28 A DERIVATIVE ACTION
Derivative Action in Terms of South African Companies Act
A derivative action is a legal mechanism that allows shareholders and other stakeholders to initiate a lawsuit on behalf of a company when the company itself has suffered harm due to the actions of its directors or officers but has failed to take legal action. This process is crucial in holding directors accountable for breaches of duty and ensuring that the interests of the company are protected.
Legal Framework
Under the South African Companies Act 71 of 2008, particularly Section 165, the traditional common law right to bring or prosecute legal proceedings on behalf of a company has been abolished and replaced with statutory rights. The relevant section provides a structured method to ensure that genuine claims can be pursued while preventing frivolous or vexatious litigation.
Procedure for Derivative Action
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Demand to the Company:
The initiating party must serve a legal demand on the company to commence or continue proceedings.
2. Application to Set Aside Demand:
Within 15 business days, the company can apply to a court to set aside the demand if it is frivolous, vexatious, or without merit.
3. Investigation of the Demand:
If the demand is not set aside, the company must appoint an independent party to investigate the demand and provide a report to the board on the potential cause of action, related proceedings, probable costs, and whether it serves the company’s best interests.
4. Company’s Response:
Within 60 business days, the company must initiate proceedings as demanded or notify the demander of its refusal to comply.
5. Court Intervention:
If unsatisfied with the company’s response, the individual who made the demand may apply for court leave to bring proceedings in the name of the company. The court will only grant leave if specific procedural and substantive requirements are met.
Importance and Impact
Derivative actions are essential in providing a remedy when the company’s board, primarily responsible for initiating legal actions against breaches, fails to act due to conflicts of interest or other reasons. This mechanism upholds corporate governance standards and ensures directors are accountable for their conduct.
Conclusion
The derivative action serves as an essential tool for shareholders and other stakeholders to protect corporate rights and uphold fiduciary responsibilities within a company. The structured approach under the South African Companies Act ensures that while directors are held accountable, the process cannot be misused for vexatious purposes. This balance protects the interests of the company, its shareholders, and the broader corporate community.