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, 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, BENTON STREET PARTNERS I, L.P., BENTON STREET PARTNERS II, L.P., BENTON STREET PARTNERS III, L.P., 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: December 5, 2016 REPLY BRIEF FOR PLAINTIFF-APPELLANT To Be Argued By: Eric Brenner Time Requested: 20 Minutes i Status of Related Litigation The status of related litigation in Appellant’s opening brief, as updated by Respondents’ brief, is accurate as of December 5, 2016. There are no further updates. ii Table of Contents Pages Status of Related Litigation ....................................................................................... i Table of Cases and Authorities ................................................................................ iv Preliminary Statement ................................................................................................ 1 Argument.................................................................................................................... 3 I. Rule 12A is a Cayman procedural mechanism applicable to derivative cases involving companies from any jurisdiction and embodies no substantive principles of Cayman corporate law. ............................................................... 3 A. The procedural mechanisms in Rule 12A do not establish the Cayman Grand Court as the exclusive gate-keeper to decide derivative standing in cases against Cayman companies. ...................................... 3 B. Renova does not justify treating Rule 12A as anything other than a procedural mechanism. .......................................................................... 7 C. Allowing New York courts to assess derivative standing under Cayman law is consistent with existing practice as well as the internal affairs doctrine. ....................................................................................11 D. The prejudicial policy ramifications of the March 10 Order further justify reversal. ....................................................................................16 II. The Foss exceptions give Davis standing to bring derivative claims to address wrongs that would otherwise escape redress. ...................................21 A. The fraud on the minority exception applies.......................................21 1. The element of wrongdoer control has been satisfied based on well-founded allegations of joint wrongdoing involving the Investors and the Directors. ......................................................21 2. The element of wrongdoer benefit has also been satisfied by Davis’s well-founded conspiracy allegations. ..........................24 iii B. The interests of justice exception also applies. ...................................27 Conclusion ...............................................................................................................28 Rule 500.13(c) Certificate of Compliance ...............................................................30 iv Table of Cases and Authorities Cases Pages Arc Capital, LLC v. Kalra, No. 652931/2012, 2013 N.Y. Misc. LEXIS 2600 (Sup. Ct., N.Y. Cnty, June 18, 2013) ........................................................... passim Baseball Office of Com’r v. Marsh & McLennan, Inc., 295 A.D.2d 73 (1st Dep’t 2002) ...........................................................................10 Daniels v. Daniels, [1978] Ch. 406 ............................................................................................... 25, 26 Dragon Investments Co. II v. Shanahan, No. 0602868/2005, 2007 WL 4144251 (Sup. Ct., N.Y. Cnty. Nov. 2, 2007) ............................................................. 14, 15 Foss v. Harbottle, [1843] 2 Hare 461 ......................................................................................... passim Hayat v. Al Mazeedi, 28 Mass. L. Rptr. 243, 2011 WL 1532109 (Mass. Sup. Ct. 2011) ................................................................................ 9, 10, 12 In re Harbinger Capital Partners Funds Inv’r Litig., No. 12 Civ. 1244 (AJN), 2013 WL 5441754 (S.D.N.Y. Sept. 30, 2013) ............................................................................. 12, 13 Konamaneni v. Rolls Royce (India) Ltd., 2002 1 W.L.R. 1269 .............................................................................................20 Locals 302 & 612 of Int’l Union of Operating Eng’rs – Emp’rs Constr. Indus. Ret. Tr. v. Blanchard, No. 04 Civ. 5954(LAP), 2005 WL 2063852 (S.D.N.Y. Aug. 25, 2005) .......................................................................... 5, 14, 15 People v. Krieg, 139 A.D.3d 625 (1st Dep’t 2016) .........................................................................11 v People v. Thompson, 678 N.Y.S.2d 845 (Sup. Ct., Kings Cnty. 1998) ..................................................11 People v. Wrotten, 14 N.Y.3d 33 (2009) .............................................................................................11 Prudential Assurance Co. Ltd. v. Newman Industries Co Ltd., (No. 2) [1982] Ch 204 ................................................................................... 22, 24 Renova Res. Private Equity Ltd. v. Gilbertson, [2009] C.I.L.R. 268 ...................................................................................... passim Shenwick v. HM Ruby Fund, L.P., 106 A.D.3d 638 (1st Dep’t 2013) .................................................................. 12, 13 Shultz v. Reynolds & Newport Ltd., [1002-93] C.I.L.R. 59 .................................................................................... 24, 25 Tanges v. Heidelberg N. Am., Inc., 93 N.Y.2d 48 (1999) .................................................................................... 3, 7, 16 Winn v. Shafer, 499 F. Supp. 2d 390 (S.D.N.Y. 2007) ............................................... 13, 14, 25, 26 Statutes and Other Authorities Business Companies Act of the British Virgin Islands, XA, §§ 184A-I .. 4, 5, 14, 15 Canadian Business Corporations Act § 239 ................................................. 