ETD Hamadziripi Thesis PDF

Derivative actions in contemporary company law: A comparative assessment from an
enhanced accountability perspective
A Thesis Submitted in Fulfilment of the Requirements for the Degree of
DOCTOR OF LAWS (LL.D)
By
FRIEDRICH CLEMENCE HAMADZIRIPI
(201104322)
In the Nelson R. Mandela School of Law
Supervisor: Professor Patrick Osode
2020
DECLARATION
I, Friedrich Clemence Hamadziripi, do hereby declare that except for the references indicated as
such in the text, and any other help as I have acknowledged, this thesis is wholly a product of my
own research, opinion, analysis and industry and has not been submitted in fulfilment of the
requirements for degree purposes or academic examination towards any qualification at any other
University or any other organisation for any other purpose. All the academic sources I have used
or quoted have been appropriately indicated and acknowledged by means of complete references.
…………………………………………..
Friedrich Hamadziripi
Date: 31 August 2020
East London
i
ABSTRACT
The company is one of the most popular organisational vehicles for conducting business. The very
nature of the company as a juristic person is attractive. The principle of legal personality entitles
a company to act as a legal entity separate from its members. The principle was laid down in the
landmark decision of Salomon v Salomon 1897 AC 22 (HL). This decision shows that a company
is a full player in the legal arena. It has standing before the courts of law and is the proper plaintiff
for wrongs done to it, not any of the stakeholders who may also be affected by the wrongdoing.
However, it has to be noted that a company is just an artificial person. It is a fictitious being, a
juristic person and a creature of statute. Therefore, even though a company has the capacity to
acquire rights which can be enforced in a court of law and obligations which another legal subject
can enforce against it, a company cannot in all respects be equated with a human person, for it has
no physical substance. Inevitably, a director must act as its hands, brain, legs, mouth and eyes.
Regardless of how financially strong a company can be, its juristic nature places all its resources
and wealth at the mercy of its directors and officers. A company can neither protect itself against
wrongdoing, vindicate nor enforce its rights without its representative directors and officers. If the
wrongdoing faction in a company comprises of directors who are required to act in the best
interests of the company, then who will enforce the company’s rights?
The juristic nature of a company makes it vulnerable to abuse, especially by directors. It is

important to note that internal stakeholders such as directors innocent of wrongdoing, employees
and shareholders are not the only ones who stand to lose from the failure of corporate governance.
External stakeholders’ interests too are vulnerable to abuse as a result of a company being abused
by its leaders.
There is, therefore, a need for a mechanism that controls abuse of power especially by agents of a
company. Such a mechanism is critical to accountability as it protects the company from director
malfeasance while promoting adherence to corporate governance principles in general. Also,
successful derivative claims play a significant role in securing compensation for the company.
Seeing that a company can be injured by both internal and external stakeholders, it is imperative
that there be an effective and efficient mechanism that protects both the company and its owners
without deterring entrepreneurship and stakeholder participation. Proceeding from an
ii
accountability enhancement perspective, this study undertakes a comparative assessment of the
derivative action as a mechanism that created to deal effectively with the mischief revealed in the
above paragraphs.
For a complainant to be able to invoke the derivative action for relief, he or she must comply with
certain requirements. Those requirements will be examined in greater detail with respect to the
American, South African, English and Japanese laws. Empirical research has concluded that
directors’ exposure to derivative claims remains largely theoretical. The critical question is
whether the requirements for commencing or continuing a derivative action are too onerous.
Although the remedy is available in theory, its shortcomings appear to make derivative actions
almost impossible to invoke in practice.
It has been argued that the greatest impediment to a derivative action by minority shareholders
arises from the practical barriers to the commencement of derivative proceedings. With respect to
the USA, it has further been demonstrated that there is a positive correlation between the
significant decline in the importance of derivative litigation and the creation of additional legal
hurdles in breach of directors’ duties cases. This study seeks to examine the various shortcomings
of the remedy and suggest ways to make it less onerous as well as increase its availability to more
stakeholders.
Keywords
Derivative actions, enhanced accountability perspective; litigation, historical analysis, legal

standing, filter, frivolous and vexatious suits, strike suits, demand requirement, business judgment,
business judgment rule, judicial discretion
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ACKNOWLEDGEMENTS
This work would not have been accomplished without divine providence. I would like to express
my honest and unending gratitude to the Only Potentate, Jehovah and his only begotten son Jesus
Christ through the Holy Spirit for enabling me to successfully complete this feat in record time.
None of this would have been possible without the Almighty God’s grace and the talents He gave
me. I thank Him from the bottom of my heart.
My sincere appreciation is extended to my supervisor and promoter Professor Patrick C. Osode

for his treasured mentorship and guidance. I should especially thank him for his insightful
comments, suggestions and unwavering support during the course of the research which has
resulted in this thesis. Working with you has been an absolute wonder. You also went an extra
mile and awarded me the Supervisor Linked Bursary (SLB) during my first year before the
National Research Foundation (NRF) came along. You also showed me how to write and publish.
I will continue to learn from you. May you continue to be a trans-generational influence and
destiny transformer.
Furthermore, I want to thank Mr Samuel Ncoyini of the University of Fort Hare East London
Campus Library for his assistance in training me on how to find my way through various online
databases. He together with Fundiswa Siqangwe (sis Fundi), were also very instrumental in seeing
to it that I access recent academic materials through the university’s inter-library loan (ILL)
facility. Other special persons who deserve exceptional mention in this regard are Anea Hattingh
and Kudzi Nhlema. May God bless these beautiful souls.
I would not have been able to conduct and eventually complete the mammoth task of writing this
Doctoral thesis had it not been for the NRF that awarded me a bursary as a result of which I did
not face any financial constraints during the course of the research.
The University of Fort Hare’s Govan Mbeki Research and Development Centre (GMRDC) family
deserves particular mention. Due to time and space constraints, I cannot mention everyone by
name. Thank you so much Zikhona Jacobs, Pumla Bom and Joyce Fortuin for working tirelessly
to ensure that during my three years of Doctoral studies I attend the Annual International
Mercantile Law Conference (AIMLC) in Bloemfontein twice. The exposure and experience I
acquired from these conferences are priceless and eternal.
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I also need to single out my Pastors- Zwelitsha and Rejoice Dlamini, Lainos and Betty Masukuta
and Godknows and Sarudzai Mupanga for their prayers and moral support. Last but not least, I am
deeply thankful to my loving family that was so patient and supported me throughout this research
project. The completion of this thesis would not have been possible without them. Thank you to
my mom Beauty, Fletcher Hamadziripi, Phillip and Munyaradzi Ngonisa, Tawanda Kazingizi,
Loydah Zvinairo, Shumirai Tsvanhu, Ms F Usayi and Mrs Chidhakwa. To my special and
treasured friends, Justice Mudzamiri, Gray Muchechetere, Dr Shelton T Motamakore (LLD), I say
remain blessed forevermore. Dr TV Warikandwa and Dr Nyasha Chidhakwa, you are awesome
people.
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DEDICATION
This work is dedicated to my loving and precious mother Beauty Magaso whom God has blessed
with a unique resilience and ability to remain optimistic even under absolute pressure. May the
God of Ezekiel, the creator of heavens and earth bless you with many more years full of joy and
divine health. I love you.
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LIST OF TABLES AND FIGURES
Figure 1: Historical development of derivative actions in England

Figure 2: Derivative Actions in the Enhanced Accountability Perspective
Figure 3: The English Court Structure
Figure 4: The USA Dual Court Structure
Figure 5: Demand Requirement in the Enhanced Accountability Perspective
Figure 6: Standing Requirements in the Enhanced Accountability Perspective
Figure 7: The Business Judgment Rule under the Enhanced Accountability Perspective
Figure 8: Exercise of Judicial Discretion under the Enhanced Accountability Perspective
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ABBREVIATIONS AND ACRONYMS
AD Appellate Division
AIG American International Group
AJ Acting Judge
ALI American Law Institute
ASIC Australian Securities and Investments Commission
B-BBEE Broad-Based Black Economic Empowerment
BC Before Christ
BJR Business Judgment Rule
BONY Bank of New York
BoR Bill of Rights
CA Court of Appeal
CC Constitutional Court
CEO Chief Executive Officer
CFI Centre for Financial Inclusion
Ch. Chancery
ChD. Chancery Division
CJ Chief Justice
CLR Commonwealth Law Reports
CPR Canadian Pacific Railway
CSARS Commissioner for the South African Revenue Service
DCF Discounted Cash Flow
DGCL Delaware General Corporation Law
DTI Department of Trade and Industry
ECFR European Company and Financial Law Review
ECGI European Corporate Governance Institute
ESV Enlightened Shareholder Value
EU European Union
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EWHC High Court of Justice of England and Wales
FNB First National Bank
FTSE Financial Times Stock Exchange
GFC Global Financial Crisis
HKEC Hong Kong Electronic Cases
HL House of Lords
ICC Independent Crushers Consortium
IODSA Institute of Directors for South Africa
JA Judge of Appeal
JSE Johannesburg Stock Exchange
LLC Limited Liability Company
LLP Limited Liability Partnership
LSE London Stock Exchange
Ltd Limited
MBA Master of Business Administration
MBCA Model Business Corporation Act
NASDAQ National Association of Securities Dealers Automated
Quotations
NAV Net Asset Value

NSWLR New South Wales Law Reports
NYSE New York Stock Exchange
OECD Organisation for Economic Cooperation and Development
PAIA Promotion of Access to Information Act
Pty Proprietary
RSA Republic of South Africa
SA South Africa
SCA Supreme Court of Appeal
SEC Securities and Exchange Commission
ix
SLC Special Litigation Committees
SLR Singapore Law Reports
SRC Special Review Committee
TCC Toronto Construction Company
THRHR Tydskrif vir Hedendaagse Romeins – Hollandse Reg.
UK United Kingdom
USA United States of America
UWC University of the Western Cape
VAT Value Added Tax
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CONTENTS
DECLARATION............................................................................................................................ i
ABSTRACT ................................................................................................................................... ii
ACKNOWLEDGEMENTS ........................................................................................................ iv
DEDICATION.............................................................................................................................. vi
LIST OF TABLES AND FIGURES .......................................................................................... vii
ABBREVIATIONS AND ACRONYMS .................................................................................. viii
CHAPTER ONE ........................................................................................................................... 1
Introduction to the study .............................................................................................................. 1
11 INTRODUCTORY BACKGROUND .......................................................................... 1
12 DERIVATIVE REMEDY FEATURES ....................................................................... 9
13 RESEARCH PROBLEM ............................................................................................ 10
14 RESEARCH OBJECTIVES ....................................................................................... 12
15 RESEARCH QUESTIONS ......................................................................................... 12
16 SCOPE OF THE STUDY ............................................................................................ 13
17 LITERATURE REVIEW ............................................................................................ 15
18 RESEARCH METHODOLOGY ............................................................................... 23
19 STRUCTURE OF THE STUDY................................................................................. 26
1 10 REFERENCING .......................................................................................................... 27
CHAPTER TWO ........................................................................................................................ 28
The genesis, development and transplantation of derivative actions ..................................... 28
21 INTRODUCTION ........................................................................................................ 28
22 REPRESENTATIVE LITIGATION AS THE PRECURSOR ................................ 30
23 SHAREHOLDER ACTIVISM AGAINST MANAGEMENT MISCONDUCT .... 35
24 THE PROPER PLAINTIFF RULE ........................................................................... 37
25 EXCEPTIONS TO THE PROPER PLAINTIFF RULE ......................................... 42
251 Ultra vires or illegal conduct................................................................................. 43
252 Requirement of special majority vote ................................................................. 44
253 Violation of personal or individual rights........................................................... 45
254 Fraudulent conduct affecting the minority......................................................... 45
26 LEGAL TRANSPLANTATION OF THE DERIVATIVE REMEDY ................... 49
261 Derivative remedy in England ............................................................................. 49
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262 Derivative suits in the USA .................................................................................. 52
263 Derivative claims in Japan ................................................................................... 56
264 Derivative actions in South Africa....................................................................... 60
27 PRELIMINARY CONCLUSIONS ............................................................................ 63
CHAPTER THREE .................................................................................................................... 66
The enhanced accountability perspective ................................................................................. 66
31 INTRODUCTION ........................................................................................................ 66
32 THE CONCEPT OF ACCOUNTABILITY .............................................................. 68
3 3 THE ENHANCED ACCOUNTABILITY PERSPECTIVE OF DERIVATIVE
ACTIONS................................................................................................................................. 69
34 FACETS OF THE ENHANCED ACCOUNTABILITY PERSPECTIVE ............. 72
341 Moral and ethical consciousness .......................................................................... 72
342 Stakeholder sensitivity .......................................................................................... 73
343 Responsible management ..................................................................................... 77
344 Equilibrium in substantive and procedural requirements ............................... 78
345 Internal limitations to avoid multiplicity of suits ............................................... 80
346 All stakeholders as potential victims of directorial misconduct ....................... 81
347 Directors’ fiduciary duty owed only to the company ........................................ 82
35 PRELIMINARY CONCLUSIONS ............................................................................ 85
CHAPTER FOUR ....................................................................................................................... 86
Corporate governance: Pertinent conceptual ideas and institutional arrangements ........... 86
41 INTRODUCTION ........................................................................................................ 86
42 CORPORATE GOVERNANCE ................................................................................ 87
421 Separation of ownership and control .................................................................. 91
422 Shareholding patterns .......................................................................................... 93
423 Strategic players and issues.................................................................................. 94
4 2 3 1 Directors.............................................................................................................. 94
4 2 3 2 Auditors ............................................................................................................... 96
4 2 3 3 Source of finance ................................................................................................. 97
4 2 3 4 Creditors............................................................................................................ 102
4 2 3 5 Employees.......................................................................................................... 103
4 2 3 6 Derivative litigation defendants ........................................................................ 103
4 2 3 7 Court structure of South Africa, the UK, the USA and Japan .......................... 105
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424 Primary beneficiaries of directors’ fiduciary duties ........................................ 110
425 Regulatory instruments ...................................................................................... 112
426 Board structure ................................................................................................... 115
427 Cause of action .................................................................................................... 120
428 Double or multiple derivative actions ............................................................... 122
43 SUMMARY AND PRELIMINARY CONCLUSION ............................................. 125
CHAPTER FIVE ...................................................................................................................... 127
The requirement of legal standing in derivative actions ....................................................... 127
51 INTRODUCTION ...................................................................................................... 127
52 GENERAL REQUIREMENTS FOR LEGAL STANDING .................................. 129
53 LEGAL STANDING IN DERIVATIVE LITIGATION ........................................ 132
54 THE CONTEMPORANEOUS OWNERSHIP RULE ........................................... 136
541 Rationale for the contemporaneous ownership rule ........................................ 140
542 Exceptions to the rule ......................................................................................... 145
543 Criticisms of the contemporaneous ownership rule ........................................ 147
55 CONTINUING WRONG DOCTRINE .................................................................... 157
551 Rationale and application of the continuing wrong doctrine ......................... 159
552 Criticisms of the continuing wrong doctrine .................................................... 159
56 CONTINUOUS OWNERSHIP RULE ..................................................................... 166
57 NON-SHAREHOLDER COMPLAINANTS ........................................................... 169
571 Creditors .............................................................................................................. 170
572 Directors and officers ......................................................................................... 173
573 Employees ............................................................................................................ 173
574 Discretionary complainants ............................................................................... 174
58 PRELIMINARY CONCLUSIONS .......................................................................... 175
CHAPTER SIX ......................................................................................................................... 178
Assessing the requirement of demand on directors from the enhanced accountability
perspective ................................................................................................................................. 178
61 INTRODUCTION ...................................................................................................... 178
62 NATURE AND SCOPE OF THE DEMAND REQUIREMENT .......................... 182
621 Form of the demand............................................................................................ 182
63 THE PURPOSE FOR THE DEMAND RULE ........................................................ 187
64 SATISFYING A DEMAND ...................................................................................... 190
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641 The USA................................................................................................................... 191
642 South Africa......................................................................................................... 193
643 Japan .................................................................................................................... 198
644 The English approach ......................................................................................... 199
65 THE BOARD’S RESPONSE TO THE DEMAND ................................................. 206
651 Special litigation committees .............................................................................. 210
6 5 1 1 Special Review Committees ............................................................................... 212
652 Pursuing litigation ............................................................................................... 213
653 Internal resolution of the grievance .................................................................. 213
654 Rejection of the demand ..................................................................................... 214
655 When the board agrees to disagree ................................................................... 215
656 Reasonable time to respond ............................................................................... 216
66 EXCEPTIONAL CIRCUMSTANCES .................................................................... 220
661 Demand futility ....................................................................................................... 220
662 Imminent irreparable harm ............................................................................... 222
67 CRITICISMS OF THE DEMAND REQUIREMENT ........................................... 223
671 Information asymmetry...................................................................................... 224
672 Overcoming the business judgment rule........................................................... 231
673 Proving directors’ lack of independence and interest ..................................... 232
674 Complexity of the demand rule ......................................................................... 232
CHAPTER SEVEN ................................................................................................................... 238
Managing the interplay between the business judgment rule and derivative actions ........ 238
71 INTRODUCTION ...................................................................................................... 238
72 HISTORICAL OVERVIEW OF THE RULE ........................................................ 242
73 THE SIGNIFICANCE OF THE BJR ...................................................................... 245
731 Rationales for the adoption of the rule ............................................................. 246
732 Purposes of the BJR ............................................................................................ 250
74 THE NATURE OF THE BJR ................................................................................... 253
741 Elements of the BJR............................................................................................ 253
7 4 1 1 Business Judgment or decision ......................................................................... 253
7 4 1 2 Best interests of the company ............................................................................ 255
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7 4 1 3 Rationality ......................................................................................................... 257
7 4 1 4 Independence and disinterestedness .................................................................... 258
742 Manifestations of the BJR .................................................................................. 259
7 4 2 1 The BJR as an abstention doctrine .................................................................... 259
7 4 2 2 The BJR as an immunity doctrine ..................................................................... 261
7 4 2 3 The BJR as a standard of liability ..................................................................... 262
75 THE BJR IN THE USA ............................................................................................. 263
76 A UNIQUE SOUTH AFRICAN VERSION OF THE BJR? .................................. 268
77 JAPAN ......................................................................................................................... 275
78 ENGLAND .................................................................................................................. 277
79 THE APPLICABILITY OF THE BJR TO DERIVATIVE ACTIONS ............... 281
791 Is the board’s decision not to litigate a commercial decision? ........................ 281
792 When should courts disregard the BJR? .......................................................... 282
7 10 THE FUTURE OF THE RELATIONSHIP BETWEEN THE BJR AND
DERIVATIVE ACTIONS .................................................................................................... 283
7 11 PRELIMINARY CONCLUSIONS .......................................................................... 290
CHAPTER EIGHT ................................................................................................................... 293
The exercise of judicial discretion in derivative litigation .................................................... 293
81 INTRODUCTION ...................................................................................................... 293
82 PURPOSE OF THE REQUIREMENT OF LEAVE OF COURT ........................ 295
83 THE LEGAL FRAMEWORK OF JUDICIAL DISCRETION ............................ 296
84 SIMILARITIES BETWEEN TWO OR MORE JURISDICTIONS ..................... 301
841 The requirement of good faith ........................................................................... 301
842 The best interests of the company and SLC disinterestedness ....................... 313
843 Ratification and approval/authorisation of the impugned conduct ............... 320
85 JURISDICTION-EXCLUSIVE ISSUES ................................................................. 322
851 The USA ............................................................................................................... 322
8 5 1 1 Determining demand futility.............................................................................. 322
8 5 1 2 Other Rule 23.1 discretionary aspects .............................................................. 330
852 Japan .................................................................................................................... 331
853 England ................................................................................................................ 338
8 5 3 1 Discretion in terms of section 263(3)(e) of the UK Companies Act.................. 339
8 5 3 2 Discretion in terms of section 263(3)(f) of the UK Companies Act .................. 343
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854 South Africa......................................................................................................... 344
8 5 4 1 Trial of a serious question of material consequence to the company ............... 345
86 CRITICISMS OF THE ROLE OF JUDICIAL DISCRETION ............................ 346
CHAPTER NINE ...................................................................................................................... 354
Conclusions and Recommendations ........................................................................................ 354
91 INTRODUCTION ...................................................................................................... 354
92 RECAPITULATION ................................................................................................. 355
93 FINDINGS AND CONCLUSIONS .......................................................................... 363
9 4 RECOMMENDATIONS FOR THE ENHANCED ACCOUNTABILITY
PERSPECTIVE OF DERIVATIVE ACTIONS ................................................................ 366
941 Enhanced accountability derivative action demand requirement.................. 367
9 4 1 1 Form and service of the demand ....................................................................... 367
9 4 1 2 Satisfying a demand .......................................................................................... 370
9 4 1 3 Responding to a demand ...................................................................................... 372
9 4 1 4 Demand futility .................................................................................................. 375
942 Derivative standing requirements under the enhanced accountability
perspective .......................................................................................................................... 377
9 4 2 1 Contemporaneous ownership rule .................................................................... 377
9 4 2 2 Continuing wrong doctrine ............................................................................... 380
9 4 2 3 Continuous ownership rule ............................................................................... 381
9 4 2 4 Extension of legal standing to non-shareholder complainants ......................... 382
943 Adaptation of the business judgment rule for operation of the enhanced
accountability perspective of derivative actions ............................................................. 384
944 Exercise of judicial discretion under the enhanced accountability perspective
of derivative litigation ....................................................................................................... 387
9 4 4 1 The requirement of good faith ........................................................................... 390
9 4 4 2 The best interests of the company and SLC disinterestedness .......................... 391
9 4 4 3 Ratification and approval/authorisation of the impugned conduct .................. 392
95 FINAL CONCLUSION ............................................................................................. 393
BIBLIOGRAPHY ..................................................................................................................... 396
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CHAPTER ONE
Introduction to the study
11 INTRODUCTORY BACKGROUND
The company is one of the most popular organisational vehicles for conducting business.1 In a
nation like South Africa, with an estimated population of fifty-eight million people,2 it was
recorded that over 3.1 million companies were registered by the year 2018.3 Similarly, in England,
it was reported that as many as eighty companies were born every hour in 2016. 4 These statistics
indicate that the company offers unique advantages to would-be entrepreneurs. It is submitted that
the very nature of a company as a juristic (artificial) person5 is attractive.6 This essentially means
that a company is in the eyes of the law a legal person.7 However, this legal person is not brought
to life in the same way as a natural person, but through the mechanism laid down by the legislature
in an Act of Parliament.8 The renowned principle of legal personality9 entitles a company to act as
1
Ruohonen “Company Directors’ Key Duties and the Business Judgment Rule” in Kangas et al (eds) Leading
change in a complex world - Transdisciplinary perspectives (2019) 246.
2
Statistical Release: Mid-year Population Estimates 2019
http://www.statssa.gov.za/publications/P0302/P03022019.pdf (accessed 20-11-2019).
3
Tax Statistics https://www.sars.gov.za/About/SATaxSystem/Pages/Tax-Statistics.aspx (accessed 20-11-2019).
4
Palmer “Record 80 new companies being born an hour in 2016”
http://www.telegraph.co.uk/business/2016/07/12/record-80-new-companies-being-born-an-hour-in-2016/
(accessed 05-06-2017). Statistics published in the Business Statistics Briefing Paper Number 06152 23
November 2016 House of Commons library, revealed that there were about 5,5 million businesses in England in
2016.
5
Section 1 of the Companies Act 71 of 2008 provides that “‘company’ means a juristic person incorporated in
terms of this Act…”. Section 1(1) of the United Kingdom Companies Act 2006 contains a similar provision
which provides that “in the Companies Acts, unless the context otherwise requires “company” means a company
formed and registered under this Act”. Article 3 of the Japanese Companies Act 86 of 2005 states that “a company
shall be a juridical person”. See also Hendrikse and Hefer Corporate governance handbook: Principles and
practice 3 ed (2019) 37.
6
Beuthin and Luiz Beuthin’s basic company law 3 ed (2000) 5-7. Kaplan and Elwood “The Derivative Action: A
Shareholder's ‘Bleak House’?” 2003 U.B.C Law Review 443 state that investment in both public and private
companies has stirred “economic expansion in the [industrialised] world”. In the words of Abugu “The Monster
Theory: Setting the Boundary for Corporate Financial Malpractice” An Inaugural Lecture delivered at the
University of Lagos 2015 13, the concept of corporate legal personality together with the limited liability doctrine
“provide versatile potentials for wealth generation and growth”.
7
Section 19(1)(a) of the South African Compaanies Act 71 of 2008. See also Beuthin and Luiz Beuthin’s basic
company law 3 ed (2000) 6; Sahu “Investors protection: The derivative action” 2017 International Journal of
Law 101 101; Penner The Law Student’s Dictionary (2008) 69; Wild and Weinstein Smith and Keenan’s
company law 16 ed (2013) 2; Bourne Bourne on company law 6 ed (2013) 17.
8
Beuthin and Luiz Beuthin’s basic company law 3 ed (2000) 6.
9
Cassim R “Piercing the Veil under Section 20(9) of the Companies Act 71 of 2008: A new Direction” 2014 SA
Merc LJ 307 307 asserts that company law is founded on this principle of separate legal personality. See also
1
a legal entity separate from its members. Even if a company has only one member, 10 it has the
ability to acquire rights and duties separate and distinct from those of its member.11
The principle that a company has legal personality was laid down in the landmark decision of
Salomon v Salomon.12 The case was an appeal to the House of Lords (HL) from the Court of
Appeal (CA). Very briefly, the appellant, Mr Aron Salomon who was a sole trader, decided to sell
his solvent business to a limited liability company, Aron Salomon and Company Ltd, with a
nominal capital of 40 000 shares of £1 each.13 In part payment of the purchase-money, debentures
forming a floating security were issued to the appellant. 14 The company’s Memorandum of
Association was subscribed for by the appellant, his wife and the couple’s five children. 15 Each
person subscribed for one share. Afterwards, the appellant had 20 000 more shares allotted to him.
Consequently, the appellant had 20 001 shares and the other six shareholders had a single share
each. No shares other than these 20,007 were ever issued.
All the terms of sale were known to and approved by the shareholders of the company which
consisted of the appellant, his wife, a daughter and four sons.16 The court had to determine whether
the respondent company was a company at all, that is, whether in actual fact the Legislature’s
artificial creation had been validly constituted in the present case?17 It was argued on behalf of the
appellant (Mr Salomon) that the sale of the business was bona fide, that at the time the business
Abugu “The Monster Theory: Setting the Boundary for Corporate Financial Malpractice” An Inaugural Lecture
Delivered at the University of Lagos 2015 4.
10
See section 66(2) of the Companies Act 71 of 2008 which provides that, “the board of a company must
comprise (a) in the case of a private company, or a personal liability company, at least one director; or (b) in the
case of a public company, or a non-profit company, at least three directors, section 155(1) of the United Kingdom
Companies Act 2006 which state that, “[c]ompanies are required to have at least one director who is a natural
person” and Davies and Worthington Gower’s principles of modern company law 10 ed (2016) 29. It is therefore
possible for a company to have only one director. See also Loubser et al Company secretarial practice Revision
service 2 2018 8-8.
11
Cassim MF The new derivative action under the Companies Act: Guidelines for judicial discretion (2016) 5;
Bourne Bourne on company law 6 ed (2013) 17; Kershaw Company law in context: Text and materials 2 ed
(2012) 30-31; Alan and Lowry Company law: Core texts and series 8 ed (2014) 15; Coetzee “A comparative
analysis of derivative litigation proceedings under the Companies Act 61 of 1973 and Companies Act 71 of
2008” in Mongalo (ed) Modern company law for a competitive South African economy (2010) 290; Clark The
Japanese company (1979) 98.
12
Salomon v Salomon 1897 AC 22 (HL). See also an analysis of this case by Abugu “The Monster Theory: Setting
the Boundary for Corporate Financial Malpractice” An Inaugural Lecture Delivered at the University of Lagos
2015 4-6.
13
Salomon v Salomon 1897 AC 22 (HL) 28.
14
15
Ibid.
16
17
Ibid.
2
was sold it was genuine, solvent and had significant surplus funds.18 Additionally, it was contended
that all the conditions were known to and approved by the shareholders, that creditors were under
no obligation to trust the company, that it made no difference who held the shares or debentures
and in what proportion and if the creditors so desired, they could have found out.19
On the other hand, the respondents argued that the change by the vendor from a sole proprietorship
to a limited company was simply for him to continue carrying on his business without the risk to
himself but so doing at the expense of the creditors.20 It was further contended that “the company
never had an independent existence: It was in fact the appellant under another name; he was
managing director, the other directors being his sons and under his control. The shareholders other
than himself were his own family, and his vast preponderance of shares made him absolute
master”.21 The company was contrary to the true meaning and intent of the Companies Act22 and
was “a mere sham and fraud”,23 so argued the respondent on behalf of the creditors.
The HL rejected the argument advanced by the respondents that the company was simply an alias
for the appellant and reversed the CA’s decision.24 The apex court held that “[the company] is not
another name for the same person; [it] is ex hypothesi a distinct legal persona”.25 This seminal case
put the record straight that “once the company is legally incorporated it must be treated like any
other independent person with its rights and liabilities appropriate to itself, and that the motives of
those who took part in the promotion of the company are absolutely irrelevant in discussing what
those rights and liabilities are”.26 This decision shows that a company is a full player in the legal
arena. It has complete capacity to enforce its rights. Additionally, it has standing before the courts
18
19
Ibid.
20
Ibid.
21
Ibid.
22
1862.
23
24
25
Ibid.
26
Salomon v Salomon 1897 AC 22 (HL) 30. Section 19(1)(b) of the Companies Act 71 of 2008 provides that “from
the date and time that the incorporation of a company is registered, as stated in its registration certificate, the
company has all of the legal powers and capacity of an individual, except to the extent that a juristic person is
incapable of exercising any such power, or having any such capacity; or the company’s Memorandum of
Incorporation provides otherwise”. See also Abugu “The Monster Theory: Setting the Boundary for Corporate
Financial Malpractice” An Inaugural Lecture Delivered at the University of Lagos 2015 5.
3
of law and is the proper plaintiff for wrongs done to it, not any of the stakeholders who may also
be affected by the wrongdoing.27
Decisions that followed Salomon v Salomon28 took cognisance of the principle of legal personality
of a company. For example, this principle was emphasised in the South African case of Dadoo Ltd
v Krugersdorp Municipal Council.29 In this case, the appellant was a company registered in the
Transvaal Province whose main object was “the acquisition of, and the traffic in, landed property,
and the conduct of any business connected with [the] property so acquired”. 30 Mr Mahomed
Dadoo, an Asiatic (Indian), owned 149 of the company’s issued 150 shares. The legal issue
concerned the transfer of property from two white individuals, Fouche and Howell, to Dadoo Ltd.
The respondent, Krugersdorp Municipality, argued that although the property was registered in the
name of Dadoo Ltd, Mr Mahomed Dadoo was the actual owner who just opted to register the
property in the name of the company to evade the law that prohibited Asiatics (Indians) from being
owners of fixed property. Referring to Salomon v Salomon,31 the court held that “a registered
company is a legal persona distinct from the members who compose it”.32
However, it has to be noted that a company is an artificial being.33 It is a fictitious being, a juristic
person34 and a creature of statute.35 Therefore, even though a company has the capacity to acquire
rights which can be enforced in a court of law and obligations which another legal subject can
27
Foss v Harbottle 1843 67 ER 189; Chen “The Statutory Derivative Action in Malaysia: Comparison with an
Australian Judicial Approach” 2017 Asian Journal of Comparative Law 281 281; Shaowei “How Could
Derivative Action Work in China: The Funding Issue” 2019 China Legal Science 138 140; Erickson “The
Gatekeepers of Shareholder Litigation” 2017 Oklahoma Law Review 237 264; Black et al “Legal liability of
directors and company officials part 2: Court procedures, indemnification and insurance, and administrative and
criminal liability (Report to the Russian Securities Agency)” 2008 Columbia Business Law Review 1 26.
28
1897 AC 22 (HL).
29
1920 (AD) 530. See also the discussion in Pretorius et al Hahlo’s South African Company Law through the
Cases: A Source Book – A collection of cases on company law with explanatory notes and comments 6 ed (1999
reprinted 2013) 14.
30
Dadoo Ltd v Krugersdorp Municipal Council 1920 (AD) 531.
31
1897 AC 22 (HL).
32
33
Davies and Worthington Gower’s principles of modern company law 10 ed (2016) 29; Mayson et al Company
law 33 ed (2016) 5; Nwafor “Corporate Criminal Responsibility: A Comparative Analysis” 2013 Journal of
African Law 82.
34
Section 8(4) of the Constitution of the Republic of South Africa 1996 provides that “[a] juristic person is entitled
to the rights in the Bill of Rights to the extent required by the nature of the rights and the nature of that juristic
person”. See Rehana Cassim’s discussion on the legal nature of a company in Loubser et al Company secretarial
practice Revision service 2 2018 2-2.
35
Beuthin and Luiz Beuthin’s basic company law 3 ed (2000) 6; Mayson et al Company law 33 ed (2016) 5; Bourne
Bourne on company law 6 ed (2013) 17; Padfield “The Role of Corporate Personality Theory in Opting out of
Shareholder Wealth Maximization” 2017 The Tennessee Journal of Business Law 415 418.
4
enforce against it, “it cannot in all respects be equated with a human person, for it has no physical
substance and exists only in the contemplation of the law”.36 Furthermore, in R v Kritzinger37 it
was held that a company “…reads or hears a representation through the eyes or ears of, inter alios,
its directors acting in the course of their duty…”.38 A director or board of directors becomes its
hands, brain, legs, mouth and eyes.39 Regardless of how financially strong a company can be,40 its
juristic nature places all its resources and wealth at the mercy of its agents who, in practice, are
usually its directors. A company can neither protect itself against wrongdoing, vindicate nor
enforce its rights without its representative directors and officers.
The juristic nature of a company makes it vulnerable to abuse, especially by its directors.41 A good
illustration is the Canadian case of Cook v Deeks42 where the Toronto Construction Company
(TCC) had four directors who were all equal shareholders. Their names were GM Deeks, GS
Deeks, Hinds and Cook. The first three directors purposed to exclude Cook from an imminent deal
with the intention of appropriating the contract for themselves. The Canadian Pacific Railway
(CPR) had offered a new lucrative contract to TCC. Through a shareholder resolution, the first
three directors were able to declare that the TCC had no interest in the offer. The three directors
then managed to appropriate the contract for themselves by forming a different company that later
contracted with CPR. Cook alleged that the CPR contract opportunity belonged to TCC and that
36
Beuthin and Luiz Beuthin’s basic company law 3 ed (2000) 7. The Constitutional Court of the Republic of South
Africa took note of the fact that the way the right to privacy is applied to natural persons cannot be the same
when it is applied to juristic persons In Investigating Directorate: Serious Economic Offences v Hyundai Motor
Distributors (Pty) Ltd: In re Hyundai Motor Distributors (Pty) Ltd v Smit NO 2001 1 SA 545 (CC).
37
1971 2 SA 57 (A).
38
R v Kritzinger 1971 2 SA 57 (A). See also Financial Mail (Pty) Ltd (1990) v Sage Holdings Ltd 1993 (AD)
where it was held that a company has no feelings; Dean v John Menzies (Holdings) Ltd E 1981 where the court
held that a company “has no sense of shame”; in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd E 1915
AC it was held that “the directors are the directing mind and will of the corporation”. Further see Mayson et al
Company law 33 ed (2016) 5; Pretorius et al Hahlo’s South African Company Law through the Cases: A Source
Book – A collection of cases on company law with explanatory notes and comments 6 ed (1999 reprinted 2013)
12-14.
39
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd 1915 AC 705. See also Casarino and Greene “Back to
Basics: Board & Special Litigation Committee Investigations” 2019 The Corporate Governance Advisor 16. For
companies with one director see CIR v Richmond Estates (Pty) Ltd 1956 1 SA 602 A.
40
Francis “The Top 25 Corporate Nations” http://foreignpolicy.com/2016/03/15/these-25-companies-are-more-
powerful-than-many-countries-multinational-corporate-wealth-power/ (accessed 15-08-2017) shows that if
Walmart were a country, it would surpass the Gross Domestic Product of more than 150 countries. Other
“metanational” corporations, as the author puts it, that amass hundreds of billion US$s in annual revenue include
Exxonmobil, Apple, Samsung and Glencore.
41
delivered at the University of Lagos 2015 13.
42
1916 1 AC 554.
5
the three directors of TCC abused the juristic nature of the company. Together they held 75%
ownership of TCC which made it difficult for Cook to sue them on the company’s behalf.
In the South African case of Mouritzen v Greystones Enterprises (Pty) Ltd43 the applicant, Kenneth
Hansen Mouritzen, and the second respondent, Digby Hall Mouritzen, were brothers and the only
directors of the first respondent, Greystones Enterprises (Pty) Limited (the company).44 The
applicant and the second respondent, as co-directors, were paid equal monthly salaries by the
company.45 Additionally, their personal credit cards were linked to the company’s First National
Bank (FNB) account in the sense that all credit card transactions were automatically debited to,
and paid by the company.46 The applicant alleged that the second respondent abused his personal
credit card to the detriment of the company and its shareholders.47 The applicant then served a
demand48 on the company to institute legal action in order to recover the funds. The respondent,
in his capacity as a director, refused to comply with the demand. 49 This case again highlights the
vulnerability of a company. The respondent director abused the company’s juristic nature and
confidence reposed in him.
Similar circumstances prevailed in Larrett v Coega Development Corporation (Pty) Ltd,50 another
South African case. Here, the applicant was a director in a company called Independent Crushers
Consortium (Pty) Ltd (ICC).51 According to the applicant, ICC was awarded road surfacing
contracts by the first respondent. It was alleged that an amount of R2 087 000 due to ICC was paid
into a bank account different from the nominated one, but one which belonged to one of the
shareholders of ICC, thus prejudicing ICC. After some further investigations, the applicant found
that the co-director (third respondent) was heavily involved in diverting the said amount into that
account, apparently for his own benefit.52 Thereafter, the co-director became passive and unwilling
43
2012 5 SA 74 (KZD).
44
Mouritzen v Greystones Enterprises (Pty) Ltd 2012 5 SA 74 (KZD) para 2.
45
46
Ibid.
47
Ibid.
48
In terms of section 165(2) of the Companies Act 71 of 2008.
49
Mouritzen v Greystones Enterprises (Pty) Ltd 2012 5 SA 74 (KZD) para 34. It should be noted that the second
respondent and his wife owned a total of 98 shares of the issued 198. Applicant and second respondent’s two
sisters each held a share and the remainder was owned by the Mouritzen Trust in which the applicant was a
trustee.
50
ECD 2639/2013.
51
Larrett v Coega Development Corporation (Pty) Ltd ECD 2639/2013 para 1.
52
6
to participate in the running of the company. As a result, the applicant could not set up the board
meeting with the third respondent to secure the necessary authorisation to institute legal action on
behalf of ICC.53
It is important to note that internal stakeholders such as directors innocent of wrongdoing,

