. 437-440. But, like the board at large, the Committee was actually tainted by affiliations between at least two of its members and Cerberus and MassMutual. R. 437-438. The Directors also misled Scottish Re’s Ordinary Shareholders about the Merger’s true purpose. They were told that the objective of the Merger was to benefit the Ordinary Shareholders by providing 10 them with liquidity. R. 434. But the real purpose was to allow Cerberus and MassMutual to avoid sharing in the significant value that could be obtained from the Company with the minority shareholders. R. 438, 441-443. To implement Cerberus and MassMutual’s plan, both the Special Committee and the full Scottish Re board advised the Ordinary Shareholders that they should accept $0.30 for each of their ordinary shares, even though it was just a small fraction of the Ordinary Shareholders’ pro rata stake in Scottish Re’s value. R. 434-437. The Ordinary Shareholders were told that, if the Merger was rejected, Cerberus and MassMutual could assert their control rights and liquidate the Company, rendering the ordinary shares worthless. R. 437. This “something is better than nothing” rationale reflected coercion pure and simple, including because it said nothing about the actual economic fairness of $0.30 per share versus any other alternative scenario. R. 423. This threat was also grossly misleading because the Directors did not reveal facts that, at a minimum, called into question whether the Investors ever could or would force through a transaction that would leave the Ordinary Shareholders penniless. For example, the Information Statement sent to Ordinary Shareholders in connection with the Merger never explained how Scottish Re’s directors, consistent with their fiduciary duties, could approve such a transaction that brazenly favored the Investors (who were also controlling shareholders) while imposing the worst possible outcome on 11 Ordinary Shareholders—who would get nothing and would lose the ability to ever receive anything of value in the future for their ownership interest in Scottish Re. R. 115-290; see also R. 423. Acting under compulsion and having been misled about the nature of the threat they faced, on June 8, 2011, a majority of Scottish Re’s Ordinary Shareholders voted to approve the Merger. R. 423, 434-435, 438. Davis did not support the Merger. R. 2221-2222, 4279-4280. Nevertheless, the majority vote meant that Davis was involuntarily squeezed out as an Ordinary Shareholder and forced to surrender his ordinary shares for far less than they were worth, while Cerberus and MassMutual acquired total control of the Company. R. 440-443. At the same time the Investors were forcing through the self-interested Merger, Cerberus also profited by conspiring with the Directors to cause Scottish Re to unwind an investment that affiliates of Cerberus had previously made in an affiliate of Scottish Re called Orkney Holdings, LLC. R. 436. Scottish Re had formed this entity (along with Orkney Re, Inc., collectively “Orkney”) in 2005 to finance collateral reserves to support its reinsurance of a block of insurance contracts as required by regulators. R. 432. In 2009, affiliates of Cerberus purchased at a discount $700 million of the $850 million in debt securities that Orkney had issued. R. 432-433. In so doing, Cerberus and its affiliates knowingly usurped a corporate opportunity that belonged to Scottish Re and created a conflict 12 of interest, given Cerberus’s interest in unwinding its Orkney position at a profit and the power and control that Cerberus had to cause the Company to undertake such an unwind transaction. R. 432. Two years later, in 2011, simultaneously with the Merger, Scottish Re did in fact repurchase Cerberus’s Orkney notes for $590 million, allowing Cerberus to exit its position at an undisclosed gain. R. 440. While Cerberus profited, Scottish Re was damaged as, for example, its book value declined by roughly $150 million. R. 433, 440-441, R. 456-458. The Orkney unwind transaction was not properly analyzed by the Scottish Re board or disclosed to Scottish Re’s Ordinary Shareholders to consider in deciding whether to approve the Merger. R. 440-441. B. The Derivative Causes of Action In his Original Complaint, Davis asserted ten causes of action, three of which are the Derivative Causes of Action at issue on this appeal. The Seventh Cause of Action in the Original Complaint asserts a claim of waste against the Directors on behalf of the Company3 based on, among other conduct, the Directors’ actions in improperly causing Scottish Re to enter into the Merger and the Orkney unwind transaction. R. 454. 3 Although the Seventh Cause of Action was not styled as a derivative cause of action in the Original Complaint, Davis does not dispute that this claim is being brought on behalf of Scottish Re and therefore is governed by the standards under Cayman law for a derivative cause of action. 13 The Ninth Cause of Action in the Original Complaint asserts claims of breach of fiduciary duty against the Directors on behalf of the Company based on, among other conduct, the Directors’ actions in connection with the Orkney unwind transaction. R. 455-457. The Tenth Cause of Action is a so-called double derivative cause of action that Davis brings against the Investors, the Directors, and the directors of Respondent Scottish Re (US), Inc. (“SRUS”), based on Davis’s status as a shareholder of Scottish Re, which is in turn the parent of SRUS. This claim is based on harm to SRUS (and, indirectly, to Scottish Re itself) arising out of the actions of the SRUS directors, working in concert with the Investors and Director Respondents, in connection with the Orkney unwind transaction. R. 457-459. C. The Trial Court’s Dismissal Order Defendants moved to dismiss the Original Complaint in full for failure to state claims, lack of personal jurisdiction, and lack of standing. R. 110-111, 412- 413, 653-654. In an Order of the Honorable O. Peter Sherwood dated October 7, 2014, R. 31-62, the trial court resolved the motions to dismiss. The trial court dismissed all of Davis’s causes of action, except for two claims against Scottish Re for breach of contract. In dismissing Davis’s Fourth, Sixth, Seventh, Eighth, Ninth and Tenth Causes of Action, the trial court held that they were each derivative, not direct, 14 causes of action and Davis lacked standing to pursue them because he had not sought and received leave to proceed with his shareholder derivative claims from a Cayman court pursuant to Rule 12A. R. 55-57, 59. Rule 12A states, in relevant part, that “[w]here a Defendant in a derivative action has given notice of intention to defend, the Plaintiff must apply to the Court for leave to continue the action.” R. 55. The Dismissal Order reasoned that under this Court’s decision in Tanges v. Heidelberg N. Am., Inc., 93 N.Y.2d 48 (1999), Rule 12A is a substantive (as opposed to procedural) rule, which it was therefore bound to apply as a condition precedent to Davis’s claims under New York’s choice of law rules. R. 56-57. Alternatively, the trial court concluded that, even if Rule 12A did not apply, dismissal of these causes of action was appropriate because Davis could not satisfy the “fraud on the minority exception” to the English common law rule set forth in Foss v. Harbottle. R. 57-58. The trial court found that this exception did not apply because the Original Complaint did not allege that Scottish Re’s Directors had “control” over the Company. R. 57-58. In a footnote, the trial court also concluded that the exception had not been met because the Original Complaint did not allege that Scottish Re’s directors had personally benefitted from the transactions at issue to the detriment of Scottish Re. R. 58 n.6. On October 28, 2014, Davis timely appealed the Dismissal Order to the Appellate Division, First Department. R. 18-20. 