5, 14, 15 CPLR 3211 ...............................................................................................................10 CPLR § 603 ..............................................................................................................10 Massachusetts Rule 42(b) ........................................................................................10 N.Y. Ct. App. R. § 500.22 ...................................................................................... 20 vi N.Y. Judiciary Law § 2-b(3) ....................................................................................11 Order 15, rule 12A of the Rules of the Grand Court of the Cayman Islands ................................................... passim Preliminary Statement Respondents’ insistence on treating Rule 12A1 as a substantive rule of law applicable to derivative claims against Cayman companies in all forums worldwide is untethered from the Rule’s governing text and unsupported by the case law and legal principles that Respondents invoke. There are statutory schemes in countries like Canada and the British Virgin Islands that establish the jurisdiction’s own courts as the exclusive gate-keepers for deciding whether shareholder derivative actions can proceed against companies incorporated in those jurisdictions. Rule 12A looks nothing like these statutory schemes. Rather, by its clear and express terms, it just establishes a procedural mechanism that a Cayman court can use to evaluate shareholder standing in derivative claims involving any jurisdiction of incorporation. That is, Rule 12A is agnostic as to any principles of substantive law, Cayman or otherwise, and does not establish that a Cayman court is the exclusive arbiter of whether Davis can proceed with his derivative claims. Contrary to Respondents’ emphatic assertions, neither the Cayman Renova decision nor New York’s internal affairs doctrine compels a different conclusion. Respondents’ reliance on Renova blurs entirely the distinction between the substantive test a shareholder must meet to establish standing (i.e., the prima facie 1 Capitalized terms have the same meaning as in Appellant’s opening brief (“Opening Brief” or “App. Br.”). Respondents’ Brief is referred to as “Resp. Br.” 2 case standard as set out in Renova) and the conceptually distinct issue of what procedural mechanisms in what courts are available to administer that test. Nothing in Renova addresses the latter issue, let alone trumps the non-exclusive provisions of Rule 12A. The internal affairs doctrine only reinforces this point. Undisputedly, it requires a New York court to analyze Davis’s standing to bring a derivative claim under the standards of the jurisdiction of Scottish Re’s incorporation, i.e., the Cayman standards in Renova. But there is nothing unusual about a New York court applying the doctrine to use New York’s own procedural mechanisms to apply the substantive foreign law in question. Notably, the cases cited by Respondents on this point involve New York courts applying foreign shareholder demand rules for themselves. And Davis’s Opening Brief showed that New York courts have also routinely decided issues of shareholder derivative standing under Cayman law for themselves without there ever being a suggestion that, as the Appellate Division erroneously concluded, Rule 12A was an obstacle. Finally, the Court should also find that Davis has the authority to pursue his derivative claims under one of the exceptions to Foss v. Harbottle. Any other result ignores Respondents’ unquestionable power to preclude Scottish Re from bringing such claims itself, which would wrongly insulate Scottish Re’s directors from any liability for the wrongdoing that has been alleged. 3 Argument I. Rule 12A is a Cayman procedural mechanism applicable to derivative cases involving companies from any jurisdiction and embodies no substantive principles of Cayman corporate law. Respondents’ treatment of Rule 12A as a substantive requirement of Cayman law ignores the clear text of the rule, wrongly treats it as the equivalent of obviously distinguishable statutory schemes in other jurisdictions, distorts the significance of New York case law, and stretches the Cayman judgment in Renova Res. Private Equity Ltd. v. Gilbertson, [2009] C.I.L.R. 268 (available at R. 1666- 84), beyond recognition. Under Tanges v. Heidelberg N. Am., Inc., 93 N.Y.2d 48 (1999), there is no justification for treating Rule 12A as anything other than the “procedural mechanism” that Respondents’ own Cayman law expert recognized it is below. R. 3924. The March 10 Order should be reversed. A. The procedural mechanisms in Rule 12A do not establish the Cayman Grand Court as the exclusive gate-keeper to decide derivative standing in cases against Cayman companies. The Appellate Division’s analysis of Rule 12A never referenced the actual text of the rule, which makes clear its procedural character. The Opening Brief showed two key features of Rule 12A that the Appellate Division accordingly missed. First, the Appellate Division failed to recognize that, by its terms, Rule 12A is agnostic as to any substantive principles of standing for shareholder derivative claims. Cayman law is not mentioned in the text of the Rule, which is 4 structured to allow a Cayman court to apply the relevant legal standards established under whatever substantive law governs the derivative case at issue— Cayman or not. App. Br. 20-21. Second, the Appellate Division also ignored that, by its terms, Rule 12A has no application to claims filed outside of the Cayman courts, whether against a Cayman company or otherwise. Rule 12A applies only to “an action begun by writ” and is triggered only at such time as the defendant company has “given notice of intention to defend”— Cayman-specific litigation events. Thus, by design, Rule 12A is targeted exclusively at proceedings filed in the Grand Court, not in some other jurisdiction. App. Br. 27; R. 2065-66 ¶34. The Opening Brief demonstrated how these distinctive features of Rule 12A contrast with the corporate law of other Commonwealth jurisdictions which include express statutory restrictions on the right of shareholders to initiate derivative proceedings absent permission from a court in the incorporation jurisdiction. App. Br. 21-25. For example, Section 184C of the Business Companies Act of the British Virgin Islands provides that “[e]xcept as provided in this section, a member is not entitled to bring or intervene in any proceedings in the name of or