employees and shareholders are not the only ones who stand to lose from the failure of corporate
governance. External stakeholders’54 interests are also vulnerable to abuse as a result of a company
being abused by its directors/agents. A classic example is presented by the Lehman Brothers
debacle. Lehman Brothers was founded by Henry Lehman and his brothers Emanuel and Mayer
in 1850 meaning it had survived the Great Depression of the 1930s and the two world wars. At the
time of its collapse, Lehman Brothers was the fourth-largest investment bank in the United States
of America (USA).55 When it filed for bankruptcy, Lehman Brothers had $639 billion in assets
and $619 billion in debt which made it the largest ever bankruptcy filing in history surpassing
previous spectacular giants such as Worldcom and Enron.56 It has been argued that the day Lehman
Brothers filed for bankruptcy marked the beginning of the worst economic crisis in history. 57 The
effects of the investment bank’s demise were far-reaching. It is believed that the Lehman Brothers
debacle triggered the 2008 economic recession which led to almost six million job losses, the
unemployment rate almost doubled, the London Stock Exchange (LSE) and the Financial Times
Stock Exchange (FTSE) were massively shaken, companies in similar businesses experienced
major setbacks and investors panicked and withdrew some of their investments.58 Some would
53
54
External stakeholders include creditors, the community and the government. See also Millstein et al “Fiduciary
Duties of Corporate Directors in Uncertain Times” 2018 Journal of Applied Corporate Finance 17 18; Wiese
Corporate governance in South Africa with international comparisons 2 ed (2016) 7-9. According to Hendrikse
and Hefer Corporate governance handbook: Principles and practice 3 ed (2019) 45, a stakeholder is any
individual or group who has a direct or indirect interest in the operations of a business.
55
Wiggins et al “The Lehman Brothers Bankruptcy” 2014 Yale School of Management 1 2.
56
Ibid. For more on these and other corporate debacles see Larcker and Tayan Corporate Governance Matters: A
closer look at organizational choices and their consequences 2 ed (2016) 3; Panagiotou “The derivative action
in Greek corporation law” 2017 The Company Lawyer 329 329; Abugu “The Monster Theory: Setting the
Boundary for Corporate Financial Malpractice” An Inaugural Lecture Delivered at the University of Lagos 2015
10-12.
57
Farndale “Lehman Brothers collapse: How the worst economic crisis in living memory began”
http://www.telegraph.co.uk/finance/recession/3917584/Lehman-Brothers-collapse-How-the-worst-economic-
crisis-in-living-memory-began.html (accessed 15-08-2017).
58
Shell “Lehman Bros. collapse triggered economic turmoil” http://abcnews.go.com/Business/lehman-bros-
collapse-triggered-economic-turmoil/story?id=8543352 (accessed 15-08-2017. However, Mukwiri and Siems
“The Financial Crisis: A Reason to Improve Shareholder Protection in the EU?” 2014 Journal of Law and Society
51 60-63 have a different opinion as far as the actual cause of the 2008 Global Financial Crisis is concerned. The
7
blame the government for not bailing out this investment banking giant. However, it is also argued
that Lehman Brothers CEO Richard Fuld contributed to the bank’s fall from grace. “Fuld went
wrong in not taking seriously enough the impairment of his balance sheet”.59
If the wrongdoing faction comprises of directors who are expected to act in the best interests of a
company,60 then who will enforce the company’s rights?61 In actual fact, these would have disabled
the company in terms of enforcing its rights and entitlements. Thus, as Siems argued, it is
appropriate to allow shareholders to institute derivative actions and “by doing so, become the
company’s ‘watchdog’”.62 Lord Denning MR captured the mischief in the following words;
“if [a company] is defrauded by a wrongdoer, the company itself is the one person to sue for the damage.
The rule [in Foss v Harbottle] is easy enough to apply when the company is defrauded by outsiders.
The company itself is the only person who can sue. Likewise, when it is defrauded by insiders of a
minor kind, once again the company is the only person who can sue. But suppose it is defrauded by
insiders who control its affairs – by directors who hold a majority of the shares – who then can sue for
damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not
authorise the proceedings to be taken by the company against themselves. If a general meeting is called,
they will vote down any suggestion that the company should sue them themselves. Yet the company is
the one person who is damnified. It is the one person who should sue. In one way or another some
means must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice
would be done without redress”.63
co-authors argue that, inter alia, short-termism and lack of shareholder engagement rather than weak corporate
governance models led to this global financial catastrophe.
59
Plumb and Wilchins “Lehman CEO Fuld's hubris contributed to meltdown” http://www.reuters.com/article/us-
lehman-backstory-idUSN1341059120080914 (accessed 15-08-2017).
60
Section 76(3)(b) of the Companies Act 71 of 2008.
61
Chen 2017 Asian Journal of Comparative Law 281.
62
Siems “Private Enforcement of Directors’ Duties: Derivative Actions as a Global Phenomenon” 2012 4 available
at: http://ssrn.com/abstract=1699353 (accessed 28-06-2018). See also Rose “Cutting Class Action Agency Costs:
Lessons from the Public Company” 2019 29 available at https://ssrn.com/abstract=3460585 (accessed 26-11-
2019).
63
Wallersteiner v Moir (No 2) [1975] 1 All ER 849 857. A vital commentary of this case was presented by Abugu
“The Monster Theory: Setting the Boundary for Corporate Financial Malpractice” An Inaugural Lecture
delivered at the University of Lagos 2015 14-16. See also Cassim MF The new derivative action under the
Companies Act: Guidelines for judicial discretion (2016) 6-7.
8
There is, therefore, a need for a mechanism that controls abuse of power especially by agents of a
company.64 Such a vehicle is critical to ensuring accountability65 as it protects the company from
director malfeasance66 while promoting adherence to corporate governance principles in general.67
A company can be injured by both internal and external stakeholders. It is therefore pertinent to
have an effective and efficient mechanism that protects both the company68 and its owners whilst
at the same time inspiring entrepreneurship69 and stakeholder participation. This study will
undertake a critical comparative assessment of the derivative action70 as a mechanism that has
been created to deal with the mischief revealed in this introductory background. Also, it must be
noted that successful derivative claims inevitably play a significant role in securing compensation
for the company.71
12 DERIVATIVE REMEDY FEATURES

The main features of the derivative remedy are the demand requirement, locus standi and judicial
discretion. Due to the nature and significance of the business judgment rule, it will be regarded as
a stand-alone feature of derivative remedy for the purposes of this study. Depending on the
jurisdiction in question, the requirement of derivative locus standi may consist of other sub-
64
Sahu 2017 International Journal of Law 101; Weidner “Dissatisfied Members in Florida LLCs: Remedies” 2019
Florida State University Business Review 6; Siems 2012 1 available at: http://ssrn.com/abstract=1699353
(accessed 28-06-2018).
65
Jones “An Empirical Examination of the Resolution of Shareholder Derivative and Class Action Lawsuits” 1980
Boston University Law Review 542; Sahu 2017 International Journal of Law 104; Ramsay and Saunders
“Litigation by Shareholders and Directors: An Empirical Study of the Statutory Derivative Action” 2006 Journal
of Corporate Law Studies 397 413. The problem of managerial/directorial accountability was also noted by
delivered at the University of Lagos 201518-19.
66
Such protection is a result of the remedy’s deterrent effect. For more on the deterrent effect of derivative actions
see Baum and Puchniak “The derivative a ction: An economic, historical and practice-oriented approach” in
Puchniak et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 23-24;
Katelouzou and Siems “Disappearing Paradigms in Shareholder Protection: Leximetric Evidence for 30
Countries, 1990–2013” 2015 Journal of Corporate Law Studies 127 131; Ramsay and Saunders 2006 Journal of
Corporate Law Studies 404; and Cassim MF “Costs Orders, Obstacles and Barriers to the Derivative Action
under Section 165 of the Companies Act 71 of 2008 (Part 1)” 2014 SA Merc LJ 4.
67
Tang “The anatomy of Singapore’s statutory derivative action: Why do shareholders sue – or not?” 2019 Journal
of Corporate Law Studies 1; Chen 2017 Asian Journal of Comparative Law 281; Erickson 2017 Oklahoma Law
Review 237-238; and Cassim MF 2014 SA Merc LJ 3.
68
Weidner 2019 Florida State University Business Review 1 3.
69
Ramsay and Saunders 2006 Journal of Corporate Law Studies 404.
70
Derivative actions are claims brought before a court of law by a complainant seeking redress on behalf of a
company usually when the director(s) is/are unable or unwilling to do so. See Sahu “Investors protection: The
derivative action” 2017 International Journal of Law 101 101.
71
Ramsay and Saunders 2006 Journal of Corporate Law Studies 413; Cassim MF 2014 SA Merc LJ 2 and 5; Baum
and Puchniak “The derivative action: An economic, historical and practice-oriented approach” in Puchniak et al
(eds) The derivative action in Asia: A comparative and functional approach (2012) 15-18.
9
features such as proof of a prima facie case in the UK and the contemporaneous ownership and
continuous wrong requirements in the USA. In South Africa, the requirement of locus standi also
includes aspects such as the continuous interest principle. Another pertinent feature of the
derivative remedy is judicial discretion.
13 RESEARCH PROBLEM
For a complainant to be able to successfully institute and prosecute the derivative action for relief,
s/he must comply with certain mandatory requirements. These requirements will be examined and
critically assessed with respect to the pertinent American, South African, English 72 and Japanese
laws in chapters four to eight below. For example, the plaintiff must have standing to commence
and/or maintain such an action and in some jurisdictions should also comply with what is known
as the ‘demand requirement’.73 For the plaintiff to satisfy the demand requirement, he or she must
“allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff
desires . . . and the reasons for the plaintiff’s failure to obtain the action or for not making the
effort”.74
In its current construction, the derivative remedy has not been easily accessed especially by
minority shareholders. In one empirical study conducted in Australia, it was found that almost
seventy per cent of the derivative claims were unsuccessful because the applicants failed to prove
that the applications were brought bona fide in the best interests of the company to try a serious
question.75 Baker and Hacking have argued that almost ten years after the introduction of the
statutory derivative claim which was meant to increase shareholder participation especially in
72
It is noteworthy that English derivative actions can also be commenced in pursuance of an order of the court in
proceedings under section 994 of the UK Companies Act 2006. Although section 994 deals with the protection
of members against unfair prejudice, if the court is satisfied that a section 994 petition is well founded, it may
make such an order as it thinks fit for giving relief in respect of the matters complained of including authorising
civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such
terms as the court may direct. This is, in effect, a judicial order permitting the commencement of a derivative
action. However, this study is limited to an examination of proceedings brought under sections 260-264 of the
same Act.
73
Section 165(2) of the South African Companies Act 71 of 2008; Henochsberg on the Companies Act 71 of 2008
Vol 1 Service Issue 2 2012 586; Shaowei 2019 China Legal Science 139; Seitz Jr. and Sirkin “The Demand
Review Committee: How It Works, and How It Could Work Better” 2018 The Business Lawyer 305.
74
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 20.
75
10
quoted companies,76 very little use has been made of the remedy because “the bar to bringing
derivative claims is set high”.77 In their assessment of shareholder protection development
covering 30 jurisdictions and spanning about twenty-four years, Katelouzou and Siems noted that
the demand requirement imposes some form of restriction on the private enforcement of directors’
duties through derivative actions.78 On their part, Hall and Naylor have concluded that “directors’
exposure to derivative claims remains largely theoretical”.79 Commenting on the current English
derivative remedy, Koh has opined that the remedy is “notoriously restrictive” and that its
deficiencies need to be addressed.80 Similarly, Reisberg has also acknowledged that shareholders
intending to institute derivative litigation under the statutory procedure in the UK Companies Act
face numerous obstacles.81 The above mentioned restrictions and obstacles limit the use and
effectiveness of the derivative remedy by minority shareholders.
The critical question is, therefore, whether the requirements for instituting and or maintaining the
derivative action are too onerous and, therefore, inappropriate, irrational or unjustifiable from a
legal policy standpoint. Although the remedy is available in theory, its shortcomings may make
derivative actions almost impossible to pursue in practice.82 While the importance of derivative
litigation is undebatable,83 some substantive and procedural barriers attached to the remedy cannot
76
According to the Business Dictionary http://www.businessdictionary.com/definition/quoted-company.html
(accessed 06-10-2017) a quoted company refers to a company whose shares can be traded on the securities
market.
77
Baker and Hacking “Statutory derivative claim regime: ten years on” http://gowlingwlg.com/en/global/insights-
resources/statutory-derivative-claim-regime-ten-years-on (accessed 06-10-2017). See also Black et al “Legal
Liability of Directors and Company Officials Part 1: Substantive Grounds for Liability (Report to the Russian
Securities Agency)” 2007 Columbia Business Law Review 614 647 and 709 who argued that the practical
possibility of instituting derivative litigation has been limited by the procedural rules attached to the remedy.
78
Katelouzou and Siems 2015 Journal of Corporate Law Studies 131. See also Deakin et al “Is there a Relationship
between Shareholder Protection and Stock Market Development?” 2018 Journal of Law, Finance, and
Accounting 115 121; Armour et al “Shareholder Protection and Stock Market Development: An Empirical Test
of the Legal Origins Hypothesis” 2009 Journal of Empirical Legal Studies 343 354.
79
Hall and Naylor “Derivative claims update” Reynolds Porter Chamberlain LLP 8 December 2009.
80
Koh “Reconstructing the Reflective Loss Principle” 2016 Journal of Corporate Law Studies 373 396.
81
Reisberg “Shadows of the Past and Back to the Future – Part 11 of the UK Companies Act 2006 (in)action” 2009
ECFR 219 242–243. See also Sykes “The Continuing Paradox: A Critique of Minority Shareholder and
Derivative Claims under the Companies Act 2006” 2010 Civil Justice Quarterly 205 209.
82
After conducting a risk/benefit analysis, the court in Zavahir v Shankleman [2016] EWHC 2772 (Ch) held that
it was not reasonable to proceed with the derivative claim regardless of the fact that a prima facie case had been
proven against one of the company directors. See also Gurrea-Martínez “Towards a credible system of
independent directors in controlled firms” 2019 Working Paper Series 1/2019 27 available at
https://ssrn.com/abstract=3380868 (accessed 27-09-2019).
83
Coffee and Schwartz “The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform”
1981 Columbia Law Review 302-329; Ramsay and Saunders 2006 Journal of Corporate Law Studies 404 all
11
be ignored.84 South African scholar, Cassim MF, has unequivocally asserted that “the greatest
impediment to a derivative action by minority shareholders arises from the practical barriers to the
commencement of derivative proceedings”.85 Relying upon what will be described as the
‘enhanced accountability perspective’, this study seeks to identify and examine the various
shortcomings of the derivative remedy and suggest ways to make it more effective for the
attainment of the underlying legal policy objectives.
14 RESEARCH OBJECTIVES
In order to competently address the research problem identified above, this study will pursue the
following objectives:
 critically trace the historical evolution of derivative actions highlighting the underlying
policy objectives and/or justifications for their creation;
 expose the weaknesses of the derivative action as a remedy and the impacts of those
weaknesses on the remedy’s effectiveness;
 undertake a comparative analysis of derivative actions in South Africa, England, the USA
and Japan;
 Suggest ways to address the shortcomings of the derivative action to increase its efficacy
while reducing its vulnerability to abuse and;
 Develop and apply an enhanced accountability perspective86 of derivative actions with a

view to minimising the possibility of managerial abuse while maximising the efficiencies
of directorial autonomy.
15 RESEARCH QUESTIONS
Against the backdrop of the above research problem and objectives, the research questions that
will drive this study are as follows:
agree that derivative actions deter directorial misconduct and management dishonesty. Cassim MF 2014 SA Merc
LJ 1 argues that “a functional derivative action is essential to a sound system of corporate law”.
84
Garth et al “Empirical Research and the Shareholder Derivative Suit: Toward a Better-Informed Debate” 1985
Law and Contemporary Problems 137 139 state that “an array of procedural hurdles developed in connection
with the derivative suit”.
85
Cassim MF 2014 SA Merc LJ 1.
86
The enhanced accountability perspective will be developed further in chapter three below.
12
 What is the origin of the derivative action and how did it evolve?
 What are the acute weaknesses of the derivative action which undermine its efficacy?
 How is the derivative action remedy invoked and applied in South Africa, Japan, the USA
and England?
 How can the shortcomings of the derivative action be addressed in a manner that increases
the remedy’s efficacy while reducing its vulnerability to abuse? And
 How will the enhanced accountability perspective reform the current rules pertaining to the
derivative remedy to enhance its effectiveness as a means of securing corporate and
directorial accountability?
16 SCOPE OF THE STUDY

Company stakeholders have different remedies which can be divided into judicial and
administrative. Judicial remedies include, inter alia, derivative actions and shareholder oppression
claims. This study is confined to a comparative assessment of derivative actions. Accordingly, a
discussion of other company stakeholder remedies falls outside the scope of this study which, as
indicated above, adopts a comparative approach. South African company law on derivative actions
will be compared87 to that of England,88 the USA89 (especially the State of Delaware) and Japan.90
87
Section 5(2) of the Companies Act 71 of 2008 also states that, “to the extent appropriate, a court interpreting or
applying this Act may consider foreign company law”. See also S v Makwanyane 1995 3 SA 391 (CC) para 39
where Chaskalson CJ said, “we can derive assistance from public international law and foreign case law, but we
are in no way bound to follow it”. See also Cassim MF The new derivative action under the Companies Act:
Guidelines for judicial discretion (2016) 32.
88
English company law provides the foundation of the company law of most if not all of the common law
jurisdictions including South Africa.
89
Baum and Puchniak “The derivative action: An economic, historical and practice-oriented approach” in Puchniak
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 77 argue that,
historically, it is only in the USA where the derivative remedy has been instrumental in striking a balance
between “corporate efficiency and minority shareholder protection”. For this reason, the scholars argue that the
North American jurisdiction provides an indispensable point of reference for other countries “in their quest for
the Holy Grail”. Furthermore, the USA has also been selected due to its “economic prowess which allows it to
influence global norms”. The same jurisdiction is also home to some important doctrines such as the business
judgment rule which is the focus of chapter seven. See Yaru “The Business of Judging Directors’ Business
Judgments in Singapore Courts” 2016 SAcLJ 440 and Nyombi “The USA as a good comparator for UK in
corporate governance” 2018 International Journal of Law and Management 135 139.
90
Whilst South Africa is a developing country, the other three are all developed states with different historical
backgrounds and are all strategically located on different on distinct continents. Puchniak “The complexity of
derivative actions in Asia: An inconvenient truth” in Puchniak et al (eds) The derivative action in Asia: A
comparative and functional approach (2012) 99 argues that “the mix [of developmental diverse] allows for a
13
English company law provides the foundation of the company law of most if not all of the common
law jurisdictions of which both South Africa and the USA are part. Therefore, exploration of the
law in England is valuable as it has heavily influenced South African company law.91 Furthermore,
not very long ago, England’s company law underwent some major reforms.92 It will be shown that
the drafters of the current Companies Act93 of South Africa drew some lessons from the reforms
in England. Japan qualifies for reckoning as an “important and dynamic economy” since it is the
world’s third-largest economy behind the USA and China.94 Additionally, unlike the other three
common law jurisdictions, Japan is a civil law jurisdiction which allows one to “examine whether
the derivative action functions differently in each system and to test the validity of the highly
contentious ‘common law’ superiority theory”.95 The USA has been selected due to its extensive
case law96 on the remedy under study97 and because of its economic supremacy.98 It is
determination of whether the functionality of the derivative action is in some way contingent on a jurisdiction’s
level of development”.
91
Cassim FHI “The Companies Act: An overview of a few of its core provisions” 2010 SA Merc LJ 157 157.
92
The House of Commons Trade and Industry Committee noted that a series of reviews were set up in response to
financial scandals in the late 1980s and early 1990s. The reviews started with the Cadbury Report of the
Committee on the Financial Aspects of Corporate Governance 1992, followed by Rutteman Working Group
Internal Control and Financial Reporting: Guidance for Directors of Listed Companies, Institute of Chartered
Accountants of England and Wales 1994, Greenbury Directors’ Remuneration Report of a Study Group Chaired
by Sir Richard Greenbury 1995, Hampel Committee on Corporate Governance: Final Report 1998 and Turnbull
Internal Control: Guidance for directors on the Combined Code Institute of Chartered Accountants of England
and Wales 1999. These reviews encouraged reforms in the law relating to inter alia directors’ duties,
environmental and social reporting, enhancing shareholder engagement and ensuring better regulation. These
reforms were then proposed in the UK’s White Paper on Modernising Company Law Sixth Report of Session
2002–03 and the Secretary of State for Trade and Industry’s Company Law Reform Presentation to Parliament
in 2005 and were finally incorporated in the current UK Companies Act 2006.
93
71 of 2008.
94
Puchniak “The complexity of derivative actions in Asia: An inconvenient truth” in Puchniak et al (eds) The
derivative action in Asia: A comparative and functional approach (2012) 98.
95
Ibid.
96
It is submitted that this makes the USA’s derivative remedy mature and jurisprudentially rich and that South
Africa could benefit from drawing some valuable lessons from it.
97
Nyombi 2018 International Journal of Law and Management 137-140 argued that the USA is a good comparator
for English corporate governance because both jurisdictions have similar market participant profiles as their
markets are dominated by widely dispersed institutional investors. See also Siems 2012 3 available at:
http://ssrn.com/abstract=1699353 (accessed 28-06-2018).
98
It is worthwhile examining how derivative litigation proceedings offer protection to shareholders and other
minorities in the world’s strongest economy for an argument can be advanced that economic prosperity may to
a significant extent be proportional to the level of investor confidence.
14
acknowledged that although decisions from the above-mentioned jurisdictions are not binding in
South Africa,99 they are useful interpretive tools with significant persuasive value.100
17 LITERATURE REVIEW
Whilst it is conceded that, in general, a considerable amount of literature has been written on
derivative actions, especially in common law jurisdictions,101 very little has been written from a
particular perspective, more so an accountability one. Considering the corporate governance
weaknesses which were exposed by the 2007-2008 Global Financial Crisis (GFC), very little
attention has been paid to enhancing directorial accountability and investor protection. This section
reviews the selected literature102 in order to identify gaps in existing texts and also to explain the
study’s significant strengths.
One of the leading authors on derivative actions in South Africa is Cassim MF who has published
several articles103 on the subject. Also, the scholar undertook her doctoral thesis on the same
subject.104 In her doctoral thesis, Cassim examined the guidelines for the exercise of judicial
discretion with respect to section 165 of the South African Companies Act.105 In summary, the
thesis focussed on the exercise of judicial discretion in the context of derivative litigation. The
renowned scholar explored how section 165 of the Act confers “a pivotal function on the courts as
gatekeepers to the derivative action, with an important filtering or screening function to weed out
99
See S v Makwanyane 1995 3 SA 391 (CC) para 39 where Chaskalson CJ said, “We can derive assistance from
public international law and foreign case law, but we are in no way bound to follow it”.
100
Section 5(2) of the Companies Act 71 of 2008 also states that, “[t]o the extent appropriate, a court interpreting
or applying this Act may consider foreign company law”.
101
For example, see Bawah “A Comparison of the Statutory Provisions of the United Kingdom (UK) Companies
Act 2006 and Ghana's Companies Act 1963 (Act 179), to the Rule in Foss v Harbottle” 2019 Beijing Law Review
153; Beyer D “Business Judgment Dismissal of Shareholder Derivative Suits by Board Litigation Committees:
An Expanded Role for the Courts” 1982 Vand. L. Rev. 235; Dennis “Contrivance and Collusion: The Corporate
Origins of Shareholder Derivative Litigation in the United States” 2015 Rutgers University Law Review 1479.
102
It must be noted that this section is not intended to provide a review of all works that have been written on
derivative litigation but only those that are relevant in order to show gaps in existing literature.
103
Some of her works on derivative actions include Cassim MF “Costs Orders, Obstacles and Barriers to the
Derivative Action under Section 165 of the Companies Act 71 of 2008 (Part 1)” 2014 South African Mercantile
Law Journal 1; Cassim MF “Judicial Discretion in Derivative Actions under the Companies Act of 2008” 2013
South African Law Journal 778; Cassim MF “Obstacles and Barriers to the Derivative Action: Costs Orders
Under Section 165 of the Companies Act of 2008 (Part 2)” 2014 South African Mercantile Law Journal 228;
Cassim MF “The Statutory Derivative Action under the Companies Act of 2008: The Role of Good Faith” 2013
South African Law Journal 496.
104
Cassim MF The Statutory Derivative Action under the Companies Act of 2008: Guidelines for the Exercise of
the Judicial Discretion 3 (PhD-thesis, UP, 2014).
105
71 of 2008.
15
applications for derivative actions that are frivolous, vexatious or without merit”.106 Cassim MF’s
comparative analysis largely consisted of other common law jurisdictions such as the USA, the
UK, New Zealand, Nigeria, Ghana, Canada and Australia. Notably, little was gleaned from any
civil law jurisdictions. One of the conclusions arrived at by the author was that the presumption in
section 165(7) and (8) of the Companies Act is defective as far as South African derivative
litigation is concerned. Most importantly, Cassim MF developed a framework for the appropriate
exercise of the judicial discretion to make costs orders, “which is known to have plagued minority
shareholders wishing to bring derivative proceedings against miscreant directors who have
wronged the company”.107
Most research work conducted on derivative litigation has followed a similar trend of selecting
common law jurisdictions alone for comparative purposes.108 However, it is submitted that there
are some principles and procedures that common law jurisdiction may learn from civil law based
states and vice versa. Japanese derivative plaintiffs do not need to prove wrongful refusal by the
board neither do they need to show demand futility as the procedure is in the USA.109 The concept
of demand futility is alien to Japanese company law whereas it constitutes the backbone of USA
derivative suits, especially in the Delaware State. Furthermore, the requirement of a fair and
adequate representation is non-existent in Japanese derivative remedy legal framework.110 One
recent study that sought to bridge this common law-civil law comparative gap was by Shaowei
Lin. The author compared and contrasted the approaches in the UK and the USA to consider which
one was more suitable for China.111 Some of the issues which the author focussed on include
grounds for instituting or commencing derivative litigation, payment of litigation expenses and the
role of the court in the said proceedings. Huang and Thomas have also compared Chinese
106
107
108
See Bawah “A Comparison of the Statutory Provisions of the United Kingdom (UK) Companies Act 2006 and
Ghana's Companies Act 1963 (Act 179), to the Rule in Foss v Harbottle” 2019 Beijing Law Review 153; Beyer
D “Business Judgment Dismissal of Shareholder Derivative Suits by Board Litigation Committees: An Expanded
Role for the Courts” 1982 Vand. L. Rev. 235; Dennis “Contrivance and Collusion: The Corporate Origins of
Shareholder Derivative Litigation in the United States” 2015 Rutgers University Law Review 1479; Akinyera A
Comparison of the UK and US Legal Approaches to Derivative Action (University of West London 2016, LLM
Thesis).
109
Ibid.
110
Goto 2014 Michigan Journal of Private Equity & Venture Capital Law 139.
111
Shaowei “How Could Derivative Action Work in China: The Funding Issue” 2019 China Legal Science 138.
16
derivative proceedings to the USA approach.112 However, these studies were limited in that they
excluded some pertinent substantive aspects of derivative litigation namely the demand
requirement and the effect of the business judgment rule upon the said proceedings. In order to
address these issues in this study, a chapter has been dedicated to the exploration of each of these
two issues.
There is an impression, though subject to debate, that most civil-common law comparative studies
have included China more than Japan. This may be attributed to the continued Chinese rise as a
global economic goliath. However, it is argued that in terms of the derivative remedy, Japan is an
important civil jurisdiction as it has employed derivative litigations on a large scale. 113 Puchniak
and Nakahigashi confirm that since 1993, Japan has had an explosion of derivative litigation.114
Mark West long observed the same fact.115 Puchniak and Nakahigashi further argued that, globally,
Japan is second only to the USA, if not the largest user, of derivative litigation. 116 As such, it is
submitted that more attention should be paid to Japan as well. However, most of the comparative
studies that have been conducted on Japanese derivative litigation have been between developed
countries such as the USA and/or Germany117, two jurisdictions that have greatly influenced
derivative proceedings in Japan. It is no wonder why the Japanese Commercial Code118 contained
a right allowing minority shareholders holding at least one-tenth of a company’s capital to require
the company to file an action against its directors.119 This provision is reminiscent of section 268
of the German Commercial Code.120 Besides comparing Japanese and USA derivative
112
Huang and Thomas “The Law and Practice of Shareholder Inspection Rights: A Comparative Analysis of China
and the U.S” 2019 Vanderbilt Journal of Transnational Law 19.
113
West “Why Shareholders Sue: The Evidence from Japan” 2 available at
http://papers.ssrn.com/paper.taf?abstract_ID=251012 (accessed 02-04-2017); Puchniak and Nakahigashi
“Japan's Love for Derivative Actions: Irrational Behavior and Non-Economic Motives as Rational Explanations
for Shareholder Litigation” 2012 Vand. J. Transnat'l L. 2.
114
Puchniak and Nakahigashi “Japan's Love for Derivative Actions: Irrational Behavior and Non-Economic
Motives as Rational Explanations for Shareholder Litigation” 2012 Vand. J. Transnat'l L. 2.
115
West “Why Shareholders Sue: The Evidence From Japan” 2 available at
http://papers.ssrn.com/paper.taf?abstract_ID=251012 (accessed 02-04-2017).
116
Puchniak and Nakahigashi “Japan’s Love for Derivative Actions: Irrational Behavior and Non-Economic
Motives as Rational Explanations for Shareholder Litigation” 2012 Vanderbilt Journal of Transnational Law 6.
117
Kawashima and Sakurai 1997 Stanford Journal of International Law 13; Fujita 2004 SAcLJ 322; Kanda and
Milhaupt 2003 Am. J. Comp. L. 887; and Shishido 2001 Am. J. Comp. L 659.
118
Law 48 1899.
119
Eisen “Limitations on Derivative Actions in Germany and Japan to Prevent Abuse” 2012 J. Japan L. 213;
Kawashima and Sakurai 1997 Stanford Journal of International Law 14.
120
1897. In Germany, it is called the Handelsgesetzbuch (HGB).
17
proceedings, this study also includes an African common law jurisdiction, South Africa, a
developing country.
One of the substantive issues that will be considered in this study is the demand requirement. Most
of the authoritative literature on the demand requirement is outdated as it was written more than
three decades ago when derivative litigation was mostly based on the common law. Emerson has
examined how the demand requirement filters derivative litigation.121 On the other hand, DeMott
has explored, in greater detail, some of the problems associated with the interpretation and function
of the demand requirement.122 However, most of the jurisdictions, including common law-based
have since codified the remedy.123 These old sources do not provide adequate guidance when it
comes to other technical aspects of the demand requirement such as the form and manners of
service of the demand. Some jurisdictions, like South Africa124 have opted to prescribe a certain
form for the demand, while others, the UK in particular do not even require a complainant to first
serve a demand on the board.125 Instead, the UK employs a prima facie test into its derivative
proceedings in place of the demand requirement.
However, there are some authors who have remarkably contributed to the jurisprudence on the
demand requirement in the last decade. For example, Goehre has argued that the labyrinthine
nature of the demand requirement may potentially escalate litigation costs as the plaintiff battles
to overcome the necessary hurdles.126 Bainbridge has also complained that procedural restrictions
on derivative proceedings “insulate boards of directors from shareholder litigation”.127 While
commenting on the UK’s lack of a demand rule in derivative proceedings, Keay has suggested that
England’s few derivative suits can be attributed to the plaintiffs’ lack of financial incentive since
121
Emerson “Aronson and Its Progeny: Limiting Derivative Actions through Demand Requirements” 1986 John
Marshall L. Rev. 571 572;
122
DeMott “Demand in Derivative Actions: Problems of Interpretation and Function” 1986 University of California
L. Rev. 461 485.
123
Some of the jurisdictions that have codified their derivative remedy include South Africa, Zambia, Ghana,
Kenya, the UK and Zimbabwe.
124
Regulation 36(1) of the Companies Regulations 2011 provides that “a person who holds any securities of a
company may give notice to the company for any purpose contemplated in section … 165 (2) by delivering a
completed Form CoR 36.1 to the company, except to the extent that the requirements of a central securities
depository provide otherwise”. However, Cassim MF The new derivative action under the Companies Act:
Guidelines for judicial discretion (2016) 17 is of the opinion that the Act is silent regarding the form of the
demand.
125
Section 261(1) and (2) of the Companies Act 2006.
126
Goehre 2010 Wisconsin Int’l L. J. 142.
127
Bainbridge 2006 Harv. L. Rev. 1748.
18
all the proceeds of a derivative suit accrue to the company, the inherent free-rider aspect and that
more shareholders seem to be “using section 994 [of the 2006 Companies Act] petitions, alleging
unfair prejudice against directors, rather than initiating derivative proceedings, as the same facts
might lead to a claim on either basis”.128
Despite the contribution of some respected company law commentators, a lot of territory remains
uncharted as far the demand requirement is concerned. There has not been a detailed study on the
nexus between the demand requirement and shareholders’ access to information. This issue is of
particular importance especially in modern day company law when more and more jurisdictions
are becoming constitutional democracies. A deliberation of the contours of the right of access to
corporate information versus the company’s right to privacy is vital to contemporary company
law. Derivative proceedings are a very unique form of litigation. Information asymmetries exist
not only between the plaintiff and defendant, but also between the “two plaintiffs” which are, the
shareholder seeking to sue derivatively and the company that possesses the legal right to claim.129
More so, in general, omissions in the plaintiff’s pleadings which may potentially undermine her/his
demand futility claim cannot be rehabilitated through discoveries.130
Also, although a lot of writers have commented on and examined the demand requirement as an
aspect of derivative litigation, not so much has been written on the link between the demand
requirement and the business judgment rule. This gap will be addressed in this study. Additionally,
the success or failure of the UK’s prima facie standard has not been measured against jurisdictions
such as South Africa, who though they have been diligent disciples of UK company law, have
snubbed their master but instead, adopted a codified comprehensive demand requirement.
Another substantive feature of derivative proceedings that will be analysed in this thesis is the
business judgment rule (BJR). Admittedly, voluminous accounts have been written on the nature,
significance and manifestation of the business judgment rule especially in the broad context of
directors’ decision-making power. In justifying the existence of the BJR, Giraldo argued that the
courts are simply “ill-equipped to make business decisions and should not second-guess directors
128
Keay “Assessing and rethinking the statutory scheme for derivative actions under the Companies Act 2006”
2016 Journal of Corporate Law Studies 43-44.
129
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 43.
130
Emerson 1986 John Marshall L. Rev. 591.
19
or substitute its judgment for that of the directors”.131 As a result, Cooksey and Hutchins contended
that the judiciary should be reluctant to “enter the boardroom” and conclude that the directors’
decision not to litigate is not in the best interests of the company.132 Bainbridge added that the rule
exists to protect directors and to encourage them to fully exercise their powers 133 since directors
have the responsibility to manage the affairs of their companies.134 Additionally, Morales indicated
that there is a need to avoid “the risk of stifling innovation135 and venturesome business
activity”.136 McMillan points out that the BJR seeks to protect directors who act in good faith even
though ex post facto their decisions might prove to be illogical.137 Mongalo asserts that the purpose
of the rule is to prevent courts from second-guessing directors’ decisions.138 Cassim FHI et al
opine that the rule was created “to protect directors from hindsight bias”.139 Similarly, but in more
general terms, Havenga submits that the rule is there “to protect honest directors”.140
Notably, discussions on the BJR have been located outside the context of derivative litigation. The
business judgment rule has generally been treated as a stand-alone directors’ defence to allegations
of misconduct. Very little has been written on the interplay between the BJR and derivative actions.
Also, discussions on the BJR have not been done through the lens of an enhanced accountability
perspective. Bainbridge tangentially addressed the nexus between directorial accountability and
the BJR, but not to a greater extent. According to Bainbridge, the purpose of the BJR is to strike a
compromise between two competing values namely authority and accountability. 141 Recently,
131
Giraldo “Factors affecting the Application of the Business Judgment Rule: An Empirical Study of the US, UK,
Australia and the EU” 2006 121-122. See also Dodge v Ford Motor Co. 1919 170 NW 668.
132
Cooksey and Hutchins 1981 Texas Tech L. Rev. 635-636.
133
Bainbridge 2004 Vand. L. Rev 111; Neri-Castracane 2015 Frontiers L. China 11.
134
Sharfman “The Importance of the Business Judgment Rule” 2017 New York University J.L. & Bus. 55; Cassim
R “The Power to Remove Company Directors from Office: Historical and Philosophical Roots” 2019 Fundamina
37 62; Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 247.
135
Section 7(c) of the Companies Act 71 of 2008 encourages the adoption of innovative strategies and techniques
in South African markets.
136
Morales 2018 Indon. J. Int'l & Comp. L. 176 argues that “the liability regime should not result in discouragement
to entrepreneurial activity”. See also Joy v North 692 F 2d 880 (1982); Bainbridge 2004 Vand. L. Rev 112;
Branson 2002 Valparaiso University Law Review 637; Havenga 2000 SA Merc LJ 29; Bouwman 2009 SA Merc
LJ 524; Rosenberg 2009 Berkeley Bus. L.J. 217; Davies et al Companies and other business structures in South
Africa 3 ed (2013) 125; and Cassim FHI et al Contemporary company law 2 ed (2012) 565.
137
McMillan 2012 William & Mary Business Law Review 527-528.
138
Mongalo Corporate law and corporate governance: A global picture of business undertakings in South Africa
(2003) 159; Mongalo et al Forms of business enterprise: Theory, structure and operation (2004) 217.
139
Cassim FHI et al Contemporary company law 2 ed (2012) 565.
140
Havenga 2000 SA Merc LJ 28.
141
Bainbridge 2004 Vand. L. Rev 85. See also Ponta “The Business Judgement Rule - Approach and Application”
2015 Juridical Tribune 28 and 29.
20
Mupangavanhu sought to consider whether the business judgment rule is a standard of liability or
a standard of conduct.142
Another pertinent issue in this thesis is the exercise of judicial discretion in derivative actions.
Baum and Puchniak stated that the requirement for leave of the court “makes the court the primary
arbiter of whether the action can proceed”.143 The primary purpose for the requirement of leave of
the court is to provide a filter against unmeritorious actions.144 Cassim MF regards judicial
discretion as “the chief safeguard against the exploitation of section 165”145 of the South African
Companies Act.146 In South African derivative litigation, the plaintiff bears the onus to prove on a
balance of probabilities147 that s/he is pursuing the purported derivative action in good faith,148 that
it is in the best interests of the company to do so and that the proposed or continuing proceedings
involve the trial of a serious question of material consequence to the company.149 Therefore, if the
action is brought for an ulterior purpose or if another adequate remedy is available, the court will
not allow the derivative action to proceed.150 It has to be noted that in South Africa, the good faith
requirement is intimately tied up with the other substantive requirements in section 165(5)(b) of
the Companies Act.151
Conversely, in the UK, the good faith requirement is combined with the best interests of the
company requirement.152 South African law treats the two as separate stand-alone requirements.153
Baum and Puchniak argue that the UK’s prima facie test is substantially similar to the “Rule in
142
Mupangavanhu “Standard of Conduct or Standard of Review? Examination of an African Business Judgment
Rule under South Africa’s Companies Act 71 of 2008” 2019 Journal of African Law 1
143
144
Lewis para 47. Baum and Puchniak “The derivative action: An economic, historical and practice-oriented
approach” in Puchniak et al (eds) The derivative action in Asia: A comparative and functional approach (2012)
48.
145
Cassim MF “Costs Orders, Obstacles and Barriers to the Derivative Action under Section 165 of the Companies
Act 71 of 2008 (Part 1)” 2014 SA Merc LJ 7.
146
71 of 2008.
147
The standard of proof remains the same for civil proceedings. No lower threshold is acceptable as was contended
for by the applicant’s counsel in Mbethe 2016 para 153.
148
A bald assertion of good faith is insufficient, the plaintiff has to demonstrate her/his good faith.
149
Mbethe 2016 para 82.
150
Barrett v Duckett [1995] 1 BCLC 243. This is also the position under the Companies Act of 2006. See Parry v
Bartlett [2011] EWHC 3146 (Ch).
151
71 of 2008. See also the discussion by Cassim MF The new derivative action under the Companies Act:
Guidelines for judicial discretion (2016) 51-55.
152
153
Ibid.
21
Foss”.154 The said requirement has been condemned on the basis that it essentially “requires a trial
of the action in order to proceed to trial”.155 Whilst it is understood that the plaintiff is only required
to satisfy the criteria in the leave application on a prima facie basis, it is argued that, in practice, it
is difficult to fulfil such requirements unless one delves into the detail of the claim.156
Consequently, the plaintiffs will be left with no choice but to spend significant time and money
just for them to know whether or not they have the right to bring the derivative action. 157 This is
economically unjustifiable considering the fact that in those jurisdictions that provide for
shareholder indemnification, in particular, the plaintiff, at the leave application stage is unsure
whether s/he will receive indemnification for her/his costs.158
It remains debatable whether the court is in the best position to decide whether the application is
brought in the best interests of the company based on the plaintiff’s prima facie evidence.159 Baum
and Puchniak do not think it justified that the court and not independent directors who possess an
intimate knowledge of the business of the company should make such a determination. 160 The
shareholders’ general meeting has also been thought to be a competent substitute for the court’s
filtering role. However, shareholder general meetings are “costly administratively and [do] nothing
to confront the wrongdoers who have actual or de facto control of the meeting”.161
Tang has expressed concern that there is a high probability that the scope of section 263(3) of the
UK Companies Act could be expanded by the courts.162 Davies and Worthington argue that the
requirement of leave of court can be inconvenient as the plaintiff’s enthusiasm for derivative
litigation is subject to convincing a judicial officer that the litigation is in the best interests of the
company.163 The appropriateness of the requirement of good faith has also been questioned on the
ground that the plaintiff’s motive should not matter as long as s/he is bringing the application in
154
155
Ibid.
156
Ibid.
157
Ibid.
158
Ibid.
159
160
Ibid.
161
162
Tang 2012 UCL Journal of Law and Jurisprudence 181.
163
Davies and Worthington Gower’s principles of modern company law 10 ed (2016) 598.
22
the best interests of the company164 since derivative litigation is by nature litigation brought on
behalf of the company.165 Should the derivative litigation be successful, the company is the direct
beneficiary of the proceedings whilst the plaintiff’s economic benefit is remote.166
In view of the above and in a quest to minimise the gaps identified, this study reviews existing
literature to develop an alternative perspective in such a manner that will reflect changes that
contemporary company law has underwent especially due to the 2007-2008 GFC. This thesis is
the first of its kind to provide a comparative analysis on the four jurisdictions from an enhanced
accountability perspective. A holistic approach to the analysis of derivative litigation has been
adopted to include a discussion of aspects that have hardly been commented on such as the demand
requirement. Very little has been written about this aspect of derivative litigation in with respect
to South African law. Considering the arguments raised above, the study departs from the
viewpoint that there is a need for a modern-day perspective to approach the question of directorial
authority and accountability.
The study will engage and analyse the relevant legal sources to recommend law reforms in the
concluding chapter of this study. In doing so, this thesis hopes to make a modest contribution to
the existing body of knowledge regarding the on-going debate and efforts aimed at addressing the
challenges relating to the promotion and protection of minority shareholder interests. The main
aim is to ensure that derivative proceedings rules are neither too restrictive nor too flexible.
Additionally, the study intends to provoke future scholarly research on the issue of directorial
accountability in South Africa especially in the context of derivative litigation.
18 RESEARCH METHODOLOGY
Research methodology refers to “a set of rules of procedures about the way of conducting research
which includes some explanation and justification for using certain research methods”. 167 The
importance of research methodology cannot be overstated. To a large extent, the structure and
164
165
Mongalo et al Forms of business enterprise: Theory, structure and operation (2004) 273; TWK Agriculture
Limited v NCT Forestry Co-operative Ltd 2006 6 SA 20 (N); Nwafor “Shareholder Derivative Action - Nigerian
Statutory Innovation - Not Yet a Victory for the Minority Shareholder” 2010 Macquarie J. Bus. L 215.
166
167
Vibhute and Aynalem Legal research methods- Teaching material (2009) 19.
23
underpinnings of one’s research are influenced by the methodology adopted.168 Furthermore, if a
writer clearly states his/her research methodology it becomes easier for the reader to understand
where the arguments are coming from as well as identifying how one’s work is positioned in
relation to that of others’.169
The general classification is between qualitative and quantitative research methodologies.170