15 D. The Appellate Division’s March 10 Order On March 10, 2016, the Appellate Division issued its Decision and Order modifying the Dismissal Order by granting Davis an opportunity to replead his Fourth and Sixth Causes of Action as direct, rather than derivative, claims. R. 4256-4261, 4264.4 The Appellate Division otherwise upheld the Dismissal Order. R. 4261, 4263-4264. In two paragraphs, the March 10 Order addressed Davis’s standing to proceed with the derivative claims asserted in his Seventh, Ninth, and Tenth 4 With respect to the fourth cause of action regarding an allegedly improper dividend policy adopted by the Directors, the Appellate Division majority found that Davis’s pleading had “confuse[d] derivative and individual rights” and these “deficiencies” made “it virtually impossible to discern just how the dividend policy was discriminatory.” R. 4255-4256. The majority concluded, however, that Davis “should be given an opportunity to replead to remedy the pleading deficiencies” in recognition of the fact that “rather than corporate mismanagement, plaintiff asserts unequal treatment in the form of an intentional, premeditated plan to pay the Investors huge windfall dividends while freezing out minority shareholder in order to induce them to sell their shares to the Investors at a steep discount.” R. 4256. With respect to the sixth cause of action challenging the Directors’ conduct in connection with the Merger, the Appellate Division majority found that that claim “as pleaded, … merges direct claims with derivative claims” because it alleged that that the board’s conduct caused harm to both Davis and the company and sought rescission of the Merger as alternative relief. R. 4258. Again, however, the majority concluded that Davis “should be given leave to replead his separate direct claim of being induced by the Directors to part with his common shares in Scottish Re for less than their true value from his derivative claim alleging harm to the company…and to set forth facts to establish the special circumstances necessary under Cayman law to create a fiduciary duty between the Directors and plaintiff as a minority shareholder.” R. 4258. 16 Causes of Action. The Appellate Division affirmed the dismissal of these claims based on its conclusion that Rule 12A “is applicable in the courts of this state as a substantive, rather than procedural, condition precedent to the continuation of a derivative action.” R. 4261-4262. Having reached the conclusion that Rule 12A bars Davis’s claims, the Appellate Division did not address the trial court’s ruling that Davis’s pleading was also insufficient to satisfy the “fraud on the minority” exception to the English common law rule in Foss v. Harbottle. R. 4262. Given the prominence of the Cayman Islands as a financial center, the significance of the March 10 Order was quickly highlighted in the investment and legal communities. For example, the law firm of Schulte Roth & Zabel (counsel for Respondent Cerberus) issued a client “Alert” recognizing that the March 10 Order is “significant” for imposing “a rule recognized by a New York appellate court for the first time, requiring plaintiffs asserting derivative claims under Cayman law to first obtain leave of the Cayman courts,” which would present a “significant hurdle to shareholders seeking to bring derivative claims under Cayman Law in NY courts.”5 Davis timely moved for leave to appeal the March 10 Order. On July 7, 2016, the Appellate Division granted his motion. R. 4247. 5 The SRZ Alert is available at https://www.srz.com/images/content/7/0/v2/ 70727/032416-First-Department-Rules-Derivative-Claims-Under-Cayman- Law.pdf (accessed September 20, 2016) [hereinafter “SRZ Alert”]. 17 Argument I. The March 10 Order should be reversed because New York courts have the authority to employ New York procedures to decide whether a New York plaintiff has standing to bring a derivative claim against a Cayman company. In two paragraphs, the March 10 Order affirmed the dismissal of the Derivative Causes of Action based on the Appellate Division’s conclusion that Order 15, rule 12A of the Grand Court of the Cayman Islands “is applicable in the courts of this state as a substantive, rather than procedural, condition precedent to the continuation of a derivative action.” R. 4261. The only appellate authority cited by the Appellate Division in support of this conclusion was the Court of Appeals’ decision in Tanges v. Heidelberg N. Am., 93 N.Y.2d 48 (1999), which discusses generally the choice of law principles that should guide courts in distinguishing between substantive and procedural rules.6 The Appellate Division’s holding regarding Rule 12A should be reversed as a matter of law. See Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994) (rulings on motions to dismiss are reviewed de novo); see also CPLR 4511(c) (determinations regarding foreign law are reviewed as matter of law). First, even on its own terms, 6 On this point, the trial court also cited only to Tanges and no other appellate authority. R. 56. 18 the March 10 Order misapplies Tanges given the Appellate Division’s own recognition that Rule 12A only addresses remedy issues. Second, and more generally, the March 10 Order should be reversed because it cannot be reconciled with the express terms of the controlling Cayman procedural scheme. By its terms, Rule 12A has nothing to do with any substantive rule of Cayman law. It is—in the words of Respondents’ own Cayman law expert—simply the “procedural mechanism,” R. 3924, that a Cayman court relies on to determine a shareholder’s standing to sue on behalf of a corporation from any jurisdiction regardless of whether it is a Cayman company or not and regardless of what substantive standing doctrines control. In New York, the CPLR likewise has various pre-trial procedural mechanisms to allow a court to screen out those derivative claims that a shareholder does not have standing to pursue under whatever law substantive law controls—Cayman or otherwise. New York courts have routinely undertaken this analysis in the past. There is no basis to prevent them from doing so in this case or going forward. Finally, under this Court’s authority and as a general matter of policy, there is no basis to divest New York courts of their authority to apply New York procedures to consider the Cayman standing issues for themselves—especially when, absent reversal, the Order will create significant hurdles that could effectively bar all derivative claims on behalf of Cayman companies in New York. 19 A. The Appellate Division’s recognition that Rule 12A governs a “remedy” and not a “right” requires reversal under Tanges. The parties agree, and the Appellate Division held, that the application of Rule 12A in the New York courts is informed by this Court’s decision in Tanges. That opinion held that Connecticut’s statute of repose was a substantive rule of law that a New York court needed to apply because the statute extinguished a plaintiff’s underlying rights once sufficient time passed. 