on behalf of a company” unless the BVI High Court, based “on the application of a member of a company, grant[s] leave to that member.” R. 2074-75 ¶54. The term “company” is defined to mean a BVI company, in contrast to a “foreign company” which is a 5 separate concept under the act. R. 2076 ¶¶56-57. Taken together, these provisions abrogate all common law rights a member of a BVI company would otherwise have under English law to bring derivative claims. R. 2075-76 ¶55. And contrary to Rule 12A, these provisions further unequivocally provide that if a member of a BVI company wants to take advantage of the statutory right to pursue a derivative claim, the BVI High Court is itself the exclusive arbiter of whether derivative standing exists. The Canadian Business Corporations Act similarly abrogates any common law rights a shareholder of a Canadian company has to bring a derivative claim and provides that a shareholder of a Canadian company can only exercise the statutory right to proceed with a derivative claim if a Canadian court gives permission. See Locals 302 & 612 of Int’l Union of Operating Eng’rs – Emp’rs Constr. Indus. Ret. Tr. v. Blanchard (“Blanchard”), No. 04 Civ. 5954(LAP), 2005 WL 2063852, at *7 (S.D.N.Y. Aug. 25, 2005). In claiming that Rule 12A is a “fundamental gate-keeping statute,” Resp. Br. 15, Respondents wrongly assume that Rule 12A should be treated as if it were the same kind of exclusive jurisdiction provision that exists in the BVI and Canadian statutory schemes. Respondents contend that it does not matter that Rule 12A—by its clear terms—has no application to derivative actions commenced in courts outside the Cayman Islands because nothing “precludes Rule 12(A)’s application in a different forum.” Resp. Br. 25 (emphasis in original). But the question is not 6 whether application of Rule 12A by a Cayman court to a litigation filed in a New York court is theoretically possible, but whether it is somehow justified under substantive principles of Cayman law and the text of Rule 12A. The fact that the drafters of Rule 12A did not include language establishing it as a gate-keeping provision for Cayman companies shows that no such substantive principles are in play. Indeed, the fact that Rule 12A applies to all derivative claims filed in the Grand Court without regard to country of incorporation further demonstrates that the rule was only intended as a procedural mechanism that allows the application of a multitude of substantive principles without embodying any specific underlying principle of derivative standing law itself.2 For these reasons, Respondents’ assertion that Rule 12A “envelopes both the remedy and the right of a shareholder to bring a derivative claims,” Resp. Br. 22, is inconsistent with what the rule actually says—and what it would need to say to be construed the same as the kinds of statutory schemes that actually establish exclusive gate-keeping functions for courts in the countries of incorporation. Again, nothing in Rule 12A establishes exclusivity or otherwise says anything about a party’s rights under Cayman law; when Rule 12A is invoked as a remedy in a derivative case filed in the Grand Court the contours of a shareholder’s right to 2 To be clear, although it is a relevant fact, Davis does not argue that Rule 12A is a procedural mechanism merely because it not located in the Cayman Islands Companies Law. Compare Resp. Br. 23-24, with App. Br. 21. 7 proceed with the claim is entirely dependent on some external source of law. Accordingly, because Rule 12A is not itself the source of any such rights, under Tanges, the Appellate Division erred in treating Rule 12A as substantive and the March 10 Order must be reversed. B. Renova does not justify treating Rule 12A as anything other than a procedural mechanism. Although Respondents devote a page of their brief to setting forth the provisions of Rule 12A, Resp. Br. 17, they necessarily steer clear of the actual implications of its text. Instead, they focus on arguing that under the internal affairs doctrine, the Cayman judgment in Renova should be viewed as the “seminal Cayman Islands case construing Rule 12(A).” Resp. Br. 18. Respondents go so far as to claim that Davis failed to identify this authority in his Opening Brief because he has no answer for it. Respondents are wrong. Far from “sweeping” it “under the rug,” Resp. Br. 21 n.7, Davis had no reason to discuss Renova or the internal affairs doctrine since this authority stands for uncontroversial propositions that are fully consistent with Davis’s position. To be clear, there is no dispute that under the internal affairs doctrine Davis’s standing to prosecute a shareholder derivative suit is governed by the law of Scottish Re’s place of incorporation—i.e., Cayman law. There is also no dispute that Renova is the leading Cayman judgment on the issue of when a shareholder has standing to bring a derivative claim against a Cayman company 8 under Cayman law. And Davis also agrees that Cayman law, as set forth in Renova, seeks to filter out certain derivative claims by requiring a threshold showing that there is a sufficiently strong basis to allow the claim to proceed (the so-called prima facie case test), and that the action falls within an applicable exception to the rule in Foss v. Harbottle, [1843] 2 Hare 461. R. 1675 ¶33. In adopting these standards, Renova unquestionably establishes the substance of Cayman law regarding when a shareholder plaintiff can pursue a derivative claim against a Cayman company. But the Renova judgment did not also hold that there is a further substantive principle of Cayman law establishing a Cayman court as the exclusive arbiter of Renova under Rule 12A. The issue of the appropriate procedural mechanisms for applying the Renova test was simply not before the court, and there is not even dicta in the decision to suggest that courts in New York or other foreign jurisdictions are somehow neutered from applying the Renova standard themselves under their own procedural rules. Respondents’ distorted presentation of Renova is fatal to their arguments. Respondents contend that had Davis complied with Rule 12A he would have been required to satisfy the prima facie case test and, “[a]s in Renova” a Cayman court would have determined whether he had a basis to pursue