Quantitative research refers to “a formalised, systematic [and] objective approach to research
where numerical data and statistical analysis are used to generalise results from a sample group to
the population”.171 Generation and utilisation of mathematical theories and propositions regarding
the problem under study is the main purpose of quantitative research. 172 Such research usually
makes use of numbers or numerical means to interpret the outcome(s) of a study. The outcome is
usually presented in the form of diagrams and it has a lot to do with size and amounts. Examples
of quantitative research methods include experimental designs and non-experimental ones such as
surveys.173
On the other hand, qualitative methods are concerned with or involve the quality of phenomena
that is the subject matter of the study.174 Qualitative research relies on the object behind different
features of conduct.175 This type of research is mostly based on description and observation.176
Most qualitative research methods take the form of an in-depth analysis of relevant texts in the
pertinent discipline. In the case of the present study, this would mean working through legal texts
such as legislation, case law, textbooks, articles and reports. Most legal studies are carried out
through qualitative research methods. However, there have been some developments wherein
168
Morris and Murphy Getting a PhD in Law (2011) 29. Van Hoecke “Legal doctrine: Which method(s) for what
kind of discipline?” in Van Hoecke (ed) Methodologies of legal research: Which kind of method for what kind
of discipline (2011) 4-18.
169
Morris and Murphy Getting a PhD in Law (2011) 29.
170
However, Morris and Murphy Getting a PhD in Law (2011) 30 state that legal research methodologies can be
divided into internally-focussed and integrated methodologies. See also Morgan and Sklar “Sampling and
Research Paradigms” in Maree (ed) Complete your thesis or dissertation successfully: Practical guidelines
(2012) 70; Saslow Basic research methods (1982) 36.
171
Morgan and Sklar “Sampling and Research Paradigms” in Maree (ed) Complete your thesis or dissertation
successfully: Practical guidelines (2012) 71.
172
Vibhute and Aynalem Legal research methods (2009) 17.
173
Creswell Research design: Qualitative, quantitative, and mixed methods approaches 4 ed (2014) 13.
174
Morgan and Sklar “Sampling and Research Paradigms” in Maree (ed) Complete your thesis or dissertation
successfully: Practical guidelines (2012) 72; Anderson and Poole Assignment and thesis writing: South African
edition (2009) 24-25.
175
Ibid.
176
Creswell Research design: Qualitative, quantitative, and mixed methods approaches 4 ed (2014) 18-20.
24
researchers combine both qualitative and quantitative methods.177 A major contributing factor has
been the emergence of inter- and trans-disciplinary studies. Examples of qualitative methods
include the legal comparative method, legal historical method and the empirical method,
interpretative and analytical method, critical studies and evaluation.178
This study chooses qualitative over quantitative research methodology. Furthermore, given its
nature as one involving the relationship between juristic and natural persons, qualitative methods
are preferable as they would allow the researcher to undertake an in-depth critical study of the
conduct of companies and their directors. Through the qualitative methods, it is proposed in this
study to use the critical study and evaluation, comparative and legal historical methods. A brief
description and justification of these preferred methods follow hereunder.
Under the legal historical method, “one intends to trace historical antecedents of a legal fact”. 179
Legal history goes beyond mere “study of the development of material legal norms”. 180 It also
includes an investigation of such rules with respect to “external legal history”. 181 Therefore, the
legal historical method enables one to spot changes, amendments and the reasons thereof in respect
of derivative actions taking into consideration relevant political and socio-economic factors.
Vibhute and Aynalem point out that employing the legal historical method;
“discloses alternatives, different than the currently adopted ones, which were considered and rejected
by the lawmakers and reasons thereof, it becomes useful, rather warranted, when the present statute or
statutory provision has raised meaningful queries and it becomes necessary to explore the
circumstances in which the present position came out and it supplies the researcher the reasons that
justify the present position”.182
The above reasons justify the adoption of the legal historical method in this study. The critical and
evaluation approach seeks to enable competent appraisal of the significant legal rules on a study’s
subject matter. This method allows a researcher “to ascertain the nature, scope and source of law
in order to explain what law is, and also to spell out several propositions used in law”. 183 The
177
Creswell Research design: Qualitative, quantitative, and mixed methods approaches 4 ed (2014) 13 and Kroeze
“Legal Research Methodology and the Dream of Interdisciplinarity” 2013 PER 35.
178
Du Plessis “A Self Help Guide: Research Methodology and Dissertation Writing” 2007 28.
179
Vibhute and Aynalem Legal research methods (2009) 106.
180
181
Ibid. By “external” is meant the economic, cultural, political, social, philosophical and religious environment.
182
Vibhute and Aynalem Legal research methods (2009) 106-107.
183
Ibid 102.
25
method also enables one to look at both sides of the issue at hand and be able to make reasonable
judgments. By employing this method, it will be possible to critique the nature and scope of the
various rules pertaining to the commencement and prosecution of derivative actions. The different
premises on which derivative actions are based as a form of stakeholder remedies will also be
interrogated.
There are different legal families. Some of these include religious systems such as the Hindu,
Jewish and Islamic law, mixed systems such as South Africa and England, and Roman-Germanic
systems to which all European legal systems belong.184 The legal comparative method compares
different legal systems with each other.185 This method is most valuable when studying legislative
texts, jurisprudence and also legal doctrines of foreign laws.186 “If a lawyer has knowledge of his
or her own legal system only, it is easy to sit down and praise the virtues of the existing legal
system. That which is wrong is never seen”.187 The legal comparative method has been selected in
this study since a comparison of similarities and peculiarities exposes inconsistencies and enables
one to suggest solutions.188 Furthermore, apart from being used to study law common to all, the
legal comparative method also initiates acquaintance with foreign law.189
This study will adopt a literature study approach. Legislative instruments such as the Companies
Act,190 the Japanese Companies Act191 and the UK Companies Act192 will be critically analysed.
In addition to the above primary sources of law, judicial decisions especially those from South
Africa, the USA and England will be examined. Secondary sources of law such as books and
journal articles will also be consulted for expert legal commentary. These will prove helpful in
providing diverse views and perspectives of the law in the selected jurisdictions.
19 STRUCTURE OF THE STUDY

The study is divided into nine chapters. The first chapter introduces the study and provides a
general outline of the thesis. It sets out the research problem, objectives, questions and the
184
185
Ibid.
186
Razak “Understanding Legal Research” 2011 Integration and Dissemination 21.
187
Du Plessis “A Self Help Guide: Research Methodology and Dissertation Writing” 2007 28-29.
188
Ibid 30.
189
Vibhute and Aynalem Legal Research Methods (2009) 107.
190
71 of 2008.
191
RSC 1985.
192
Of 2006.
26
methodology.193 Chapter two presents a historical synopsis of derivative actions. Chapter three
discusses the enhanced accountability perspective. Chapter four seeks to examine some pertinent
corporate governance concepts from each of the jurisdictions that are part of this study. Chapters
five to eight present a comparative analysis of derivative actions in England, the USA, Japan and
South Africa. While chapter five consists of a discussion on stakeholders’ locus standi to bring
derivative claims before the courts, the next chapter focuses on the demand requirement. Chapter
seven examines the nature and effects of the business judgment rule in the context of derivative
actions. The last discursive chapter of this study is devoted to an examination of the requirement
of leave of court. Chapter nine presents the conclusions of the study as well as a brief recapitulation
of the discussions in the preceding chapters and, most importantly, the study’s recommendations.
1 10 REFERENCING
The style of referencing used in this study is that of Speculum Juris, an accredited, online and
open-source law journal published by the Nelson R. Mandela School of Law, University of Fort
Hare.
193
The works of Mouton How to succeed in your Master’s and Doctoral Studies: A South African guide and
resource book (2001) 44-58; Chapin Research Projects and Research Proposals (2004) 18-19 and Hofstee
Constructing a good dissertation: A practical guide to finishing a Master’s, MBA or PhD on schedule (2006)
35-43 are influential on proposal structuring.
27
CHAPTER TWO
The genesis, development and transplantation of derivative actions
21 INTRODUCTION
In contemporary company law shareholders and other company stakeholders can legally challenge
directors’ harmful decisions by instituting derivative claims,194 subject to compliance with certain
requirements or conditionalities usually spelt out in applicable legislation or case law. A harmful
decision is one which results in corporate injury195 or one which adversely affects the company as
a whole.196 Proponents of the shareholder primacy theory have relentlessly construed “the
company” as referring to shareholders only.197 However, it is submitted that most jurisdictions,
including England, Canada and South Africa, have departed from or at least no longer subscribe
to the aforementioned theory.198 The derivative action is one of the common forms of shareholder
remedies and minority protection mechanisms worldwide.199 In this thesis, the terms derivative
194
Mukwiri and Siems “The Financial Crisis: A Reason to Improve Shareholder Protection in the EU?” 2014
Journal of Law and Society 51 56.
195
MacIntosh “The Oppression Remedy: Personal or Derivative?” 1991 Canadian Bar Review 30; Davies and
Worthington Gower’s principles of modern company law 10 ed (2016) 598-600; Cassim FHI et al Contemporary
company law 2 ed (2012) 775.
196
Velasco “Fiduciary Principles in Corporate Law” 2018 Notre Dame Law School Legal Studies Research Paper
No. 1933 29 available at https://ssrn.com/abstract=3374505 (accessed 15-10-2019) asserts that breaches of
fiduciary duty adversely affect a company as a separate legal person “rather than shareholders directly”. In the
words of MacIntosh 1991 Canadian Bar Review 30, the company will be injured when “all shareholders are
affected equally, with none experiencing any special harm”. See also Panagiotou “The derivative action in Greek
corporation law” 2017 The Company Lawyer 329 331.
197
Greenhalgh v Ardene Cinemas Ltd 1951 291 (Ch); Attenborough “How Directors Should Act When Owing
Duties to the Companies’ Shareholders: Why we need to stop applying Greenhalgh” 2009 ICCLR 342; and
Nwafor “The Shifting Responsibilities of Company Directors – How Desirable in Modern Times” 2012
Macquarie J. Bus. L 160.
198
For example, according to section 172(1) of the UK Companies Act 2006, when directors are performing their
duty to promote the success of the company, they are required to have regard to the likely consequences of any
decision in the long term, the interests of the company’s employees, the need to foster the company’s business
relationships with suppliers, customers and others, the impact of the company’s operations on the community
and the environment. On its part, section 238(d) of the Canada Business Corporations Act allows any person
who, in the discretion of a court, is a proper person to commence derivative litigation. In the case of South Africa,
section 157(1) of the Companies Act may be interpretd to effectively extend standing to apply for remedies to
any stakeholder subject to the court’s discretion. See also section 165(2)(c) and (d) of the said South African
Act. Goddard “‘Modernising Company Law’: The Government’s White Paper” 2003 Modern Law Review 405;
Ajibo “A Critique of Enlightened Shareholder Value: Revisiting the Shareholder Primacy Theory” 2014
Birkbeck Law Review 44-47; and Esser and Du Plessis “The Stakeholder Debate and Directors’ Fiduciary Duties”
2007 SA Merc L.J. 351 who assert that the debate in the lead-up to the United Kingdom (UK) Companies Act
2006 was between the enlightened shareholder value approach and the pluralist approach.
199
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 1; Black et al “Legal
Liability of Directors and Company Officials Part 1: Substantive Grounds for Liability (Report to the Russian
28
action, derivative suit (as commonly used in the United States of America), derivative claim and
derivative proceedings are used interchangeably.
Derivative actions are claims brought before a court of law by a complainant seeking redress on
behalf of a company usually when the director(s) is/are unable or unwilling to do so. 200 In other
words, the complainant is not the direct beneficiary of the court order that is being sought. The
action is called “derivative” because the complainant (usually a minority shareholder) steps into
the shoes of the company to seek redress on its behalf. Therefore “the shareholder ‘derives’ his or
her right of action from that of the company”.201 Derivative actions can also be viewed as a feature
of the checks and balances invoked by shareholders to monitor directors’ conduct.202 Furthermore,
a derivative suit “is a representative action brought by one shareholder [on behalf] of all the
shareholders in the company other than those who are made defendants”.203
In order to critically examine the nature of derivative proceedings, it is valuable to explore the
historical origin of the remedy. This chapter discusses the genesis, development and assimilation
of derivative claims in England, the United States of America (USA), Japan and South Africa. Just
Securities Agency)” 2007 Columbia Business Law Review 614 715; Velasco “Fiduciary Principles in Corporate
Law” 2018 Notre Dame Law School Legal Studies Research Paper No. 1933 29 available at
200
Weidner “Dissatisfied Members in Florida LLCs: Remedies” 2019 Florida State University Business Review 1
6; Sahu “Investors protection: The derivative action” 2017 International Journal of Law 101 101; Black et al
2007 Columbia Business Law Review 614 798; Mayson et al Company law 33 ed (2016) 559; Farrar and
Hannigan Farrar’s company law 4 ed (1998) 430; Mongalo et al Forms of business enterprise: Theory, structure
and operation (2004) 273. In the South African case of TWK Agriculture Limited v NCT Forestry Co-operative
Ltd 2006 6 SA 20 (N) it was held that “as a general rule, where a wrong is alleged to have been committed
against a company, it is the company that must seek redress”.
201
Cassim FHI et al Contemporary company law 2 ed (2012) 775 while making reference to the case of Estmanco
(Kilner House) v Greater London Council 1982 1 WLR. See also Cassim MF The new derivative action under
the Companies Act: Guidelines for judicial discretion (2016) 5; Casarino and Greene “Back to Basics: Board &
Special Litigation Committee Investigations” 2019 The Corporate Governance Advisor 16; Melbinger and
Moore “Lawsuits against Directors over Their Own Compensation” 2017 Benefits Law Journal 5 7; Shaowei
“How Could Derivative Action Work in China: The Funding Issue” 2019 China Legal Science 138 140; Tang
“The anatomy of Singapore’s statutory derivative action: Why do shareholders sue – or not?” 2019 Journal of
Corporate Law Studies 1.
202
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 1; Erickson “The Gatekeepers of
Shareholder Litigation” 2017 Oklahoma Law Review 237 239. Hendrikse and Hefer Corporate governance
handbook: Principles and practice 3 ed (2019) 3 noted that the past three decades have witnessed an erosion of
a proper system of checks and balances that should control business operations.
203
Farrar and Hannigan Farrar’s company law 4 ed (1998) 430 and 435. See also Sahu 2017 International Journal
of Law 101; Black et al “Legal liability of directors and company officials part 2: Court procedures,
indemnification and insurance, and administrative and criminal liability (Report to the Russian securities
agency)” 2008 Columbia Business Law Review 1 43 and Nwafor “Shareholder Derivative Action - Nigerian
29
as a human being cannot survive without the spinal column, this chapter provides the foundation
upon which the arguments presented in chapters four to eight of this study will be built. In doing
so, the theoretical and judicial underpinnings of the remedy will be unveiled here. The chapter is
also intended to provide the standard against which any interpretational inconsistencies and
departures from the original mischief for which the remedy was created will be measured. History
is prophecy in reverse204 and to be forewarned is to be forearmed. The sage once said, “history
teaches us the mistakes we are going to make”.205 Early pitfalls and shortcomings of derivative
claims as will be chronicled hereunder ought to inform everyone interested in company law from
students and business people to law and policymakers.
The immediately following section will present a discussion on representative litigation in general.
It will present an analysis of the nature of early civil proceedings before derivative actions were
judicially recognised. That section is especially important as it will highlight the original legal
policy purpose which the remedy was intended to serve. Thereafter, an examination of shareholder
activism against management misconduct will follow. That discussion will lead to a critical
analysis of the proper plaintiff rule and its exceptions as enunciated and established in the famous
case of Foss v Harbottle206 and related cases. Foss v Harbottle is universally believed to have
triggered and shaped contemporary derivative actions.207 Lastly, the assimilation and adaptation
of derivative actions from England to the USA, Japan and South Africa will be explored before
the preliminary concluding remarks are proffered.
22 REPRESENTATIVE LITIGATION AS THE PRECURSOR

Derivative actions did not just originate as shareholder remedies in company law. It is almost
settled, at least in England, that companies emerged from partnerships.208 A corollary of that fact
204
Schlegel Quick Verse 2011 Draper’s Book of Quotations for the Christian World 5708.
205
Bodin Quick Verse 2011 Draper’s Book of Quotations for the Christian World 5715.
206
Foss v Harbottle 1843 67 ER 189. See also Tsang “International Multiple Derivative Actions” 2019 Vanderbilt
Journal of Transnational Law 75 80; Wild and Weinstein Smith and Keenan’s company law 16 ed (2013) 302-
303; Mayson et al Company law 33 ed (2016) 554; Kershaw Company law in context: Text and materials 2 ed
(2012) 601.
207
Scarlett “Shareholder Derivative Litigation’s Historical and Normative Foundations” 2013 Buffalo Law Review
837 856; Davies et al Companies and other business structures in South Africa 3 ed (2013) 273; Cassim FHI et
al Contemporary company law 2 ed (2012) 775.
208
In Foss v Harbottle 1843 67 ER 189 202 - 203 the court recognised that “corporations like this, of a private
nature, are in truth little more than private partnerships”. See also Cassim R “The Power to Remove Company
Directors from Office: Historical and Philosophical Roots” 2019 Fundamina 37 40-43; Scarlett 2013 Buffalo
Law Review 856-858.
30
is that under early company law stakeholder remedies were heavily wrapped with strands of the
law of partnerships. To this end, it is suggested that an examination of the “pre-corporate” era is
pertinent for a better understanding of derivative actions.
Relics of representative litigation209 in English feudal society can be traced back to as early as the
12th century.210 However, the earliest published examples can be gleaned from the 16th century.211
A good example is the case of How v Tenants of Bromsgrove.212 The dispute here arose when a
certain nobleman213 appropriated land in Bromsgrove village with the intention of using it as a
hunting ground. The appropriation was challenged by tenants who brought a bill214 of peace before
the court. The English Court of Chancery allowed the tenants to proceed in a representative
capacity and held that such group litigation was necessary to avoid multiplicity of suits215 and the
possibility of inconsistent results.216 The litigating groups could sue as either plaintiffs or be sued
as defendants. The two important elements of group litigation were “shared identical interests
[among the members] and consent to representation by the named parties”.217
With the passage of time, there was a transition in the English Court of Chancery from group
litigation to class litigation around the 18th century.218 Class litigation was devised to take care of
situations where the number of individuals who would have suffered the same wrong becomes
difficult to manage since under group litigation every affected member had to be joined and
become a party to the case, whereas, under class litigation, only a select few would represent the
“class”.219 The transition from group litigation to class litigation was occasioned by commercially
209
Slater and Gordon “Group Litigation Explained” https://www.slatergordon.co.uk/commercial-and-group-
litigation/group-litigation/ (accessed 08-11-2017) define ‘group litigation’ as “a way for individuals with similar
complaints to join together against the wrongdoer and avoid pitfalls that can be associated with individuals
having to make their own separate claim each time”. Therefore, it is not the same as a class action.
210
Scarlett 2013 Buffalo Law Review 843.
211
212
(1681) 23 Eng. Rep. 277 (Ch).
213
According to https://www.merriam-webster.com/dictionary/nobleman (accessed 08-11-2017) a nobleman refers
to a man of high rank or birth and the word “lord” can be used as its synonym.
214
This is an archaic English law term that refers to a declaration made in writing, stating some wrong the
complainant has suffered from the defendant, or a fault committed by some person against a law. Due to rareness
of its use in contemporary literature, the words application, motion and action will be used instead.
215
Sahu 2017 International Journal of Law 102.
216
How v Tenants of Bromsgrove (1681) 23 Eng. Rep. 277 (Ch).
217
218
Ibid. Garner et al Black’s law dictionary 8 ed (2004) 267 defines class action as “a lawsuit in which the court
authorises a single person or a small group of people to represents the interests of a larger group”.
219
Garner et al Black’s law dictionary 8 ed (2004) 267.
31
connected groups, such as shareholders, who sought recognition as litigating entities in the 18th
century.220 Around the same era, the English Chancery Court formulated what came to be known
as the necessary parties or proper parties rule according to which the joinder of all interested parties
was indispensable in order for a final resolution to be attained.221 The rationale for class litigation
was articulated in Mozley v Alston222 where the court held that “the rule which requires all persons
interested to be parties has been relaxed to meet the exigencies of modern times, it being found
that too strict an adherence to it would operate in many cases as a denial of justice, and leave
parties who had a real grievance without a remedy”.223 However, one serious defect of class
litigation is that the principle only works for plaintiffs. There is no remedy yet for instances where
the defendants are so numerous that it is impossible to name all of them.224
Unlike in group litigation, in enunciating the exceptions, the Chancery Court increasingly set aside
the idea of consent among the members and depended on the shared interest of the group as the
key for representation.225 The actual reason for the court’s disregard of the requirement of the
members’ consent is not clear. A possible reason could be that since the purpose of the litigation
was to advance rather than limit a member’s right, logic dictates that there is no harm in ignoring
one’s consent to something that will make them better off.226 On the other hand, the member’s
consent may be necessary when it comes to settling the costs of the suit should the outcome of the
litigation be negative.227
Like any other rule, the necessary parties rule also had its exceptions. These were masterfully
captured in Duke of Bedford v Ellis.228 In this case, Ellis and five others sued on behalf of
themselves and all other farmers in their town to enforce rights conferred on them by the Covent
220
221
Ibid.
222
(1847) 1 Ph. 790.
223
Mozley v Alston (1847) 1 Ph. 790.
224
Mozley v Alston (1847) 1 Ph. 799.
225
226
In Mozley v Alston (1847) 1 Ph. 790, it was held that “the court has permitted one or more of them to sue on
behalf of all, subject, however, to this restriction, that the relief which is prayed must be one in which the parties
whom the [p]laintiff professes to represent, have all of them an interest identical with his own: for if what is
asked may by possibility be injurious to any of them, those parties must be made defendants”.
227
See Eisenberg T et al “When Courts Determine Fees in a System with a Loser Pays Norm: Fee Award Denials
to Winning Plaintiffs and Defendants” 2013 UCLA Law Review 1452 1454 who explain the “loser pays” rule
according to which the losing party is responsible for both the applicant/plaintiff’s and respondent/defendant’s
costs.
228
HL 1901.
32
Garden Act229 against the Duke of Bedford. The issue was whether the necessary parties rule was
restricted to claims of some beneficial right of property only. The court held that;
“Under the old practice, the Court required the presence of all parties interested in the matter in suit,
in order that a final end might be made of the controversy. But when the parties were so numerous that
you could never ‘come at justice’, the rule was not allowed to stand in the way. It was originally a rule
of convenience: for the sake of convenience it was relaxed. Given a common interest and a common
grievance, a representative suit was in order if the relief sought was in its nature beneficial to all whom
the plaintiff proposed to represent”.230
From the reasoning advanced by the court, it can be deduced that the idea of litigation convenience
was at the heart of both the necessary parties rule and its exceptions. The rule is convenient in the
sense that it avoids a multiplicity of actions by requiring all affected parties to be joined. Also, the
exceptions are appropriate as it is impossible in certain circumstances to locate all the affected
individuals in order to make them parties to a single suit.231
The above paragraphs have provided an account of the origin and development of representative
litigation in the context of individuals and non-corporate bodies. Against this background, the next
section reveals how representative litigation was adapted and assimilated into company law.
During the 18th and 19th centuries, the English Court of Chancery introduced the exceptions to the
necessary parties rule into litigation involving business owners.232 Scarlett argues that these actions
can be regarded as the predecessors of the contemporary shareholder derivative action. 233 The
proper parties rule and its exceptions were applied in the same way to both joint-stock
companies234 and corporations235 in respect of actions by or against their owners.236
229
1828.
230
Duke of Bedford v Ellis HL 1901.
231
See Leigh v Thomas (1751) 28 Eng. Rep 201 (Ch).
232
233
Ibid.
234
According to Garner et al Black’s law dictionary 8 ed (2004) 298, a joint stock company is “an unincorporated
association of individuals possessing common capital, the capital being contributed by the members and divided
into shares, of which each member possesses a number of shares proportionate to the member’s investment”.
235
A corporation is the English equivalent of a company. The Law Dictionary
http://thelawdictionary.org/corporation/ (accessed 08-11-2017) defines a corporation as “an artificial
person or legal entity created by or under the authority of the laws of a state or nation”.
236
Scarlett 2013 Buffalo Law Review 848 cited Foss v Harbottle (1843) 67 Eng. Rep. 189 (Ch.) 202-204 as an
example.
33
However, as is the case with most common law principles, the courts were initially inconsistent in
their application of the necessary parties rule and its exceptions. Two cases are discussed here to
demonstrate this judicial oscillation. In the case of Chancey v May,237 the plaintiffs were the
treasurer and manager of the Temple Mills Brass Works. The two commenced an action on behalf
of themselves and all other owners against the former treasurers and managers alleging
mismanagement and embezzlement.238 The defendants objected on the grounds that since some of
the proprietors were not parties to the suit, a multiplicity of suits could ensue. The court held that
since the plaintiffs were litigating on behalf of the others, absent proprietors were in effect parties
to the case.239 It was further held that it would not be practical if all proprietors were made parties
by name and there would be “no coming of justice”.240 In other words, for the sake of justice, the
interests and concerns of the plaintiffs should not be unduly disregarded by the mere absence of
the other affected parties.
However, notwithstanding the presence of similar circumstances, the court in Moffat v