93 N.Y.2d at 55-56. By contrast, the Court of Appeals noted “Statutes of Limitation are generally considered procedural because they are viewed as pertaining to the remedy rather than the right.” Id. at 54-55 (citation and internal quotation omitted) (emphasis added). Emphasizing the distinction between rights and remedies, the Court of Appeals cited with approval the relevant section in Siegel’s New York Practice, which states: “The theory of the statute of limitations generally followed in New York is that the passing of the applicable period does not wipe out the substantive right; it merely suspends the remedy.” Siegel, N.Y. Prac. § 34, at 38 (2d ed. 1991) (emphasis added). The Appellate Division purported to follow this authority. It actually did the opposite. Citing Tanges, the Order analyzed Rule 12A as a “substantive, rather than procedural, condition precedent to the continuation of a derivative action, as the underlying remedy is extinguished if a plaintiff fails to file an application to continue the derivative action.” R. 4261. But as Tanges and the Siegel treatise 20 make clear, given the Appellate Division’s conclusion that Rule 12A pertains to the “underlying remedy”, it necessarily follows that Rule 12A is a procedural rule—just like the remedy-extinguishing Statutes of Limitations discussed in Tanges. The Appellate Division’s contrary holding that Rule 12A “is applicable in the courts of this state as a substantive” requirement for “the continuation of a derivative action” is therefore error that misapplied the Appellate Division’s own conclusions to the Appellate Division’s own recognition of the controlling law. For this reason alone, the March 10 Order should be reversed. B. Rule 12A is a “procedural mechanism” that does not set forth substantive principles of Cayman law. The Appellate Division’s conclusion that Rule 12A is a “substantive” rule of Cayman law also cannot be reconciled with the text of Rule 12A, which says nothing about, and has nothing to do with, the substance of the Cayman Islands Companies Law. By its terms, Rule 12A is simply a Cayman court “rule” that “applies to every action begun by writ by one or more shareholders of a company where the cause of action is vested in the company and relief is accordingly sought on its behalf (referred to in this rule as a ‘derivative action’).” R. 2064. Notably, the word “company” in Rule 12A is lowercase and undefined. The ramifications of this word choice are undisputable: Rule 12A is not implementing a policy 21 regarding what the substance of Cayman law is as applied to Cayman companies specifically; rather, it is providing Cayman judges with a procedure to handle derivative actions brought by a shareholder of any “company” regardless of where such company might be incorporated and regardless of what substantive law applies. Thus, for example, a shareholder derivative action in the Cayman Grand Court against a BVI company would also be controlled by Rule 12A. R. 2077. The same would be true of a derivative action in the Cayman courts against a U.S. company; again, the procedures of Rule 12A would govern how to resolve whether under U.S. substantive law the case could proceed. Consistent with this plain text, Rule 12A was adopted as part of the procedural rules of the Grand Court of the Cayman Islands and is not a provision in the Cayman Islands Companies Laws. R. 2061-2062. While the drafters’ characterization of Rule 12A as procedural does not require this Court to adopt the same conclusion, it is compelling evidence of why the Appellate Division erred. When legislatures want to impose substantive rules setting forth the standards applicable to derivative claims against a company incorporated in the legislature’s own jurisdiction, they adopt those rules as part of the companies laws of those jurisdictions. See, e.g., Locals 302 and 612 of Int’l Union of Operating Eng’r- Employers Constr. Indus. Ret. Trust v. Blanchard, No. 04 CIV. 5954 (LAP), 2005 WL 2063852, at *3-7 (S.D.N.Y. Aug. 25, 2005) (discussing provisions of 22 Canadian Business Corporations Act which enumerate specific Canadian courts that may exclusively hear derivative actions against Canadian corporations); Microsoft Corp. v. Vadem, CIVA 6940-VCP, 2012 WL 1564155, at *4-6 (Del. Ch. Apr. 27, 2012) (discussing provisions of Business Companies Act of 2004 of the British Virgin Islands which requires that any member of a BVI company must obtain leave from a BVI court before bringing a derivative suit on behalf of the company). But when the issue is what procedure to use to implement whatever substantive rules may be applicable to derivative claims involving any company from anywhere, it makes sense, as with Rule 12A in the Cayman Islands, to adopt such a mechanism as part of the court’s general procedural rules. See R. 2061-62 (committee that drafted Rule 12A was charged with “regulating pleading, practice and procedure” in the Cayman courts). Indeed, Respondents’ own expert on Cayman law has conceded that “Order 15 rule 12A provides a procedural mechanism for bringing a substantive issue before the Court, namely the pre- requisite for standing to bring a derivative action under Cayman Islands law,” R. 3924 (emphasis added). New York practice, of course, has its own pre-trial “procedural mechanisms” that allow a New York court to filter out cases where a shareholder plaintiff cannot meet the “pre-requisite for standing to bring a derivative action under Cayman Islands law.” For example, under CPLR 3211(a)(3), a trial court 23 has the authority to consider if a plaintiff has a “legal capacity to sue” and CPLR 3211(b) and (c) further provide the court with authority to consider evidence in connection with this issue or to “order a continuance to permit further affidavits to be obtained or disclosure to be had” or “make such other order as may be just.” Alternatively, under CPLR § 603, the trial court can order severance of “any separate issue.” In Hayat v. Al-Mazeedi, 28 Mass. L. Rep. 243 (Mass. Sup. Ct. 2011), a Massachusetts court reviewed the analogues of these CPLR provisions in the Massachusetts Rules of Civil Procedure and concluded that they gave judges ample opportunity to determine the issues which, in the British and Cayman courts, would be addressed in an application to continue under a mechanism like Rule 12A. This conclusion applies equally to New York judges. The March 10 Order does not address Hayat. Even more fundamentally, the Appellate Division did nothing to consider whether the judiciary in this State is fully capable of applying the substantive rules applicable in Cayman derivative actions for themselves. Notably, the possibility of New York courts capably applying New York procedures to decide the relevant substantive issues of Cayman law is not simply hypothetical: in a prior, unrelated federal case involving precisely the same Cayman company at issue here (Scottish Re), the court readily decided the standing issues without regard to Rule 12A. Winn v. Schafer, 499 F. 24 Supp. 2d 390 (S.D.N.Y. 2007).7 Numerous New York state and federal courts have also considered and addressed a shareholder’s standing to initiate a derivative lawsuit on behalf of a Cayman company under Cayman law. See, e.g., Shenwick v. HM Ruby Fund, L.P., 106 A.D.3d 638, 639 (1st Dep’t 2013); CMIA Partners Equity Ltd. v. O’Neill, 920 N.Y.S.2d 240 (N.Y. Cty. Sup. Ct. 2010); In re Harbinger Capital Partners Funds Inv’r Litig., No. 12 CIV. 1244 (AJN), 2013 WL 5441754, at *21-22 (S.D.N.Y. Sept. 30, 2013) (vacated in part on other grounds, 2013 WL 7121186 (S.D.N.Y. Dec. 16, 2013)); Howe v. Bank of New York Mellon, 783 F. Supp. 2d 466, 475 n.9 (S.D.N.Y. 2011); Feiner Family Trust v. VBI Corp., No. 07 CIV. 1914 (RPP), 2007 WL 2615448, at *5-6 (S.D.N.Y. Sept. 11, 2007). There is no basis to now conclude that other New York courts are either incompetent to, or precluded from, similarly making such determinations utilizing the procedures available to them, rather than having to defer to a Cayman court. The Appellate Division cited to the trial court decision in ARC Capital as a basis to find that Rule 12A is a substantive provision of Cayman law. R. 4263- 4264 (citing ARC Capital, LLC v. Kalra, No. 652931/2012, 2013 N.Y. Misc. LEXIS 2600 (N.Y. Cty. Sup. Ct. June 18, 2013)). This lower court decision is obviously not binding on this Court. Regardless, ARC Capital relied on a case 7 The substance of this decision, and the trial court’s erroneous reliance on it, are discussed further in Section II.A.1. below. 