his derivative claims or not. Resp. Br. 20. According to Respondents, “Rule 12(A), therefore, goes to the very heart of plaintiff’s right to bring those claims.” Resp. Br. 20. But this is a 9 non sequitur. It is the standing rule established in Renova that is at the heart of the matter, not the procedural mechanism that a Cayman court or any other court uses to apply this rule. And, again, nothing in Renova establishes that there is a substantive principle of Cayman law that ousts a New York court from itself assessing “plaintiff’s right to bring” his derivative claims. Respondents note that Renova contemplates the possibility of a hearing that is preliminary in nature to evaluate the evidence each side has submitted regarding whether the prima facie test has been satisfied. Resp. Br. 18. They further contend that a “loophole” exists because there is no specific New York rule “requiring a shareholder to make such a showing to a New York court at the inception of an action.” Resp. Br. 35. But, under standard choice of law principles, it is the application of Renova itself that would be the basis for a New York judge to undertake the inquiry contemplated by Cayman law. Respondents cite no case law for the extreme proposition that a New York court would somehow be unable to administer a proceeding that is perfectly within its competence and which applicable foreign law mandates. Respondents ignore the analysis on this point in Hayat v. Al Mazeedi, 28 Mass. L. Rptr. 243, 2011 WL 1532109 (Mass. Sup. Ct. 2011). Respondents seek to diminish Hayat as persuasive authority by suggesting it is based on Massachusetts choice of law doctrine. Resp. Br. 25. But they do not, because they 10 cannot, explain how the Massachusetts standards differ in any relevant way from governing New York law. Even more fundamentally, Respondents do not even try to address the conclusion in Hayat that the governing “Rules of Civil Procedure provide ample opportunity for determination of the issue which, in British and Cayman courts, would be addressed in an application to continue, whether on the pleadings (Rule 12(b)(6)), on a documentary record (Rule 56), or a trial of all issues of such preliminary ‘separate issues’ as may be pertinent to the viability of the derivative claims (Rule 42(b)).” 2011 WL 1532109, at *10. Each of the Massachusetts rules cited in Hayat have counterparts under the CPLR. Taken together, they similarly give a New York court ample authority to hold whatever proceedings substantive Cayman law requires under Renova or otherwise. Indeed, while Respondents quibble about the extent to which Renova issues could be evaluated under CPLR 3211, Resp. Br. 35-36, they ignore CPLR § 603, even though it was cited in Davis’s Opening Brief, App. Br. 23; is the counterpart of Massachusetts Rule 42(b) cited in Hayat; and, by itself, empowers a New York court to order a preliminary trial regarding Renova issues. See, e.g., Baseball Office of Com’r v. Marsh & McLennan, Inc., 295 A.D.2d 73, 78-79 (1st Dep’t 2002) (recognizing that CPLR 603 allows for separate trial of issues that are relatively short and potentially dispositive of the case). 11 Moreover, regardless of any specific procedural mechanism in the CPLR, N.Y. Judiciary Law § 2-b(3) also gives New York courts the inherent authority “to devise and make new process and forms of proceedings” where “necessary to carry into effect the powers and jurisdiction possessed by it.” See, e.g., People v. Wrotten, 14 N.Y.3d 33, 37 (2009) (“courts may fashion necessary procedures consistent with constitutional, statutory, and decisional law” (internal citations omitted)); People v. Krieg, 139 A.D.3d 625, 627 (1st Dep’t 2016), leave to appeal denied, 28 N.Y.3d 932 (2016) (recognizing “court’s broad discretion inherent in the Constitution and Judiciary Law § 2-b(3) to use appropriate innovative procedures to fulfill the court’s functions”); People v. Thompson, 678 N.Y.S.2d 845, 851 (Sup. Ct., Kings Cnty. 1998) (allowing an otherwise untimely Rosario motion and ordering a hearing based Judiciary Law § 2-b(3), which “authorizes a court to devise new process necessary to carry out its function”). Such procedural mechanisms and authority further rebut Respondents’ professed concern that there is a “loophole” because New York somehow lacks its own procedural mechanisms to apply the Renova standing principles. C. Allowing New York courts to assess derivative standing under Cayman law is consistent with existing practice as well as the internal affairs doctrine. Davis’s Opening Brief showed that New York courts have routinely analyzed shareholder derivative standing under Cayman law in the way that 12 Respondents argue should be precluded. App. Br. 24 (citing cases). Respondents are wrong that this authority is irrelevant. And there is no “substantial body” of contrary authority. Resp. Br. 3.3 First, Respondents claim that it is misleading to take note of the fact that New York courts have long addressed issues of shareholder derivative standing under Cayman law without regard to Rule 12A. App. Br. 24 (citing relevant cases). Respondents point out that none of the cases at issue involved situations where the defendant—like Respondents here—advocated for the application of Rule 12A as a substantive condition precedent to the New York litigation. Resp. Br. 25. But this observation only highlights the extremity of Respondents’ position. In cases like Shenwick and Harbinger Capital Partners, the Renova decision was both briefed by the parties and referenced in the courts’ opinions. Yet, notwithstanding Respondents’ claim that Renova is “seminal” to understanding what Rule 12A actually means, none of the parties in these prior cases, or their Cayman law experts, argued that Renova somehow deprived a New 3 Respondents contend that “three New York courts have uniformly” supported their arguments. Resp. Br. 16. But the referenced decisions include the very trial court and appellate decisions under review. Other than the instant case, there are only two decisions on point in the United States. The judge in one of those cases—Justice Bransten in Arc Capital—agreed with Respondents’ position. In the other—the Hayat decision discussed above—the judge ruled consistent with Davis’s position. Outside of this litigation, no appellate court has addressed which of Arc Capital or Hayat is correct, and even the March 10 Order did not address the analysis in Hayat. It is wholly disingenuous for Respondents to suggest that their position is either solidly rooted in existing authority or uncontroversial. 