Farquharson241 took the view that the exceptions to the necessary parties rule did not apply. In
this case, the plaintiff sued the defendants on behalf of himself and the other part-owners of a ship.
He was demanding that the defendants account for money paid to them for the appointment of the
ship’s captain.242 The defendants argued that all part-owners should have been parties to the case.
The court held that this case was distinguishable from earlier cases of class action and ordered that
all part-owners had to be made actual parties.243 However, the court failed to provide the real basis
for distinguishing this case from its predecessors. Scarlett submits that the court got it wrong. 244
Regardless of such judicial inconsistency, the interests of justice continued to grow in

acknowledgement until it became an established exception to the necessary parties rule. In Adair
v New River Company245 the court held that although the plaintiffs could not bring forward all the
persons who may have been liable, that should not have prevented the institution of the suit, if
237
(1722) 24 Eng. Rep 265.
238
Chancey v May (1722) 24 Eng. Rep 265.
239
Ibid.
240
Ibid.
241
(1788) 29 Eng. Rep. 189 (Ch).
242
Moffat v Farquharson (1788) 29 Eng. Rep. 189 (Ch).
243
Ibid.
244
245
(1805) 32 Eng. Rep 1153 (Ch).
34
necessary for the attainment of justice.246 By the middle of the 19th century, the necessary parties
rule and its exceptions had crystallised into the fabric of English company law litigation.
23 SHAREHOLDER ACTIVISM AGAINST MANAGEMENT MISCONDUCT

The dispute in the landmark case of Carlen v Drury247 arose between the shareholders and
management of The Bankside Brewery, a partnership which the plaintiffs, defendants and other
persons had agreed to form. Among others, it was agreed that Drury and two other defendants
were invested with full authority to conduct the affairs of the partnership as managers. Also, a
committee consisting of twelve of the partners was to be appointed annually for the purposes of
auditing the accounts. As an internal remedy, it was agreed that should the managers misbehave,
this committee or any seven of them would call for a special general meeting to present a report
on them and that the managers’ removal could be approved at a second general meeting.248
Six members of the committee brought an application on behalf of themselves and all the other
partners249 against the defendants alleging, inter alia, gross mismanagement and neglect on the
part of the managers. The defendants argued that there was no substantial ground for judicial
interference and that if the plaintiffs were really aggrieved, they should have resorted to the internal
means of redress, afforded them by the Articles.250 The plaintiffs responded that the imminent
collapse of the partnership trumped the requirement of invoking internal means of redress through
the committee or general meetings which could be called at the discretion of the managers.251
It was observed that it was impossible for all the partners to be parties to the case due to the great
number concerned. The court upheld the plaintiffs’ argument that the court should interfere where
the available internal means of redress is ineffective.252 However, the court reasoned that the
parties put themselves under the control of a committee being aware of the inconvenience and that
there was no harm in the plaintiffs requesting the court to make an order compelling the managers
to convene meetings where misbehaving managers could be removed.253 Consequently, in
246
Adair v New River Company (1805) 32 Eng. Rep 1153 (Ch).
247
(1812) 35 ER 61.
248
Carlen v Drury (1812) 35 ER 61.
249
It has to be noted that the partnership had about three hundred partners.
250
Carlen v Drury (1812) 35 ER 61
251
252
Ibid.
253
Ibid.
35
rejecting the motion, it was held that the court could not “interfere [since] the plaintiffs [had] a
remedy in their own hands, to which they have not resorted”.254 This case is further proof that
English company law principles were heavily rooted in partnership law. 255 This landmark case is
also believed to be the genesis of the internal management debate and the business judgment
rule.256 Briefly stated, the internal management rule is a presumption that, in general, the decisions
of management are consistent with a company’s rules and should therefore not be interfered
with.257 The business judgment rule can be considered to be a corollary of the internal management
debate. The rule can be loosely described as a mechanism for directors’ immunity from civil
liability in corporate transactions concluded in good faith and on an informed basis, for the best
interests of the company in circumstances where the decision-maker had no personal interest in
the outcome.258
Some scholars are of the opinion that Carlen v Drury259 was the first official English judicial
pronouncement that attempted “to define a boundary between business organisations and the
law”.260 For the purposes of this study, the most important point to note from this case is that the
court should exercise restraint whenever the plaintiffs have at their disposal an effective internal
remedy for mismanagement to which they have neither resorted nor proven the futility thereof.
The relevant question then would be - under what circumstances should the court interfere with
management’s decisions? Since this case is from partnership law, it is inappropriate to focus on
the exceptions to the necessary parties rule before one examines its application to company law.261
The next case (discussed below) examines the court’s perspective on judicial interference with the
activities of business organisations or management decisions in the context of company law.
254
Carlen v Drury (1812) 35 ER 63; Boyle Minority shareholders’ remedies (2002) 2.
255
See also Boyle Minority shareholders’ remedies (2002) 2.
256
See Barnes and Oldham “Carlen v Drury (1812): The Origins of the Internal Management Debate in Corporate
Law” 2017 The Journal of Legal History 1.
257
Carlen v Drury (1812) 35 ER 63; Mayson et al Company law 33 ed (2016) 554; Alan and Lowry Company law:
Core texts and series 8 ed (2014) 187; Morrison “The Continued Role of the Common Law Indoor Management
Rule Due Inquiry Exception” 1996 QUTLJ 29; Barnes and Oldham 2017 The Journal of Legal History 1-2.
258
Black Black’s Law Dictionary 5 ed (1979) 181. For more on this rule see also McMillan “The Business Judgment
Rule as an Immunity Doctrine” 2012 William & Mary Business Law Review 524; Bainbridge “The Business
Judgment Rule as Abstention Doctrine” 2004 Vand. L. Rev 105; Cassim FHI et al Contemporary company law
2 ed (2012) 563.
259
(1812) 35 ER 61.
260
Barnes and Oldham 2017 The Journal of Legal History 1-2.
261
Boyle Minority shareholders’ remedies (2002) 3 opines that the rule in Foss v Harbottle (1812) 35 ER 61
“transformed the old partnership rule into one of the leading principles of modern company law”.
36
By the middle of the 19th century, the necessary parties rule and its exceptions were firmly
embedded into the fabric of litigation involving incorporated bodies. The dispute in Hichens v
Congreve262 arose when aggrieved shareholders initiated action on behalf of themselves and others
complaining of fraudulent misapplication of company funds by the directors. The defendants
argued that all of the two hundred shareholders were supposed to be made parties.263 However,
since the necessary parties rule and its exceptions were well established by that time, the court
simply rejected the defendants’ argument without even a lengthy explanation of the ratio decidendi
and allowed the action to continue.264 However, it is submitted that it is the decision in Foss v
Harbottle265 that transformed the necessary parties rule from a mere old partnership principle into
an engraved company law principle.266 The next section presents a critical examination of this
landmark decision.
24 THE PROPER PLAINTIFF RULE

In 1835, certain persons decided to form a joint-stock company267 called The Victoria Park
Company (the company) which was incorporated268 in terms of an Act of Incorporation.269 The
business purpose behind the formation of the company was to build, let and sell houses on some
land that the company would buy. The property that the company eventually bought belonged to
Joseph Denison, who was one of the defendants in the case, and others.270 The plaintiffs, Foss and
Turton, subscribed for shares in the company and paid the required deposit. The defendants
262
1828 38 Eng. Rep 917
263
Hichens v Congreve 1828 38 Eng. Rep 917.
264
Ibid.
265
1843 67 ER 191.
266
Boyle Minority shareholders’ remedies (2002) 3.
267
It should be realised that this case arose in the context of a joint stock company in which there was considerable
separation of ownership and management. See Boyle Minority shareholders’ remedies (2002) 3. In
contemporary company law this distinction has been blurred.
268
The effect of incorporation was that the company could sue or be sued by its name both in law and equity.
269
This legislation was entitled “An Act for Establishing a Company for the Purpose of Laying Out and Maintaining
an Ornamental Park within the Townships of Rusholme, Charlton-upon-Medlock and Moss Side, in the County
of Lancaster”. It has to be noted that the purpose for such incorporation was to avoid the ordinary responsibilities
of a partnership which included, as per Carlen v Drury (1812) 35 ER 62, “[first that], the person, who takes upon
himself the management, is answerable to the whole extent of his engagements, secondly, that each Individual
is at Law answerable for the Amount of the whole of the Debts of the Concern; and thirdly, that each Individual
is liable to a Contribution for what the Agents have”. It is also important to realise that during that era there was
no general piece of legislation that regulated the formation of companies. Therefore, like what transpired in this
case, each company had to be formed by a specific Act of Incorporation which was unique to that company only.
270
Denison was also the company’s auditor. See Foss v Harbottle 1843 67 ER 194.
37
Harbottle, Adshead, Byrom, Westhead and Bealey were appointed directors.271 They were tasked
to effect the objects of the company and to perform any other acts that they consider to be in the
interests of the company.272 It is submitted that by accepting such responsibilities, the directors
owed a duty to the company and in performing such a duty they had the discretion273 to decide
such acts as would fall within the ambit of the best interests of the company.274 The other
defendants were Lane and Bunting who were appointed architect and attorney for the company,
respectively.
The plaintiffs alleged that the purchase and sale of land to the company was a result of fraudulent
collusion between the defendants which was intended to enable them to derive a profit or personal
benefit275 from the establishment of the said company. The plaintiffs also claimed that the
defendants had agreed among themselves that certain individuals would be appointed directors
who would then decide to buy the land from Denison and others at greatly inflated and exorbitant
prices which unreasonably exceeded those at which the sellers had purchased the property. 276 By
1840 Adshead, Byrom and Westhead were declared bankrupt and ceased to qualify to act as
directors of the company.
An application was brought before the court by two shareholders of the company on behalf of
themselves and all the other shareholders except those who were defendants against, inter alia,
five directors and the company’s attorney and architect. The plaintiffs alleged that the defendants
271
Foss v Harbottle 1843 67 ER 191. See also the discussions by Mayson et al Company law 33 ed (2016) 559;
Alan and Lowry Company Law: Core texts and Cases 8 ed (2014) 188.
272
Foss v Harbottle 1843 67 ER 191.
273
Discretion is one of the elements that the courts look at to determine the existence of a fiduciary duty. The other
elements are vulnerability, trust and confidence. By that time there was already some convincing authority for
the view that directors owe fiduciary duties to a company. A good example is Charitable Corporation v Sutton
1742 2 Atk a case in which the directors who were still known as committee-men, appeared before the Chancery
Court on alleged breach of trust which resulted in the company suffering losses. Lord Hardwicke held that
“because directors are agents of the people who grant them power to manage the corporation's affairs, they are
liable for any negligent acts or omissions. A director of a company owes duties to the company in the same
measure and quality as does a trustee to a trust”. See also Siems “Private Enforcement of Directors’ Duties:
Derivative Actions as a Global Phenomenon” 2012 3 available at: http://ssrn.com/abstract=1699353 (accessed
28-06-2018).
274
See Foss v Harbottle 1843 67 ER 202 where the court held obiter that “the fiduciary character of the projector
would, in such a case, commence from the time when he first began to deal with the public, and would of course
be controlled in equity by the representation he then made to the public”.
275
According to the no-profit rule which has its roots in Keech v Sandford 1726 25 ER 223 (Ch), Cassim FHI et al
Contemporary company law 2 ed (2012) 536 state that “directors may not retain any profit made by them in their
capacity as directors while performing their duties as directors”. See also Phillips v Fieldstone Africa (Pty) Ltd
2004 3 SA 465 (SCA); and Regal (Hastings) Limited v Gulliver 1942 All ER 378 (HL).
276
38
had committed various fraudulent and illegal transactions which resulted in the company’s
property being “misapplied and wasted”.277 It was further argued that there was an insufficient
number of qualified directors to constitute a board and that the shareholders had no power to take
the property out of the hands of the defendants.278 The plaintiffs, therefore, sought an order
compelling the defendants to make good the losses and expenses occasioned by their conduct.
The defendants objected to the plaintiffs’ claims for lack of joinder of all the necessary parties and
multiplicity. The defendants suggested, among others, that all the shareholders in the company and
the owners of land named in the schedule to the Act,279 were necessary parties to the case.280 It
was further contended that it was unjustified for the plaintiffs to claim that the company had
suffered serious injury yet it was not one of the parties. Further, the defendants argued that such a
defect could not be cured by adding the company as a defendant to the case for “the plaintiffs were
not entitled to represent the corporate body for the purpose of impeaching the transactions
complained of”281 which rendered the plaintiffs’ application unsustainable. It was also contended
that if the plaintiffs had any basis to call into question the validity of the defendants’ conduct, the
former should have used the name of the corporation in which case the defendants or board of
directors would have opted to apply either for a stay of proceedings or on order preventing the use
of the corporate name.282 Such a route would then have allowed the court to make a determination
on the alleged usurpation of power or whether the plaintiffs’ claims should be permitted to proceed.
The court held that “the Victoria Park Company is an incorporated body, and the conduct with
which the [d]efendants are charged in this suit is an injury not to the [p]laintiffs exclusively; it is
an injury to the whole corporation by individuals whom the corporation entrusted with powers to
be exercised only for the good of the corporation”.283 This marked the birth of the famous proper
plaintiff rule which is also referred to as “The Rule in Foss v Harbottle”.284 The court added that,
277
278
Ibid.
279
The full title was an Act for Establishing a Company for the Purpose of Laying Out and Maintaining an
Ornamental Park within townships of Rusholme, Charlton-upon-Medlock and Moss Side, in the County of
Lancaster which received Royal assent on 5 May 1837.
280
281
Ibid.
282
Ibid.
283
284
1843 67 ER 189. See also Erickson 2017 Oklahoma Law Review 237 264; Black B et al 2008 Columbia Business
Law Review 26; Bawah “A Comparison of the Statutory Provisions of the United Kingdom (UK) Companies
Act 2006 and Ghana's Companies Act 1963 (Act 179), to the Rule in Foss v Harbottle” 2019 Beijing Law Review
39
in the contemplation of the law, the company and its aggregate members should be distinguished.
It was further held that the relevant question should be whether, in the given circumstances, a
departure from the rule that requires a company to sue in its own name and corporate character, or
in the name of someone whom the law has assigned to be its representative, was justifiable?
There are two important principles upon which the court’s dictum was founded. First, Wigram VC
held that the plaintiffs were required to prove that the majority shareholders had no power to
lawfully defeat the court’s pronouncement by approving the very acts which formed the subject of
the minority’s suit.285 It was thought to be redundant for the court to decide on the company’s
transactions which were voidable at the instance of the majority shareholders whose decision
generally bound the whole entity including a reluctant minority. The plaintiffs’ case could not be
sustained as long as the majority of shareholders were able to assemble at a special general meeting
and exercise the power to approve such transactions. Put differently, the court upheld the principle
of majority rule286 even in business organisations. Second, it was also held that the plaintiffs were
supposed to have proved that all avenues to “set the body of proprietors in motion, or to procure a
meeting to be convened for the purpose of revoking the acts complained of … have been resorted
to and found [to be] ineffectual”.287
The proper plaintiff principle is based on the direct harm rule which states that “where a wrong is
committed, the only person(s) entitled to seek redress is/are him/her/those who suffered direct
153 154; Lowry and Reisburg Pettet’s company law: Company law and corporate governance 4 ed (2012) 239;
Hargovan “Under Judicial and Legislative Attack: The Rule in Foss v Harbottle” 1996 SALJ 631-632; and Farrar
and Hannigan Farrar’s company law 4 ed (1998) 430.
285
286
Aderibigbe “Corporate Litigation and the Majority Rule: Retreating from the Precipice” 2012 Int'l J. Advanced
Legal Stud. & Governance 35 explains that the principle of majority rule determines that the decisions of the
majority will always prevail over those of the minorities. Oshio “The True Ambit of Majority rule under the
Companies and Allied Matters Act 1990 revisited” Modern Practice Journal of Finance and Investment Law 1
explains that the term “majority rule” is commonly used in relation to the constitutional law of democratic states.
However, the scholar further argued, that the term is also applicable to business organisations as corporate legal
theory perceives companies to be democratic entities. See also Mayson et al Company law 33 ed (2016) 556;
Kershaw Company law in context: Text and materials 2 ed (2012) 603.
287
40
harm as a result of it”.288 In the context of corporate law, if a company, as a distinct legal entity,289
is injured, it is the only person with standing to approach a court for relief. 290 The “direct harm”
principle is strongly connected to the legal personality of companies. 291 The proper plaintiff rule
was considered and accepted by other courts both in England and many other common law
jurisdictions.292 A direct consequence of the proper plaintiff rule is that “where a wrong is
committed against a company, it is for the company, as the proper claimant, to decide whether to
institute legal proceedings for redress”.293 However, some corporate law commentators294 contend
that the rule in Foss v Harbottle295 was actually a combination of the court’s judgments in that
case and in the case of Mozley v Alston296 which was decided almost four years later. They argue
that these two cases gave birth to the two-pronged rule.297 For the purposes of this study, it is
accepted that the rule in Foss v Harbottle298consists of both the proper plaintiff doctrine and the
internal management principle and that both cases were influential in the development of the rule.
288
Idensohn “The Fate of Foss under the Companies Act 71 of 2008” 2012 SA Merc L.J 356. See also Shaowei
2019 China Legal Science 138 140; Tsang 2019 Vanderbilt Journal of Transnational Law 79; Bawah 2019
Beijing Law Review 156; Lowry and Reisburg Pettet’s company law: Company law and corporate governance
4 ed (2012) 239; Mayson et al Company law 33 ed (2016) 554; Kershaw Company law in context: Text and
materials 2 ed (2012) 601.
289
Salomon v Salomon and Company Ltd 1897 (AC) 22 HL. Section 19(1)(a) and (b) of the Companies Act 71 of
2008 provides that “from the date and time that the incorporation of a company is registered, as stated in its
registration certificate, the company- (a) is a juristic person, which exists continuously until its name is removed
from the companies register in accordance with this Act; (b) has all of the legal powers and capacity of an
individual, except to the extent that- (i) a juristic person is incapable of exercising any such power, or having
any such capacity; or (ii) the company’s Memorandum of Incorporation provides otherwise”.
290
Cassim FHI et al Contemporary company law 2 ed (2012) 775-777; Mongalo Corporate law and corporate
governance: A global picture of business undertakings in South Africa (2003) 265-266; and Mongalo et al Forms
of business enterprise: Theory, structure and operation (2004) 275.
291
Idensohn 2012 SA Merc L.J 356.
292
Bawah 2019 Beijing Law Review 154; MacIntosh 1991 Canadian Bar Review 31.
293
Idensohn 2012 SA Merc L.J 356. See also Bawah 2019 Beijing Law Review 154; Girvin et al Charlesworth’s
company law 18 ed (2010) 509; Farrar and Hannigan Farrar’s company law 4 ed (1998) 431; Abugu “The
Monster Theory: Setting the Boundary for Corporate Financial Malpractice” An Inaugural Lecture delivered at
the University of Lagos 2015 20.
294
See Farrar and Hannigan Farrar’s company law 4 ed (1998) 431; Du Plessis “Revisiting the Judge-Made Rule
of Non-Interference in Internal Company Matters” 2010 SALJ 306; Lowry and Reisburg Pettet’s company law:
Company law and corporate governance 4 ed (2012) 238.
295
1843 67 ER 189.
296
1847 1 Ph 790. For this proposition see also Farrar and Hannigan Farrar’s company law 4 ed (1998) 431.
297
Farrar and Hannigan Farrar’s company law 4 ed (1998) 431; Cassim MF The new derivative action under the
Companies Act: Guidelines for judicial discretion (2016) 6; Girvin et al Charlesworth’s company law 18 ed
(2010) 509.
298
1843 67 ER 189.
41
However, the court in Foss v Harbottle conceded that there are circumstances which may justify
a departure from the rule that the company is the proper plaintiff.299 For example in instances
where the conduct of a company’s members has resulted in harm to the company for which there
exists no remedy “except that of a suit by individual corporators in their private characters, and
asking in such character the protection of those rights to which in their corporate character they
were entitled”.300 Having defined the interaction between the law and company management’s
decisions in the context of company law paying special attention to the corporate character of
companies, the next section examines instances that justify a departure from the rule that a
company is the proper plaintiff in respect of wrongs done to it.
25 EXCEPTIONS TO THE PROPER PLAINTIFF RULE

This section presents an analysis of four instances that justified a departure from the rule in Foss
v Harbottle.301 An indiscriminate application of the proper plaintiff rule would mean that the
minority’s wishes, regardless of whether they were in the best interests of the company or not,
stood a greater chance of being disregarded. If the rule was applied without qualification to all
cases of conduct that may harm the company when it is in the power of the general meeting to
decide whether or not to institute proceedings for and/or on behalf of the company, only those
instances in which the meeting decides to institute proceedings will have the chance of redress.302
It has been argued that the principal effect of the proper plaintiff rule was to bar minority
shareholders’ actions.303 Also, no stakeholder in their personal capacities will have the standing to
approach the court for redress on behalf of the company for the simple reason that they are not the
“proper plaintiff” since they did not directly suffer the harm. 304 In the UK, the statutory right of
minority shareholders to address corporate wrongs challenging oppressive and unfairly prejudicial
actions of directors in control is treated as a direct or personal remedy and therefore does not form
part of this study.305
299
Foss v Harbottle 1843 67 ER 202-203.
300
301
1843 67 ER 189. See also MacIntyre Business law 4 ed (2008) 599-600; Judge Law for business students (2006)
177-178; Adams Law for business students 6 ed (2010) 493.
302
Idensohn 2012 SA Merc L.J 357.
303
304
Ibid.
305
See section 75 of the UK Companies Act 1980 and section 994 of the UK Companies Act 2006.
42
2 5 1 Ultra vires or illegal conduct
The directors of a company or its shareholders may not apply their control or shareholding clout
to approve illegal or ultra vires conduct.306 This first exception can be better understood by
reference to the English case of Smith v Croft.307 The plaintiffs, who were minority shareholders
with 14.44% of the voting rights, brought an action in the English Chancery Division against the
defendants who held shares carrying 62.5% of the voting rights. The defendants included the
executive directors of the company. The plaintiffs alleged that the company’s money was used for
illegal and ultra vires purposes “in fraudulent breach of the executive directors’ fiduciary
duties”.308 The company and one of the executive directors applied for the action to be struck out
on the grounds that the plaintiffs lacked standing to commence such an action.
The issues were, inter alia, whether the proper plaintiff rule barred the plaintiffs from commencing
a minority shareholders’ action and whether they fell within the exception to the said rule.
Although the plaintiffs’ case failed, the court acknowledged that since a prima facie case of breach
of fiduciary duty had been established with respect to some of the transactions, such transactions
were “both ultra vires and illegal, and therefore unratifiable”. 309 Put differently, a minority
shareholder is allowed to sue where the conduct complained of is illegal or ultra vires “for not
even the unanimous consent of all the members of the company can ratify [such]”.310 In an earlier
decision in Burland v Earle,311 the Judicial Committee of the Privy Council held that minority
shareholders can sue in their own names, but must show that the acts complained of are either
306
Sahu 2017 International Journal of Law 101 102; Wild and Weinstein Smith and Keenan’s company law 16 ed
(2013) 304; Lowry and Reisburg Pettet’s company law: Company law and corporate governance 4 ed (2012)
240; Bourne Bourne on company law 6 ed (2013) 227; Alan and Lowry Company law: Core texts and series 8
ed (2014); Oshio “The True Ambit of Majority rule under the Companies and Allied Matters Act 1990 revisited”
Modern Practice Journal of Finance and Investment Law 3. See also Ashbury Railway Carriage & Iron Co v
Riche (1875) 33 LT 450.
307
(No 2) [1987] 3 All ER 909.
308
Smith v Croft (No 2) [1987] 3 All ER 909.
309
Smith v Croft (No 2) [1987] 3 All ER 937. See also Wedderburn “Shareholders' Rights and the Rule in Foss v
Harbottle” 1957 Cambridge Law Journal 203.
310
Oshio “The True Ambit of Majority rule under the Companies and Allied Matters Act 1990 revisited” Modern
Practice Journal of Finance and Investment Law 4.
311
[1902] AC 83.
43
fraudulent or ultra vires.312 However, it has been argued that the courts were inconsistent regarding
the meaning of conduct ultra vires the company.313
2 5 2 Requirement of special majority vote

The dispute in another English case of Edwards v Halliwell314 presented a good opportunity to
understand the second exception to the proper plaintiff rule. In this appeal case, the plaintiffs sued
on behalf of themselves and all other members of a certain registered trade union. 315 The
defendants were sued on behalf of themselves and all other members of the executive committee
of the union, and the union was also joined as a defendant. The appeal arose from the interpretation
of one of the union’s rules by the court a quo. The defendants contended that even if the lower
court’s construction of the rules was correct, the plaintiffs were not entitled to the relief which they
claimed because the court was not supposed to interfere in a matter intra vires a trade union and
one which concerned its internal management.316
The court held that it would grant relief if it was proper to do so since the matter in issue did not
concern a mere irregularity in the internal management of the union but a matter of substance
mixed with oppression.317 It was further held that the rule in Foss v Harbottle318 “does not prevent
an individual member suing if the matter in respect of which he is suing can validly be done, not
by a simple majority of the members of the association, but, as in the present case, only by some
special majority”.319 If this exception did not exist, the effect would be “to allow a company acting
in breach of its articles to do de facto by ordinary resolution that which according to its own
regulations could only be done by special resolution”.320 The scope of this exception extended to
312
Burland v Earle [1902] AC 83.
313
See the comparison between Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204; Smith
v Croft (No 2) [1988] Ch 114 and Gray v Lewis (1873) LR 8 Ch App 1035 by Bawah 2019 Beijing Law Review
157.
314
[1950] 2 All ER 1064. See also Wild and Weinstein Smith and Keenan’s company law 16 ed (2013) 301.
315
Edwards v Halliwell [1950] 2 All ER 1064. See also the discussion in Bawah 2019 Beijing Law Review 156.
316
Ibid.
317
Ibid.
318
Foss v Harbottle 1843 67 ER 189
319
Edwards v Halliwell [1950] 2 All ER 1064. Wedderburn 1957 Cambridge Law Journal 203 and 207.
320
Edwards v Halliwell [1950] 2 All ER 1067. See also Lowry and Reisburg Pettet’s company law: Company law
and corporate governance 4 ed (2012) 240; Wild and Weinstein Smith and Keenan’s company law 16 ed (2013)
304-305; Bourne Bourne on company law 6 ed (2013) 228; Alan and Lowry Company law: Core texts and series
8 ed (2014) 195.
44
instances of violation of any particular procedure laid down in the articles, constitution or rules of
the organisation.321
2 5 3 Violation of personal or individual rights

In the English case of Pender v Lushington,322 the plaintiff was the registered holder of 1000 shares
in a certain company. He commenced proceedings in the Chancery Division on behalf of himself
and all shareholders who voted with him against a certain amendment at an extraordinary general
meeting. It was alleged that certain votes were improperly rejected by the chairman.323
Accordingly, the essence of the plaintiffs’ matter was that certain individuals’ or the voters’
personal rights were violated.
Jessel MR prefaced his judgment with the indication that in a court of law, as distinguished from
a court of morality or conscience, the standard is that those who have the right to property are
entitled to exercise them regardless of the motive.324 This was impliedly confirmed in Menier v
Hooper's Telegraph Works.325 The court held that a member of a company is entitled to his right
to vote in a general meeting. Regardless of whether the member votes in the majority or minority,
he “is entitled to have his vote recorded, [it is] an individual right in respect of which he has a right
to sue”.326 The court made it clear that the question of violation of an individual’s personal rights
in casu had nothing in common with the issue raised in Foss v Harbottle.327
2 5 4 Fraudulent conduct affecting the minority

The last exception, which is universally accepted328 as being the only true exception to the rule in
Foss v Harbottle,329 has been chronicled in a number of cases. Derivative actions were initially
321
Edwards v Halliwell [1950] 2 All ER 1067.
322
(1877) 6 ChD 70.
323
Pender v Lushington (1877) 6 ChD 70.
324
325
Ch. 350 354.
326
Pender v Lushington (1877) 6 ChD 81. Wedderburn 1957 Cambridge Law Journal 203.
327
Foss v Harbottle 1843 67 ER 189. See also Lowry and Reisburg Pettet’s company law: Company law and
corporate governance 4 ed (2012) 240; Bourne Bourne on company law 6 ed (2013) 228; Alan and Lowry
Company law: Core texts and series 8 ed (2014) 196.
328
See Pavlieds v Jensen 1956 Ch 565; Daniels v Daniels 1978 2 All E.R. 89. See also Tsang 2019 Vanderbilt
Journal of Transnational Law 75 80; Sahu 2017 International Journal of Law 102; Alan and Lowry Company
law: Core texts and series 8 ed (2014) 197.
329
Foss v Harbottle 1843 67 ER 189. See also Lowry and Reisburg Pettet’s company law: Company law and
corporate governance 4 ed (2012) 240; Bourne Bourne on company law 6 ed (2013) 229.
45
instituted under this exception to the proper plaintiff rule.330 In Atwool v Merryweather,331 the
plaintiff, who was a minority shareholder, commenced a suit at equity on behalf of himself and all
the shareholders except those who were defendants for the purpose of setting aside a contract for
the sale and purchase of certain mines and to compel the defendants to repay and/or return a certain
amount of money and shares which had been allotted to them. 332 It was alleged that the contract
for the sale333 and purchase of the said mines had been fraudulently obtained by misrepresenting
the value of the mines in the company’s prospectus.334
On the other hand, the defendants, who were the majority shareholders and one of whom was also
a director in the concerned company, contended that the contract was prima facie not void but
merely voidable as it could still be approved by the majority shareholders. By relying on Foss v
Harbottle335 the defendants further argued that the plaintiff had no locus standi and should have
applied for leave to sue in the name of the company.336 Page VC upheld the plaintiff’s argument
that the contract was fraudulent in its entirety. In its construction of this exception, the court held
that;
“if I were to hold that no bill could be filed by shareholders to get rid of the transaction on the ground
of the doctrine of Foss v Harbottle, it would be simply impossible to set aside a fraud committed by a
director under such circumstances, as the director obtaining so many shares by fraud would always be
able to outvote everybody else”.337
Therefore minority shareholders should be allowed to sue in instances of fraud by a controlling

majority.338 Henceforth, for the purposes of this study, fraud by a controlling majority will be the
only recognised exception to the proper plaintiff rule.
330
Tsang 2019 Vanderbilt Journal of Transnational Law 79; Riches and Allen Keenan and Riches’ business law 10
ed (2011) 193; Girvin et al Charlesworth’s company law 18 ed (2010) 511; Kershaw company law in context:
Text and materials 2 ed (2012) 601.
331
(1867-68) L.R. 5 Eq. 464.
332
Atwool v Merryweather (1867-68) L.R. 5 Eq. 464.
333
This was against the purpose for which the company was formed.
334
335
336
337
Ibid.
338
Ibid.
46
A century after Atwool v Merryweather,339 the exception was recognised in the Australian340
appeal case of Gambotto v WCP Ltd.341 In that case, the majority of shareholders held about 99.7%
of the issued share capital. The company passed a special resolution to amend its articles of
association to enable a shareholder holding 90 per cent or more of the issued shares to acquire
compulsorily shares held by the minority shareholders for a stipulated share price.342 The question
for determination was: Under what circumstances would a decision by majority shareholders to
acquire compulsorily the shares of the minority shareholders through amendment of the articles be
held invalid on the basis that it was oppressive?343 The court on the facts of this case found in
favour of the plaintiff and held that the amendment was invalid.344
It seems that the courts expanded the exception from allegations of fraud to include cases of
negligence which resulted in a profit to the majority shareholders at the expense of the company.
The dispute in the English case of Daniels v Daniels345 resulted in the plaintiffs approaching the
Chancery Division for relief. The plaintiffs were minority shareholders in the defendant company.
The first and second defendants, who were also husband and wife, were the majority shareholders
and directors in the company. In 1970, the directors sanctioned the sale of certain land to the second
defendant for £4 250. The land was sold in 1974 by the second defendant for an amount of
£120 000.
The plaintiffs alleged that the price at which the land was sold to the second defendant was well
below its market value. It was further claimed that the first and second defendants were aware of
the undervaluation of the property but opted to adopt the probate value346 of the land which was
usually much less than the open market value.347 The plaintiffs did not allege any fraudulent
conduct by the defendants but argued that the rights of the minority extended to any case of breach
339
(1867-68) L.R. 5 Eq. 464.
340
Although Australia is not one of the four jurisdictions covered in this study, this case is relevant in demonstrating
how the fraud on the minority exception was interpreted by the courts.
341
182 CLR 432 (1995).
342
Gambotto v WCP Ltd 182 CLR 432 (1995).
343
Ibid.
344
See Wedderburn 1957 Cambridge Law Journal 203.
345
[1978] 2 All ER 89.
346
This term is common in English Tax Law. Cran https://www.eddisons.com/articles/valuations/what-is-a-
probate-valuation-and-why-do-i-need-it (accessed 07-11-2017) states that “a probate valuation takes into
account all the [assets of the deceased including bank account balances, jewellery, vehicles and property] and
deducts any outstanding debts to calculate how much inheritance tax is owed”.
347
Daniels v Daniels [1978] 2 All ER 91.
47
of duty including the sale of the undervalued property. As the plaintiffs had no other available
remedy except through a minority shareholders’ action,348 they were, in their argument, entitled to
bring the action. The defendants argued that regardless of what the exception to the rule in Foss v
Harbottle349 might be, mere gross negligence was not actionable, of which the plaintiffs had in this
case pleaded negligence.350
The court dismissed the defendants’ arguments and held that;
“To put up with foolish directors is one thing; to put up with directors who are so foolish that they
make a profit of £115,000 at the expense of the company is something entirely different. The principle
… is that a minority shareholder who has no other remedy may sue where directors use their powers
intentionally or unintentionally, fraudulently or negligently in a manner which benefits themselves at
the expense of the company”.351
An injustice would be done if, by application of the rule in Foss v Harbottle, minority shareholders’
actions are restricted to fraud which is difficult to prove.352 There should be no reason why cases
of fraud ought to be treated differently from cases where there is no fraud but the directors’
negligence confers some benefit upon the directors and majority shareholders at the expense of the
company.353 Minority shareholders, therefore, continued to approach the courts for recourse on
behalf of their companies with respect to instances largely relating to management misconduct,
exploitation of the corporate character of the company and abuse of control by the majority. The
associated remedy is what came to be known as the derivative action. 354 Having established the
existence and importance of the derivative remedy, the next section examines how this legal
antidote was assimilated into the company laws of other Anglo-American jurisdictions.
348
See Carney and Keith “The Death of Appraisal Arbitrage: Ending Windfalls for Deal Dissenters” 2018 Delaware
Journal of Corporate Law 61 93.
349
350
Daniels v Daniels [1978] 2 All ER 96. As held in this case, traditionally, there has been no stand alone interest
of justice exception to the rule in Foss v Harbottle.
351
Ibid.
352
353
Ibid.
354
Erickson 2017 Oklahoma Law Review 264.
48
26 LEGAL TRANSPLANTATION OF THE DERIVATIVE REMEDY
As the establishment of companies became easy355 thereby catching the attention of many
entrepreneurs as viable and sustainable means of conducting business, so grew the need to protect
various stakeholders’ interests. Derivative actions have become one of the most popular remedies
especially for the protection of minority shareholders such that it has been adopted by innumerable
jurisdictions subject to certain jurisdiction-specific modifications. For the purposes of this study,
this section is restricted to a comparison of the adoption and development of this remedy in
England, USA, Japan and South Africa.
2 6 1 Derivative remedy in England

