Costs orders, obstacles and barriers to the derivative action under section 165 of the Companies Act 71 of 2008 (Part 1)

Abstract

The greatest impediment to a derivative action by minority shareholders arises from the practical barriers to the commencement of derivative proceedings. The chief barriers are, first, the risk of the minority shareholder being burdened with liability for the costs of the derivative proceedings and, secondly, the lack of access to corporate information. As long ago as 1970 the Van Wyk De Vries Commission of Inquiry into the Companies Act1 declared that one of the worst anomalies of the derivative action is the risk of the plaintiff shareholder having to bear the costs of an action in which he is 'in effect not the real plaintiff'. In the light of this progressive and enlightened finding, it is disappointing that the legislature has failed to adopt a more resolute approach under the Companies Act 71 of 2008 ('the Act') to the vexed issue of costs. If the new liberalised derivative action is to be a success, the courts must face this obstacle head on. It is vital that the remedy is not unwittingly suffocated by the courts, through the imposition of adverse costs orders on shareholder litigants.