13 York court of authority to apply substantive Cayman standing standards for itself, relegating such proceedings exclusively to Cayman courts. Similarly, while Scottish Re’s current defense counsel argues that it is “hard to a fathom a rule that more clearly envelopes a shareholder’s right to bring derivative claims on behalf of a Cayman Islands company” than Rule 12A, Resp. Br. 17, Scottish Re’s prior defense counsel certainly did not “fathom” this supposedly self-evident proposition when they litigated Winn v. Shafer and never asserted that Rule 12A was relevant to Judge Scheindlin’s standing analysis under Cayman law, let alone that it precluded her from deciding the issue. While cases like Shenwick, Harbinger Capital, and Winn do not by themselves mandate reversal, they contradict Respondents’ overheated claims that their litigation position is compelled by the analysis in Renova and the text of Rule 12A. Respondents are in fact seeking to impose a strained rule of Cayman law that is so disconnected from the relevant authority that it never even occurred to the New York judges and counsel (including Respondents’ own predecessor counsel) who litigated the same question of law in these cases. Second, Respondents’ arguments about Rule 12A are also unsupported by the cases holding that “shareholder demand rules are substantive.” Resp. Br. 29. This uncontroversial proposition—that the demand rules for suing a foreign corporation are governed by the substantive law of the foreign jurisdiction—is 14 consistent with Davis’s position because nothing in this authority limits the power of New York courts themselves to apply the governing foreign substantive law. Whether it was the shareholder demand rules of Delaware, Pennsylvania, or Massachusetts, or the majority permission rule of Venezuela, in each of the cases cited by Respondents4 it was the New York court that made the decision regarding whether the governing foreign law permitted the plaintiff to proceed with the derivative claim. In precisely the same way, for all the reasons discussed above, a New York court likewise has authority to filter derivative claims for itself based on the substantive Cayman standards.5 Third, Respondents are wrong to rely on the decisions in Blanchard and Dragon Investments Co. II v. Shanahan, No. 0602868/2005, 2007 WL 4144251 (Sup. Ct., N.Y. Cnty. Nov. 2, 2007), which involve Canadian and BVI law, respectively. Blanchard, which specifically addressed the scope of provisions in the Canadian Business Corporations Act (“CBCA”), is particularly noteworthy since Justice Bransten relied on it Arc Capital, LLC v. Kalra, No. 652931/2012, 2013 N.Y. Misc. LEXIS 2600 (Sup. Ct., N.Y. Cnty, June 18, 2013), the decision 4 See Resp. Br. 29-30 (citing cases). 5 The case law that Respondents cite regarding discovery rules, Resp. Br. 31-32, and from other jurisdictions, Resp. Br. 32 n.13, similarly involves United States courts applying foreign substantive law. The Vaughn case cited by Respondents at note 13 involved a BVI statutory scheme analogous to the Canadian provisions discussed above, which the court expressly distinguished from Cayman Islands law as analyzed in Winn v. Shafer. None of this authority supports Respondents’ position. 15 that is a centerpiece of Respondents’ argument here. Justice Freedman in Dragon Investments also relied on Blanchard, implicitly assuming that interpretation of the CBCA elucidated BVI legal principles. 2007 WL 4144251. But, as discussed above and in Davis’s Opening Brief, App. Br. 21, 24-25, Rule 12A is not analogous to a Canadian statutory scheme that expressly “enumerates specific Canadian courts where” derivative actions against Canadian companies “may exclusively be heard.” Blanchard, 2005 WL 2063852, at *3 (emphasis added). Even with this distinction front and center in the briefing, Respondents contend that Blanchard and Dragon Investments should be treated as “highly persuasive.” Resp. Br. 27. But a sound interpretation of Cayman law cannot be based on the unique and inapplicable features of the Canadian statute. This analytical flaw is at the heart of Respondents’ arguments. The Cayman standards for “weed[ing] out meritless shareholder derivative claims at the beginning of a case” are indeed substantive law that apply in a New York court. Resp. Br. 27. But it requires another analytical step entirely to conclude that Rule 12A is not just a Cayman procedural mechanism for derivative claims in the Cayman courts, but a substantive exclusivity requirement of its own. Respondents’ failure to address the distinctions between Section 239 of the CBCA and Rule 12A—even as they insist on highlighting cases that were decided under, or rely on, Canadian law—only reinforces that their position is baseless. 16 D. The prejudicial policy ramifications of the March 10 Order further justify reversal. Davis’s Opening Brief showed that the Appellate Division’s treatment of Rule 12A would have undesirable policy ramifications by closing the doors of the New York courts to claims involving, in many cases, significant New York financial firms. App. Br. 26-30. Respondents, who do not dispute that such implications are relevant under Tanges, fail in their efforts to minimize them. First, Respondents have no basis to claim that even if the Court affirms, “New York courts may still hear derivative claims against directors of a Cayman Islands company once a shareholder has obtained the required leave to prosecute such claims from a Cayman Islands court.” Resp. Br. 28. As discussed above, Rule 12A is not a procedural mechanism allowing for derivative plaintiffs to make a free standing application for leave to proceed. It provides only for a derivative plaintiff to apply for leave to continue an existing derivative action after it has been filed in a Cayman court and after the defendant has given notice of intention to defend that suit. R. 2064-65 ¶32. This procedure is inapplicable by its own terms to a derivative action that has been filed in New York. Respondents argue that Davis