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International Law Case Summaries

■ Vaughn v. LJ Int'l, Inc., No. B208192

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.

FACTUAL AND PROCEDURAL HISTORY

            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.[1]

            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.[2]

            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.[3]  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.[4]

            On October 10, 2007, plaintiff and appellant Vaughn filed the instant derivative complaint against LJI and its directors.[5]  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.[6]

            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.

■ HELD:

In a derivative action alleging breach of fiduciary duty, trial court order sustaining defendant's demurrer without leave to amend is affirmed where plaintiff's standing to bring the claims against the corporation and its directors in California is governed by British Virgin Islands Business Companies Act sec. 184C requiring approval of the BVI High Court before a shareholder can sue derivatively, and the plaintiff had no such approval.
Vaughn v. LJ Inter.-B208192-5/26/09 CA2/8
Vaughn v. LJ Inter.-B208192-5/26/09 CA2/8-PDF

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