Since most of the discussion above relates to England, the reflection in this section will be limited
to developments that occurred after the establishment of the proper plaintiff rule and its exception.
Even though the exception to the proper plaintiff rule was well established soon after Foss v
Harbottle,356 English law was still unclear on whether proof of fraud by a controlling majority
eliminated the requirement for minority shareholders to first refer the matter to the general
meeting. Boyle argues that the decision in Mozley v Alston357 was the first step in a gradual process
by which English courts ceased to require that the minority’s complaint be referred first to the
general meeting.358
Due to a series of legislation that the English Parliament passed that addressed both substantive
and procedural problems of joint-stock companies and corporations from the middle of the 19th
century, cases of derivative litigation took a nosedive.359 By the middle of the twentieth century,
the derivative remedy had disappeared from English company law.360 There were some challenges
355
It has to be realised that at that time companies could only be formed through a specific Act of incorporation.
For example, in Foss v Harbottle 1843 67 ER 191, The Victoria Park Company was incorporated in terms of
“An Act for Establishing a Company for the Purpose of Laying Out and Maintaining an Ornamental Park within
the Townships of Rusholme, Charlton-upon-Medlock and Moss Side, in the County of Lancaster”. This is no
longer the case with modern company law whereby jurisdictions have general legislation that regulate the
formation of companies. For example, see Chapter 2 of the South African Companies Act 71 of 2008.
356
1843 67 ER 189.
357
(1847) 41 E.R. 833.
358
359
360
Yeazell From Medieval Group Litigation to the Modern Class Action (1987) 194-195.
49
with the fraud on the minority or wrongdoer control exception.361 First, the courts failed to properly
define the parameters of fraud.362 Secondly, it was also not clear whether de facto or de jure control
satisfied the requirement of wrongdoer control.363 Further, the exception has also been criticised
on the grounds that it was overly onerous for minority shareholders. 364 The English Law
Commission stressed the need for greater transparency in corporate governance and that derivative
proceedings needed to be “rationalised and modernised”.365 The common law derivative remedy
had to be replaced with a new procedure “with more modern, flexible and accessible criteria for
determining whether a shareholder can pursue the action”.366 However, the remedy has recently
been revived by the enactment of the UK Companies Act367 which introduced a statutory derivative
remedy into English company law for the first time.368
361
Chen “The Statutory Derivative Action in Malaysia: Comparison with an Australian Judicial Approach” 2017
Asian Journal of Comparative Law 283. See also Tsang 2019 Vanderbilt Journal of Transnational Law 80;
Cassim MF The new derivative action under the Companies Act: Guidelines for judicial discretion (2016) 1.
362
Bawah 2019 Beijing Law Review 158; Alan and Lowry Company law: Core texts and series 8 ed (2014) 198;
Lowry and Reisburg Pettet’s company law: Company law and corporate governance 4 ed (2012) 240-241; Wild
and Weinstein Smith and Keenan’s company law 16 ed (2013) 305 quoting Estmanco (Kilner House) Ltd v
Greater London Council 1982 1 All ER 437, where it was held that “it does not seem to have yet become very
clear what the word ‘fraud’ means…”.
363
Bawah 2019 Beijing Law Review 158. See further Alan and Lowry Company law: Core texts and series 8 ed
(2014) 199-201.
364
Tsang 2019 Vanderbilt Journal of Transnational Law 80.
365
Report of the Law Commission on Shareholder Remedies No. 246 1997 para 6. See also Cinematic Finance Ltd
v Ryder [2012] B.C.C. 797 para 11; Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013]
EWHC 348 (Ch) para 34; Lowry and Reisburg Pettet’s company law: Company law and corporate governance
4 ed (2012) 247; Girvin et al Charlesworth’s company law 18 ed (2010) 516-517.
366
Lowry and Reisburg Pettet’s company law: Company law and corporate governance 4 ed (2012) 248; Wild and
Weinstein Smith and Keenan’s Company law 16 ed (2013) 313; Alan and Lowry Company law: Core texts and
series 8 ed (2014) 193.
367
2006. Siems “Private Enforcement of Directors’ Duties: Derivative Actions as a Global Phenomenon” 2012 10
available at: http://ssrn.com/abstract=1699353 (accessed 28-06-2018).
368
Lowry and Reisburg Pettet’s company law: Company law and corporate governance 4 ed (2012) 249.
50
Figure 1: Historical development of derivative actions in England
51
2 6 2 Derivative suits in the USA
The derivative action has been in existence in the USA for more than 180 years. 369 It emerged as
an equitable remedy that allowed the shareholders of a company to institute litigation to “protect
the corporation in situations where it was threatened with harm or had suffered injury”.370 In
Prunty’s words, derivative suits can be seen as “the lawmakers’ response to recognised misuse of
economic organisations viewed against popularly accepted standards of business conduct. The
shareholders' right to command a judicial forum comes in answer to a demonstration of need”.371
In everyday parlance, it is generally acknowledged that when one speaks of “the lawmakers” the
reference is to the legislature or parliament. If this is accepted, then Prunty’s assertion will be
vulnerable to criticism as the derivative remedy was developed by the courts as a common law
doctrine before any legislative intervention.372 However, this does not invalidate Prunty’s
submission that derivative suits, like any other remedy, arose in response to shareholders’ plight
against management misconduct.
Historically, colonies usually adopted the law of their colonial masters.373 The USA was no
exception. Inevitably, it also had to adopt the necessary parties’ rule and its exceptions from
England as its colonial master.374 The necessary parties rule and its exceptions were so engraved
in the USA’s company law that even after gaining its independence, American courts continued to
apply it.375 Like its English counterpart, before the necessary parties rule and its exceptions were
369
Dennis “Contrivance and Collusion: The Corporate Origins of Shareholder Derivative Litigation in the United
States” 2015 Rutgers University Law Review 1481; Cooney “A Modality for Accountability to Shareholders:
The American Way” 2003 Okla. City U. L. Rev 718.
370
Dennis 2015 Rutgers University Law Review 1481.
371
Prunty “The Shareholders' Derivative Suit: Notes on Its Derivation” 1957 N.Y.U. L. Rev. 980.
372
As argued above (see part 2 4), in England, the genesis of the derivation action can be traced back to the case of
373
Armour et al “Shareholder Protection and Stock Market Development: An Empirical Test of the Legal Origins
Hypothesis” 2009 Journal of Empirical Legal Studies 343 346. For example, Meintjies et al Introduction to
South African Law: Fresh Perspectives 4 ed (2013) 17-18 opine that South Africa inherited Roman-Dutch law
when Jan van Riebeck and the Dutch settlers took over the Cape from the 17th century. After the English settlers’
invasion of the Cape of Good Hope in 1806, English legal principles such as the doctrine of judicial precedent
influenced the development of South African legal system. It is as a result of such events that South Africa now
possesses a hybrid legal system.
374
Scarlett 2013 Buffalo Law Review 860; Nyombi “The USA as a good comparator for UK in corporate
governance” 2018 International Journal of Law and Management 135 138.
375
Scarlett 2013 Buffalo Law Review 860. The necessary parties rule was perfectly captured in West v Randall 29
F. Cas. 718 C.C.D.R.I. 1820 when Justice Story held that “it is a general rule in equity that all those materially
interested . . . in the subject of a bill . . . ought to be made parties”. See also Elmendorf v Taylor 23 U.S. (10
Wheat.) 152 1825; and Beatty v Kurtz 27 U.S. (10 Wheat.) 566 1829.
52
introduced into American company law, it was applied to ordinary class actions.376 Justice Story377
was very influential in embedding the necessary parties rule and its exceptions in the USA. In
1838, he published his Commentaries on Equity Pleadings and Incidents thereto: According to the
Practice of the Courts of Equity of England and America 378 in which he expanded his analysis of
the necessary parties rule and its exceptions.379 Relying on Hutchison,380 Scarlett argues that
Justice Story’s works on the necessary parties rule and its exceptions were essentially codified by
the Supreme Court when it promulgated the Federal Equity Rules 47381 and 48382 in 1842.
However, the Supreme Court continued to interpret these rules in light of the common law
interpretations of the necessary parties rule.383 The Supreme Court’s revisions of the Federal
Equity Rules in 1912 made the judgment in class action suits binding on absent parties and also
permitted common question representation.384 In 1938, the Supreme Court promulgated the
Federal Rules of Civil Procedure, which merged law and equity for the first time.385 It is argued
that Justice Story’s formulation of class actions has survived to modern times through the Federal
Rule of Civil Procedure 23.386
However, there were some differences in the focal points of the remedy between the colony and
the master. While English debates pertaining to the remedy were more inclined to the procedural
376
377
He was an associate justice of the United States Supreme Court between 1811 and 1845.
378
1838.
379
380
Hutchinson “Class Actions: Joinder or Representational Device?” 1983 Supreme Ct. Rev. 460-461.
381
Federal Rule 47 stated that: “In all cases where it shall appear to the court, that persons, who might otherwise be
deemed necessary or proper parties to the suit, cannot be made parties by reason of their being out of the
jurisdiction of the court, or incapable otherwise of being made parties, or because their joinder would oust the
jurisdiction of the court as to the parties before the court, the court may in their discretion proceed in the case
without making such persons parties; and in such cases the decree shall be without prejudice to the rights of the
absent parties”.
382
Federal Rule 48 stated that: “Where the parties on either side are very numerous, and cannot, without manifest
inconvenience and oppressive delays in the suit, be all brought before it, the court in its discretion may dispense
with making all of them parties, and may proceed in the suit, having sufficient parties before it to represent all
the adverse interests of the plaintiffs and the defendants in the suit properly before it. But in such cases the decree
shall be without prejudice to the rights and claims of all the absent parties”.
383
384
Rule 23(a) states that “one or more members of a class may sue or be sued as representative parties on behalf of
all members only if: the class is so numerous that joinder of all members is impracticable, there are questions of
law or fact common to the class; the claims or defenses of the representative parties are typical of the claims or
defenses of the class; and the representative parties will fairly and adequately protect the interests of the class”.
385
Scarlett 2013 Buffalo Law Review 871 who also argues that “Federal Rule of Civil Procedure 23 specifically
codified class actions and Rule 23, as revised in 1966, is substantially the same as today’s rule”.
386
53
aspects, the USA’s formulation was more concerned with the substantive aspects of the remedy387
seeing that derivative suits were also meant to deter future misconduct by directors.388
Legal literature389 attributes the paternity of derivative actions in the USA to the New York
Chancery Court’s decision in Robinson v Smith.390 In that case, the three shareholder plaintiffs
who together owned 160 shares of New York Coal Company’s 4000 shares instituted legal action
against the company’s directors. The plaintiffs alleged that the directors illegally and fraudulently
misappropriated corporate funds to speculate in financial books which was against the company’s
purpose of “exploring for, digging and vending coal”.391 The plaintiffs further claimed that the
directors’ conduct resulted in a loss of at least $150 000 which rendered their shares valueless. In
their objection, the defendant directors relied on the necessary parties rule and urged the court to
reject the motion since some of the shareholders were not joined as plaintiffs.392 The defendants
further argued that the three shareholders should have filed separate suits rather than joining
together as one. Also, the directors argued that the company had to be named as a party to the
suit.393
In dismissing the defendants’ first objection, the court held that it was not even necessary to refer
to the exceptions to the necessary parties’ rule as it was likely that the defendant directors held the
remaining 3 840 shares.394 Therefore, the directors, who were also shareholders were already party
to the case and could not be both plaintiffs and defendants in the same case. With respect to the
possibility that there existed other shareholders besides the named plaintiffs and defendants,
Chancellor Walworth confirmed the existence of exceptions to the necessary parties’ rule and held
that “if the stockholders were so numerous as to render it impossible, or very inconvenient to bring
them all before the court, a part[y] might file a bill, in behalf of themselves and all others standing
in the same situation”.395 Dennis asserts that it became normal practice for shareholders who
387
Prunty 1957 N.Y.U. L. Rev. 985.
388
It remains debatable whether it is difficult to assess the effectiveness of the deterrence effect of the derivative
remedy in the USA given the unprecedented nature of corporate debacles such as Enron, Tyco and Worldcom.
389
Dennis 2015 Rutgers University Law Review 1486; Prunty 1957 N.Y.U. L. Rev. 986; Scarlett 2013 Buffalo Law
Review 873.
390
Ch. 222 N.Y 1832.
391
Robinson v Smith Ch. 222 N.Y 1832.
392
Ibid.
393
Ibid.
394
Ibid.
395
Ibid. See also Hichens v Congreve (1828) 38 Eng. Rep 917 (Ch).
54
commenced derivative actions after the decision in Robinson v Smith396 to allege that they sued
“‘[on] behalf of themselves and all others standing in the same situation’, or nearly identical
language”.397 In the same case of Robinson v Smith, the court also disagreed with the defendants’
second objection and held that it was entirely appropriate for the shareholders to join together and
file a single suit as they sought the same redress from the same acts by which they suffered
common injury.398 However, the court upheld the defendants’ third objection that the company
ought to have been made a party to the case.
Furthermore, the court in Robinson v Smith indicated that, in general, the company is the proper
plaintiff to institute litigation against the malfeasant directors.399 However, in situations where the
company refuses to prosecute or is under the control of the defendants, the shareholders would be
allowed to litigate in their own names and make the company a defendant party.400 Since the New
York Coal Company was still under the control of the erring directors who were also the majority
shareholders, the court allowed the plaintiffs to simply amend their complaint to add the company
as a defendant and leave was granted for the plaintiffs to proceed derivatively. Following the
judgment in Robinson v Smith,401 shareholders sought to hold directors accountable for
wrongdoing and mismanagement by applying the mechanism of the derivative action in cases
ranging from inter alia, fraud, ultra vires transactions, and self-dealing to gross negligence.402
States such as Maine,403 Massachusetts,404 Wisconsin,405 Rhode Island,406 Connecticut407 and New
Hampshire408 followed in the steps of New York by permitting shareholders to sue company
management.409 The first USA Federal case on derivative actions was Dodge v Woolsey.410 By the
396
Ch. 222 N.Y 1832.
397
398
Robinson v Smith Ch. 222 N.Y 1832 230-231.
399
Robinson v Smith Ch. 222 N.Y 1832. See also Foss v Harbottle 1843 67 ER 189 and Cooney 2003 Okla. City U.
L. Rev 718.
400
Cooney 2003 Okla. City U. L. Rev 719.
401
Ch. 222 N.Y 1832.
402
403
Smith v Poor 40 Me. 415 (1855).
404
Smith v Hurd 53 Mass. (12 Met.) 371 (1847).
405
Putnam v Sweet 2 Pin. 302 (Wis. 1849).
406
Hodges v New England Screw Co. 1 R.I. 312 (1850).
407
Allen v Curtis 26 Conn. 456 (1857).
408
March v Eastern R.R. Co. 40 N.H. 548 (1860).
409
Scarlett 2013 Buffalo Law Review 875-882.
410
59 U.S. (18 How.) 331 (1855).
55
time Dodge v Woolsey411 was adjudicated, derivative actions had become commonplace in the
USA.
However, by the 1980s, derivative actions in the USA had become a weak mechanism for
enforcing director accountability by shareholders.412 Cooney cites procedural uncertainties
regarding the demand requirement413 and the increased use of Special Litigation Committees414 as
possible reasons for the decline in the effectiveness of derivative suits.415
2 6 3 Derivative claims in Japan

In the previous section, it was noted that the saplings of derivative actions were transplanted from
England to the USA mainly because the former had colonised the latter. Consequently, the law of
the colonialist would prevail in the colony. However, Japan is one of those countries that were
never formally colonised416 by any state. This section provides a historical account of how
derivative actions was exported into or originated in Japan.
Japan’s modern commercial law is largely based on the Commercial Code.417 The Japanese legal
system has been heavily influenced by the German and French legal systems.418 It is no wonder
why the Japanese Commercial Code419 contained a right allowing minority shareholders holding
at least one-tenth of a company’s capital to require the company to file an action against its
directors.420 This provision is reminiscent of section 268 of the German Commercial Code.421
411
Ibid.
412
413
This is the subject of chapter six below.
414
These will be examined in greater detail in chapter six below.
415
416
See “Encyclopedia of Western Colonialism since 1450” http://www.encyclopedia.com/history/encyclopedias-
almanacs-transcripts-and-maps/japan-colonized (accessed 24-11-2017).
417
1899. See also Kawashima and Sakurai “Shareholder Derivative Litigation in Japan: Law, Practice, and
Suggested Reforms” 1997 Stanford Journal of International Law 13; Fujita “Modernising Japanese Corporate
Law: Ongoing Corporate Law Reform in Japan” 2004 SAcLJ 321-322; Kanda and Milhaupt “Re-examining
Legal Transplants: The Director's Fiduciary Duty to Japanese Corporate Law” 2003 Am. J. Comp. L. 887; and
Shishido “Reform in Japanese Corporate Law and Corporate Governance: Current Changes in Historical
Perspective” 2001 Am. J. Comp. L 653.
418
Kawashima and Sakurai 1997 Stanford Journal of International Law 13; Fujita 2004 SAcLJ 322; Kanda and
Milhaupt 2003 Am. J. Comp. L. 887; and Shishido 2001 Am. J. Comp. L 659.
419
Law 48 1899.
420
Eisen “Limitations on Derivative Actions in Germany and Japan to Prevent Abuse” 2012 J. Japan L. 213;
421
1897. In Germany, it is called the Handelsgesetzbuch (HGB). Section 268 of the German HGB provides that
“the company's rights of action arising out of the promotion against the persons rendered liable by sections 202
204 and 208, or arising out of the conduct of the business against the members of the directorate and board of
supervision must be enforced if a resolution in favour of such enforcement is passed at a general meeting by a
56
Japan’s company law has also been influenced by some USA concepts. 422 Therefore, it can be
argued that Japan developed a hybrid commercial legal system.
Under the Japanese Commercial Code (the 1899 Code),423 stock companies were governed by
shareholders, directors and auditors.424 Among these three constituencies, shareholders retained
the ultimate power over the company through general shareholder meetings.425 Besides deciding
on matters that affected the operations of the company within the confines of the law and its articles
of incorporation, shareholders could also make decisions that were binding on the directors.426 Due
to directors’ limited power, the 1899 Code did not provide for derivative suits427 given that
derivative suits are generally a means of ensuring director accountability which usually stems from
the wide discretion bestowed on management. Evidently, in the absence of such power on the side
of the directors, there is no use trying to limit what in effect has already been limited by operation
of law.
With the passage of time, companies became more popular and grew in size. This growth led to
an increase in the number of shareholders in companies which resulted in more dispersed share
ownership.428 As a result, shareholders lost control over the directors. 429 Control of the company
was no longer concentrated in a few individuals. By 1950, the 1899 Code was subjected to two
revisions which sought to strengthen shareholders’ rights by clarifying directors’ duties.430 It is the
1950 revision of the 1899 Code that introduced derivative actions in Japan.431 The introduction of
derivative remedies in Japanese company law effectively redistributed power between
shareholders and directors with the former’s influence being reduced while the latter enjoyed
expanded control.432 Modelling its derivative action after the USA’s style,433 Japan’s lawmakers
bare majority (ii), or if such enforcement is demanded by a minority, the aggregate amount of whose shares is
not less than a tenth part of the capital of the company”.
422
Kanda and Milhaupt 2003 Am. J. Comp. L. 887.
423
1899.
424
425
Ibid; and Shishido 2001 Am. J. Comp. L 659.
426
427
Ibid. However, the 1899 Code provided for a substitute mechanism which was only available to principal
shareholders who owned at least ten percent of a company’s capital.
428
Kawashima and Sakurai 1997 Stanford Journal of International Law 14
429
Ibid.
430
Kawashima and Sakurai 1997 Stanford Journal of International Law 14; and Fujita 2004 SAcLJ 322.
431
432
Ibid.
433
Footnote 43 explains why the American derivative suit relies on deterrence.
57
introduced the remedy as a measure aimed at directorial accountability. The two principles
underlying the adoption of derivative actions were compensation and deterrence. 434 The Japanese
derivative remedy remained relatively unused for the first three decades following its
introduction.435 The first Japanese derivative suit only arose in 1956, six years after its
institution.436 Between 1950 and 1985 about a mere twenty derivative suits were adjudicated upon
in Japan.437
However, the game-changer that revitalised Japanese derivative litigation was issued by the Tokyo
District Court in 1986 in the case of Mizuno v Ariyoshi (Mitsui Mining).438 In that case, the
defendant company, Mitsui Mining planned to acquire Mitsui Cement. The plan was opposed by
one of Mitsui Mining's shareholders who was of the opinion that his ownership interest in the
company would be diluted. In an effort to proceed with the acquisition, the management of Mitsui
Mining bought the dissenting shareholder's shares and sold them at a loss of ¥3.5 billion.439
Another shareholder brought a derivative action against the company. The court held the
management liable, finding that the loss resulted from the management's actions in violation of
Article 210 which prohibited corporate repurchase of shares.440 The court’s judgment in Mizuno v
Ariyoshi (Mitsui Mining)441 opened the floodgates of derivative litigation in Japan. By the end of
1992, Japan had thirty-one pending derivative suits whilst in 1993 the number rose to eighty-four
and to 145 in 1994.442
There were other domestic and international factors and reforms that influenced increased usage
of derivative litigation in Japan. First, the East Asian country introduced a lower fixed filing fee
434
Kawashima and Sakurai 1997 Stanford Journal of International Law 15. The remedy sought to compensate the
company by recovering from the directors the loss incurred to the company and also deter future misconduct by
the management.
435
Kawashima and Sakurai 1997 Stanford Journal of International Law 17; Shaowei 2019 China Legal Science
138 139; Siems “Private Enforcement of Directors’ Duties: Derivative Actions as a Global Phenomenon” 2012
7 available at: http://ssrn.com/abstract=1699353 (accessed 28-06-2018).
436
437
Ibid.
438
1194 Hanrei Jiho 33 1986.
439
Mizuno v Ariyoshi (Mitsui Mining) 1194 Hanrei Jiho 33 1986.
440
Ibid.
441
442
Kawashima and Sakurai 1997 Stanford Journal of International Law 18; Cooney 2003 Okla. City U. L. Rev 729
footnote 92; Shaowei 2019 China Legal Science 139.
58
for commencing a derivative action.443 According to Articles 4 and 8 of the Law Concerning Civil
Litigation Costs and other Matters,444 plaintiffs are required to purchase a number of revenue
stamps and affix them to their complaint.445 The number of stamps required was proportional to
the amount of recovery sought by the plaintiff.446 Consequently, filing fees barred plaintiffs from
instituting derivative actions that involved huge amounts. The plaintiffs were known to lower the
amounts involved in order to institute derivative claims.447 Before 1993, it was not clear “whether
filing fees in derivative suits should be calculated as a percentage of the amount of recovery sought
by the plaintiff or as a percentage of the fixed figure of ¥950,000”.448 For example, in a shareholder
derivative suit for the recovery of ¥1 billion, application of the former approach would result in
the plaintiff being required to buy ¥3,117,600 of revenue stamps. On the other hand, the adoption
of the latter method would only require the plaintiff to purchase ¥8,200 of revenue stamps. 449
Based on the 1993 reforms, the second approach, by which the plaintiff was required to pay a fixed
filing fee ¥8,200, was adopted.450
Another substantive change was the expansion of possible recovery for shareholders. 451 In terms
of the amended Article 268-272(1) of the Commercial Code,452 successful shareholders were
allowed to claim necessary costs incurred in the course of conducting a private investigation of the
case. This was an incentive to overburdened shareholders who were reluctant to commence
derivative actions due to the associated litigation costs. Additionally, Japan was under pressure
from the USA. The latter persistently encouraged the South East Asian state to make its economy
more transparent and one way of doing that was by strengthening shareholder rights through the
mechanism of derivative actions.453 In 2001, Japan’s corporate governance system underwent
443
Kawashima and Sakurai 1997 Stanford Journal of International Law 19; Cooney 2003 Okla. City U. L. Rev 729;
at: http://ssrn.com/abstract=1699353 (accessed 28-06-2018).
444
No. 40 of 1971 as amended by Law No. 82 of 1982.
445
446
Kawashima and Sakurai 1997 Stanford Journal of International Law 19; Cooney 2003 Okla. City U. L. Rev 729
footnote 90; and Eisen 2012 J. Japan L. 213.
447
For example, in Mizuno v Ariyoshi (Mitsui Mining) 1194 Hanrei Jiho 33 1986, the shareholder claimed only
¥100 million from the directors despite the corporation's alleged ¥3.5 billion in losses.
448
449
Ibid.
450
See Article 267(4) of the amended Code; Azai v Iwasaki (Nikko Securities) 121 Shiryoban Shouji Houmu 149
1994; Cooney 2003 Okla. City U. L. Rev 729; and Eisen 2012 J. Japan L. 213.
451
452
1899.
453
59
more reforms which resulted in the adoption of directors’ limited liability and improved derivative
litigation proceedings.454 These legislative reforms and judicial developments played a pivotal role
in making derivative actions the preferred remedy in shareholder protection and minority
protection cases in Japan.455
On May 1 2006, the Japanese Companies Act456 came into effect. The Act457 provides for
derivative actions in articles 847-853 under the term “An Action for Pursuing the Liability of a
Stock Company”. Unlike the Commercial Code,458 the Act departs from the Germanic and French
influence as it does not require the prospective complainant to own a minimum of ten percent of
the company’s shares.459 In 2014 there were some law reforms which led to the introduction of the
“comply or explain” rule into Japanese company law.460 It has to be noted that currently, proposals
for further reform of the Japanese Companies Act are at an advanced stage. The Japanese
Legislative Council (“hosei-shingi-kai”) has already submitted its final report to the Minister of
Justice.461 Some of the proposed reforms include the requirement for an outside director 462 which
is vital in contemporary corporate governance. Currently, Japan is second only to the USA in the
use, if not the largest user, of derivative litigation.463
2 6 4 Derivative actions in South Africa