is relying on “bare assertion” that is “unsupported by any authority” to call into doubt the authority of a Cayman court to entertain a leave to proceed application intended solely to allow a shareholder to pursue a claim in New York. Resp. Br. 38. But it is the text of Rule 12A that self- 17 evidently supports this proposition. Davis’s expert on Cayman law also confirmed this point. And while Respondents call this opinion “inapposite,” Resp. Br. 38, they cannot reconcile the aspersions they cast with the actual conclusion at issue, which is clearly on point. R. 2061 ¶25. Respondents also dismiss as “unsupported” a leading Cayman law firm’s conclusion that the Appellate Division’s position in the March 10 Order “could effectively bar all derivative claims on behalf of Cayman funds in New York.” Resp. Br. 38 (referring to Mourant Ozannes Briefing cited at App. Br. 4 n.1). But Respondents do not even try to explain why, on the merits, this firm was wrong to conclude that an action brought to seek leave to continue a New York litigation could, under Cayman Islands’ procedural rules, be deemed an abuse of process. And this Cayman firm’s analysis is not an outlier. The Appleby firm, which represented the Special Committee of Directors in connection with the merger at issue in this litigation, R. 136, itself issued a “News Alert” following the March 10 Order that observed: “Although the decision of the New York Appellate Division seems to be based on the premise that the Cayman courts could and would grant leave to continue proceedings outside the jurisdiction, this premise remains untested as a matter of Cayman Islands law.”6 6 See http://www.applebyglobal.com/publication-pdf/article/2016/leave-for-cayman- derivative-actions--international-or-domestic-only--(theaverwren-and-vking)-july-2016.pdf. 18 There is, in short, good reason to conclude that the Appellate Division’s Rule 12A ruling could have the dramatic effect of “effectively bar[ring] all derivative claims on behalf of Cayman funds in New York.” App. Br. 4 n.1 (citing Mourant Ozannes Briefing at 19). And, on the other side of the ledger, Respondents offer nothing at all. Even as Respondents (wrongly) chastise the absence of support for Davis’s position, Respondents fail to cite any legal analysis from their own Cayman law expert. This is no accident: when the issue was joined below, their expert never proffered the legal opinion Respondents would have needed to create a disputed issue on this point. This silence was referenced in Davis’s opening papers, App. Br. 27; Respondents’ opposition answers only with more silence, further confirming that Respondents’ version of what Cayman law permits does not comport with what Respondents’ Cayman law expert was prepared to opine. Respondents’ citation to the decision in Arc Capital does not show otherwise. Resp. Br. 38. Arc Capital does not hold that a Cayman court could or would entertain a leave to proceed application in connection with a New York derivative case. All Justice Bransten did was give the shareholder plaintiff leave “to refile derivative claims in New York if Cayman Islands Grand Court allowed plaintiff to pursue such claims on behalf of company.” 2013 Misc. LEXIS 2600, at *11. Creating this contingent right is not the same as determining the Grand Court 19 has the power to act—an issue Arc Capital does not address and which a New York court has no power to decide. Second, Respondents also wrongly suggest that, even if affirming the March 10 Order would curtail access to the New York courts, this is not an issue of concern. Respondents cite cases decided under the internal affairs doctrine where New York courts have applied a foreign legal rule that completely bars pursuit of derivative claims against the directors of foreign corporation. Resp. Br. 33. Respondents argue that if New York courts are willing to enforce this rule, forcing New York plaintiffs to bring derivative claims against Cayman companies in the Cayman courts should raise no policy concerns. Resp. Br. 34-35. But there is no comparison between the restrictions the March 10 Order places on cognizable claims and the cited decisions applying the internal affairs doctrine to preclude New York litigants from pursuing derivative claims that are not viable in any jurisdiction. A shareholder of a Cayman company might have many good reasons for proceeding with a derivative action in New York rather than in a Cayman court, especially when the case involves financial firms with substantial New York connections (like Cerberus and MassMutual here) and the company that is the nominal defendant (like Scottish Re here) has no meaningful connection to the Cayman Islands except that it is the place of incorporation. 20 The foundational English cases discussing the procedural law in respect of derivative actions are in accord: they recognize that when a company is incorporated in an offshore tax haven of convenience and the business of the company and the substantive defendants to the claim were unlikely to have a material (or any) connection to the offshore haven, there could be sound justifications for pursuing the claim outside the offshore jurisdiction. R. 2073 ¶50; see also Konamaneni v. Rolls Royce (India) Ltd., 2002 1 W.L.R. 1269 at ¶66 (available at R. 2722) (“it may be wholly unjust to require recourse to an offshore haven to pursue fraudulent directors in a case which has no connection with the jurisdiction other than it is the place of incorporation”).7 Finally, there is no merit to Respondents’ argument that the March 10 Order furthers the policy underlying New York’s internal affairs doctrine or comports with the settled “expectations of commercial actors.” Resp. Br. 36. It was precisely because the March 10 Order raised novel issues of public importance that leave to appeal was granted so this Court could make definitive law regarding an issue that was, by definition, not settled. See Section 500.22 of the Rules of the Court of Appeals. And reversal of the Appellate Division’s Rule 12A holding will not implicate the internal affairs doctrine: as discussed, New York courts routinely 7 While Davis is a foreign investor, the Appellate Division’s rule would require all plaintiffs to litigate derivative claims in the Cayman courts regardless of their citizenship or their means, and no matter how tenuous the connection of the parties, witnesses or evidence to the Cayman Islands. 