Sheng Lu v BVCF Management Ltd

• Jurisdiction: Cayman Islands
• Judge: Mrs. Justice Margaret Ramsay-Hale
• Judgment Date: 26 April 2022
• Court: Grand Court (Cayman Islands)
• Docket Number: CAUSE NO. FSD 244 OF 2021 (MRHJ)

Between

Sheng Lu

Plaintiff

and

BVCF Management Limited

Defendant

Before:

The Hon. Mrs. Justice Margaret Ramsay-Hale

CAUSE NO. FSD 244 OF 2021 (MRHJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

HEADNOTE

Application to strike out claim as disclosing no reasonable cause of action — test to be applied - Order 18 rule 19 — McKay v Essex Area Health Authority [1982] QB 1166.

IN CHAMBERS

Appearances:

Mr. Tom Lowe QC instructed by Ms Katie Pearson and Mr. Niall Dodd of Harney, Westwood & Riegels for the Plaintiff

Mr. Robert Levy QC (via video link) instructed by Mr. Rupert Bell and Mr. Blake Egelton of Walkers for the Defendant

REASONS FOR DECISION

Introduction

1 By Originating Summons dated 11 August 2021 (“the OS”), the Plaintiff, Sheng Lu (“Mr. Lu” or “the Plaintiff”), formerly the head of Investor Relations and Communications, and later Partner, of the Defendant, BVCF Management Limited (“the Company”), made a claim for relief against the Company, an investment manager of several funds under the umbrella of the Bio Veda China Fund (“BVCF”) brand, including the fund known as BVCF III, LP (“the Fund”), a Cayman Islands exempted limited partnership.

2 Mr. Lu claimed, inter alia:

• (i) Declaratory relief that he was entitled to 5% of the “carried interest” payable to the Company from the Fund of which the Company was the investment manager;

• (ii) Specific performance of Schedule 2, Part III, of a contract of employment between himself and the Defendant dated 1 May 2014 (“the 2014 Employment Contract”);

• (iii) In the alternative to (ii) above, damages for breach of the 2014 Employment Contract and breach of the statutory duty under section 6 of the Labour Act (2021 Revision) (“Labour Act”) in the amount of the supposed 5% carried interest.

3 By Consent Order made on 10 September 2021, the proceedings were ordered to continue as if commenced by writ. Mr. Lu filed his Statement of Claim on 19 September 2021, which claimed relief in similar but not identical terms to the OS, including, inter alia:

• (i) A declaration that Mr. Lu is entitled to 5% of the carried interest payable to the Company by the Fund;

• (ii) An order, by way of specific performance of Schedule 2, Part III of the 2014 Employment Contract directing the Company to pay the Plaintiff 5% of the carried interest paid to the Company by the Fund;

• (iii) In the alternative to the order sought at paragraph 2 above, an order directing the Company to pay Mr. Lu 5% of the carried interest paid to the Defendant by the Fund by way of damages for breach of Schedule 2, Part III of the 2014 Employment Contract and of the statutory duty under section 6 of the Labour Act.

4 The Company filed a summons to strike out the entirety of Mr. Lu's claim on 30 September 2021. The Company succeeded in its application, which was heard on 3 December 2021 for reasons which I promised to set out in writing. This I do now.

The Claim

5 Under an agreement made between the Company and the Fund, the Company was entitled to share in the Fund's profits. This share in profits, which is essentially a performance fee paid to investment managers and /or general partners, is referred to as “carried interest”' in the private equity industry.

6 Mr. Lu claims to be contractually entitled to 5% of the carried interest payable to the Company by the Fund.

7 The way in which that entitlement is said to arise is set out in his Statement of Claim as follows:

• 19) Schedule 2, Part III of the 2012 Contract provided as follows:

  “In consideration of the entry by the Employee into this Agreement, the Employer hereby grants the Employee the option to subscribe for up to fifty (50) Class B Shares, representing the Employee's proportional entitlement to participate in the distributions by the Employer of amounts received in respect of the Carried Interest received by the Employer from BVCF III, L.P., on the terms and conditions more fully set out in the Shareholders' Agreement attached as Appendix A.

  Any exercise by the Employee of any option to purchase Class B Shares shall be subject to, and conditional upon, the Employee having executed and delivered a Deed of Adherence to the Shareholders' Agreement substantially in the form appended hereto.”

• 20) Neither the ‘Shareholders’ Agreement’ (the Shareholders’ Agreement) nor the ‘Deed of Adherence’ (the Deed of Adherence), referred to in the extract from the 2012 Contract set out above, were appended to the 2012 Contract.

