Protecting company interests : a review of the statutory derivative action in terms of the Companies Act 71 of 2008

Abstract

Generally, the board of directors are expected to initiate any legal proceedings aimed at enforcing the rights of the company. This position is reinforced by the fact that the business and affairs of a company must be managed by the board and that the board has the authority to exercise all of the powers and perform any functions on behalf of the company, except to the extent that the Act and the company’s Memorandum of Incorporation provides otherwise. Therefore, where a wrong is alleged to have been committed against a company, the company itself has the right to seek redress in that instance. This position means that companies may not afford much protection to minority shareholders. The derivative action as formulated in section 165 of the 2008 Companies Act offers a viable alternative to shareholders for use when a company is harmed by its directors. It contains unique provisions which can be useful in bringing wrongdoing directors to account. Through section 165, shareholders derive the right to action from that of the company whose rights they seek to protect. Proceeds from such an action accrue to the company and not to the shareholder who initiated the derivative proceedings. However, shareholders have historically faced a wide range of challenges which make it difficult for them to choose the derivative action as a remedy of choice when seeking to remedy wrongs done by directors to the company. They cannot easily access company records and also face the possibility of high litigation costs which can prove to be a deterrent in pursuing derivative litigation.