Judicial discretion in derivative actions under the Companies Act of 2008

Abstract

The judicial discretion to grant leave for a derivative action, in terms of s 165(5)(b) of the Companies Act 71 of 2008, involves a tension between two equally important policy objectives. On the one hand is the benefit of a right of redress, where a stakeholder may seek redress on the company’s behalf; on the other hand is the indisputable need to protect companies and their directors from nuisance actions by stakeholders. The guiding criteria for the granting of leave attempt to draw a proper balance between these two objectives. They serve as checks and balances to curtail the abuse of the derivative action, by weeding out claims that are frivolous, vexatious or meritless. Much depends on the application by the courts of the open-textured criteria for leave to institute derivative proceedings. The legislature has left it to the courts to flesh out the interpretation, application and contours of the guiding criteria and, thereby, to determine effectively the success or failure of this remedy in South African law. This article focuses on two leading criteria, namely that the proposed action must involve the ‘trial of a serious question of material consequence to the company’, and that it must be ‘in the best interests of the company’. Guidelines are suggested for the proper judicial approach to these preconditions for a derivative action, based on the jurisprudence developed in Australia, Canada, New Zealand and the United Kingdom, all of which have influenced the relevant provisions of the Companies Act.