• 21) The Plaintiff asked Dr Yang orally for a copy of the Shareholders' Agreement and the Deed of Adherence shortly after the Plaintiff joined the Company in September 2012. Dr Yang assured the Plaintiff that both documents would be provided to him when BVCF III had achieved final closing. Final closing in the private equity funds context means the date when the fund ceases to accept new investments.

• 22) Between September 2012 and May 2014, the Plaintiff made several more oral requests for the Shareholders' Agreement and the Deed of Adherence to Ms Gandolfo. Ms Gandolfo also assured the Plaintiff that the documents would be provided to him after the final closing of BVCF III. The Company did not provide the Plaintiff with the Shareholders' Agreement or the Deed of Adherence.

• 23) In 2014, Ms Gandolfo on behalf of the Company asked the Plaintiff, along with other employees of the Company, to sign a new employment contract.

• 24) Ms Gandolfo provided the Plaintiff with a copy of the 2014 Contract prior to 1 May 2014. Once again, the 2014 Contract had been drafted by the Company's attorneys, Walkers, and signed by Dr Yang on behalf of the Company.

• 25) Schedule 2, Part III of the 2014 Contract provided as follows:

  “In consideration of the entry by the Employee into this Agreement, the Employer hereby grants the Employee the option to subscribe for up to five (5) Class B Shares, representing the Employee's proportional five per cent (5%) entitlement, upon having been fully-vested, to participate in the distribution by the Employer of amounts received in respect of the Carried Interest received by the Employer from BVCF III, L.P., on the terms and conditions more fully set forth in the Shareholders' Agreement attached as Appendix A.

  Any exercise by the Employee of any option to purchase Class B Shares shall be subject to, and conditional upon, the Employee having executed and delivered a Deed of Adherence to the Shareholders' Agreement substantially in the form appended thereto.”

• 26) Neither the Shareholders' Agreement nor the Deed of Adherence were appended to the 2014 Contract. The Plaintiff requested these orally from Ms Gandolfo prior to signing the 2014 Contract. Ms Gandolfo told him they would be provided at the final closing of BVCF III.

• 27) The Plaintiff signed the 2014 Contract on 1 May 2014.

• 28) On 31 March 2015, BVCF III achieved final closing.

• 29) The Company did not provide the Plaintiff with the Shareholders' Agreement or the Deed of Adherence on 31 March 2015.

• 30) Between 31 March 2015 and 31 January 2019, the Plaintiff made periodic oral requests of Ms Gandolfo for the Shareholders' Agreement and Deed of Adherence. Ms Gandolfo assured the Plaintiff that they would be provided. Notwithstanding these assurances, the Company did not provide the Plaintiff with the Shareholders' Agreement or the Deed of Adherence.”

8 It is Mr. Lu's case that it was expressly agreed between himself and the Company, which was represented by Ms Gandolfo prior to signing the 2012 contract, that he was entitled to carried interest and that this agreement is recorded in Schedule 2, Part III of the Plaintiff's 2012 contract of employment with the Company (“the 2012 Employment Contract”) in the words: “ the Employee's proportional entitlement to participate in the distributions by the Employer of amounts received in respect of the Carried Interest received by the Employer from BVCF III, L.P” and also recorded in the 2014 Employment Contract in the words: “the Employee's proportional five per cent (5%) entitlement, upon having been fully-vested, to participate in the distribution by the Employer of amounts received in respect of the Carried interest received by the Employer from BVCF III, L.P”.

9 He avers that he was fully-vested in September 2016, having completed 4 years employment with the Company.

10 The particulars of Loss and Damage are set out as follows:

• 46) According to the express wording of the Employment Contracts:

  • (a) the Plaintiff's entitlement to the Carried Interest was conditional upon the Plaintiff having subscribed for Class B Shares in the Company; and

  • (b) the Plaintiff's ability to subscribe for Class B Shares was:

    • (i) subject to terms and conditions more fully set forth in a Shareholders' Agreement which was said to be attached as Appendix A to the 2014 Contract, but was never provided to the Plaintiff; and

    • (ii) conditional upon the Plaintiff having executed and delivered a Deed of Adherence to the Shareholders' Agreement substantially in the form appended thereto. This Deed of Adherence was never provided to the Plaintiff.

• 47) It was an implied term of the Employment Contracts that the Company would not unreasonably or otherwise unfairly prevent the Plaintiff from complying with the conditions necessary to entitle him to receive the Carried Interest.

• 48) It was an express term, alternatively an implied term, of the Employment Contracts that the Company would provide the Shareholders' Agreement and the Deed of Adherence to the Plaintiff within a reasonable time period and in any event, during the course of his employment with the Company.

• 49) In breach of the terms referred to at paragraphs 47 and 48 above, the Company failed to provide the Plaintiff with the Shareholders' Agreement and the Deed of Adherence upon request and thus prevented him from exercising his option to...