25 involving the Canadian Business Corporations Act: Locals 302 and 612 of Int’l Union of Operating Eng’r-Employers Constr. Indus. Ret. Trust v. Blanchard, No. 04 CIV. 5954 (LAP), 2005 WL 2063852 (S.D.N.Y. Aug. 25, 2005). The Canadian statute applies to Canadian companies and expressly requires that shareholder derivative actions and leave proceedings involving such companies be brought in particular Canadian courts. Id. at *3-4. Rule 12A, by contrast, is not part of the Cayman Islands Companies Law, says nothing about Cayman companies in particular, and does not purport to establish exclusive jurisdiction with respect to any type of proceedings or actions. The cases cited by Respondents below are similarly irrelevant, because they involve statutory schemes that are not comparable to the procedural mechanism embodied by Rule 12A. For example, Respondents cited Lewis v. Dicker, 118 Misc. 2d 28, 29 (Kings Cty. Sup. Ct. 1982), which involved a substantive Pennsylvania requirement of a pre-suit demand before filing a derivative suit against a corporation “organized under the laws of Pennsylvania.” They also cited authority involving a Venezuelan statute that is similarly express in applying substantive requirements regulating the conduct of shareholders in companies incorporated in that country. See Hausman v. Buckley, 299 F.2d 696, 701 (2d Cir. 1962) (dismissing derivative claim against Venezuelan company where shareholder had failed to obtain permission of majority of shareholders as required 26 under substantive provisions of Venezuelan law applicable to Venezuelan companies). If anything, these cases only confirm that New York courts are perfectly capable of applying their own procedures to enforce the substantive principles governing shareholder derivative claims in foreign legal regimes. And, in any event, none of the legal regimes at issue in these cases are analogous to Rule 12A, which, again, does not create Cayman-specific substantive rules for derivative lawsuits involving Cayman corporations; it just sets forth a procedural mechanism applicable to derivative claims against any company from any jurisdiction, if they have been filed in the Cayman courts. C. The Appellate Division’s interpretation of Rule 12A will close the doors of the New York courts to significant claims that bear on New York’s status as a financial center. The Appellate Division’s analysis of Rule 12A is not only inconsistent with the text of the rule and with Tanges, it would also have draconian policy ramifications if not reversed. The March 10 Order requires New York plaintiffs to try to first seek permission from the Cayman courts under Rule 12A as a condition precedent of continuing a shareholder derivative action against a Cayman company in New York. The Appellate Division, however, failed to recognize the very real possibility that it has created a hoop that is not only legally unjustified, but also 27 impossible to jump through as a matter of practice—i.e., a rule that would insulate Cayman companies from derivative suits in New York. By its terms, Rule 12A does not apply to shareholder derivative litigation commenced in courts anywhere but in the Cayman Islands itself. R. 2061-2062. Nor is there any other Cayman procedural rule that would create jurisdiction for a Cayman court to hear a Rule 12A application filed as a threshold to bringing a New York case. As Appellant’s expert on Cayman law concluded: “There is no mechanism whereby a shareholder of a Cayman Islands company who brings a derivative claim in a court outside the Cayman Islands could bring an o.15, r.12A application.” R. 2061. Faced with this opinion in connection with the briefing below, Respondents’ own Cayman law expert responded only with silence: he never disputed this proposition, nor did he ever identify how a New York plaintiff like Davis could have gone to a Cayman court to establish standing before filing his New York complaint. Thus, while the March 10 Order treats a Rule 12A application by Appellant as a mere threshold issue prior to litigation in the New York courts, the record is devoid of any evidence that would support the Court’s finding that Davis is in breach of any purported “condition precedent.” The draconian consequences of this situation have been recognized in a client briefing by one of the leading Cayman law firms, which warns that there is 28 real “doubt whether the Cayman court would entertain such applications only as a prerequisite for an investor pursuing a claim in New York, with the result that actions brought merely to seek leave to continue could, under Cayman Islands’ procedural rules, be deemed an abuse of process.” Mourant Ozannes Briefing (see note 1 above) at 3. In other words, the position adopted in the March 10 Order “could effectively bar all derivative claims on behalf of Cayman funds in New York.” Id. Notably, just days after the Appellate Division issued the March 10 Order, counsel for Cerberus similarly emphasized that the Appellate Division’s new rule of law created a “significant hurdle to shareholders seeking to bring derivative claims under Cayman Law in NY courts.” SRZ Alert (see note 5, above). The many investment firms that have flocked to the Cayman Islands based on its status as a tax haven may embrace such “significant hurdles” as a means to insulate themselves from the reach of the New York courts and shareholder challenges in New York State. But this result is not good policy or consistent with New York choice of law doctrine. New York courts have an interest in “safeguard[ing] New York’s recognized interest in maintaining and fostering its undisputed status as the preeminent commercial and financial nerve center of the Nation and the world.” Curtis, Mallet-Prevost, Colt & Mosle, LLP v. Garza-Morales, 308 A.D.2d 261, 269 (1st 29 Dep’t 2003) (citation omitted). Here, if New York plaintiffs cannot actually go to the Cayman courts as the Appellate Division assumes they can, the practical reality is that the March 10 Order closes the doors of the courts of this State to derivative actions against Cayman companies, including even actions brought by New York residents.8 Reversing the March 10 Order is correspondingly of vital importance to maintain power of the New York judiciary to ensure justice is done in a significant category of claims involving arguably the most important offshore jurisdiction in the world9, which heavily relies on its close ties to U.S. financial markets. 8 In briefing below, Respondents emphasized that Appellant is “foreign” or a “Mexican resident.” But the March 10 Order creates a substantial burden for all plaintiffs seeking to proceed with derivative claims against a Cayman company, including—to the extent nationality or residence matters—New York residents. Moreover, here, Scottish Re issued the shares purchased by Davis through a public offering at the New York Stock Exchange and the trial court has found that Scottish Re’s center of gravity in connection with the Merger was New York, evidencing Respondents’ availment of the New York financial markets in connection with the transactions at issue. See Davis v. Scottish Re Group Ltd., 2016 N.Y. Slip Op. 31313(U), 2016 WL 3688466, at * 6, (N.Y. Cty. Sup. Ct. July 11, 2016). 