Derivative actions are also part of South African law.464 This remedy used to be based on a
common law rule only but it has now been incorporated into legislation. 465 Mongalo states that
under the common law, for one to succeed with a claim based on the derivative action, s/he simply
had to prove that there had been fraud on the minority and that the wrongdoers were in control of
454
Fujita 2004 SAcLJ 324.
455
Puchniak and Nakahigashi “Japan's Love for Derivative Actions: Irrational Behavior and Non-Economic
Motives as Rational Explanations for Shareholder Litigation” 2012 Vand. J. Transnat'l L. 6.
456
86 of July 26 2005.
457
Ibid.
458
1899.
459
Article 847(1) of the Japanese Companies Act 86 of July 26 2005.
460
Goto and Matsumoto “The Upcoming Reform of the Japanese Companies Act” 2019 available at:
https://www.law.ox.ac.uk/business-law-blog/blog/2019/06/upcoming-reform-japanese-companies-act
(accessed 16-11-2019).
461
Ibid.
462
Ibid.
463
Puchniak and Nakahigashi “Japan’s Love for Derivative Actions: Irrational Behavior and Non-Economic
Motives as Rational Explanations for Shareholder Litigation” 2012 Vanderbilt Journal of Transnational Law 6.
464
See sections 266 – 268 of the Companies Act 61 of 1973 and section 165 of the Companies Act 71 of 2008; and
Davies et al Companies and other business structures in South Africa 3 ed (2013) 296.
465
See section 165 of the Companies Act 71 of 2008.
60
the company.466 This is similar to England’s common law requirements for the remedy.467
Mongalo further opines that the shortcomings of the common law derivative action led to the
Report of the Commission of Enquiry into South Africa’s company law468 recommending the
introduction of a statutory derivative action.469
Section 266 of the Companies Act470 has introduced a statutory derivative action into South Africa.
According to that section, “any member of the company may initiate proceedings on behalf of the
company against such director or officer or past director or officer in the manner prescribed by
this section”.471 The use of the word “member” may cause confusion seeing that close
corporations472 are the ones that have members but companies have shareholders. Although the
term is not defined in the Act, contextual usage seems to be referring to shareholders. Therefore,
any shareholder was eligible to institute derivative actions under the 1973 Act.
The nature of derivative proceedings under the 1973 Act was explained in the case of TWK
Agriculture Ltd v NCT Forestry Co-operative Ltd.473 The court acknowledged the general rule as
set out in Foss v Harbottle474 that since a company is a legal persona it is the proper plaintiff to
institute legal action for wrongs done to it.475 Relying on Burland v Earle,476 the court spelt out
466
(2003) 268 and Mongalo et al Forms of business enterprise: Theory, structure and operation (2004) 277-278.
See also Girvin et al Charlesworth’s company law 18 ed (2010) 513.
467
Davies et al Companies and other business structures in South Africa 3 ed (2013) 273 who acknowledge that
under the common law, the company was the proper plaintiff to institute proceedings for wrongs done to it. This
is the proper plaintiff rule in action.
468
1963 (hereinafter referred to as the Van Wyk De Fries Commission).
469
(2003) 272; Mongalo et al Forms of business enterprise: Theory, structure and operation (2004) 280-281.
Mongalo asserts that under common law, a stakeholder purporting to bring a derivative action against the
company would bear all the legal costs and also faced the problem of information asymmetry. See also Davies
et al Companies and other business structures in South Africa 3 ed (2013) 294.
470
61 of 1973.
471
See section 266(1).
472
A close corporation (CC) is an “easy to establish and operate” South African form of a business entity. A CC
has its own legal personality and perpetual succession. It has no share capital and therefore no shareholders. The
owners of a CC are the members. However, from the coming into effect of the Companies Act 71 of 2008 on 1
May 2011, no new CC can be registered and no conversion from a company to a CC is permissible. See
https://www.sars.gov.za/ClientSegments/Businesses/SmallBusinesses/StratingBusiness/Registering/Pages/Clos
e-Corporations-CC.aspx (accessed 19-01-2020).
473
2006 6 SA 20 (N).
474
1843 67 ER 189.
475
TWK Agriculture Ltd v NCT Forestry Co-operative Ltd 2006 6 SA 20 (N) para 9.
476
1902 AC 83 (PC).
61
the fraud on the minority exception to the rule.477 One of the questions before the court was whether
the common law derivative action was part of South African law. The court held that prior to the
introduction of the statutory derivative remedy in section 266 of the 1973 Act, the common law
doctrine and the exceptions to the proper plaintiff rule were applied by South African courts in the
context of companies and trade unions.478
Furthermore, the 1973 Act provided that derivative proceedings may be instituted
“notwithstanding that the company has in any way ratified or condoned any such wrong, breach
of trust or breach of faith or any act or omission relating thereto”. 479 According to this provision,
it did not matter whether the company had ratified or condoned the impugned conduct. The
legislature had probably learnt from the loopholes of the English common law approach in early
derivative remedy proceedings whereby sometimes the court would not decide on a dispute but
rather refer it back to the company if the impugned conduct was voidable at the instance of a
shareholders’ meeting. Under the said South African statute, the fact that the conduct complained
of was ratified by the majority shareholders did not prevent the courts from coming to the rescue
of the complainant. Accordingly, it can be argued that section 266 of the 1973 Companies Act
empowered minority shareholders and to a certain extent diluted the majority’s control. The 1973
Act, therefore, provided certainty as to the approach of the court with respect to the so-called
internal management decisions. The said Act allowed the court to be more interventionist in
corporate decisions by disregarding ratification and condonation of the impugned conduct.
Being sensitive to a dynamic corporate world480 and responding to some influential law reforms,481
South Africa enacted a new Companies Act in 2008.482 Cassim FHI et al opine that “the new Act
abolishes the common-law derivative action and institutes a new statutory regime to govern
477
478
479
Section 266(1) of the Companies Act 61 of 1973.
480
After having witnessed some of the worst corporate debacles which include LeisureNet and Regal Treasury
Bank, there was a need to reform South Africa’s corporate governance framework.
481
These include the Constitution of the Republic of South Africa, 1996, the Broad-Based Black Economic
Empowerment Act 53 of 2003 and the Promotion of Access to Information Act 2 of 2000. An elaborate
discussion of how these pieces of legislation influenced corporate law reform is outside the scope of this study
but one can refer to Esser “The Enlightened Shareholder Value Approach versus Pluralism in the Management
of Companies” 2005 Obiter 722-723; and Havenga “The Company, the Constitution, and the Stakeholders” 1997
Juta's Bus. L 134-135.
482
71 of 2008.
62
derivative actions”.483 However, Du Plessis disagrees with the above assertion and states that
“there is no indication in the new Companies Act 71 of 2008 that any of these judge-made rules
have been abolished or codified to any extent that would make them irrelevant or inapplicable in
the modern company law context in South Africa”.484 The Companies Act485 does not explicitly
state that it abolishes the common law derivative action. However, section 165 of the new South
African Companies Act486 can be taken as the authority for the abolition of the common law
derivative action.487 It is submitted in this study that section 165 of the Companies Act has indeed
abolished the common law derivative action in South Africa.
27 PRELIMINARY CONCLUSIONS
The discussion above presented a critical analysis of the origin, development and transplantation
of the derivative remedy from England to the USA, Japan and lastly South Africa. The chapter
commenced by looking at life before derivative actions. Firstly, it can be concluded that
representative litigation took two forms namely group litigation and class action. The original
tenets of representative litigation were the doctrine of necessity and the need to avoid a multiplicity
of suits which would automatically eliminate the possibility of inconsistent results. It was further
required that members who partook in group litigation should have identical interests. 488 In other
words, the plaintiffs should have suffered the same wrong.
One major weakness of group litigation was that all the interested members had to be parties to
the case. This proved difficult to manage in cases where the number of individuals who would
have suffered the same wrong was large. The elixir came with the introduction of class actions
according to which only a few individuals were chosen to represent the rest of the affected parties.
However, there was a further requirement that the affected parties give their consent to those who
483
Cassim FHI et al Contemporary company law 2 ed (2012) 778. The authors further submit that the common law
derivative action has been abolished in other common law jurisdictions such as Australia and England. Cassim
“The Statutory Derivative Action under the Companies Act of 2008: The Role of Good Faith” 2013 SALJ 508
also argues that the common law derivative action has been abolished by the new Act. See also Hendrikse and
Hefer Corporate governance handbook: Principles and practice 3 ed (2019) 371 and Henochsberg on the
Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 585.
484
Du Plessis 2010 SALJ 304-305.
485
71 of 2008.
486
71 of 2008. Section 165(1) states that “any right at common law of a person other than a company to bring or
prosecute any legal proceedings on behalf of that company is abolished, and the rights in this section are in
substitution for any such abolished right”.
487
See Cassim FHI et al Contemporary company law 2 ed (2012) 778.
488
63
would be representing the class. Gradually, the courts began to disregard the requirement of the
plaintiffs’ consent. Therefore, the only prerequisite for the institution of class actions came to be
that the complainants should have suffered the same injury. The practice crystallised and resulted
in the English Court of Chancery developing the necessary parties rule. This rule originated in
English feudal and partnerships law.
According to the necessary parties or proper parties rule, all the affected members, including the
company, were required to be joined as parties to the suit.489 However, an indiscriminate
application of the necessary parties rule would deny justice to the plaintiffs due to the absence of
some affected members. Consequently, in the interests of justice, the courts came up with
exceptions to the necessary parties rule. Some of these exceptions included convenience and the
impracticability of calling all the affected parties to become parties to a suit.
The next major breakthrough in the development of derivative actions was the introduction of
representative litigation involving corporate bodies. The main driver was shareholder activism
against management misconduct. Initially, the courts would not entertain the plaintiffs’ requests
where the complainant had at her/his disposal an effective internal remedy for mismanagement to
which they had neither resorted nor proved the futility thereof490 or where the conduct complained
of, though voidable, could still be ratified by a shareholders’ meeting.491 However, it was realised
that the courts could justifiably interfere where the available internal means of redress was
ineffective or the conduct complained of was unratifiable.492
The landmark case of Foss v Harbottle493 later transformed the legal landscape by introducing the
necessary parties rule and its exceptions into company law. In that celebrated case, the court held
that the company is the proper plaintiff for wrongs done to it since it is a legal entity separate from
its members which can sue and be sued in its name. Wigram VC’s dictum in that case coupled with
the decision in Mozley v Alston494 gave birth to the famous proper plaintiff rule. As expected, the
courts developed four exceptions to this rule.495 However, the only true exception to the proper
489
Ibid.
490
491
Smith v Croft (No 2) [1987] 3 All ER 937; Wedderburn 1957 Cambridge Law Journal 203.
492
Ibid.
493
1843 67 ER 189.
494
1847 1 Ph 790.
495
See part 2 5 above.
64
plaintiff rule pertains to fraudulent acts by the majority. Derivative actions then emerged in
England as an exception to the rule in Foss v Harbottle496 until they attracted legislative
attention.497
Colonies usually applied the law of their colonial masters. Such was the case with the
transplantation of the necessary parties rule and its exceptions from England to the USA. The
necessary parties rule and its exceptions were later applied with some modifications to derivative
claims. However, it is noteworthy that the derivative remedy in the USA was not an exact replica
of the English version.
Japan’s commercial law was heavily influenced by German and American law. Its modern
company law was modelled by the Japanese Commercial Code.498 However, the Code did not
provide for derivative suits until 1950 after some major company law reforms had taken place.
Some of the events which played a major role in the introduction of the derivative remedy include
the introduction of lower fixed filing fees, the decision of the Tokyo District Court in Mizuno v
Ariyoshi (Mitsui Mining),499 the expansion of possible recovery for shareholders in conducting a
private investigation and the authorisation of directors’ limited liability.
Lastly, it was found that, in South Africa, derivative remedies under the common law were similar
to England’s version. The 1973 Companies Act introduced a statutory derivative remedy which
was still much the same as its common law counterpart. However, section 165 of the 2008
Companies Act abolished the common law derivative remedy and ushered in a new statutory
regime.
496
1843 67 ER 189.
497
See Lowry and Reisburg Pettet’s company law: Company law and corporate governance 4 ed (2012) 242;
MacIntyre Business law 4 ed (2008) 597; McLaughlin Unlocking company law 2 ed (2013) 314 and sections 260
– 264 of the UK Companies Act 2006.
498
1899.
499
65
CHAPTER THREE
The enhanced accountability perspective
31 INTRODUCTION
As the assimilation of derivative litigation into other jurisdictions grew, a body of theoretical
underpinnings or justifications of the derivative remedy was also gradually developing. First, it
has been argued that derivative litigation is a vital corporate governance tool for internal dispute
resolution.500 It is desirable that “unwarranted interference with the internal management of
companies” is avoided and that directors are protected from “unreasonable interruption” of their
day to day business.501 In principle, shareholders have been taken to be the owners of a company
whilst directors perform managerial duties.502 However, when company interests have been
violated by or are vulnerable to self-interested directors, judicial interference through the
derivative action is justified. By so doing, derivative litigation provides the much-needed checks
and balances between directorial authority and accountability.503
Secondly, derivative litigation plays a critical role in securing compensation for corporate losses
or injuries.504 This is based on what has been termed the economic theory of derivative actions.
According to this theory, derivative actions “increase [the] net corporate value if the expected
benefits of the suit exceed[s] the manager’s gains from the violation plus the litigation costs borne
by the corporation”.505 The remedy protects the interests of the company for the benefit of all
shareholders.506 Although the company is the proper plaintiff for wrongs done to it,507 in instances
500
Ramsay and Saunders “Litigation by Shareholders and Directors: An Empirical Study of the Statutory Derivative
Action” 2006 Journal of Corporate Law Studies 397 414. Cassim MF “The Statutory Derivative Action under
the Companies Act of 2008: The Role of Good Faith” 2013 The South African Law Journal 496 516.
501
502
Davies and Worthington Gower’s principles of modern company law 10 ed (2016) 40; Cassim R 2019
Fundamina 40; Millstein et al “Fiduciary Duties of Corporate Directors in Uncertain Times” 2018 Journal of
Applied Corporate Finance 17 18; Seitz Jr. and Sirkin “The Demand Review Committee: How It Works, and
How It Could Work Better” 2018 The Business Lawyer 305 306; Sahu 2017 International Journal of Law 101.
However, in practice, this distinction is not so clear as there is considerable overlap. For example, one can be
both a director and a shareholder of the same company concurrently.
503
Cassim MF 2013 The South African Law Journal 505; Cassim FHI et al Contemporary Company Law 2 ed
(2012) 777; Hamadziripi 2018 Journal of Corporate and Commercial Law & Practice 75.
504
Ramsay 2006 Centre for Corporate Law and Securities Regulation University of Melbourne 16-17.
505
Pardow “The Economic Theory of Derivative Actions” 2011 10 available at http://ssrn.com/abstract=1941209
(accessed 25-04-2020).
506
Ramsay 2006 Centre for Corporate Law and Securities Regulation University of Melbourne 17.
507
Asian Journal of Comparative Law 281 281; Shaowei “How Could Derivative Action Work in China: The
66
where those managing the company are unwilling or unable to enforce its rights, derivative
litigation becomes vital.508 The proper plaintiff rule may, therefore, result in injustice and inequity
and raise the potential for abuse of power where “the wrongdoers who commit a wrong against the
company are the directors themselves”.509
Third, derivative litigation is also intended to ensure and promote directorial accountability. Of the
three mentioned uses of derivative litigation, this is the primary function of the remedy. 510 The
separation of ownership and control511 presents shareholders with the problem of potentially
encouraging “the misuse of company resources by some directors for their own benefit”.512 In the
words of Griggs, derivative litigation acts as a form of “corporate watchdog, to pursue an action
against a wrongdoer, when the board refuses to act”.513 However, traditionally, the context in
which managerial accountability has been discussed has generally been limited to shareholders’
interests. Unfortunately, this has led to the following undesired outcomes. First, the traditional
approach assumes that shareholders will monitor the management for the maximisation of their
investments’ value.514 However, in practice, this monitoring/oversight role may only be played
effectively by institutional shareholders because of their large shareholdings. 515 Secondly,
commenting on the 2008 Global Financial Crisis and worldwide corporate scandals that have
occurred in the past 30 years, Hummel et al assert that theories and ideas that “neglect the ethical
and moral dimensions of decision-making” and whose sole focus is profit maximisation “engender
moral misbehaviour”.516 Unethical behaviour has been cited as the number one cause of corporate
Funding Issue” 2019 China Legal Science 138 140; Erickson “The Gatekeepers of Shareholder Litigation” 2017
Oklahoma Law Review 237 264.
508
509
Cassim MF 2013 The South African Law Journal 499; Hamadziripi “Judicial Construction of the Requirement
of Good Faith in Section 165(5)(b) of the Companies Act 71 of 2008” 2018 Journal of Corporate and
Commercial Law & Practice 74 74.
510
511
For a historical account of this principle see Cassim R “The Power to Remove Company Directors from Office:
Historical and Philosophical Roots” 2019 Fundamina 37 39-46.
512
Ramsay 2006 Centre for Corporate Law and Securities Regulation University of Melbourne 16; Hamadziripi
“Judicial Construction of the Requirement of Good Faith in Section 165(5)(b) of the Companies Act 71 of 2008”
2018 Journal of Corporate and Commercial Law & Practice 74 74.
513
Griggs “The Statutory Derivative Action: Lessons that May be Learnt from its Past!” 2002 University of Western
Sydney Law Review 63 64 as quoted by Ramsay 2006 Centre for Corporate Law and Securities Regulation
University of Melbourne 16.
514
Birkmose “Forcing Shareholder Engagement – Theoretical Underpinning and Political Ambitions” 2018
European Business Law Review 613 625.
515
Birkmose 2018 European Business Law Review 626.
516
Hummel et al “Does Economics and Business Education Wash Away Moral Judgment Competence?” 2018
Journal of Business Ethics 559 559.
67
fraud in contemporary company law.517 Clearly, the traditional accountability approach has failed
to address contemporary company law problems. To that end, this study will critically examine
derivative litigation from an enhanced accountability perspective. The facets and underlying policy
rationales of that perspective are discussed below.
The underlying theory posits that if derivative actions are a vital tool in ensuring good corporate
governance then its policy objectives must be sensitive to the interests of all company stakeholders.
There are two main underlying themes at the core of this enhanced accountability perspective.
First, the procedural and substantive requirements for invoking the remedy must not be so onerous
as to render the remedy ineffective. At the same time, the said requirements must not be so easy
to comply with that the remedy becomes susceptible to being abused by mischievous applicants
seeking to bring frivolous, vexatious and strike suits. Secondly, directorial misconduct does not
only affect minority shareholders, but the company as a business entity and, as such, the remedy
must be available to all stakeholders acting in the best interests of the company.
32 THE CONCEPT OF ACCOUNTABILITY
According to Black’s Law Dictionary, accountability means the state of being responsible or
answerable.518 The Merriam-Webster Dictionary defines the same concept as “an obligation or
willingness to accept responsibility or to account for one's actions”.519 Board accountability is a
key feature of any efficient regime of corporate governance. 520 It is viewed as an indispensable
element of corporate governance that promotes “good governance behaviour and market trust”.521
A lack of directorial accountability can “create a perception that trust destroying behaviour can be
engaged in with impunity, and thus deter participation in the market”.522 It is widely believed that
“good corporate governance is best achieved by holding directors accountable for their behaviour
517
Salin et al “The Role of Islamic Ethics to Prevent Corporate Fraud” 2017 International Journal of Business and
Society 113 116; Abugu “The Monster Theory: Setting the Boundary for Corporate Financial Malpractice” An
Inaugural Lecture delivered at the University of Lagos 2015 10; Hendrikse and Hefer Corporate governance
handbook: Principles and practice 3 ed (2019) 86-87.
518
Garner et al Black's Law Dictionary 8 ed 2004 55.
519
https://www.merriam-webster.com/dictionary/accountability (accessed 25-04-2020).
520
Keay “An Analytical Study of Board Accountability in Transnational Codes of Corporate Governance” 2017
available at https://link.springer.com/chapter/10.1007/978-3-319-51868-8_6 (accessed 25-04-2020).
521
Keay et al “Business judgment and director accountability: a study of case-law over time” 2019 Journal of
Corporate Law Studies 1 2.
522
Keay et al 2019 Journal of Corporate Law Studies 5.
68
and decisions”.523 If directors are not held accountable then the enforcement of their duties
becomes complicated.524 Following the GFC, there has been amplified calls by both policy makers
and politicians to increase “directorial accountability before the courts and regulators for decisions
that may be misjudgments rather than misconduct”.525 Failure to review business judgments can
potentially weaken the “utility of litigation to promote accountability”.526 According to the
Cadbury Report, “(t)he issue for corporate governance is how to strengthen the accountability of
boards of directors to shareholders”.527 The need for accountability basically emanates from
agency problems528 arising from the separation of ownership and control.529 Accountability has
also been associated with power.530 It has been argued that accountability is a prerequisite that acts
“as an exchange for the grant of authority. The essential rationale for board accountability is said
by many to enable boards to have legitimacy in relation to the exercise of the power they have”.531
33 THE ENHANCED ACCOUNTABILITY PERSPECTIVE OF DERIVATIVE

ACTIONS
The perspective is all about birthing a novel derivative litigation scheme whose requirements are
neither too onerous lest the remedy becomes an access barrier to justice nor too flexible lest the
remedy be readily prone to abuse. The enhanced accountability perspective seeks to “minimise the
possibility of managerial abuse while maximising the efficiencies of managerial autonomy”. 532
The perspective is constructed and adopted in this thesis to offer a contemporary solution to
523
Keay “An Analytical Study of Board Accountability in Transnational Codes of Corporate Governance” 2017
available at https://link.springer.com/chapter/10.1007/978-3-319-51868-8_6 (accessed 25-04-2020).
524
Ibid.
525
Keay et al “Business judgment and director accountability: a study of case-law over time” 2019 Journal of
526
527
Report of the Committee on the Financial Aspects of Corporate Governance under the chairmanship of Sir
Adrian Cadbury 1992 para 6.1 as cited by Keay et al “Business judgment and director accountability: a study of
case-law over time” 2019 Journal of Corporate Law Studies 4.
528
In the context of a company, shareholders are the principals and directors are the agents. Shareholders expect
directors to conduct themselves in a way that maximises return on their investment. However, in practice
directors may act contrary to shareholders’ wishes and maximise their personal wealth. The divergence in these
interests results in three types of agency costs namely monitoring, bonding and residual loss. See Jensen and
Meckling “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” 1976 Journal of
Financial Economics 305;
529
530
Licht “Accountability and Corporate Governance” 2002 available on
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=328401 as cited by Keay et al 2019 Journal of Corporate
Law Studies 5.
531
Keay et al 2019 Journal of Corporate Law Studies 4-5.
532
Bird and Park “Organic Corporate Governance” 2018 Boston College Law Review 29.
69
modern-day corporate woes. A critical aspect of the proposed perspective is the infusion of moral
and ethical consciousness into directorial decision-making.533
It has been argued that a lack of directorial accountability and information asymmetry are some of
the major causes of weakness in any system of corporate governance.534 Directorial accountability
is essential for the protection of investor funds.535 As posited by Keay, board accountability has
four stages. The first stage, which can be summarised as the disclosure stage, entails “the board
providing accurate information concerning its decisions and actions so that those to whom the
account is being given are informed as to what has been done”.536 The second stage, which has
been generally seen as the pre-eminent aspect of accountability in most literature “involves a board
explaining and justifying its actions, omissions, risks, and dependencies for which it is
responsible”.537 It is submitted that in South Africa, these first two stages of Keay’s definition of
accountability are captured in the “apply and explain” approach of the King IV Report on
Corporate Governance for South Africa.538 The third stage is constituted by “the questioning and
evaluating of the reasons provided by the board for what it has done [which] allows for analysis
of the actions of boards”.539 The final stage is “the possibility, but not the requirement, of the
imposition of consequences”.540 This is the definition of accountability that will be adopted for the
533
Corporate ethical obligations demand that “companies have a duty not to harm others and to comply with relevant
legislation”. See Wiese Corporate governance in South Africa with international comparisons 2 ed (2016) 123.
In practice, corporate ethical strategy is reduced into company policy which manifests as a code of conduct that
acts as “an ethical standard for conduct by the board, management and [employees]”.
534
Madhani “Diverse Roles of Corporate Board: Review of Various Corporate Governance Theories” 2017 The
IUP Journal of Corporate Governance 3.
535
Hafeez “An Analysis of Asian and Western Corporate Governance Systems: Theoretical and Operational
Concerns” 2014 South East Asia Journal of Contemporary Business, Economics and Law 4; Ramsay 2006
Centre for Corporate Law and Securities Regulation University of Melbourne 16.
536
Keay “Board Accountability and the Entity Maximization and Sustainability Approach” 3 available at
http://ssrn.com/abstract=2747398 (accessed 20-11-2019). See also Hendrikse and Hefer Corporate governance
handbook: Principles and practice 3 ed (2019) 14.
537
Ibid.
538
The King IV Report is a set of voluntary code of corporate governance principles and leading practices. It has
not statutory force. See Loubser et al Company secretarial practice Revision service 2 2018 7-2; Cassim FHI et
al Contemporary company law 2 ed (2012) 473-474 and Hendrikse and Hefer Corporate governance handbook:
Principles and practice 3 ed (2019) 207. However, it must be noted that the King IV Report is binding on all
listed companies. Paragraph 3.84 of the JSE Listings Requirements available at
https://www.jse.co.za/content/JSESpecificationsItems/Guidelines%20to%20Listing%20on%20the%20JSE.pdf
accessed 06-07-2020) states that “[t]he effect of incorporating certain practices from the King Code in the
Listings Requirements is to make their implementation mandatory, this is notwithstanding the fact that
application of the corporate governance practices in the King Code is generally voluntary”.
539
540
Ibid.
70
purposes of this study because it is one that comes closest in attempting to highlight what the study
seeks to establish. However, the said definition falls short in respect of other key aspects of the
enhanced accountability perspective as envisaged in this study. These aspects include morals and
ethics and will be discussed in greater detail below.
Figure 2: Derivative Actions in the Enhanced Accountability Perspective
71
34 FACETS OF THE ENHANCED ACCOUNTABILITY PERSPECTIVE
3 4 1 Moral and ethical consciousness
The concept of accountability should not always resonate with punishment.541 In essence, board
accountability is basically about the relationship between directors and other stakeholders. Like
most relationships involving legal subjects, moral542 and ethical543 concerns should not be ignored.
In the words of Licht, accountability “mainly reflects a blend of ethical responsibility, either moral
or professional”.544 In a study that was conducted using a sample of banks from 15 jurisdictions,
it was found that there is a correlation between company ethics and management behaviour. 545 It
was also found that Islamic bank managers behaved more ethically than their counterparts in
commercial banks. The main distinguishing feature that might have had a direct impact on the
outcome of the said study is that Islamic banks incorporated Shariah supervisory boards (SSB).546
In the enhanced accountability perspective, although it might not be feasible that religion plays
such an influential role in shaping directors’ behaviour, it is submitted that promotion and
enforcement of company ethics and professional morals can assist in curbing directorial
misconduct.
Company directors, like any other human beings, are influenced by ethical codes of their
communities.547 Therefore, directors need not divorce their moral and ethical responsibilities from
the decision-making process especially when deciding whether or not to commence litigation after
541
The idea of inflicting punishment upon the wrongdoers in the name of accountability is part of the political
rhetoric employed by most politicians around the globe. For example, George W Bush, then USA President,
once stated amid the Enron-Worldcom corporate debacles that the Justice Department was going to hold
accountable everyone involved in wrongdoing. He further warned that there was going to be “consequences” for
the wrongdoers. See Bumiller Bush Issues Call for Honest in Corporate America New York Times June 29 2002
as quoted in Licht “Accountability and corporate governance: A cross-cultural perspective” 5 available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=328401 (accessed 19-11-2019).
542
Garner et al Black’s law dictionary 8 ed (2004) 1030 define moral law to mean “a collection of principles
defining right and wrong conduct; a standard to which an action must conform to be right or virtuous”.
543
Garner et al Black’s law dictionary 8 ed (2004) 592 state that ethical conduct conforms to “moral norms or
standards of professional conduct”.
544
Licht “Accountability and Corporate Governance: A cross-cultural perspective” 5 available at
545
Quttainah and Almutairi “Corporate ethics: Evidence from Islamic banks” 2017 Journal of Management
Governance 815 815.
546
An SSB refers to a “second” board, besides the board of directors, that issues religious rulings based Islamic
jurisprudence. These rulings have to be endorsed by the board of directors for proper implementation. Clearly,
SSBs function in two-tier board systems. See Quttainah and Almutairi 2017 Journal of Management Governance
816.
547
Quttainah and Almutairi 2017 Journal of Management Governance 560. The co-authors assert that: “If we treat
managers as financially self-interested automatons who must be lured by the carrot of stock options and beaten
with the stick of corporate governance, that attitude will become self-fulfilling”.
72
receiving a demand. Corporate scandals that have occurred especially in the last 30 years are
indicative of the fact that “the external regulatory mechanism is less effective to prevent or, at a
minimum, to reduce corporate fraud and scandals. [P]eople need to emphasise the basics of the
human ‘internal’ regulatory mechanisms: morality and ethics”.548 Therefore, it is submitted that
moral and ethical conscience will better align directorial and stakeholder interests in derivative
litigation.
3 4 2 Stakeholder sensitivity
The enhanced accountability perspective assumes that the derivative remedy would be made
available to all victims of directorial misconduct. “[A]ll those who have effectively invested in the
company should be entitled to take action to safeguard the wealth of the company in which they
have a potential distinct interest”.549 Directorial misconduct does not only affect minority
shareholders, but the company as a business entity and, as such, the remedy must be available to
all stakeholders acting in the best interests of the company. This clearly departs from the
traditionally held view that the remedy is generally invoked by minority shareholders.
A stakeholder is any party that has an interest in the activities of a company. 550 Traditional
corporate governance approaches have been modelled around shareholders’ interests namely,
profit maximisation. However, a company is made up of more than shareholders.551 The mere fact
that there are other stakeholders who also contribute to the sustainability of a company invites one
to question the validity of the traditional shareholder primacy view.552 Some of the company
stakeholders include creditors, employees and the government. It has been claimed that the
548
Salin et al 2017 International Journal of Business and Society 120.
549
550
Benn et al “Defining and identifying stakeholders: Views from management and stakeholders” 2016 S. Afr. J.
Bus. Manage. 1.
551
Macey and Miller “Corporate Stakeholders: A Contractual Perspective” 1993 University of Toronto Law Journal
401; Esser and Du Plessis “The Stakeholder Debate and Directors’ Fiduciary Duties” 2007 19 SA Merc L.J. 346
also insist that “there is, however, a shift in public opinion with regards to consideration of a wider variety of
interests than only those of the shareholders”. Esser and Du Plessis “The Stakeholder Debate and Directors’
Fiduciary Duties” 2007 19 SA Merc LJ 360 point out that “a company is represented by many interests”. See
also Dodd “For Whom Are Corporate Managers Trustees?” 1932 Harvard Law Review 1153-1154. As held in S
v Makwanyane 1995 3 SA 391 (CC) public opinion does not form the law but the law may take into account
public interests.
552
The shareholder approach is founded on the traditional view that “the company” means shareholders and
therefore the company’s interests must necessarily translate to shareholders’ interests. See Greenhalgh v Ardene
Cinemas Ltd 1951 291 (Ch); Nwafor “The Shifting Responsibilities of Company Directors – How Desirable in
Modern Times” 2012 Macquarie J. Bus. L 160.
73
traditional shareholder primacy approach was conceived during a period when companies’ human
rights obligations were still developing,553 hence the inclination towards investor protection.
However, the approach is inherently flawed in that shareholders cannot be regarded as a unified
group who have common interests throughout all the time the company is in existence. That is
why it is generally difficult to have unanimous decisions during shareholder voting.554
Creditors also provide capital to a company. A creditor is any individual or company to whom
money is owing.555 Nwafor, a notable company law scholar, explains that the meaning of the word
“creditors” should “not [be] restricted to those who have present claims against the company, but
extends to prospective creditors having future claims against it”.556 There are secured and
unsecured creditors. Unsecured creditors are interested in the company’s business as they see it as
a credit risk.557 Lin says “creditors have fixed claims against the corporation that entitle them to
receive a pre-determined rate of interest and repayment of their principal at a specified maturity
date”.558 Creditors’ interests have not been uniformly addressed through derivative actions. There
are some jurisdictional differences in approach. In South Africa, creditors may be awarded
derivative locus standi by virtue of section 165(2)(d) of the Companies Act. However, most
common law jurisdictions only award derivative standing to shareholders.559
The enhanced accountability perspective does not seek to extend directors’ fiduciary duties to all
stakeholders. The perspective essentially seeks to afford all the victims of directorial misconduct
a chance to hold miscreant official accountable. For example, there are a lot of challenges in
constructing directors’ fiduciary obligations to creditors. The first issue is whether such a duty is
a direct or an indirect obligation.560 A look at the UK’s case law reveals that courts have been more
553
Ramnath and Nmehielle “Interpreting Directors’ Fiduciary Duty to Act in the Company’s Best Interests through
the Prism of the Bill of Rights: Taking Other Stakeholders into Consideration” 2013 Speculum Juris 105.
554
For example, section 65(7) and (9) state that “for an ordinary resolution to be approved by shareholders, it must
be supported by more than 50 percent of the voting rights exercised on the resolution. For a special resolution to
be approved by shareholders, it must be supported by at least 75 percent of the voting rights exercised on the
resolution”.
555
Kavanagh et al South African Concise Oxford Dictionary (2002) 271.
556
Nwafor “Fraudulent Trading and the Protection of Company Creditors: the Current Trend in Company
Legislation and Judicial Attitude” 2013 Comm. L. World Rev 312.
557
Esser and Du Plessis “The Stakeholder Debate and Directors’ Fiduciary Duties” 2007 19 SA Merc LJ 346.
558
Lin “Shift of Fiduciary Duty upon Corporate Insolvency: Proper Scope of Directors' Duty to Creditors” 1993
Vanderbilt Law Review 1488.
559
For example the UK and the USA.
560
Skene “The Directors’ Duty to the Creditors of a Financially Distressed Company: A Perspective from across
the Pond” 2007 Journal of Business and Technology Law 3. The same scholar explains that an independent duty
74
inclined to an indirect duty.561 In Yukong Lines of Korea v Rendsberg Investment Corp of Liberia
(No2)562 the court rejected a direct duty and held that “a director does not owe a direct fiduciary
duty to an individual creditor, nor is an individual creditor entitled to sue for breach of the fiduciary
duty owed by the director to the company”.563
Another challenge with the extension of a fiduciary duty to creditors relates to who the creditors
are.564 As highlighted above, directors’ fiduciary duties to the company require them to consider
both present and future shareholders. The question is does a duty to creditors analogically cover
present and future creditors’ interests? Skene compounds the issue by adding that “creditors are
not a homogeneous group, current and future creditors’ interests may conflict, and does the duty
apply to unsecured creditors only or ‘general creditors’?”565 Furthermore, case law reveals some
inconsistencies on whether “creditors are entitled to exclusive consideration”.566 It is also not clear
whether a subjective or objective test applies and when the duty arises.567
is one whereby directors report directly to the creditors. The effect of this is that creditors can therefore enforce
it on directors. An indirect duty is one owed to the company and only the latter can enforce it against the directors.
561
the Pond” 2007 Journal of Business and Technology Law 3.
562
1998 1 WLR 294.
563
Yukong Lines of Korea v Rendsberg Investment Corp of Liberia (No2) 1998 1 WLR 294.
564
the Pond” 2007 Journal of Business and Technology Law 4 and Sealy “Directors' ‘Wider’ Responsibilities –
Problems Conceptual, Practical and Procedural” 1987 Monash University LR 178.
565
the Pond” 2007 Journal of Business and Technology Law 5.
566
See Kinsela v Russell Kinsela 1986 4 NSWLR 722; Brady v Brady 1988 20 BCLC and Walker v Wimborne 1976
137 CLR.
567
the Pond” 2007 Journal of Business and Technology Law 5; Keay “The Director's Duty to Take into Account
the Interests of Company Creditors: When is it Triggered?” 2001 Melbourne University Law Review 322-329
claims that the concept of insolvency is ambiguous and also lists some factors that are considered when deciding
what triggers the duty at 331-334. The same author also points out that it is not clear whether the duty should be
recognised at near insolvency, or in the vicinity of insolvency, at doubtful solvency, at risk of insolvency or at
financial instability. However, Sealy “Directors' ‘Wider’ Responsibilities – Problems Conceptual, Practical and
Procedural” 1987 Monash University Law Review 179 questions the relevance of insolvency in deciding whether
directors owe any duties to creditors. For more on arguments against the enlargement of directors fiduciary
obligations, see Rousseau “The Duties of Directors of Financially Distressed Corporations: A Quebec
Perspective on the Peoples Case” 2004 Canadian Business Law Journal 382 and 390. With respect to
characteristics of decisions in which directors were held to a fiduciary duty to creditors, see Lin “Shift of
Fiduciary Duty upon Corporate Insolvency: Proper Scope of Directors' Duty to Creditors” 1993 Vanderbilt Law
Review 1513 and Sealy “Directors' ‘Wider’ Responsibilities – Problems Conceptual, Practical and Procedural”
1987 Monash University Law Review 171-172.
75
Another group of stakeholders is employees. Employees’ interests in a company are basically
founded on job security.568 At common law, directors did not owe any fiduciary obligations to a
company’s employees.569 Section 172(1) of the UK Companies Act570 provides that employees’
interests be considered when directors act to ensure the success of the company. However, Esser
is of the view that the purpose of section 172(1) of the UK Companies Act571 is “to create an
awareness of the other interests that need to be considered as opposed to creating a direct duty”.572
Some are of the opinion that since employees’ interests are protected by different statutes and
contracts, it is not necessary to create direct directors’ duties towards them. Therefore, under the
common law, directors did not owe any fiduciary obligations to employees and although section
172 of the UK Companies Act573 requires directors to consider employees’ interests it is not certain
if that section was intended to create a direct fiduciary duty towards employees.
In South Africa, section 165(2)(d) of the 2008 Act extends derivative standing to anyone who has
been granted leave of the court to do so, which may be granted only if the court is satisfied that it
is necessary or expedient to do so to protect a legal right of that other person. This is a plausible
legislative provision which on the face of it advances directorial accountability. However, in this
study the said provision will be interrogated in the lens of the other aspects of the enhanced
accountability perspective to determine the practical effect of section 165(2)(d) of the Act.
Furthermore, the provision of section 72(4) of the South African Companies Act574 strengthens the
view that a broad interpretation of section 76 includes other non-shareholder stakeholders. Section
72(4) of the Companies Act provides that the minister, by regulation, may prescribe a category of
companies that must each have a social and ethics committee, if it is desirable in the public interest.
According to Regulation 43(1)(a), these companies include all the state owned companies and
listed public companies.575 According to regulation 43(5)(a) of the Companies Regulations, the
functions of the Social and Ethics Committee include “good corporate citizenship, labour and
568
Esser “The Enlightened Shareholder Value Approach versus Plurism in the Management of Companies” 2005
Obiter 720.
569
Farrar and Hannigan Farrar’s Company Law 4 ed (1998) 385.
570
2006.
571
Ibid.
572
Esser Recognition of Various Stakeholder Interests in Company Management (Unpublished LLD-thesis,
University of South Africa, 2008) 63.
573
2006.
574
71 of 2008.
575
Companies Regulations 2011 51.
76
employment [issues], social and economic development, the environment, health and public safety,
including the impact of the company’s activities and of its products or services”.576
3 4 3 Responsible management
The purpose of responsible corporate management is not for the courts to usurp directors’ decision
not to act on the demand.577 Enhanced accountability is about balancing the rights and
responsibilities of directors and other stakeholders including minority shareholders. Company
interests have pre-eminence. While directors’ conduct needs to be regulated to avoid abuse of
power,578 there is also a need to allow for flexibility in corporate decision-making processes as
rigidity will stifle innovation and responsible risk-taking, two vital ingredients for success in
today’s dynamic world of commerce. In the enhanced accountability perspective, responsible
management is enforced through reducing information asymmetry.
Information asymmetry579 is a major barrier to stakeholders’ invocation of derivative suits in other

jurisdictions.580 One of the major criticisms about the UK’s prima facie test is that it is too onerous
as the shareholder suffers from information asymmetry.581 A plaintiff’s ability to efficiently access
accurate information about her or his case is very important in all forms of litigation.582 In the
USA, lack of access to the relevant information required may lead to a plaintiff who might have a
576
Companies Regulations 2011 51-52.
577
578
Bainbridge “The Business Judgment Rule as Abstention Doctrine” 2004 Vand. L. Rev 85.
579
and the U.S” 2019 Vanderbilt Journal of Transnational Law available at https://ssrn.com/abstract=3440857
(accessed 28-10-2019) explain that shareholder access to company documents allows them to obtain relevant
information “to monitor the company’s performance, evaluate the company’s financial status, and determine
whether and how to take proper action”. See also a discussion in the context of South Africa by Cassim MF The
new derivative action under the Companies Act: Guidelines for judicial discretion (2016) 167-169.
580
Asian Journal of Comparative Law 283; Mukwiri and Siems 2014 Journal of Law and Society 54 while making
reference to Tomasic and Akinbami “Towards a New Corporate Governance After the Global Financial Crisis”
2011a International Company and Commercial Law Rev. 248-249; Gelter “Mapping Types of Shareholder
Lawsuits across Jurisdictions” 2017 ECGI Working Paper Series in Law 30 available at:
https://ssrn.com/abstract=3011444 (accessed 21-11-2019). With respect to South Africa, Cassim MF The new
derivative action under the Companies Act: Guidelines for judicial discretion (2016) 168 also narrates the
challenges that a prospective applicant may face in trying to invoke section 165(4) of the Act as a channel for
access to company information.
581
582
77
potentially meritorious action failing to meet the verification standard required by Rule 23.1. 583
Derivative proceedings are a very unique form of litigation. Information asymmetries exist not
only between the plaintiff and defendant, but also between the “two plaintiffs” which are, the
shareholder seeking to sue derivatively and the company that possesses the legal right to claim.584
More so, in general, omissions in the plaintiff’s pleadings which may potentially undermine her/his
demand futility claim cannot be rehabilitated through discoveries.585 Therefore, it is argued in line
with the enhanced accountability perspective that the burden of proof should shift to the party that
possesses or has access to the relevant information. On the other hand, the shareholders’ right of
inspection must be subject to an internal limit where the judiciary exercises its discretion to balance
the shareholders’ rights and those of the company.586
3 4 4 Equilibrium in substantive and procedural requirements