21 apply foreign legal standards to screen shareholder derivative cases against foreign companies; if the March 10 Order is reversed, it would do no more than give New York courts the freedom to follow this consistent practice. II. The Foss exceptions give Davis standing to bring derivative claims to address wrongs that would otherwise escape redress. Davis demonstrated in his Opening Brief that the trial court’s Foss ruling also requires reversal, assuming the Appellate Division’s Rule 12A ruling is reversed. App. Br. 31-49. If the Court chooses to reach this issue rather than remand, it should reject Respondents’ contrary arguments. A. The fraud on the minority exception applies. 1. The element of wrongdoer control has been satisfied based on well-founded allegations of joint wrongdoing involving the Investors and the Directors. Davis’s Opening Brief showed that he had satisfied the “control” element of the fraud on the minority exception to Foss based on the fact that the Investors held at least majority control of Scottish Re during the relevant time period and were wrongfully acting in concert with the Directors to further 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.8 App. Br. 34-40. This joint wrongdoing satisfies the standards of Foss. As recognized in the leading English case of 8 Davis does not disagree that the Tenth Cause of Action is against the Directors only, and not the Investors. Cf. Resp. Br. 42 n.16. 22 Prudential Assurance Co. Ltd. v. Newman Industries Co Ltd., (No. 2) [1982] Ch 204 (available at R. 1557-1632), the Foss “exception may apply not only where the wrongdoers are a majority but where some other reason can be shown for saying that unless the minority are allowed to sue on behalf of the company the interests of justice will be defeated in that an action which ought to be pursued on behalf of the company will not be pursued.” R. 1623. The Prudential judgment is also clear that in assessing whether wrongdoers command a majority of the votes so that it would be absurd to call a shareholder meeting to assess the propriety of the conduct at issue, the inquiry must include all “shareholders who have an interest which directly conflicts with the interest of the company.” Id. Under this test, given the allegations of joint wrongdoing, the control and holdings of the Investors must be considered here.9 Respondents argue that Davis’s allegations of a conspiracy among the Investors and the Directors are no more than “conclusory” and therefore can be ignored. Resp. Br. 45-46. In fact, the alleged conspiracy is grounded in Respondents’ own documents. In connection with the Merger, Scottish Re issued an Information Statement that included, among other things, recommendations from the Directors and the 9 Respondents note that it is control of voting shares at a general meeting of the shareholders that matters under Foss. Resp. Br. 44 n.17. Davis’s argument is based on this standard. 23 Investors about whether Scottish Re’s ordinary shareholders should vote in favor of the Merger. The Information Statement repeatedly advised that if the Merger was “not approved at the Extraordinary General Meeting and, as a result, not consummated, the Investors will continue to hold the Convertible Preferred Shares and will continue to control the Board.” R. 131 (emphasis added). The Information Statement further advised ordinary shareholders like Davis that as a consequence of this Board control, the “Investors would effectively control whether an alternative change in control transaction could be effected” in the future “without requiring the approval of the Ordinary Shareholders as a separate class and without court approval.” R. 163 (emphasis added). Thus, in stark terms, the Information Statement acknowledges that Scottish Re’s Directors were not independent at all, but were acting in concert with the Investors to facilitate their “control” of the Company, and, despite the Directors’ titular responsibility for key corporate decisions, it was actually the Investor- Director conspiracy that would “effectively control” whether a transaction like the Merger would occur. Far from relying on conclusory assertions or mere buzzwords, Davis’s allegations regarding joint wrongdoer control over Scottish Re are established in a documentary record that provides ample reason to believe that just as the Investors would “effectively control whether an alternative change in control transaction could be effected,” so would the conspiracy “effectively 24 control”—and thereby prevent—the filing of a derivative claim that challenges the conduct at issue in the Seventh, Ninth and Tenth Causes of Action. Respondents also contend that there is no basis in the case law to evaluate control by reference to the shares controlled by the Investors as joint wrongdoers. But the analysis in Prudential Assurance discussed above rebuts this claim. R. 1623. Citing Shultz v. Reynolds & Newport Ltd., Respondents also claim that Davis’s arguments about de facto control are inconsistent with the proposition that “a director does not obtain control of a majority shareholder’s voting shares merely because the majority shareholder employs or appoints that director to the company’s board of directors.” Resp. Br. 47 (emphasis added). But this is a strawman: Davis does not rely on the Directors’ status as nominees; he rests on the fact, as demonstrated, for example, by the Information Statement itself, that the Investors and the Directors were acting in concert to control the Board and, by extension, major decisions for Scottish Re itself. Nothing in Schultz addresses this point, let alone rejects the analysis in Prudential—a case Respondents fail to cite, notwithstanding its status as the most influential modern case on this issue. App. Br. 35. 