9 According to statistics maintained by the General Registry of the Cayman Islands, over 98,000 corporate entities are currently operating under Cayman law, and between 700 and 1,100 such companies are created each month. See www. ciregistry.gov.ky/portal/pls/portal/docs/1/12330502.pdf (accessed September 24, 2016). The Cayman Islands are also the principal offshore jurisdiction for hedge funds in the world. See http://www.maplesandcalder. com/expertise/ investment- funds/hedge-funds/cayman-islands-hedge-funds-group/ (accessed April 13, 2016). 30 Reversal is likewise of substantial importance to protect the sovereignty of the New York trial courts, which should not be neutered in their ability to apply the well-established procedural mechanisms in the CPLR to decide threshold standing issues for themselves in cases that have been filed before them. Cf. Sachs v. Adeli, 26 A.D.3d 52, 55 (1st Dep’t 2005) (“This Court has repeatedly held that a statute or rule of another State granting the courts of that State exclusive jurisdiction over certain controversies does not divest the New York courts of jurisdiction over such controversies.”); Tennessee Coal, Iron & R. Co. v. George, 233 U.S. 354, 360 (1914) (Alabama statute cannot defeat jurisdiction of Georgia courts to apply Alabama law regarding tort liability of employer); Randall v. Arabian Am. Oil Co., 778 F.2d 1146, 1153 (5th Cir. 1985) (portion of Saudi Labor Law providing that labor contract disputes must be brought before a Saudi commission was procedural, and therefore did not constrain a U.S. court’s consideration of such claims). These issues are precisely the kind of “policy considerations” that, under Tanges, 98 N.Y.2d at 58, require consideration. They are also a further basis for reversal. 31 II. The March 10 Order should be reversed because Davis has standing under Cayman law to pursue derivative claims that Scottish Re would never itself litigate. In an alternative holding, the Dismissal Order concluded that regardless of the applicability of Rule 12A, Davis had also failed to satisfy the substantive standards for pleading a shareholder derivative claim under the rule of Foss v. Harbottle, [1843] 2 Hare 461 (available at R. 1096-1115). The Appellate Division did not reach this issue. However, if this Court agrees that application of Rule 12A does not warrant dismissal of the Derivative Causes of Action, Davis’s challenge to the trial court’s Foss ruling will need to be resolved—either by this Court or by the Appellate Division on remand. And if this Court chooses to reach this issue, it should again reverse, because Cayman law does not impose the hyper-technical restrictions on shareholder derivative suits that the trial court applied. “For well over a century” courts in England and other Commonwealth nations applying English law “have struggled with a notion that a minority shareholder might sue, on behalf of himself and other shareholders to vindicate a wrong done to the corporation.” Messinger v. United Canso Oil & Gas Ltd., 486 F. Supp. 788, 791-92 (D. Conn. 1980). The “well spring of judicial learning” on this issue is Foss v. Harbottle, id. at 792, an 1843 case from England, which has been adopted by the Cayman Islands Court of Appeal as applicable to Cayman 32 companies. See Schultz v. Reynolds & Newport Ltd., [1992-93] C.I.L.R. 59 (available at R. 1746-1766). The general rule of Foss is that the proper plaintiff to an action to recover loss suffered by a company is the company itself. The Foss decision recognized, however, that facts might exist to justify departing from this rule. R. 1096-1115. Over time, exceptions developed to the general Foss rule that allowed shareholders to “bring an action in their own names” in situations where it would “give a remedy for a wrong which otherwise would escape redress.” Burland v. Earle, [1902] AC 83 at 93 (discussing exception for wrongdoer control) (available at R. 1051-1071). The four traditional exceptions are: “(1) if the conduct infringed on the shareholder’s personal rights; (2) if the conduct would require a special majority to ratify; (3) if the conduct qualifies as a fraud on the minority; or (4) if the conduct consists of ultra vires acts.” Winn v. Schafer, 499 F. Supp. 2d 390, 396 (S.D.N.Y. 2007). In 2006, the English Parliament abolished the rule of Foss v. Harbottle, and the English statutory scheme now permits a claim by a minority shareholder in the company against a director for negligence or any breach of duty. See R. 2073, 2091 (discussing the U.K. Companies Act of 2006, s. 265-s. 268). Other Commonwealth jurisdictions have also abolished Foss by statute. See Messinger, 486 F. Supp. at 794 (recognizing new Canadian legislation intended “to free the 33 minority from the tangles of the rule (in Foss v. Harbottle) and not (to be) constrained by the traditional exceptions” based on the “legislature’s recognition that a more accommodating and more just policy should prevail” (citations and internal quotations omitted)). Separate from the trend towards relaxing or abolishing the Foss v. Harbottle rule by statute, certain Commonwealth courts have applied common law principles to recognize a so-called “fifth exception” that allows shareholder derivative actions to proceed where the interests of justice require. A 2012 decision from Ireland (where the rule of Foss v. Harbottle still applies), assumed the fifth exception existed before determining it could not be met on the facts. Connolly v. Seskin Properties Ltd., [2012] I.E.H.C. 332 (available at R. 2408-2421). Another Irish decision from 2007 similarly recognized a “positive” view of the fifth exception to ensure that the “formulation of the rule [of Foss v. Harbottle] in the earlier cases” is not “applied in such a way as to lead injustice.” Glynn v. Owen, [2007] I.E.H.C. 328 (available at R. 2534-2545). And an Australian decision has expressly applied the fifth exception to let a derivative action proceed. Biala Pty Ltd. v. Mallina Holdings Ltd., [1993] ACSR 785 (available at R. 2290-2364). Here, Davis has standing to bring the Derivative Causes of Action under the fraud on the minority exception to Foss v. Harbottle. At minimum, his derivative claims trigger the interests of justice exception. The trial court’s contrary 34 determination was an error of Cayman law. If the Court chooses to reach these issues rather than remand, it should reverse the March 10 Order for this reason too in order to allow the Derivative Causes of Action to proceed. A. Davis satisfies the fraud on the minority exception to Foss v. Harbottle. The fraud on the minority exception to Foss v. Harbottle only requires Appellant to allege (i) that the purported wrongdoers are in “control” of the company, and (ii) that those wrongdoers have committed “fraud” as that term is broadly defined English law. R. 2091, 2093. “These labels are deceptively simple, however, because, as the cases that have considered the exception demonstrate, neither actual control nor fraud as we traditionally understand the term is required to qualify under the exception.” In re Tyco Intern., 340 F. Supp. 2d 94, 98-99 (D.N.H. 2004). The trial court erred because its formalistic application of the fraud on the minority exception cannot be reconciled with the more flexible dictates of the cases. 