The substantive and procedural requirements of any shareholder remedy ought not to defeat the
main purpose for which most business entities in capitalist economies are formed, namely profit
maximisation through risk-taking. Consequently, the design of a sensible derivative litigation
framework requires striking a balance between accountability and authority. On the one hand, both
the procedural and substantive requirements of derivative claims must not be too onerous and rigid
lest meritorious claims go unaddressed. Also, a weak derivative litigation framework undermines
directorial business judgment and may potentially fail to provide the relevant filter against
vexatious and unmeritorious suits.
For those jurisdictions that employ the demand requirement, according to the enhanced
accountability perspective, such a requirement must neither be too onerous nor too flexible. As
will become clear later, an onerous demand requirement arbitrarily restricts access to justice587 and
does not promote directorial accountability. A demand requirement that is too flexible is
vulnerable to abuse by mischievous complainants. In their extreme end, overly flexible demand
requirements become ineffective in filtering vexatious and frivolous applications and strike
583
Coffee Jr. and Schwartz 1981 Columbia L. Rev. 315. Baum and Puchniak “The derivative action: An economic,
historical and practice-oriented approach” in Puchniak et al (eds) The derivative action in Asia: A comparative
and functional approach (2012) 43.
584
585
586
Ibid.
587
The USA.
78
suits.588 Consequently, neither extremely onerous nor overly flexible demand requirements
enhance derivative litigation as a useful corporate governance too in addressing contemporary
company law problems. The enhanced accountability seeks to define and circumscribe an
equilibrium demand requirement.
Another internal filtering mechanism for derivative litigation is judicial discretion. 589 The role of
the court in derivative litigation varies per jurisdiction depending on the nature of a derivative
litigation regime adopted. For example, in the UK, the courts play a gatekeeping role 590 early in
the litigation process since the UK has opted for a prima facie test591 instead of a formal demand
requirement. For South Africa, courts are usually involved when determining whether the
applicant is acting in good faith; the proposed or continuing proceedings involve the trial of a
serious question of material consequence to the company; and it is in the best interests of the
company that the applicant be granted leave to commence the proposed proceedings or continue
the proceedings, as the case may be.592 However, South African courts may also exercise their
discretion in terms of section 165(2)(d) and section 165(4)(b). In the USA, courts usually exercise
their discretion when considering whether the Special Litigation Committees were independent
and disinterested.593 Being a civil jurisdiction, Japanese courts play a rather unique role. The role
of the judiciary is usually to interpret legislation and determine how the statutory provisions ought
to be applied in given circumstances.594 However, such judicial interpretations do not constitute
legally binding precedents.595 However, as shall become clear later, regardless of the nature of a
jurisdiction’s derivative remedy, the enhanced accountability perspective calls for the restriction
on judicial discretion in certain instances.
588
Section 165(3) of the South African Companies Act provides that “a company that has been served with a
demand in terms of subsection (2) may apply within 15 business days to a court to set aside the demand only on
the grounds that it is frivolous, vexatious or without merit”.
589
SALJ 496 496; Cassim FHI et al Contemporary company law 2 ed (2012) 777.
590
591
Section 261(2) of the UK Companies Act 2006.
592
Section 165(5)(b) of the Companies Act.
593
Melton v Blau 2004 WL 2095317 (Conn. Super. Ct. Aug. 26 2004) 6.
594
Beyer VL 1993 Bond Law Review 211.
595
Ibid.
79
Generally, the business judgment rule has been employed as a defence to allegations of directorial
misconduct.596 However, the directors’ power to company decision-making includes the
prerogative to decide whether or not to commence litigation in the name and/or on behalf of the
company.597 As such, directors may reject an applicant demand to commence litigation for conduct
that would have been injurious to the company on commercial reasons. There is a real risk of
abusing this prerogative if it is not questioned or checked. On the other hand, directorial decision-
making discretion ought not to be interfered with arbitrarily. As held in Brehm v Eisner,598 “if
judges failed to respect the decisions of directors made in good faith, this would have the effect
that the courts would become super directors measuring matters of degree in business decision
making and executive compensation”.599 Therefore, the enhanced accountability perspective seeks
to define a BJR that is neither too restrictive nor too flexible.
3 4 5 Internal limitations to avoid multiplicity of suits

As a measure against the possible multiplicity of litigation, it is important that internal limitations
are injected as part of the procedural requirements of derivative litigation. The internal limitations
should be incorporated to determine:
 any prospective applicant/plaintiff’s standing requirements,

 the time for serving the demand on the board of directors,
 to determine the applicability of any possible defences like the business judgment rule; and
ultimately
 when the court exercises its discretion.
Furthermore, to curb the possibility of multiple actions, it is also required under the enhanced
accountability perspective that once a demand has been served on the board, this has to be
communicated.
596
MacIntosh “Directors’ duties in Canada: Paintings in a stream?” in Paolini (ed) Research handbook on directors’
duties: Research handbooks in corporate law and governance (2016) 61. See also Rukmono “Some Problems
in the Implementation of the Business Judgment Rule Principles to the Directors of State-Owned Enterprises in
Indonesia” 2019 Advances in Social Science, Education and Humanities Research 233 233; Pente Investment
Management Ltd v Schneider Corp. (1998) 42 O.R (3d) 177 and BCE Inc. v 1976 Debentureholders 2008 S.C.J
No. 37.
597
Cassim MF 2013 South African Mercantile Law Journal 310; Mitchell and Hobbs (UK) Ltd v Mill [1996] 2
BCLC 102; Fusion Interactive Communication Solutions Ltd v Venture Investment Placement Ltd [2005] 2
BCLC 571.
598
746 A 2d 244 2000 Del.
599
Brehm v Eisner 746 A 2d 244 2000 Del.
80
3 4 6 All stakeholders as potential victims of directorial misconduct
It is important to note that internal stakeholders such as directors innocent of wrongdoing,
employees and shareholders are not the only ones who stand to lose from the failure of corporate
governance. External stakeholders’600 interests are also vulnerable to abuse as a result of a
company being abused by its directors/agents. A classic example is presented by the Lehman
Brothers debacle which has already been discussed above.601 Another vivid illustration is the
Enron tragedy. Before being declared bankrupt and its subsequent total collapse, Enron had
expanded enough to become the 7th largest company in the USA and had won the Fortune
Magazine’s most innovative corporation in America six times.602 It had over one hundred billion
dollars in gross revenues603 but on 2 December 2001 its shares were worth less than a dollar each,
down from $83.13 on 31 December 2000 which was just eleven months earlier.604 Enron
stakeholders were negatively affected as investors lost their money and employees were
retrenched.605 The Report of the Special Investigation Committee and of the US Senate “both
concluded that the board of directors failed in its oversight duties”.606 However, the Enron case is
more interesting because it was also found that one of the contributing factors to its collapse was
lack of directors’ independence.607 The United States Senate further emphasised that directors have
fiduciary duties to act in good faith, in the best interests of the corporation and its shareholders and
that Enron’s board of directors contributed to its collapse by failing to protect Enron’s
shareholders’ interests.608 As a result, thousands of employees lost their employment also.
600
External stakeholders include creditors, the community and the government. See also Millstein et al “Fiduciary
Duties of Corporate Directors in Uncertain Times” 2018 Journal of Applied Corporate Finance 17 18; Wiese
Corporate governance in South Africa with international comparisons 2 ed (2016) 7-9. According to Hendrikse
and Hefer Corporate governance handbook: Principles and practice 3 ed (2019) 45, a stakeholder is any
individual or group who has a direct or indirect interest in the operations of a business.
601
See the discussion on pages 8-9 above.
602
Gillan and Martin “Financial Engineering, Corporate Governance, and the Collapse of Enron” 2002 Working
Paper Series 2002-001 1.
603
Ibid 6.
604
Paper Series 2002-001 1and 8.
605
Rosen “Risk Management and Corporate Governance: The Case of Enron” 2003 Connecticut Law Review 1157-
1158.
606
Powers et al Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron
Corporation 2002 148 and Levin and Collins “The Role of the Board of Directors in Enron’s Collapse” Report
Prepared by the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs 3 and
Paper Series 2002-001 1.
607
Senate Report 3 and 51.
608
Subcommittee Report 5 and 9.
81
However, keeping in mind the factual details of some unprecedented corporate debacles of the past
two decades, it is submitted that treating directorial oversight responsibility as a shareholders’
prerogative is implausible.609 Also, this is consistent with global trends towards a more
stakeholder-centric approach in corporate governance.610 Further, although shareholders provide
companies with the much-needed equity capital, they are not the only victims of corporate
mismanagement.611 Unsecured providers of debt capital acting in the best interests of the company
also require access to justice.612 It is also worth noting that after the catastrophic collapse of British
Home Stores which led to the loss of over 11 000 jobs, the United Kingdom government embarked
on some corporate governance reforms aimed at amplifying employees’ voice. It has been argued
that “without providing a derivative claim right for employees, these measures will likely have
little impact in practice”.613 Therefore, it is submitted that the weight of rationality supports the
extension of derivative litigation to other stakeholders acting to protect company interests.
3 4 7 Directors’ fiduciary duty owed only to the company

This aspect of the enhanced accountability perspective is an essential element in achieving the
much needed balance directorial authority and accountability. Most of the perspective’s facets
discussed above seem to be assigning extra responsibilities to directors, this element makes it clear
that the enhanced accountability perspective does not intend to extend fiduciary duties to any
stakeholder(s) except the company itself. The status of shareholders and creditors under the
enhanced accountability perspective will be discussed below.
609
Some of notable corporate debacles in Zimbabwe include PSMAS, African Renaissance Bank, BCCI, Universal
Merchant Bank, ENG Capital and Barbican Bank. See Sifile et al “Corporate board failure in Zimbabwe: Have
non – executive directors gone to sleep?” 2014 IOSR Journal of Business and Management 78 78.
610
Section 172(1) of the UK Companies Act provides that directors are to consider the interests of employees,
suppliers, customers, the community and the environment when determining the best interests of the company.
In South Africa, the King IV Report on Corporate Governance for South Africa IODSA 2016 adopted the
stakeholder approach. See also Cassim MF 2018 South African Law Journal 116.
611
See Shell “Lehman Bros. collapse triggered economic turmoil” http://abcnews.go.com/Business/lehman-bros-
collapse-triggered-economic-turmoil/story?id=8543352 (accessed 15-03-2020) on the Lehman Brothers debacle
which is believed to have triggered the 2008 economic recession that led to, inter alia, almost six million job
losses and the unemployment rate almost doubled.
612
Westpac Banking Corporation v Bell Group Ltd (in liq) No 3 [2012] 44 WAR 1; Esser and Du Plessis 2007
South African Mercantile Law Journal 346.
613
Safari and Gelter “British Home Stores collapse: The case for an employee derivative claim” 2019 Journal of
Corporate Law Studies 43 43.
82
A notable consequence of the traditional view of “the company” is to regard the company’s
interests as being equal to shareholders’ interests.614 Nwafor argues that profit maximisation is the
only goal of shareholders.615 The term shareholder has been defined differently but at least
retaining the fundamental concepts of voting rights and some form of ownership proportional to
the value of shares owned.616 Shareholders provide a company with capital and “receive rights to
participate in the profits of the corporation in the form of dividends, as may be declared from time
to time at the board's discretion, and to share in the firm's residual assets upon corporate
dissolution”.617
It has been held that directors owe fiduciary obligations to shareholders collectively but not as
individuals.618 In the English case of Gaiman v National Association for Mental Health619 it was
held that “the interests of some particular section or sections of the company cannot be equated
with those of the company, and I would accept the interests of both present and future members of
the company, as a whole, as being a helpful expression”.620 Some commentators have also
submitted that acting in the shareholders’ interests means “balancing the short term interests of
present members with the long term interests of future members”.621 According to this line of
reasoning, directors are to take into account both the interests of current and future shareholders.
However, this interpretation is questionable on at least one ground. How can one ascertain the
interests of future shareholders? Since there is no time limit for the word “future”, one can go
further and claim that current competitors may become future shareholders. How is it then practical
to act in an unknown person’s interests? Explaining the term “future” in that way can be justified
614
Da Silva v CH Chemicals (Pty) Ltd 2008 6 620 (SCA) para 18; Parke v Daily News Ltd 1962 2 All ER 948 and;
Hutton v West Cork Railway 23 (ChD) 654.
615
Nwafor “The Shifting Responsibilities of Company Directors – How Desirable In Modern Times” 2012
Macquarie J. Bus. L 158.
616
Section 1 of the South African Companies Act 71 of 2008 defines a shareholder as “the holder of a share issued
by a company and who is entered as such in the certificated or uncertificated securities register, as the case may
be”. That definition is subject to section 57(1) of the same Act which provides that a shareholder “includes a
person who is entitled to exercise any voting rights in relation to a company, irrespective of the form, title or
nature of the securities to which those voting rights are attached”.
617
Lin “Shift of Fiduciary Duty upon Corporate Insolvency: Proper Scope of Directors' Duty to Creditors” 1993
618
Percival v Wright 1902 2 421 (Ch).
619
1971 317 (Ch) 330.
620
Gaiman v National Association for Mental Health 1971 317 (Ch) 330.
621
Birkbeck Law Review 44; and Havenga “Directors' Fiduciary Duties under our Future Company-law Regime”
1997 SA Merc L.J. 317.
83
if one regards a company as a going concern and assume that every shareholder has one major
objective, which is profit maximisation. However, in practice, it is not every time that shareholders
only aim to maximise profits. At times it might be enough and important just to increase a firm’s
market share.622
Furthermore, it must be noted that shareholders do not own the company, they own interests
(shares) in the company.623 The assets do not belong to the shareholders, they belong to the
company.624 So the fiduciary duty ought to be strictly owed to the company alone. Also, another
issue that stands in the way for the construction of a direct fiduciary duty is the so-called “too
many masters argument”.625 According to this argument if directors owe fiduciary obligations to
several stakeholders, they will have too many masters to be accountable to and in the end will
become servants of none.626 The construction of the ‘too many masters argument’ requires some
consideration.
In the company law context, creditors constitute a critical stakeholder group because they provide
long and short term funding to companies and can be broadly classified as secured and unsecured
creditors.627 According to Lin, “creditors have fixed claims against the corporation that entitle
them to receive a pre-determined rate of interest and repayment of their principal at a specified
maturity date”.628 However, unsecured creditors are especially interested in the company’s
business as they see it as a credit risk.629 The question whether directors owe, or ought to owe, any
622
Birkbeck Law Review 44.
623
Cassim R “The Power to Remove Company Directors from Office: Historical and Philosophical Roots” 2019
Fundamina 51.
624
Cassim R 2019 Fundamina 51.
625
Esser and Du Plessis “The Stakeholder Debate and Directors’ Fiduciary Duties” 2007 SA Merc L.J. 346. For
more on the “too many masters” argument see Ho ‘”Enlightened Shareholder Value’: Corporate Governance
beyond the Shareholder-Stakeholder Divide” 2010 Journal of Corporation Law 69; Macey and Miller
“Corporate Stakeholders: A Contractual Perspective” 1993 University of Toronto Law Journal 403; Sheehy
“Scrooge-The Reluctant Stakeholder: Theoretical Problems in the Shareholder-Stakeholder Debate” 2005
University of Miami Business Law Review 208; and Roach “The Paradox of the Traditional Justifications for
Exclusive Shareholder Governance Protection: Expanding the Pluralist Approach” 2001 9.
626
Roach “The Paradox of the Traditional Justifications for Exclusive Shareholder Governance Protection:
Expanding the Pluralist Approach” 2001 9; Esser and Du Plessis “The Stakeholder Debate and Directors’
Fiduciary Duties” 2007 SA Merc L.J. 346; and Sheehy “Scrooge-The Reluctant Stakeholder: Theoretical
Problems in the Shareholder-Stakeholder Debate” 2005 University of Miami Business Law Review 208.
627
Garner et al Black’s Law Dictionary (2004) 397 defines an unsecured creditor as “a creditor who, upon giving
credit, takes no rights against specific property of the debtor”.
628
Lin “Shift of fiduciary duty upon corporate insolvency: Proper scope of directors’ duty to creditors” 1993
629
Esser and Du Plessis 2007 South African Mercantile Law Journal 346.
84
fiduciary obligations to creditors only arises in the context of insolvency. This has been the most
controversial of all the directors’ duties to company stakeholders other than the shareholders.
Before insolvency, directors do not owe any obligation to act in the best interests of creditors.630
This chapter sought to introduce and elaborate on the seven facets of the enhanced accountability
perspective from which discussions on the derivative remedy will be viewed henceforth. It was
highlighted that there is need for greater directorial accountability especially in the aftermath of
the GFC which exposed most of the corporate governance regimes’ weaknesses. It was further
demonstrated that the main purpose of the enhanced accountability perspective is to provide the
much needed balance between directorial authority and accountability. The enhanced
accountability perspective is a vital aspect of this study as it contributes immensely to the thesis’
originality. As was demonstrated also in the literature review section above,631 this study is the
first of its kind to be conducted on derivative actions from such a perspective. The study achieves
its uniqueness by infusing pertinent aspects such as the ethical and moral dimensions into
directors’ decision-making processes.
630
Lin 1993 Vanderbilt Law Review 1510.
631
See part 1 7 above.
85
CHAPTER FOUR
Corporate governance: Pertinent conceptual ideas and institutional arrangements

41 INTRODUCTION
Before undertaking an extensive critical discussion of the substantive and procedural issues
pertaining to the derivative remedy, it is necessary, to examine, as part of laying a strong
foundation upon which various arguments will be premised, pertinent corporate governance
related institutional arrangements and key role players in each of the jurisdictions included in this
study. A comparative study usually involves an examination of pertinent aspects of the different
legal rules or systems adopted in the selected jurisdictions. These jurisdictions have diverse
historical, cultural and religious backgrounds. Such extra-legal factors can have a major bearing
on the law. For example, as will be shown below, Japan’s system of cross-shareholding, which is
not popular in South Africa, is more of a corporate financing concept that has greatly influenced
the East Asian country’s contemporary company law. On the other hand, the United States of
America (USA) is a federal state whilst England, Japan and South Africa632 are unitary states. An
understanding of the legal framework in both federal and unitary states, especially their court
systems, is very important as it may assist in assessing the efficiency of a given corporate
governance model. For example, the way the USA makes use of the concept of circuit courts may
be different from South Africa’s, although both of them are common law jurisdictions. These
examples show that this comparative study requires a discussion of the pertinent underlying
concepts before a critical analysis of the core issues is embarked upon.
An explanation of the fundamental similarities and differences becomes even more relevant where
the comparative study, as in this case, involves jurisdictions that belong to different legal families.
In the context of company law in general and derivative actions in particular, a preliminary
discussion of concepts such as separation of ownership and control, the beneficiaries of directors’
fiduciary duties and the structure of the board of directors is essential.
This chapter can also be employed as a reference point to which the reader may always revert.
This opening section of the study seeks to place derivative actions in the context of corporate
governance. Accordingly, an understanding of the policy rationales behind corporate governance
632
However, it may be argued that South Africa is a quasi-federal state. See
https://www.oecd.org/regional/regional-policy/profile-South-Africa.pdf (accessed 13-05-2019).
86
will assist with identifying weaknesses of the derivative remedy. This will, in turn, facilitate
evaluation of the effectiveness of derivative actions and development of plausible law reform
recommendations.
Immediately following this introduction is a descriptive analysis of the principle of corporate

governance. The section will commence with a presentation of different definitions of corporate
governance. It will identify the underlying common denominator behind the concept regardless of
the diverse ways in which it can be expressed or operationalised. Most importantly, the section
will also identify the functional purpose of corporate governance. This will be used as the standard
or yardstick by which the substantive and procedural issues concerning derivative actions will be
judged. Thereafter, the discussion will be dedicated to an examination of the concept of ownership
and control followed by an analysis of the different ownership models in the selected jurisdictions.
The next section examines the activities of the key role players and their relation with the company
and considers whether they are beneficiaries of the derivative remedy and how they have
contributed to shaping the remedy. The said role-players are directors and officers, creditors,
employees, shareholders, institutional investors and the courts. Thereafter, the chapter turns to the
justifications in respect of the primary beneficiaries of directors’ fiduciary duties. Before a
preliminary conclusion, an evaluation of the different board structures that exist in the selected
jurisdictions will be presented.
42 CORPORATE GOVERNANCE
Corporate governance is an elusive concept.633 Plato was the first person to explore the idea of
governance around 380 BC in his work “The Republic”, albeit, in the context of justice and
philosophy.634 It was not until the eighteenth century that the term ‘governance’ was used in
relation to companies by Adam Smith.635 Twentieth century theorists such as Berle and Means
further refined the idea of corporate governance and contributed significantly to differentiate
between how the term is used in relation to government and companies.636
633
McLaughlin Unlocking company law 2 ed (2013) 5; Wiese Corporate governance in South Africa with
international comparisons 2 ed (2016) 2-3.
634
Nyombi “The USA as a good comparator for UK in corporate governance” 2018 International Journal of Law
and Management 135-136.
635
Nyombi 2018 International Journal of Law and Management 136.
636
Ibid.
87
Corporate governance can be described as “the system by which an entity is directed and controlled
with a view to ensuring the achievement of its objectives in a sustainable manner within an
environment of accountability to its stakeholders”.637 The preamble to the Organisation for
Economic Co-operation and Development (OECD) Principles of Corporate Governance states that
“corporate governance involves a set of relationships between a company’s management, its board,
its shareholders and other stakeholders”.638 The King IV Report on Corporate Governance for
Southern Africa639 (King IV) defines this concept as “the exercise of ethical and effective
leadership by the governing body towards the achievement of … ethical culture, good
performance, effective control and legitimacy”.640 In the words of Cassim FHI et al, corporate
governance “is concerned with the structures and processes associated with management, decision-
making and control in organisations”.641 The term “organisations” in the last definition must be
understood to restrictively refer to incorporated legal entities that are separate from their founders.
One of the most commonly cited definitions642 of corporate governance is derived from the
Cadbury Report643 wherein it was couched as “the system by which companies are directed and
controlled”.644
Sakai and Asaoka divide corporate governance into two types, namely, insider645 and open
governance systems.646 Soon after the Second World War, Japanese firms usually adopted the
insider type structure that is stakeholder-based whilst Anglo-American companies were generally
637
Davis et al Companies and other Business Structures in South Africa 2 ed (2011) 171. A similar definition is
provided by Black et al “Legal Liability of Directors and Company Officials Part 1: Substantive Grounds for
Liability (Report to the Russian Securities Agency)” 2007 Columbia Business Law Review 614 798. See also the
discussion by Larcker and Tayan Corporate governance matters: A closer look at organizational choices and
their consequences 2 ed (2016) 7-8.
638
Preamble OECD Principles of Corporate Governance 2004 11.
639
2016.
640
King IV 11.
641
642
Cassim FHI et al Contemporary company law 2 ed (2012) 472-473.
643
Committee on the Financial Aspects of Corporate Governance Report of the Committee on the Financial Aspects
of Corporate Governance Chaired by Sir Adrian Cadbury 1992.
644
of Corporate Governance Chaired by Sir Adrian Cadbury 1992 para 2 5.
645
According to them, the insider type governance system is characterized by the main bank playing the monitoring
role, limited information disclosure and long term relations. See Sakai and Asaoka “The Japanese Corporate
Governance System and Firm Performance: Toward sustainable growth Research” 2003 Center for Policy and
Economy Mitsubishi Research Institute 2-4 who also add that such a model is more sensitive to creditors’
interests than shareholders.
646
Sakai and Asaoka “2003 Center for Policy and Economy Mitsubishi Research Institute 2.
88
identified with the shareholder focused open type governance model.647 Although the insider type
governance model has been lauded for its inherent ability to stabilise management and employment
relationships due to its focus on long term continuance, it has encountered persistent attacks for
being vulnerable to information asymmetry, “lack of management transparency, disregarding the
profit of such stakeholders as small shareholders and customers”.648 On the other hand, the open
type governance structure promotes a smooth flow of information within the management.649 With
the passage of time, there has been a significant appreciation that Japanese firms are moving
towards the Anglo-American governance model.650
It is important to note that corporate governance goes beyond the letter of pertinent legislation and
codes. Aspects such as morality and ethics should not be divorced from contemporary discussions
around corporate governance as history has shown that some catastrophic corporate scandals could
have been avoided by simply taking heed of such principles.651 Despite the different ways in which
corporate governance is expressed, the common denominator in all the above definitions is that
the idea hallows performance management, directors’ compliance with their duties and promotion
of accountability towards the attainment of corporate goals.652 Recent high profile corporate
scandals that have occurred in South Africa,653 England,654 USA,655 Japan656 and other developed
647
Sakai and Asaoka 2003 Center for Policy and Economy Mitsubishi Research Institute 3-4; Passador “Outside
Directors Liability: A Comparative Analysis between the U.S. and Japan” 2018 Connecticut Journal of
International Law 249 253.
648
Sakai and Asaoka 2003 Center for Policy and Economy Mitsubishi Research Institute 4.
649
Sakai and Asaoka 2003 Center for Policy and Economy Mitsubishi Research Institute 4-6.
650
Sakai and Asaoka 2003 Center for Policy and Economy Mitsubishi Research Institute 4-6 who noted that the
influence of banks was weakening and that there was a growing interest in shareholder wealth maximisation.
651
Raza “Corporate Governance: USA Versus Europe” http://www.valuewalk.com/2013/01/corporate-governance-
usa-versus-europe/ (accessed 05-03-2018).
652
653
In South Africa, major scandals which easily come to mind are LeisureNet, Regal Treasury Bank, Fidentia,
Masterbond and most recently Steinhoff. See IOL News “LeisureNet directors under scrutiny”
http://www.iol.co.za/news/south-africa/leisurenet-directors-under-scrutiny-1.68310#.VW7Hkc-qqko (accessed
03-03-2018); Beamish “Failed bank CEO jailed for eight years” http://www.moneyweb.co.za/archive/failed-
bank-ceo-jailed-for-eight-years/ (accessed 03-02-2018); Yeld “Fidentia scandal: more money is missing”
http://www.iol.co.za/news/south-africa/fidentia-scandal-more-money-is-missing-1.320704#.VTjiiu_GPIU
(accessed 15-03-2018) and Pillai “Fraudsters exploit the fact that authorities across jurisdictions do not
communicate” http://itinews.co.za/print.aspx?type=2&itemid=E6AC42E8-0C4D-40DE-9260-C6CB6F569B26
(accessed 24-01-2018).
654
Polly Peck International, Maxwell Communications Corporation, Equitable Life Insurance, MG River Group
and Northern Rock are all examples of company debacles in the England.
655
These include Enron, WorldCom, Lehman Brothers, AIG and Tyco.
656
The Japan Times https://www.japantimes.co.jp/news/2017/10/11/business/scandals-seen-shredding-japan-inc-s-
revered-image-quality/#.WrN2BWpubIU (accessed 03-22-2018) reports that corporate scandals in Japan’s
89
and developing countries have either been attributed to a failure in the corporate governance
system657 or a breach of directors’ duties in particular.658 In drawing a nexus between the last
Global Financial Crisis (GFC) and corporate governance, Crouhy et al submit that “…the essence
of what went wrong in the run-up to the 2007–2009 financial crisis had more to do with the lack
of solid corporate governance structures…”.659
Accountability mechanisms, such as the derivative remedy, should not, therefore, be separated
from the essential content of corporate governance.660 A study of derivative actions is a recognition
of the growing worldwide concern over contemporary corporate governance principles. 661 In the
USA, the derivative remedy was recognised as the “chief regulator of corporate management”662
because it promotes directorial accountability. Maleka Femida Cassim notes the growing
appreciation that derivative actions are “a valuable tool of corporate governance”. 663 The same
author went on to elaborate that:
“The role of the derivative action in corporate governance was lucidly expressed in Seinfeld v Coker
[A.2d 330, 333 (Del. Ch. 2000)] as follows: ‘It is important for shareholders to bring derivative suits
household names such as Kobe Steel Ltd, Nissan Motor Company, Toshiba Corporation and Subaru “destroyed
shareholder value”.
657
Crouhy et al The Essentials of Risk Management 2 ed (2013) 151 assert that the 2001-2003 spate of corporate
debacles that largely affected the non-financial sector and the 2007-2009 financial crisis were partly attributable
to “failures of corporate governance”.
658
See Gillan and Martin “Financial Engineering, Corporate Governance, and the Collapse of Enron” 2002 Working
Paper Series 2002-001 1; Professor Skae’s analysis of the recent Steinhoff scandal in relation to its board
structure, available at: https://citizen.co.za/talking-point/1798603/did-steinhoffs-board-structure-contribute-to-
the-scandal/ (accessed 17-03-2018); Yeld “Fidentia scandal: more money is missing”
http://www.iol.co.za/news/south-africa/fidentia-scandal-more-money-is-missing-1.320704#.VTjiiu_GPIU
(accessed 23-04-2017); Beamish “Failed bank CEO jailed for eight years”
http://www.moneyweb.co.za/archive/failed-bank-ceo-jailed-for-eight-years/ (accessed 03-06-2017); Rosen
“Risk Management and Corporate Governance: The Case of Enron” 2003 Connecticut Law Review 1157-1158.
659
Crouhy et al The Essentials of Risk Management xvii.
660
Erickson “The Gatekeepers of Shareholder Litigation” 2017 Oklahoma Law Review 237-238; Sahu “Investors
protection: The derivative action” 2017 International Journal of Law 104.
661
Crouhy et al The Essentials of Risk Management 151.
662
Cohen v Beneficial Industrial Loan Corp 337 US 541 (1949). See also the Singaporean case of Teo Gek Luang
v Ng Ai Tiong [1999] 1 SLR 434 438 where it was held that “derivative actions improve the standards of private
corporate governance since directors who breach their duties to the company could be made accountable”; Jones
“An Empirical Examination of the Resolution of Shareholder Derivative and Class Action Lawsuits” 1980
Boston University Law Review 542; and Ramsay and Saunders “Litigation by Shareholders and Directors: An
Empirical Study of the Statutory Derivative Action” 2006 Journal of Corporate Law Studies 397 403.
663
Act 71 of 2008 (Part 1)” 2014 SA Merc LJ 3; Cassim MF The new derivative action under the Companies Act:
Guidelines for judicial discretion (2016) 8. See also Baum and Puchniak “The derivative action: An economic,
90
because these suits, filed after the alleged wrongdoing, operate as an ex-post check on corporate
behavior. . . . When shareholder plaintiffs bring meritorious lawsuits, they deter improper behavior by
similarly situated directors and managers, who want to avoid the expense of being sued and the
sometimes larger reputational expense of losing in court.’”664
From an economic perspective, the derivative action can also reduce shareholders’ agency costs.665
It is apparent that derivative actions have a significant effect on a jurisdiction’s corporate
governance system. With this awareness, a refined examination of selected corporate governance
concepts that affect the application and interpretation of the derivative remedy follows.
4 2 1 Separation of ownership and control

Separation of ownership and control differentiates between “the role and people involved in
directing the company, the directors and the shareholders or owners who provide funds”.666 In
principle, shareholders have been taken to be the owners of a company whilst directors perform
managerial duties.667 However, in practice, this distinction is not so clear as there is considerable
overlap. For example, one can be both a director and a shareholder of the same company at the
same time. This overlap has significant implications for corporate sustainability at least for two
reasons. First, it presents directors with a conflict of interests during decision-making. Directors
end up being players and referees in the same game.668 Second, in cases where directors own a
significant number of shares which enable them to influence the outcome of shareholder meetings,
other stakeholders’ interests are most likely to be undermined. Although it is universally accepted
664
Cassim MF 2014 SA Merc LJ 3.
665
Cassim MF 2014 SA Merc LJ 3-4. This scholar defined agency costs as “the monitoring costs that shareholders
incur in ensuring that directors act in the interests of shareholders as a whole rather than in their own personal
interests, when their respective interests diverge”. For more on derivative litigation and agency costs see Baum
(eds) The derivative action in Asia: A comparative and functional approach (2012) 14; Ramsay “Corporate
Governance, Shareholder Litigation and the Prospects for a Statutory Derivative Action” 1992 U.N.S.W. L.J 151
and 156 who argued that agency costs can be divided into monitoring and bonding costs; Ramsay and Saunders
2006 Journal of Corporate Law Studies 403; Huang “The Statutory Derivative Action in China: Critical Analysis
and Recommendations for Reform” 2007 Berkeley Business Law Journal 231-232.
666
Steyn and Stainbank “Separation of ownership and control in South African-listed Companies” 2013 SAJEMS
316 318.
667
Davies and Worthington Gower’s principles of modern company law 10 ed (2016) 40; Cassim R 2019
Fundamina 40; Millstein et al “Fiduciary Duties of Corporate Directors in Uncertain Times” 2018 Journal of
Applied Corporate Finance 17 18; Seitz Jr. and Sirkin “The Demand Review Committee: How It Works, and
How It Could Work Better” 2018 The Business Lawyer 305 306; Sahu 2017 International Journal of Law 101;
at: http://ssrn.com/abstract=1699353 (accessed 28-06-2018); Mayson et al Company law 33 ed (2016) 4.
668
McConvill and Bagaric “Why all Directors should be Shareholders in the Company” 2004 Bond Law Review
50.
91
that shareholders are the “owners”669 of companies,670 the basis of such ownership remains
debatable. Ideally, shareholders do not control companies but they have an opportunity to
participate in the governance thereof by electing directors671 who ultimately appoint the
managers.672
The separation of ownership and control is one of the fiercely contested issues in contemporary
company law.673 This subject became problematic due to the “increase in corporate activity” from
around the twentieth century.674 England,675 USA, and South Africa have all incorporated this
conventional principle of the separation of ownership and control into their company law. 676
However, Japan’s company law is unique in that there is a strong belief that employees own the
companies.677 This could be the reason why employees in Japan enjoy relatively more privileges
669
However, Cassim R 2019 Fundamina 51 argues that “[s]hareholders do not ‘own’ a company; instead, they own
shares in the company, which gives them certain legal rights. The property and assets of the company belong to
the company itself and not to the shareholders”. This is consistent with a long-standing principle of Company
Law underlying the corporate personality of the incorporate business entity as held in Salomon v Salomon 1897
AC 22 (HL).
670
Nwafor “The Shifting Responsibilities of Company Directors – How Desirable in Modern Times” 2012
Macquarie J. Bus. L 160; Ho ‘”Enlightened Shareholder Value’: Corporate Governance Beyond the Shareholder-
Stakeholder Divide” 2010 Journal of Corporation Law 72; Sheehy “Scrooge - The Reluctant Stakeholder:
Theoretical Problems in the Shareholder-Stakeholder Debate” 2005 University of Miami Business Law Review
209.
671
Block and Gerstner “One-Tier vs. Two-Tier Board Structure: A Comparison between the United States and
Germany” 2016 Comparative Corporate Governance and Financial Regulation 9; Nyombi 2018 International
Journal of Law and Management 135-136; Jackson “Understanding Corporate Governance in the United States:
An Historical and Theoretical Reassessment” 2010 Arbeitspapier 9.
672
Nyombi 2018 International Journal of Law and Management 135-136.
673
Hendrikse and Hefer Corporate governance handbook: Principles and practice 3 ed (2019) 37; Bourne Bourne
on company law 6 ed (2013) 200; Nyombi 2018 International Journal of Law and Management 135-136. For a
concise historical account of this principle, see Abugu “Monitoring directors’ remuneration, fat cat packages and
perks of office” 2012 Journal of Financial Crime 6 8.
674
Bourne Bourne on company law 6 ed (2013) 200.
675
Davies and Worthington Gower’s principles of modern company law 10 ed (2016) 356 explain that in England,
the scope of shareholders’ and board of directors’ powers is determined in the company’s constitution which is
usually under the shareholders’ control. This allows shareholders to exercise freedom and order a company’s
affairs as they wish. However, this is not always the case. In this regard, the position in England contrasts sharply
with the German position. In the latter jurisdiction, the role of the board of directors for large companies is
elaborated in a separate legislation, the Aktiengesetz, whereas the powers of board members in smaller companies
is regulated by another statute, the Gesellschaft mit beschrankter Haftung.
676
Burnhill “Overview: The US Governance Model” 2013 CFI Governance Working Group Presentation 2; Cassim
FHI et al Contemporary company law 2 ed (2012) 39 argue that shareholders do not have the right to exercise
any managerial duties. The old English case of Salomon v Salomon 1897 AC 22 (HL) shows that this position is
not affected by the fact that all of a company’s shares are held by one person.
677
Pejovic “Japanese Corporate Governance: Insights from the Unsuccessful Adoption of the American Model”
2012 Yonsei Law Journal 201 cites the outcome of a survey conducted in Japan by Yoshimori Whose Company
is it? The Concept of Corporation in Japan and the West 1995 33-44. According to that survey 97% of
respondents affirmed that the company belonged to all stakeholders. Only 3% responded that it belonged to
shareholders. According to the same survey, “in Japan 97% of respondents viewed job security as more important
92
than other stakeholders.678 It remains to be seen whether such privileges translate into effective
legislative, judicial and contractual protection. The most important question is whether employees
in Japan have adequate access to effective derivative litigation?
4 2 2 Shareholding patterns
The purpose of this section is to differentiate between closely held and widely held shares. In the
former, shares of a company are owned by one person or a small number of controlling individuals
often within the same family.679 On the other hand, widely held shares are owned by thousands or
even millions of shareholders.680 Closely-held shares are usually not traded publicly on securities
exchanges681 such as the Johannesburg Stock Exchange (JSE) for South Africa and the London
Stock Exchange (LSE) for England. Most of the USA,682 English, Japanese and South African683
companies are widely held.684 In other words, there is dispersed ownership of shares.685 Equity is
the preferred way of funding companies in the USA. Another important feature is that most USA
companies are characterised by institutional investors such as mutual funds and pension funds who
own large stakes in these organisations.686 This is potentially disadvantageous to minority
shareholders who may not be able to raise their voices loud enough. The institutional investors are
also able to influence decision making processes because of the significant voting power they
than dividends, while in the U.S. only 11% considered job security as more important and 89% viewed dividends
as more important”.
678
Pejovic 2012 Yonsei Law Journal 197-198 elaborates that under Japan’s long-term employment system, “an
employee… is expected to remain in the company's employ for the length of his or her career. In return, he or
she can expect not to be fired or discharged, except under some extraordinary circumstances”.
679
Garner et al Black’s law dictionary 8 ed (2004) 365. Most private companies are closely held. It is in such entities
that directors and shareholders are usually the same people.
680
Helwege et al “Why Do Firms Become Widely Held? An Analysisof the Dynamics of Corporate Ownership”
2007 The Journal of Finance 995 996.
681
682
The Financial Industry Regulation Authority http://www.finra.org/investors/nyse-nasdaq-and-get-know-uss-
stock-exchanges-part-1 (accessed 22-03-2018) has indicated that the USA has more than 10 securities exchanges
besides the popular New York Stock Exchange (NYSE) and National Association of Securities Dealers
Automated Quotation System (NASDAQ).
683
“South Africans invited to buy shares in Reserve Bank” https://www.iol.co.za/business-report/companies/south-
africans-invited-to-buy-shares-in-reserve-bank-8005903 (accessed 22-03-2018) reports that after a North
Gauteng High Court decision in 2016, the South African Reserve Bank’s shares can now be bought by any
eligible South African citizen.
684
Clarke “A Critique of the Anglo-American Model of Corporate Governance” 2009 Comparative Research in
Law & Political Economy Research Papers 2; Jackson 2010 Arbeitspapier 9; Raza “Corporate Governance:
USA Versus Europe” http://www.valuewalk.com/2013/01/corporate-governance-usa-versus-europe/ (accessed
05-03-2018).
685
Jackson 2010 Arbeitspapier 9.
686
93
possess. In such circumstances, minority shareholders’ interests are likely to be undermined. As
will become apparent later, it can be argued that jurisdictions that are dominated by institutional
investors need a robust derivative remedy. However, the USA model recognises the importance of
minority shareholder rights and their participation in the governance processes of the company by
allowing them to vote.687
4 2 3 Strategic players and issues

