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Vaughn v. LJ International

May 26, 2009


APPEAL from a judgment of the Superior Court of Los Angeles County. Peter D. Lichtman, Judge. Affirmed. (Los Angeles County Super. Ct. No. BC378903).

The opinion of the court was delivered by: O'neill, J.*fn13


A shareholder of a publicly traded corporation filed a derivative action in California alleging breaches of fiduciary duty by corporate officers and directors. The international business, a fine jewelry company incorporated in the British Virgin Islands, has no other connection to that jurisdiction. The company employs 3000 people at its manufacturing facility in China. The majority of the company's wholesale revenues are earned in North America, including substantial sales in California, where a few employees are based. The corporate headquarters is in Hong Kong, where all but one of the company's directors reside; the sole exception lives in Colorado. The shareholder-plaintiff apparently does not reside in California, but part of the basis for the action is the issuance in Los Angeles of allegedly false and misleading financial statements.

A British Virgin Islands statute requires approval from the high court of that jurisdiction before a shareholder may sue derivatively. Here we hold that such approval was required before the instant California lawsuit could proceed. Because the plaintiff had no such approval, the trial court properly sustained defendant/respondents' demurrer without leave to amend.


The following summary is gleaned from the complaint, as well as other sources of which we have taken judicial notice at the request of the parties.*fn1

Defendant/respondent LJ International (LJI) is a designer and distributor of fine jewelry which is listed and traded only on the NASDAQ National Exchange. It services wholesale customers in Japan and throughout North America and Western Europe, and has a growing wholesale and retail presence in China. Prior to the time this case arose, most of LJI's sales were in North America and its functional currency was the U.S. dollar.*fn2

LJI is incorporated in the British Virgin Islands (BVI), but its principal executive office is located in Hong Kong, where its 130 full time employees include approximately 100 management and executive staff. All but one of LJI's directors and officers reside in Hong Kong.*fn3 The company's 143,000 square foot production facility is located in Shenzhen, China, where it employees about 3,000 people. LJI's only full time employees outside Asia are three people based in Los Angeles.*fn4

On October 10, 2007, plaintiff and appellant Vaughn filed the instant derivative complaint against LJI and its directors.*fn5 Appellant asserted breaches of fiduciary duty and other misconduct by the directors based on reports issued between November 2006 and October 2007, which allegedly: (1) overstated the company's 2005 and 2006 financial results by understating tax liability; (2) falsely projected full profitability by the end of 2007; and (3) misleadingly predicted the company would meet or exceed its goal of opening 100 retail outlets in China before the start of the 2008 Olympic games. Appellant claimed the false statements resulted in company stock increasing from $4.50 per share in January 2007 to $13.15 by May 2007.

The complaint further asserts that in June 2007 the company again misled investors as to the reasons for a delay in the release of its fourth quarter 2006 and first quarter 2007 financial results. When further delays were announced in July 2007, investors began to doubt the reliability of previously reported financial results, and the NASDAQ threatened to de-list the company's stock. On September 6, 2007, LJI announced it had not achieved the 2006 financial results it had projected in January and February 2007, and that its 2006 earnings report would be adversely affected by a tax liability. According to the complaint, this news caused the stock price to fall to less than $5 per share.*fn6

Respondents' motions claiming lack of personal jurisdiction and forum non conveniens were denied. Respondents demurred on the ground that appellant was not entitled to sue derivatively without leave from the High Court of the British Virgin Islands, as required by section 184C of the British Virgin Islands Business Companies Act of 2004 (BVI Act). The demurrer was sustained with leave to cure and amend. Appellant elected not to seek leave to sue from the BVI High Court; the parties stipulated to dismissal of the action and this timely appeal followed.


1. Standard of Review

We engage in a de novo review of a sustained demurrer, based on a reasonable interpretation of the complaint which assumes the truth of all properly pleaded and judicially noticed facts. (Farm Raised Salmon Cases (2008) 42 Cal.4th 1077, 1089, fn. 10; Schuster v. Gardner, supra, 127 Cal.App.4th at p. 311.) The plaintiff bears the burden of proving the trial court erred in sustaining the demurrer. (Young v. Gannon (2002) 97 Cal.App.4th 209, 220.)

The demurrer raised a choice of law issue, i.e., whether, assuming California's jurisdiction to entertain a derivative lawsuit against a business incorporated outside the United States, a "leave to sue" provision of the incorporating jurisdiction is applicable. After setting out the provision at issue, we will address each of appellant's reasons for contending the trial court erred in ruling that the provision applicable to the present case.

2. British Virgin Islands Business Companies Act of 2004

As noted above, the trial court sustained respondents' demurrer on the ground that appellant had not obtained leave to sue from the high court of the British Virgin Islands, where LJI is incorporated. The BVI Business Companies Act, section 184C, provides: "184C. (1) Subject to subsection (3), the Court may, on the application of a member of a company, grant leave to that member to (a) bring proceedings in the name and on behalf of that company; or (b) intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company.

"(2) Without limiting subsection (1), in determining whether to grant leave under that subsection, the Court must take the following matters into account (a) whether the member is acting in good faith; (b) whether the derivative action is in the interests of the company taking account of the views of the company's directors on commercial matters; (c) whether the proceedings are likely to succeed; (d) the costs of the proceedings in relation to the relief likely to be obtained; an (e) whether an alternative remedy to the derivative claim is available.

"(3) Leave to bring or intervene in proceedings may be granted under subsection (1) only if the Court is satisfied that (a) the company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or (b) it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders or members as a whole.

"(4) Unless the Court otherwise orders, not less than twenty eight days notice of an application for leave under subsection (1) must be served on the company and the company is entitled to ...

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