1. The Original Complaint alleges wrongdoer control. “English courts have struggled to develop a workable concept of control in this context.” Tyco, 340 F. Supp. at 99. It is clear, however, that “control” is not limited to voting control by the defendants. See Smith v. Croft, (No. 2) [1988] Ch 114, 185a (“In my judgment the word ‘control’ was deliberately placed in inverted commas by the Court of Appeal in Prudential Assurance Co. Ltd. v. Newman 35 Industries Ltd., (No. 2) [1982] Ch. 204, 219 because it was recognised that voting control by the defendants was not necessarily the sole subject of investigation. Ultimately the question which has to be answered in order to determine whether the rule in Foss. v. Harbottle applies to prevent a minority shareholder seeking relief as plaintiff for the benefit of the company is ‘Is the plaintiff being improperly prevented from bringing these proceedings on behalf of the company?’”) (available at R. 3369-3445). Prudential Assurance Co. Ltd. v. Newman Industries Co. Ltd., (No. 2) [1982] Ch 204 (available at R. 1557-1632), is “the most influential modern case that addresses the issue.” Tyco, 340 F. Supp. at 99. And, as quoted by Respondents’ own Cayman law expert, Prudential establishes that “control” can embrace “a broad spectrum extending from an overall absolute majority of votes at one end, to a majority of votes at the other made of those likely to be cast by the delinquent himself plus those voting with him as a result of influence or apathy.” R. 786. Here, the trial court held that Davis could not establish the element of “control” based on the supposedly “closely analogous case” of Winn v. Schafer. Like the instant case, Winn involved derivative claims against directors of Scottish Re. But the similarities end there. The complaint in Winn alleged that a “majority of Scottish Re’s outstanding shares are owned by U.S. investors” and that “Scottish 36 Re is a publicly traded company with millions of shares outstanding … [which] were held by thousands of shareholders located throughout the nation and abroad.” Winn, 499 F. Supp.2d at 398 (quotations and omissions and alterations in original). Given this massive dispersion of “millions of shares” among “thousands of unidentifiable shareholders,” the district court found that the defendants in Winn could not possibly be found to have either actual or de facto control of the company. Id. By contrast, here, the Investors—Cerberus and Mass Mutual together with their affiliates—assumed majority control and ownership of 68.7% of Scottish Re’s shares in May 2007, subsequent to the time period at issue in Winn. R. 428, 464. Following the 2011 Merger, they acquired 100% control of Scottish Re’s common shares. R. 423, 434. And the foundational theory of the Original Complaint is that the Directors acted in concert with the Investors to further, among other wrongdoing, the Merger that is at issue in the Seventh Cause of Action and the Orkney transaction that is at issue in the Ninth and Tenth Causes of Action. R. 434-443. In other words, based on allegations that must be given “every possible favorable inference” at the pleading stage, Leon, 84 N.Y.2d at 87-88 (1994), this case involves a combination between the Directors and Investors to engage in joint wrongdoing. And these wrongdoers, acting jointly in furtherance of this combination, unquestionably had control over in excess of 68% of Scottish 37 Re’s shares during the relevant time period. The Original Complaint therefore alleges all the facts necessary to demonstrate there is de facto control under the Foss exception. This conclusion is consistent with the underlying purpose of the control prong of the fraud on the minority exception. As Respondents’ Cayman law expert explained below, this exception covers circumstances where “the wrongdoers themselves are in control of the company so that the company will not pursue the claim.” R. 785 (emphasis added). This same point was made well over one hundred years ago in a seminal English case decided under Foss, which likewise explained that an “individual corporator may maintain the suit” if it can be shown that “the wrong-doer commands the majority of the votes, so that it would be absurd to call the meeting” of shareholders to determine whether the conduct at issue should be ratified. Russell v. Wakefield Waterworks Co., (1875) LR 20 Eq 474 (emphasis added) (available at R. 1701-1708). Here, given the conspiracy alleged in the Original Complaint between the Directors and Scottish Re’s controlling shareholders, there can be no serious question on the pleaded facts that Scottish Re would not “pursue the claim[s].” Under the pragmatic rule of Prudential Assurance, the Director-wrongdoers would undoubtedly have the “influence” necessary to ensure that their co-conspirators at Cerberus and Mass Mutual joined with them in using their voting power to stop the 38 Company from pursuing litigation that targeted the Directors’ and the Investors’ own wrongdoing. Relying on Schultz v. Reynolds & Newport Ltd., the trial court emphasized that “the fact that a director has been nominated or employed by a majority shareholder does not give the director the voting power of the shareholder.” R. 58. This is true, but irrelevant. Appellant is not seeking to impute “control” to the Directors based merely on their nomination by Cerberus or MassMutual, but rather based on their participation in a conspiracy with these controlling shareholders. As co-conspirators, they would have the influence necessary to ensure that the joint voting control over Scottish Re would be used to stop the Company from ever filing the derivative claims that the Original Complaint seeks to pursue on behalf of the Company. The Schultz decision does not speak to these factual circumstances. The appellant in that case, Kirsten Schultz, alleged that an American businessman, Robert Dupre, had agreed to pay her $500,000 for business services in connection with certain projects. They formed a company, Newport Ltd., which received the $500,000 payment through an account at Canadian Imperial Bank of Commerce (“CIBC”). A CIBC subsidiary, Commerce Management Services (“CMS”), was issued 100 shares of Newport Ltd., which it was to hold as nominee shareholder jointly for the benefit of Schultz and Dupre. CMS in turn had five directors. 39 Reynolds, a senior trust officer of CIBC, was one of the five. Four other directors were local employees of CIBC. Schultz alleged that Reynolds had acted on instructions to transfer the money in the Newport Ltd. account to another account in Dupre’s name. She thereafter brought a derivative action on behalf of Newport Ltd. against Reynolds. The Cayman Court of Appeals readily concluded that no allegations existed supporting a claim that Reynolds, as the alleged wrongdoer, had either direct or indirect control over Newport Ltd. He was just one of five directors, and there was no suggestion that CMS, the sole shareholder of the company, had been involved in the alleged wrongdoing at issue. Reynolds therefore neither had any voting rights himself, nor was there any reason to believe that he, acting by himself as a single director on a five-person board, had the influence necessary to assert de facto control to stop Newport Ltd. from bringing the claim. To avoid this conclusion, Schultz argued that CMS, the sole shareholder of Newport Ltd., was a subsidiary of CIBC and “since all of the directors of Newport Ltd. and CMS are employees of CIBC, then consequently CIBC controls the board of Newport Ltd. and CMS.” 1992-93 CILR at 72 (R. 1757). This argument got no traction, as no facts had been alleged to support the inference that Reynolds would be able to influence CIBC, or to cause the other CIBC employees on the board of Newport Ltd., or CMS, to take action in furtherance of the alleged wrongdoing by 40 Reynolds—especially when none of these other employees or CMS or CIBC was implicated in any way in what Reynolds had done. In such circumstances, the court emphasized that the “directors of Newport Ltd. have a duty to act in the best interest of the company regardless of the wishes of CIBC.” Id. at 73 (R. 1757). Importantly, Schultz repeatedly recognized that the rule of Foss v. Harbottle did not stand in the way in situations where a “grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue”, or where “it was impossible to get the company itself to sue” the wrongdoers, or where there was “a wrong which would otherwise escape redress”. Id. at 64-65 (citations and internal quotations omitted) (R. 1750-1751). The facts of Schultz, however, simply did not implicate these concerns, given Reynolds’s obvious inability to prevent Newport Ltd. from litigating against him if it chose. Here, by contrast, Davis’s claims address precisely the situation where a company that is the nominal defendant in the derivative action could never be expected to sue on its own given the nature of the claims and the power of the alleged wrongdoers to jointly exercise control to deny or stop such litigation. De facto control has therefore been established under Foss at this pleading stage. The trial court’s contrary conclusion in reliance on Schultz—but without regard for the unique and distinguishable facts of that case—was reversible error. 