When companies are harmed by their own directors : the defects in the statutory derivative action and the cures (Part 1)

Abstract

At the heart of any sophisticated system of corporate law lies the proper protection of minority shareholders. A chief safeguard for them is the statutory derivative action. A derivative action is brought on behalf of a company, to redress a wrong done to the company. In other words, the minority shareholder is seeking to protect not his own rights but the company's rights. A derivative action may be pursued on behalf of the company by a shareholder, director or prescribed officer of the company, or any other person with standing1 under the Companies Act 71 of 2008 ('the Act'), but only with the leave of the court. This judicial screening mechanism is essential, because the company itself has chosen not to sue and the institution of a derivative action would involve the company in litigation against its corporate will. The requirement of the leave of the court provides a buffer against interference by disgruntled shareholders and other stakeholders in the internal management of the company, and prevents them from improperly arrogating the management function that is vested in the board of directors.