Liability of Directors and Officers and Rights of Minority Shareholders in Bermuda

The corporate law of Bermuda provides strong and effective protection from liability for directors and officers of companies incorporated in Bermuda. It also generally does not impose fiduciary duties on majority shareholders, and accordingly allows majority shareholders to direct management to pursue business strategies which they regard to be in the best interests of the company and even their own strategic interests even if they may be disadvantageous to minority shareholders. The Island is a safe haven for corporations wishing to minimise their exposure to litigation.
 
The duties of directors and officers of a Bermuda company are subject to the provisions of the Companies Act 1981 (“the 1981 Act”) and the company’s bye-laws. The duties of directors and officers of Bermuda companies are codified in section 97 of the 1981 Act.[1] Section 98 of the 1981 Act (as amended) permits Bermuda companies to adopt bye-laws which indemnify directors and officers and relieve them of all liability in relation to the performance of their duties except in cases of fraud or dishonesty.[2] The amendment came into effect on 24 June 1996. Prior to its amendment, section 98 permitted Bermuda companies to adopt bye-laws which relieved directors of liability except in cases of wilful negligence, wilful default, fraud or dishonesty.
 
The effect of bye-laws indemnifying and relieving directors from liability has been considered by the Court of Appeal for Bermuda in the Intercontinental and Focus cases.[3] In both those cases actions brought by liquidators against directors of a Bermuda company were struck out on the basis that the allegations of wilful default and neglect were not pleaded with sufficient particularity.[4] No case against Bermuda directors alleging either wilful default or neglect or fraud or dishonesty has ever succeeded at trial. Having regard to the difficulties of bringing a claim against directors in the Bermuda courts liquidators have attempted to bring actions in the United States. However, in the leading US case of O’Connell v Arthur Andersen LLP (In re AlphaStar Ins. Group, Ltd.)[5] the liquidator’s claim against directors of a Bermuda company was struck out on the basis that the complaint did not disclose a cause of action under Bermuda law.[6]
 
As a matter of principle if a director is entitled to be indemnified any claim against him fails on the grounds of circuity of action. See: Post Office v Hampshire County Council[7], a decision of the English Court of Appeal which is likely to be followed by a Bermuda court.[8] The principle of circuity of action was implicitly applied, without being specifically mentioned by name, in the most recent decision of a Bermuda Court relating to bye-law indemnification of directors, Peiris v Daniels[9], where Hellman J said that the bye-law indemnity “does not purport to exonerate the company’s directors from liability but rather to indemnify them in respect of it. However, the legal consequences would be the same in either case. A company has no cause of action against a director in respect of a matter which the company has agreed to indemnify him.”
 
The facts of Peiris v Daniels demonstrate the very strong public policy in Bermuda in favour of indemnification of directors save in cases of fraud or dishonesty. The plaintiff was a former employee of a company which was in liquidation. He had been injured at work and had sued the company under the Workmen’s Compensation Act 1965 and recovered damages and costs amounting to approximately $160,000. Under the 1965 Act, the company was required to have insurance cover in place, but the policy had expired at the time of the accident. The judge was satisfied that this was an inadvertent breach of statutory duty on the part of the directors and that they had negligently breached their duty to the company to ensure that there was no break in insurance cover. Nonetheless, the directors were entitled to rely on the bye-law indemnity which extended to all acts and omissions which did not amount to fraud or dishonesty and the plaintiff’s claim against them for damages for misfeasance under section 247 of the 1981 Act failed.
 
The decision in Peiris v Daniels however also underlines the need for companies wishing to avail of the full breadth of the permissible Bermuda statutory protections for their directors and officers to check the scope of their bye-law protections as the case opens the door to possible claims where the protections are less fulsome.
 
Actions by minority shareholders of Bermuda companies seeking relief from oppressive or prejudicial conduct pursuant to section 111 of the 1981 Act[10] have also been viewed with disfavour by the Bermuda courts. The only petition brought under section 111 ever to have succeeded at trial, In the matter of Kingboard Copper Foil Holdings Limited[11] was reversed on appeal.[12] Kingboard Copper Foil Holdings Limited (“the Company”) was incorporated in Bermuda and listed on the Singapore Stock Exchange (SGX). The Company’s minority shareholders had exercised their right under the SGX Listing Rules to veto a mandate for the Company to enter into transactions with other companies in the Kingboard Group which were owned by the majority shareholders. The Company’s management proceeded to effectively “nullify the only real right – the veto – which minority had”[13] by entering into a licensing agreement with a company called Harvest which was controlled by a “friend” of the Kingboard Group, a Mr. Lin. Under the Harvest License Agreement, the Company’s manufacturing plant in China was used to produce copper foil which was then sold to another company in the Kingboard Group, Laminates. The Company misrepresented in an announcement to its shareholders that the shareholders and directors of Harvest were independent third parties who did not have any prior connection with the Kingboard group and that the Company “had no means of knowing who Harvest’s customers would be …” The Court of Appeal for Bermuda concluded as follows:
 
“This attempt to conceal the position in respect of Harvest until the trial does not reflect well on the Company or the Kingboard Group. The Chief Justice acquitted the majority shareholders of outright dishonesty; but said that they had caused the Company to ‘flirt with deception’ … Mr. Woloniecki submits with some force, that, if there was not something fishy about the arrangements, why did those concerned attempt to paint this ‘alternative reality’ and cover up the connection with Mr. Lin. The Company, for which, after the Licence Agreement, there was no incentive to change the status quo, should have attempted constructively to engage with all the minority shareholders and addressed their concerns.

There was no easy solution but the knee jerk reaction was oppressive… I see the force of those submissions. But they face a number of obstacles. First, as I have said, there were in fact without prejudice discussions. Second it was not suggested that the unfairness or oppression was constituted by a failure to negotiate. Third, given that the Harvest Licence Agreement was not a sham, the fact that Mr. Lin had links with Kingboard and was its ‘friend’ loses much of its significance. If an arrangement was to be made which enabled the Company to have some earnings and Laminates to obtain supplies of copper foil the likelihood is that some ‘friend’ would be required for that purpose.”[14]
 
Neil Horner is Head of the Corporate Department and a director of ASW Law Limited. He has worked extensively in transactions particularly in the financial services and insurance sector since he arrived in Bermuda in 2003 including high-profile start-ups and IPO work, acquisitions and disposals and re-domiciliations to Bermuda. His practice also has a focus on convergence between insurance and funds structures particularly in the ILS space. He writes extensively and contributed the chapters on Bermuda insurance regulation and segregated account companies to the 4^th edition of O’Neill & Woloniecki’s “The Law of Reinsurance”.

Neil can be contacted on +441.295.8146 or by email at neil.horner@aswlaw.com
 
Jan Woloniecki is a member of the bars of England and Wales (1983) and Bermuda (1991) and is Head of Litigation at ASW Law Limited. He is the co-author of The Law of Reinsurance in England and Bermuda. His areas of specialisation are: insurance and reinsurance law; international commercial litigation and arbitration; private international law; trusts law; and insolvency law. Mr. Woloniecki has law degrees from the Universities of London and Cambridge and is a Fellow of the Chartered Institute of Arbitrators. He has been appointed as an arbitrator in international arbitrations held in Bermuda, London, Hong Kong and Singapore.