41 2. The Original Complaint alleges wrongdoer benefit. In a footnote, the trial court also concluded that, separate from the control issue, the Original Complaint failed to allege facts sufficient to support the equitable fraud prong of the fraud on the minority exception. The trial court did not contest that “fraud” is defined broadly for purposes of satisfying this exception, a point that the Cayman Court of Appeals also made in Schultz, 1992-93 CILR at 71 (recognizing that under Prudential Assurance, “the exception” could apply to “a breach of duty to the company (including their duty to exercise proper care)” and was not limited to circumstances “where the allegation is that directors who control company have improperly appropriated to themselves money, property or advantages which belong to the company” or “have diverted business to themselves which ought to have been given to the company”) (R. 1756). The trial court found, however, that the Original Complaint was deficient in lacking “evidence that the Scottish Re Directors engaged in self-dealing at the expense of Scottish Re with respect to the transactions at issue.” R. 58 n.6. Thus, according to the trial court, one of the predicates of the “fraud on the minority” exception was absent. Id. This conclusion at the pleading stage, based on just four sentences of discussion, is further reversible error because it is inconsistent with Cayman law. 42 Schultz itself is again instructive. R. 1746-1766. In addition to addressing the control issue discussed above, the Cayman Court of Appeals found that fraud had not been established because “[i]t was not contended that Reynolds received any personal benefit from paying out money in the account of Newport Ltd. to Dupre.” 1992-93 CILR at 77 (R. 1755). To address this issue, the appellant in Schultz sought leave to amend her complaint to add a new claim that Reynolds had conspired with Dupre and CIBC to deprive Newport Ltd. of the funds at issue and transfer them to Dupre. Id. at 80 (R. 1764). The amendment was denied for a variety of reasons. Id. at 60-62 (R. 1746-1747). The discussion of the amendment in the judgment of Georges, J.A. is directly relevant, however. It noted: I have difficulty in quieting the suspicion that the plea of conspiracy became important when it became clear that the need to allege personal benefit to the wrongdoer might be accepted as crucial. The allegation of a conspiracy could arguably fulfill that need. Id. at 91 (emphasis added) (R. 1765). Respondents’ Cayman law expert, Nigel Meeson, acknowledged the significance of this analysis below: “The point the judge was making about the conspiracy allegations was that if conspiracy was alleged it would involve wrongdoer benefit, because the allegation would then include an additional wrongdoer, namely the person who had benefited from the transfer of the monies, 43 rather than only the wrongdoer who had not benefited.” R. 3927 (emphasis added). In other words, if there are allegations that wrongdoers are acting in concert with each other, then a benefit to any one of them is sufficient to satisfy the equitable fraud prong of the Foss exception. Appellant’s Cayman law expert also made this point in his opinion below: “provided that some of the wrongdoers have benefited from the alleged wrong, even in non-fraud claims, it does not appear necessary for all the wrongdoers to have benefitted from the claim to proceed against them all.” R. 2096. The judgment in Daniels v. Daniels, [1978] CH 406 (available at R. 1081- 1095), reinforces this point. In that case, one of the two English authorities relied on by the trial court on the wrongdoer benefit issue, the two directors of the company were a husband and wife who were also controlling shareholders. The minority shareholders claimed the couple had sold property owned by the company at less than fair value to the wife, who later resold it for a profit. As an initial matter, the judgment concluded that the claim could proceed under Foss regardless of whether there had been actual fraud. Id. at 414 (“It would seem to me quite monstruous—particularly as fraud is so hard to plead and difficult to prove—if the confines of the exception to Foss v. Harbottle, were drawn so narrowly that directors could profit out of their negligence.”) (R. 1089). The judgment also rejected the husband’s argument that he should be released from the case because 44 only the wife benefitted from the undervalued property sale: “if the statement of claim is right, and the husband and wife who control 60 per cent of the shares were responsible for a sale to the wife at an undervalue, which they knew or ought to have known, then a remedy for the minority shareholders ought to lie.” Id. at 414 (R. 1089). Under these principles, the trial court erred. While the Schultz plaintiff sought to add dubious conspiracy allegations after-the-fact, Appellant’s theory of the case has been based from the start on well-founded allegations that the Director wrongdoers and the Investor wrongdoers acted in concert to force Scottish Re into unfair transactions that benefited themselves and harmed the Company. R. 434- 443. The trial court itself expressly recognized that Appellant asserts the Directors had an “allegedly conspiratorial relationship with the majority shareholders.” R. 58. And this alleged conspiracy includes precisely the wrongdoers who most directly stood to profit from the inadequate consideration paid to Ordinary Shareholders in the Merger and from the inflated consideration paid by Scottish Re to repurchase the Orkney Notes. Thus, the conspiracy allegations at issue here “involve wrongdoer benefit” of the sort that satisfy the equitable fraud prong—just as Respondents’ expert acknowledged below and the discussion of these issues in Schultz and Daniels also shows. 