2. The element of wrongdoer benefit has also been satisfied by Davis’s well-founded conspiracy allegations. Davis’s Opening Brief also showed that, under the Cayman decision in Shultz, the wrongdoer benefit element of the fraud on the minority test can be 25 satisfied where some member of the alleged conspiracy derives a benefit. App. Br. 42-43. Respondents complain that the relevant language in Shultz is just “dicta.” Resp. Br. 51. But they provide no contrary authority and offer no justification for why the only extant Cayman guidance should be ignored. Moreover, they ignore that their own Cayman law expert acknowledged the significance of this analysis below: “The point the judge was making [in Shultz] 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, rather than only the wrongdoer who had not benefited.” R. 3927 ¶33 (emphasis added). Under this rule, there was no basis for the trial court to find that Davis had failed at the pleading stage to satisfy the wrongdoer benefit element. As discussed, there are well-founded allegations of a conspiracy among the Directors and the Investors. And, regardless of the extent to which the Director-wrongdoers individually benefitted from the wrongdoing at issue, at a minimum, the conspiracy, through the Investor-wrongdoers, did. Respondents’ discussion of Daniels v. Daniels, [1978] Ch. 406 (available at R. 1081-95), and Winn v. Shafer, 499 F. Supp. 2d 390 (S.D.N.Y. 2007), is also unavailing. Respondents concede that the Daniels court “refused to conclude prior to discovery that one director had not benefited from an egregious case of self- 26 dealing” but try to avoid the decision by claiming that in the instant case “no factual allegations of self-dealing are pleaded, let alone the type of extreme allegations that, on their face, smack of an insider sweetheart deal as in Daniels.” Resp. Br. 52. This argument ignores Davis’s theory of the case, which must be accepted at the pleadings stage: i.e., that the Directors breached their fiduciary duty to the company by allowing their co-conspirators, the Investors, to benefit from sweetheart deals that harmed Scottish Re. App. Br. 8-12.10 Given such allegations of co-conspirator benefit, there is a sound basis for the Court to follow Daniels in allowing discovery into how the many Directors who were closely tied to Cerberus and MassMutual may have profited or benefitted from Cerberus’s or MassMutual’s gains, as the case may be. Winn does not show otherwise. While it also involved derivative claims against Scottish Re, it was based on different facts that pre-date the Investors’ involvement in the Company and the appointment of the current Directors. App. Br. 35-36. Winn also did not include allegations that the Directors acted as part of a conspiracy with those that appointed them. It is inapposite. 10 Respondents argue that only Cerberus benefitted from the Orkney transactions (without disputing that all of the Investors are alleged to have wrongfully benefited from the Merger). Resp. Br. 51 & n.21. Even assuming the facts someday bear this claim out, if a conspiracy is alleged and the conspiracy includes another wrongdoer who benefitted (which Respondents do not dispute Cerberus did), there is wrongdoer benefit. 27 B. The interests of justice exception also applies. Finally, Davis’s Opening Brief showed that there is an emerging common law trend towards relaxing the requirements of Foss in recognition of the fact that its strict application can lead to unjust outcomes. App. Br. 31-32. Respondents argue that because the Cayman Islands, unlike England, has not adopted a new, more flexible statutory scheme for derivative claims, it must mean that the Cayman courts would be indifferent to loosening the Foss standards if justice requires. But this logic ignores the decisions in the other jurisdictions that are working in the common law tradition, like the Cayman courts, and have recognized the viability of a fifth “interests of justice” exception to Foss without any need to adopt new legislation. Id. at 33.11 Respondents cite their expert’s claim that the fifth exception “is not part of Cayman Islands law.” Resp. Br. 54. But it is undisputed that “no Cayman court has yet addressed the viability of this exception.” App. Br. 46. The issue is whether Cayman courts would follow other “[m]odern courts” that “have confirmed the existence of another exception to the rule in Foss … where the interests of justice require the claim to be allowed.” R. 2096 ¶97. There is no reason to accept Respondents’ expert’s conclusory rejection of the fifth exception 11 Renova is also not evidence of Foss’s continued “stringent” application in the Cayman Islands. Resp. Br. 43. Renova applied an exception to Foss, which says nothing about the willingness of a Cayman court to adopt more equitable standing rules when Foss would otherwise bar a suit. 28 in the face of a contrary conclusion by Davis’s expert which is fully consistent with and supported by the emerging state of the law as reflected in cases in Ireland and Australia. R. 2096-97 ¶¶97-99; see also App. Br. 46-48. Assuming the fifth exception applies, Davis satisfies it. In defending the bona fides of the transactions challenged in the Derivative Causes of Action, Resp. Br. 54, Respondents are really just impermissibly asking the Court to accept their version of the relevant facts at the pleadings stage. Equally wrongly, they are ignoring the overwhelming evidence that, according the Information Statement itself, the Investors controlled the Board, creating a paradigmatic situation where the failure to allow Davis to proceed with his derivative claims would guarantee that the Directors are insulated from any liability for the wrongdoing that has been alleged. There is no reason to believe a Cayman court would sanction this result. Conclusion For the foregoing reasons and for the reasons stated in Appellant’s Opening Brief, the March 10 Order should be reversed. Moreover, if the Court decides to reach the issue, it should also find that the trial court erred in its analysis of Foss v. Harbottle because Davis has satisfied at least one of its exceptions. 29 Dated: New York, New York December 5, 2016 BOIES, SCHILLER & FLEXNER LLP By: 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. Kaplan 805 Third Avenue, 8th Floor New York, NY 10022 (212) 371-8008 (Phone) (212)-901-2122 (Fax) dguzov@guzovllc.com dkaplan@guzovllc.com BOLATTI & ASSOCIATES Silvia Bolatti 70 Little West St., Suite 7A New York, NY 10004 (212) 732-4929 (Phone) (646) 417-7115 (Fax) silviabolatti@me.com Attorneys for Appellant Paul Davis 30 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, and the table of cases and authorities is 6,916.