45 On top of that, no less than six of the ten Scottish Re directors were employed by or repeatedly served as directors for one Cerberus or Mass Mutual entity or another, most in very senior positions. R. 218-219. At the pleading stage, there is ample basis to infer that they also stood to benefit at the expense of the Company by implementing the transactions that allowed their firms to reap substantial profits. On this point, too, Daniels is instructive. Applying Foss, the judgment refused to dismiss the husband from the derivative action at the pleading stage, finding: “at the present moment I do not know what the facts are, and the law on the consequences of those facts has not been expounded. It seems to me to be more convenient to allow the action to continue against both husband and wife.” Daniels, [1978] CH 406, 414 (R. 1089). At a minimum, the same approach is warranted here: just as the Daniels court reasonably wondered how the husband might have benefitted from his wife’s gains, so is there ample basis to allow discovery into how, for example, a Scottish Re director like MassMutual Capital’s President and Managing Director (Larry Port) profited from MassMutual’s profits, or how a Scottish Re director who was a partner in Cerberus European Capital Advisors (Jonathan Bloomer) profited from Cerberus’s gains. See generally R. 218-219, 438 (Director Defendant Adamczyk was a member of Cerberus private equity investment team; Director Defendant Finke was Chairman and CEO of 46 MassMutual affiliate Babson Capital Management LLC; Director Defendant Joyal was prior President of Babson Capital Management; Director Defendant Rolling was Executive Vice President and Chief Financial Officer of MassMutual; Director Defendant Wechsler is Managing Director of Cerberus; Director Defendant James Chapman served on the board of several Cerberus affiliates over many years, and served as a director for many companies in which Cerberus had financial interests). B. Davis satisfies the interests of justice exception. Finally, even if the traditional fraud on the minority exception has not been satisfied, the facts here warrant application of the “fifth exception” to prevent a manifest miscarriage of justice. The parties agree that no Cayman court has yet addressed the viability of this exception under Cayman law. In the briefing below, Respondents’ Cayman law expert offered his opinion that the Cayman courts would not adopt the exception. As support, he cited three English cases as evidence that the “weight of the English cases is firmly against such a fifth exception.” R. 3928. These cases, however, are thirty or more years old and predate the 2006 English statutory reform that abolished the rule of Foss v. Harbottle.10 Modern English corporate law has 10 See e.g., Prudential Assurance Co. Ltd. v. Newman Industries Ltd., (No. 2) [1982], Ch 204 (1982 case rejecting fifth exception) (available at R. 1557- 1632); Estmanco (Kilner House) Ltd. v. Greater London Council [1982] 1 W.L.R. 2 (same) (available at R. 2460-2471); Heyting v. Dupont [1964] 1 W.L.R. 843 47 recognized that the law relating to the Foss “exceptions is rigid, old fashioned and unclear,” Law Commission, Shareholder Remedies: Report on a Reference under Section 3(1)(e) of the Law Commissions Act 1965 (Law Com No. 246, 1997) Para 1.4 (available at http://www.lawcom.gov.uk/wp-content/uploads/2015/03/ lc246_Shareholder_ Remedies.pdf (accessed September 16, 2016)), and embraced the need for more flexibility in permitting shareholder derivative actions. The fact that this flexibility came through legislation is hardly evidence that the English courts, working in the common law tradition, would not have responded to precisely the same concerns, or that a Cayman court would not also do so. See generally Bernhardt v. Polygraphed Co., 350 U.S. 198, 211 (1956) (“courts do not always wait for legislation to find a judicial doctrine outmoded”). Respondents’ Cayman law expert also tried to downplay the Australian decision in Biala applying the fifth exception on the grounds that it was “decided on its own peculiar facts with no more general application, and no application to the pleaded case.” R. 3930. But an interests of justice standard is by definition fact specific. And the relevance of the Biala case is to show how, within the common law tradition, judges are prepared to modernize the application of Foss in recognition of the fact that it would be contrary to “equity” to “require wronged (CA) (1964 case “not [to] be understood as accepting” the exception) (available at R. 2580-2588). 48 minority shareholders to bring themselves within the boundaries of the well recognised exceptions and to deny jurisdiction to a court of equity even where an unjust or unconscionable result may otherwise ensue.” R. 2354. Here, the Original Complaint alleges a deliberate scheme in which Cerberus and MassMutual took over a distressed public company, installed directors beholden to themselves, and then, in concert with each other and with those collaborating directors, used their control to enrich themselves through a self- serving and inequitable merger and debt repurchase transaction that caused Scottish Re very substantial harm. R. 433-443. At the pleading stage, these allegations must be taken as true. And, consistent with Biala, assuming these “peculiar facts,” there is every reason to believe that a Cayman Court applying Cayman law would conclude that Foss was no bar to derivative claims seeking to hold the self-interested directors to account for the transactions they approved. Any other result would lead to the “unjust” and “unconscionable” result of leaving a Cayman Company with no redress for brazen wrongdoing that caused it significant harm. * * * In sum, Davis has pleaded derivative claims that fit within the “fraud on the minority” exception to the rule of Foss v. Harbottle. Given the alleged conspiracy among the Directors and the Investors, the wrongdoers had all the influence 49 necessary to ensure, through the exercise of their joint control, that Scottish Re would never itself bring the instant claims against the Directors. Moreover, given the nature of the self-interested transactions at issue—with the Directors’ co- conspirators, Cerberus and MassMutual, alleged to have obtained substantial unwarranted profits—any “wrongdoer benefit” requirement has also been met according to the standards of Cayman law recognized by Respondents’ own Cayman law expert. Finally, even if the “fraud of the minority” exception somehow does not apply, this is a case where it is appropriate to follow the modern trend toward a flexible application of Foss and allow Davis’s derivative claims to proceed in the interests of justice; equity would not be served by allowing a Cayman company to be victimized by the kind of scheme alleged in the Original Complaint, and a court acting in the common law tradition could and would be expected to act to ensure that the fiduciaries of Scottish Re will be held liable for what they have done, assuming it is ultimately proved. Conclusion Because the Appellate Division erred in affirming the dismissal of the Derivative Causes of Action based on Rule 12A, the March 10 Order should be reversed. In addition, if the Court seeks to address the point rather than remand, it should also find that the trial court erred in its analysis of Foss v. Harbottle and, correspondingly, that the March 10 Order should be reversed on this ground too because it affirmed the dismissal of the Derivative Causes of Action without regard for the trial court's error on this issue. Dated: New York, New York September 26, 2016 Eric Brenner Matthew Tripolitsiotis 575 Lexington Ave., 7th Floor New York, NY 10022 (212) 446-2300 (Phone) (212) 446-2350 (Fax) ebrenner@bsfllp.com mtripolitsiotis@bsfllp.com GUZOV,LLC Debra J . Guzov David J. KapJan 805 Third Avenue, 8th Floor New York, NY 10022 (212) 371-8008 (Phone) (212)-901-2122 (Fax) dguzov@guzovllc.com dkaplan@guzovllc.com BOLA TTl & ASSOCIATES Silvia Bolatti 70 Little West St., Suite 7 A New York, NY 10004 (212) 732-4929 (Phone) (646) 417-7115 (Fax) bolatti@attglobal.net Attorneys for Appellant Paul Davis 50 51 Rule 500.13(c) Certificate of Compliance The foregoing brief was prepared using the Microsoft Word word processing system. A proportionally spaced typeface was used, as follows: Name of typeface: Times New Roman Point size: 14 Point Spacing: Double The total number of words in the brief, exclusive of the statement of the status of related litigation, the table of contents, the table of cases and authorities, and the statement of questions presented, is 11,684.