The literature on corporate governance usually explores company activities and how it relates to
its internal and external stakeholders including the government and the environment. However, for
the purposes of this study, the discussion under this part will be limited to the activities and/or
interactions between directors, shareholders688 creditors, employees and institutional investors.689
This limitation also promotes the purpose of this preliminary discussion, which, as mentioned
above, is not to discuss general issues in corporate governance but to provide a necessary
foundation on which various arguments advanced in the following chapters will be erected.
4 2 3 1 Directors
The most important decision-making structure in a company is the board of directors.690
Consequently, various jurisdictions have similar mandatory provisions instructing companies to
have a certain minimum number of directors.691 Unless otherwise provided for in a company’s
687
Burnhill 2013 CFI Governance Working Group Presentation 3. Regarding shareholder participation in corporate
governance, see also Mukwiri and Siems “The Financial Crisis: A Reason to Improve Shareholder Protection in
the EU?” 2014 Journal of Law and Society 51 56-57; Singer and Ron “Models of shareholder democracy: A
transnational approach” 2018 Global Constitutionalism 422 423.
688
Shareholders are generally interested in profit maximisation and asset protection. To achieve their goals,
shareholders desire a sound and profit-driven management. See Sakai and Asaoka 2003 Center for Policy and
Economy Mitsubishi Research Institute 2.
689
Garner et al Black’s law dictionary 8 ed (2004) 846 defines an institutional investor as a financially strong
organisation that invests huge funds on behalf of other people. Examples of these include commercial banks,
mutual funds, insurance companies, hedge funds and pension funds. Due to their strong financial clout,
institutional investors can easily influence directors’ decision making. Sakai and Asaoka 2003 Center for Policy
and Economy Mitsubishi Research Institute 2 note that institutional investors are interested in profitable
investment.
690
Davies and Worthington Gower’s principles of modern company law 10 ed (2016) 355. The significance of the
board of directors is highlighted by the Financial Reporting Council in the “The UK Corporate Governance
Code” 2016 5 which states that “every company should be headed by an effective board, which is collectively
responsible for the success of the company”.
691
See for example section 66(2) of the Companies Act 71 of 2008 which provides that, “the board of a company
must comprise (a) in the case of a private company, or a personal liability company, at least one director; or (b)
in the case of a public company, or a non-profit company, at least three directors. Section 154 of the UK
Companies Act 2006 requires all public companies to have at least two directors and all private companies to
94
Articles of Incorporation,692 company directors in Japan are elected by shareholders at the
shareholders’ general meeting by a simple majority of votes.693 The same requirement is prescribed
for the removal of directors.694 Davies and Worthington note that in England, the role of the board
is largely determined in the company’s constitution, which is controlled by the shareholders. 695
Directors act as shareholders’ agents to monitor management.696 Besides participating in certain
special material actions such as mergers, shareholders do not have the power to directly dictate the
course their company should take except through the appointment and removal of directors.697 It
can be submitted that the power to appoint and remove directors represents the shareholders’ most
important arsenal during the lifetime of any given corporate entity. As a corollary to the above
submission, the mechanism of derivative actions becomes very critical to corporate governance in
general and accountability in particular.
In an attempt to encourage transparency and accountability, the Japanese Companies Act strongly
recommends that listed companies have at least one outside director.698 Results of a recent report
suggested that there is a positive relationship between the appointment of an outside director and
an increase in shareholder value.699 In this respect, Passador has opined that “the role of the outside
directors represents the distinguishing feature: the most common, appreciated, and therefore, most
have at least one. Additionally, section 155(1) of the said UK Act states that, “companies are required to have at
least one director who is a natural person”.
692
This is Japan’s equivalent of the South Africa Memorandum of Incorporation.
693
Watanabe “Corporate Governance” https://gettingthedealthrough.com/area/8/jurisdiction/36/corporate-
governance-2017-japan/ (accessed 06-03-2018). See also Shishido “Japanese Corporate Governance: The
Hidden Problems of Corporate Law and their Solutions” 2000 Del. J. Corp. L. 192 who notes that neither
employees nor creditors are provided with voting rights. The same author justified the model where only
shareholders are empowered to vote by stating that “multiple group voters will have dissimilar preferences and
cannot obtain a consistent system of choices”.
694
governance-2017-japan/ (accessed 06-03-2018).
695
696
Shishido 2000 Del. J. Corp. L. 193.
697
698
Article 2 of the Japanese Companies Act 86 of July 2005 defines an outside director as “a director of any Stock
Company who is neither an Executive Director … nor an executive officer, nor an employee, including a
manager, of such Stock Company or any of its Subsidiaries, and who has neither ever served in the past as an
executive director nor executive officer, nor as an employee, including a manager, of such Stock Company or
any of its Subsidiaries”. Simply put, Black et al “Legal Liability of Directors and Company Officials Part 1:
Substantive Grounds for Liability (Report to the Russian Securities Agency)” 2007 Columbia Business Law
Review 614 799 state that an outside director is a non-executive director.
699
Passador “Corporate Governance Models: The Japanese Experience in Context” 2016 DePaul Business &
Commercial Law Journal 45 who made reference to Watanabe Dokuritu Syagai Torisimariyaku no Sennin to
ROE tono Kankei [Relation Between Independent Outside Directors and ROE] Junkan Shoji Homu 2013.
95
implemented feature. Their appointment is the best way to control business, as well as to provide
management with opinions and advice”.700
4 2 3 2 Auditors
In Japan, company auditors play a very crucial role in corporate governance as they represent
companies in derivative suits.701 These auditors are elected in the same manner as directors, by the
resolution of a shareholders meeting.702 Every large company, excluding a company which is not
a public company and a company with committees, is obliged to have a board of company auditors
and an accounting auditor.703 “A large company704 that is not a public company shall have an
accounting auditor”.705 A company auditor of a Japanese stock company may not concurrently act
as a director or employee, including a manager, of that same company or its subsidiary. 706 Also,
s/he may not act as an accounting advisor707 or an executive officer of such subsidiary.708 Company
auditors are empowered to audit the execution of duties by directors,709 attend the board of
directors meetings710 and may at any time request reports on the business from the directors,
accounting advisors, managers and other employees.711 A company with a board of company
auditors must have at least three company auditors, and at least half of them shall be outside
company auditors.712 This enhances auditor independence and disinterestedness.
700
Passador 2016 DePaul Business & Commercial Law Journal 46.
701
Kawashima and Sakurai 1997 Stanford J. Int'l L. 48.
702
703
704
Article 2(vi) of the Japanese Companies Act 86 of July 26 2005 states that a large company is “any stock
company whose amount of the stated capital in the balance sheet as of the end of its most recent business year is
¥500 million or more; or whose total sum of the amounts in the liabilities section of the balance sheet as of the
end of its most recent business year is ¥20 billion or more”.
705
706
707
If the accounting advisor is a juridical person, then this provision is directed to the member who is in charge of
its affairs. See Article 335(2) of the Japanese Companies Act 86 of July 26 2005.
708
709
710
711
712
Article 335(3) of the Japanese Companies Act 86 of July 26 2005. An outside company auditor is defined as “an
auditor of any stock company who has neither ever served in the past as a director, accounting advisor (or, in
cases where the accounting advisor is a juridical person, any member thereof who was in charge of its advisory
affairs) or executive officer, nor as an employee, including a manager, of such stock company or any of its
subsidiaries”.
96
4 2 3 3 Source of finance
For the purposes of this study, only two sources of finance will be examined. These are debt and
equity.713 In general, the former comes from creditors714 whilst the latter comes from shareholders.
The term ‘shareholder’ has been defined differently but all the definitions retain the fundamental
concepts of voting rights and some form of ownership proportional to the value of shares owned.715
Shareholders provide a company with capital and “receive rights to participate in the profits of the
corporation in the form of dividends, as may be declared from time to time at the board's discretion,
and to share in the firm's residual assets upon corporate dissolution”.716
Although the Japanese model has been criticised for being less flexible than its Anglo-American
counterparts,717 shareholders in the latter can find consolation in them being armed with rights of
inspection and proposal.718 In Japan, any shareholder who owns at least 3% of shares in a company
may, through a successful request for a court order, be allowed to review, inter alia, a company’s
accounting books.719 Also, Japan’s civil law culture has some requirements or elements that
promote transparency. As will be shown below, information asymmetry720 is a major barrier to
stakeholders’ invocation of derivative suits in other jurisdictions.721 Questions like what other
713
Clark The Japanese company (1979) 221 asserts that Japanese companies are mainly financed by debt whilst
most Anglo-Saxon companies depend on equity.
714
An amplified discussion of creditors’ interests will be undertaken below under part 4 2 3 4.
715
Section 1 of the South African Companies Act 71 of 2008 defines a shareholder as “the holder of a share issued
by a company and who is entered as such in the certificated or uncertificated securities register, as the case may
be”. That definition is subject to section 57(1) of the same Act which provides that a shareholder “includes a
person who is entitled to exercise any voting rights in relation to a company, irrespective of the form, title or
nature of the securities to which those voting rights are attached”.
716
Lin L “Shift of Fiduciary Duty upon Corporate Insolvency: Proper Scope of Directors' Duty to Creditors” 1993
717
718
Sections 293-296 of the Commercial Code. See also Shishido 2000 Del. J. Corp. L. 197.
719
720
and the U.S” 2019 Vanderbilt Journal of Transnational Law available at https://ssrn.com/abstract=3440857
(accessed 28-10-2019) explain that shareholder access to company documents allows them to obtain relevant
information “to monitor the company’s performance, evaluate the company’s financial status, and determine
whether and how to take proper action”. See also a discussion in the context of South Africa by Cassim MF The
new derivative action under the Companies Act: Guidelines for judicial discretion (2016) 167-169.
721
Asian Journal of Comparative Law 283; Mukwiri and Siems 2014 Journal of Law and Society 54 while making
reference to Tomasic and Akinbami “Towards a New Corporate Governance After the Global Financial Crisis”
2011a International Company and Commercial Law Rev. 248-249; Gelter “Mapping Types of Shareholder
Lawsuits across Jurisdictions” 2017 ECGI Working Paper Series in Law 30 available at:
https://ssrn.com/abstract=3011444 (accessed 21-11-2019). With respect to South Africa, Cassim MF The new
derivative action under the Companies Act: Guidelines for judicial discretion (2016) 168 also narrates the
97
documents are allowed, and issues relating to judicial expenses, time periods, safeguards against
abuse and the possible conflict between the right of access to information and the right to privacy
will be addressed in the forthcoming chapters.
If Japan has done great by providing shareholders with the right of inspection and proposal then
South Africa has excelled. The South African Companies Act722 provides both shareholders723 and
non-shareholders724 with the right of access to company information.725 Recently, the Supreme
Court of Appeal (SCA) of South Africa had to decide on an issue arising out of the text of section
26 in the case of Nova Property Group Holdings v Cobbett.726 This case presented the SCA with
an opportunity to provide the correct interpretation of the right to access company records as
provided in section 26(2) of the Act. In this case, the court also provided clarity on how the
provision in question relates to related provisions in the Promotion of Access to Information Act727
(PAIA) and the Constitution of the Republic of South Africa.728
The appeal originated from the attempts of Moneyweb (Pty) Ltd (the second respondent) 729 and
Mr JP Cobbett (the first respondent)730 to exercise their statutory right in terms of section 26 of the
challenges that a prospective applicant may face in trying to invoke section 165(4) of the Act as a channel for
access to company information.
722
71 of 2008.
723
Section 26(1) of the Companies Act provides that:
“A person who holds or has a beneficial interest in any securities issued by a profit company, or who is a member
of a non-profit company, has a right to inspect and copy, without any charge for any such inspection or upon
payment of no more than the prescribed maximum charge for any such copy, the information contained in the
following records of the company:
(a) The company’s Memorandum of Incorporation and any amendments to it, and any rules made by the
company, as mentioned in section 24(3)(a);
(b) the records in respect of the company’s directors, as mentioned in section 24(3)(b);
(c) the reports to annual meetings, and annual financial statements, as mentioned in section 24(3)(c)(i) and (ii);
(d) the notices and minutes of annual meetings, and communications mentioned in section 24(3)(d) and (e),...
and
(e) the securities register of a profit company, or the members register of a non-profit company that has members,
as mentioned in section 24(4)”.
724
Section 26(2) of the Companies Act provides that “[a] person not contemplated in subsection (1) has a right to
inspect or copy the securities register of a profit company, or the members register of a non-profit company that
has members, or the register of directors of a company, upon payment of an amount not exceeding the prescribed
maximum fee for any such inspection”.
725
Section 26.
726
2016 3 All SA 32 (SCA). Also see the discussion in Henochsberg on the Companies Act 71 of 2008 Vol 1 Service
Issue 2 2012 111-112.
727
2 of 2000. PAIA gives effect to section 32 of the Constitution of the Republic of South Africa 1996. See
Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 112.
728
1996.
729
Moneyweb is a publisher of business, financial and investment news.
730
The first respondent is a financial journalist who specialises in the investigation of illegal investment schemes.
98
Act to access the securities registers of Nova Property Group Holdings Ltd, Frontier Asset
Management & Investments (Pty) Ltd and Centro Property Group (Pty) Ltd (the appellants).731
The respondents were apparently linked to the Sharemax Group of Companies (Sharemax). As
part of its ongoing investigation of Sharemax’s controversial property syndication investment
scheme, the second respondent commissioned the first respondent to investigate the shareholding
structures of the appellants and to write articles on his findings for publication by Moneyweb.732
The first respondent requested access to the appellants’ securities register and to make copies
thereof in terms of section 26(2) of the Act. Arguing that the second respondent was solely
purposed to discredit the appellants and to undermine their integrity, the first respondent’s requests
were refused. As a result, the second respondent launched an application in the Gauteng Division
of the High Court, Pretoria, (the court a quo), to compel the appellants to allow Cobbett to inspect
and make copies of their securities registers.733 The court a quo held that section 26(2) did not
confer an absolute right to inspect the documents contemplated in the subsection, but that the court
retained a discretion to refuse to order an inspection.734 The court a quo further held that;
“a construction which confers a discretion on the court would more effectively promote the objects
and spirit of the Constitution. The rights that the parties assert and seek to protect are . . . constitutional
rights . . . rights to information on the one hand and privacy and dignity on the other. No constitutional
right is absolute. In the process of determining which of the competing constitutional rights should
prevail, each such right must be weighed against other relevant constitutional rights. A construction
which would disable a court from weighing and giving effect to other constitutional rights would be
subversive of the principle of fairness underlying the constitution”.735
The appeal was with the leave of the court a quo.
Section 113 of the 1973 Companies Act conferred an unqualified right, subject to the court’s
discretion to refuse access, to any person wishing to access a company’s share register. 736 The
2008 Companies Act introduced a peremptory provision: “The register of members and register
731
Nova Property Group Holdings v Cobbett 2016 3 All SA 32 (SCA) para 1.
732
733
734
735
Ibid.
736
Nova Property Group Holdings v Cobbett 2016 3 All SA 32 (SCA) 18 para 29.
99
of directors of a company must . . . be open to inspection” in section 26(6).737 It was also made
clear that this right was in addition to any rights available under PAIA.738
However, since the 2008 Companies Act contained some errors, an Amendment Bill739 was
introduced by the Minister of Trade and Industry (the Minister) to amend the said errors before the
Act came into force. The Amendment Bill sought to effect two important modifications. First, the
Bill appeared to subject the right in question to PAIA. Second, the peremptory wording “must”
was omitted.740 After receiving public submissions regarding the original Bill, the Portfolio
Committee produced a revised version741 which also contained two vital alterations. The
conjunctive “and” in subsection (4) was replaced with the disjunctive “or”.742 Additionally, a new
peremptory sub-clause that made clear the nature of the obligation imposed upon the companies
was inserted.743 These adjustments were retained in the version of the Bill that eventually became
the Amendment Act.744 A similar revolution is also reflected in the Companies Regulations.745
The court held that “legislative history squarely contradicts the construction of s 26(2) which is
contended for by the [applicants]. Essentially, this means that the ‘motive’ with which a requester
seeks access to a company’s share register is irrelevant”.746 Therefore, when a company fails or
refuses to provide access, the requester is entitled to an order compelling access.747
The appellants also contended that an unqualified right of access violates a shareholder’s right to
privacy in terms of section 14 of the Constitution and that the rights of access to information and
737
Ibid.
738
See also Luiz “The Companies Act 71 of 2008 and the Disclosure of and Rights of Access to Information about
Securities” 2014 SA Merc LJ 205; Rachlitz “Disclosure of Ownership in South African Company Law” 2013
Stellenbosch L. Rev. 417; Krige “Safeguarding the right of access to information” 2016 Without Prejudice 25;
and Clutcho (Pty) Ltd v Davis 2005 3 SA 486 (SCA).
739
B40-2010.
740
The Companies Bill B40-2010 provided that: “a person may exercise the rights set out in subsection (1) or (2),
or contemplated in subsection (3) … (b) by direct request made to a company in the prescribed manner, either in
person, or through an attorney or other personal representative designated in writing; and (c) in accordance with
the Promotion of Access to Information Act 2000” (own emphasis added).
741
Amendment Bill B40A-2010.
742
Nova Property Group Holdings v Cobbett 2016 3 All SA 32 (SCA) 19 para 30. However, a deeper exploration
of the contents of the Companies Regulations falls outside the scope of this study.
743
Section 26(5) read: “where a company receives a request in terms of subsection (4)(b) it must within 14 business
days comply with the request by providing the opportunity to inspect or copy the register concerned to the person
making such request”.
744
745
2011.
746
Nova Property Group Holdings v Cobbett 2016 3 All SA 32 (SCA) paras 32-33.
747
Section 26(5) of the Act; Regulation 24 of the Companies Regulations 2011 and Luiz 2014 SA MERC LJ 206.
100
freedom of expression must be weighed against this right since no right is absolute.748 The court
held that “an unqualified right of access to a company’s securities register is essential for effective
journalism and an informed citizenry”.749 Access to information is crucial to accurate reporting
and thus to impart accurate information to the public.750 It was further held that;
“interference with the ability to access information impedes the freedom of the press. The right to
freedom of expression is not limited to the right to speak but includes the right to receive information
and ideas. Preventing the press from reporting fully and accurately, does not only violate the rights of
the journalist, but it also violates the rights of all the people who rely on the media to provide them
with ‘information and ideas’”751
It was also held that “courts will only rarely make orders which amount to prior restraints on
expression”.752 The appellants further contended that a private company’s securities register
contains sensitive and personal information in the form of names and identities of individuals, their
home and work addresses which may be open to abuse if it falls into the hands of wrong people.
The court disagreed with the appellants’ arguments for two reasons. First, the appellants did not
challenge the constitutionality of section 26(2) of the Act on the grounds that it violates the right
to privacy.753 Second, the privacy and dignity rights of shareholders are minimally implicated in
the right of access conferred by section 26(2).754
In an organisation where there are large shareholders such as institutional investors and minority
shareholders, it stands to reason that the latter’s vote may not be loud enough to influence the
outcome of an election. The other option might be for the minority shareholders to simply sell their
shares and exit. However, this study is premised on “balancing the rights … of shareholders and
748
749
750
Nova Property Group Holdings v Cobbett 2016 3 All SA 32 (SCA) para 37 referring to Brümmer v Minister for
Social Development 2009 6 SA 323 (CC) para 63.
751
752
26 para 45. In Midi Television (Pty) Ltd t/a E-TV v DPP (WC) 2007 5 SA 540 (SCA) paras 19-20 it was held
that “publication will be unlawful, thus susceptible to being prohibited, only if the prejudice that the publication
might cause to the administration of justice is demonstrable and substantial and there is a real risk that the
prejudice will occur if publication takes place. Mere conjecture or speculation that prejudice might occur will
not be enough”. In paragraph 19, the court also held that “if publication occurs and if it is unlawful, the
Companies will be entitled to sue for damages, which will ‘usually [be] capable of vindicating the right to
reputation”.
753
23 para 40.
754
Ibid.
101
directors” which is one of the purposes of the Companies Act755 and the provision of an appropriate
remedy in the form of derivative claims, for minority shareholders who wish to continue as
shareholders for the foreseeable future since companies operate as going concerns.
4 2 3 4 Creditors
A creditor is any individual or company to whom money is owing. 756 Creditors also provide
capital to a company. Nwafor, a notable company law scholar, explains that the meaning of the
word “creditors” should “not [be] restricted to those who have present claims against the company,
but extends to prospective creditors having future claims against it”.757 There are secured and
unsecured creditors.758 Unsecured creditors are interested in the company’s business as they see it
as a credit risk.759 Lin argues that “creditors have fixed claims against the corporation that entitle
them to receive a pre-determined rate of interest and repayment of their principal at a specified
maturity date”.760 Therefore, company creditors desire sound management for the protection of
their receivables.761
There has been a significant shift towards a recognition of directors’ duties to creditors, especially
in the common law jurisdictions at least during insolvency.762 Before insolvency, directors do not
owe any obligation to act in the best interests of creditors.763 The recognition of directors’ duties
towards creditors can be traced back to the famous golden passage of Mason J in the Australian
case of Walker v Wimborne764 where the learned judge stated that:
“…it should be emphasised that the directors of a company in discharging their duty to the company
must take account of the interest of its shareholders and its creditors. Any failure by the directors to
755
71 of 2008.
756
Van Niekerk et al South African Concise Oxford Dictionary 2 ed (2010) 275.
757
Nwafor “Fraudulent Trading and the Protection of Company Creditors: The Current Trend in Company
Legislation and Judicial Attitude” 2013 Comm. L. World Rev 312.
758
Law and Martin Oxford Dictionary of Law 7 ed (2009) 571 defines an unsecured creditor as “a person who has
lent money without obtaining any security”. Garner et al Black’s law dictionary 8 ed (2004) 397 states that an
unsecured creditor is “a creditor who, upon giving credit, takes no rights against specific property of the debtor”.
759
Esser and Du Plessis “The Stakeholder Debate and Directors’ Fiduciary Duties” 2007 19 SA Merc LJ 346.
760
Lin L 1993 Vanderbilt Law Review 1488.
761
762
Lin L 1993 Vanderbilt LR 1510.
763
Ibid. Velasco “Fiduciary Principles in Corporate Law” 2018 Notre Dame Law School Legal Studies Research
Paper No. 1933 10 available at https://ssrn.com/abstract=3374505 (accessed 15-10-2019).
764
1976 137 CLR 1.
102
take into account the interests of creditors will have adverse consequences for the company as well as
for them.”765
However, it remains to be seen whether the recognition of directors duties towards creditors in
cases of insolvency justifies the latter’s legal standing in derivative actions.
4 2 3 5 Employees
In South Africa, section 200A(1) of the Labour Relations Act766 provides a rebuttable presumption
as to who an employee is. The interests of employees in a company basically pertain to job
security,767 pay increases and promotion prospects.768 Consequently, they desire a profitable
organization and sound management that prioritises sustainable corporate growth. 769 As has been
alluded to above, Japanese employees’ interests enjoy a significant consideration. 770 Whether the
Japanese system allows employees to enforce their rights through derivative actions will be
considered in the forthcoming chapters.
4 2 3 6 Derivative litigation defendants

In England, derivative actions can be brought against a director or any other person.771 However,
the court retains its discretion to decide whether the action should continue or not.772 Civil
procedure rules require that the company be made a defendant in the derivative litigation.773
Generally, derivative claims appear in the manner: “Shareholder v Director and Company”.774 It
765
Walker v Wimborne 1976 137 CLR 6-7.
766
66 of 1995. According to this section “Until the contrary is proved, a person, who works for or renders services
to any other person, is presumed, regardless of the form of the contract, to be an employee, if any one or more
of the following factors are present: (a) the manner in which the person works is subject to the control or direction
of another person; (b) the person’s hours of work are subject to the control or direction of another person; (c) in
the case of a person who works for an organisation, the person forms part of that organisation; (d) the person has
worked for that other person for an average of at least 40 hours per month over the last three months; (e) the
person is economically dependent on the other person for whom he or she works or renders services; (f) the
person is provided with tools of trade or work equipment by the other person; or (g) the person only works for
or renders services to one person”.
767
Esser “The Enlightened Shareholder Value Approach versus Plurism in the Management of Companies” 2005
Obiter 720.
768
769
Ibid.
770
Pejovic 2012 Yonsei Law Journal 201.
771
Section 260(3) of the UK Companies Act.
772
Section 263 of the UK Companies Act.
773
774
Ibid.
103
has to be noted that the company is only a “nominal defendant” because the actual defendants are
the directors.775 The USA and South Africa follow a similar procedure.
There is no limit to possible derivative defendants in the USA.776 Derivative litigation may be
instituted to redress an “injury sustained by a corporation, or to enforce a duty owed to a
corporation”.777 USA legislation does not prescribe parties that can be defendants in a derivative
suit.778 However, in practice, the most likely candidates are directors, senior executives, and
controlling shareholders since they are “most likely to abuse the corporate mechanism”.779
Since derivative actions are brought in the interests of the company, it is not debatable whether or
not the company should be one of the parties to the action. In Japan, derivative suits can be brought
against directors, auditors, senior executive officers780 and accountants.781 However, whether the
company is allowed to participate in the legal proceedings “in a supportive capacity on the
defendant's side is another issue”.782 Interestingly, Japanese company law allows the company to
participate on the side of directors.783 However, when a company intervenes to support a director,
the auditor must consent to such action.784 The participation of a company is a matter of business
judgment.785 In South Africa, one could bring an action against a former director.786
775
Ibid.
776
777
Ibid. See also Lowry and Reisburg Pettet’s company law: Company law and corporate governance 4 ed (2012)
237; Bourne Bourne on company law 6 ed (2013) 171.
778
779
Ibid.
780
It has to be noted that senior executive officers are different from ordinary executive officers against whom
liability cannot be sought. See Oda 2011 ECFR 342.
781
Oda 2011 ECFR 342.
782
Oda 2011 ECFR 345.
783
Oda 2011 ECFR 345. Also, section 849(1) of the Japanese Companies Act provides that “shareholder or a Stock
Company may intervene in a suit relating to an Action for Pursuing Liability, etc. either as a [co-party] or for
assisting either of the parties; provided, however, that this shall not apply when it will unduly delay the court
proceedings or impose an excessive administrative burden on the court”.
784
Art 849(2).
785
Oda 2011 ECFR 345.
786
Stoop “The Derivative Action Provisions in the Companies Act 71 of 2008” 2012 SALJ 527 532.
104
4 2 3 7 Court structure of South Africa, the UK, the USA and Japan
In England, a claimant can institute civil proceedings in the County Court787 for minor cases and
the High Court788 for major cases. The High Court is divided into three divisions.789 The first one
is the Queen’s Bench Division (Q.B.D) which is headed by the Lord Chief Justice.790 Two other
special courts namely; the Commercial Court, which specialises in commercial matters and the
Mercantile Court form part of the Q.B.D.791 This is followed by the Chancery Division that is
headed by the Vice‐Chancellor with the assistance of eighteen High Court judges. 792 This is the
most important High Court division for the purposes of this study. The Chancery division deals
with, inter alia, company and partnership law claims as well as tax cases.793 The division includes
three specialist courts: the Companies Court, the Patents Court and the Bankruptcy Court.794 The
Chancery Division is responsible for the creation and development of the law of equity in England.
Lastly, there is the Family Division which falls outside the scope of this study. Permitted appeals
from judgments of the High Court are heard in the Court of Appeal. The final appellate court in
England is the Supreme Court.795 The Supreme Court and the Court of Appeal’s decisions become
binding precedents that should be followed by lower courts in future cases.796
787
For claims not exceeding 25 000 pounds.
788
For claims exceeding 25 000 pounds. However, the High Court has unlimited civil original jurisdiction
789
Kapitaniak “The English Court System” 2 available on https://www.depa.univ-paris8.fr/IMG/pdf/unit_3_-
_english_court_system.pdf (accessed 27-07-2019). See also Penner The Law Student’s Dictionary (2008) 40.
790
Kapitaniak “The English Court System” 3 available on https://www.depa.univ-paris8.fr/IMG/pdf/unit_3_-
_english_court_system.pdf (accessed 27-07-2019).
791
The Judicial Office International Team “The Judicial System of England and Wales: A visitor’s guide” 9.
792
Kapitaniak “The English Court System” 3-4 available on https://www.depa.univ-paris8.fr/IMG/pdf/unit_3_-
_english_court_system.pdf (accessed 27-07-2019).
793
The Judicial Office International Team “The Judicial System of England and Wales: A visitor’s guide” 10-11
https://www.judiciary.uk/publications/the-judicial-system-of-england-and-wales-a-visitors-guide/ (accessed 27-
06-2019).
794
The Judicial Office International Team “The Judicial System of England and Wales: A visitor’s guide” 10-11.
795
The Judicial Office International Team “The Judicial System of England and Wales: A visitor’s guide” 7 noted
that although the Supreme Court is the highest court of appeal in England, it must give effect to directly
applicable European Union law, and interpret domestic law in a way that is consistent with it, so far as possible”.
However, this is highly unlikely to continue after the Brexit processes are finalised.
796
The Judicial Office International Team “The Judicial System of England and Wales: A visitor’s guide” 7.
105
Figure 3: The English Court Structure
As a federal state, the USA has a dual court system.797 USA companies are subject to the laws of
the states in which they are incorporated798 and are also affected by the laws of any other state in
which they operate.799 Company law used to be exclusively a state law question800 since it regulates
the relationship between private actors. However, due to the fact that securities regulation is largely
regulated by federal law and that procedural rules are determined by both federal and state law,
the USA’s company law has been infiltrated by both federal and state law concepts.801
797
Federal Judicial Center “The US Legal System: A Short Description” https://www.fjc.gov/content/us-legal-
system-short-description-english-original (accessed 05-03-2018).
798
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 75 submit that claims
of directors’ breach of fiduciary duty that are brought under company law will generally be dealt with by applying
the law of the state of incorporation.
799
https://saylordotorg.github.io/text_corporate-governance/s03-01-the-u-s-corporate-governance-s.html
(accessed 06-03-2018).
800
801
Ibid.
106
Consequently, in this study, with regards to the USA, reference will be made to both state law and
federal law.
The USA federal court system has evolved with time.802 Currently, the federal court structure is
comprised of three levels, namely, the Supreme Court,803 Courts of Appeals and District Courts.804
There are 94 federal district courts which serve as trial courts where federal cases are tried and
where witnesses testify.805 There are thirteen circuit courts. Twelve of them are Regional Circuit
Courts and the other one is for the Federal Circuit.806 As part of their mandate to reduce the
Supreme Court’s burden, Courts of Appeals hear appeals from District Courts.807 Unlike the fact-
finding district courts, Courts of Appeals are concerned with matters of law.808
802
See http://judiciallearningcenter.org/levels-of-the-federal-courts/ (accessed 05-03-2018). It is further stated that
the Supreme Court is the first and only court to be established by the USA Constitution.
803
This is the highest court of the land in the USA. “Court Role and Structure” http://www.uscourts.gov/about-
federal-courts/court-role-and-structure (accessed 05-03-2018). For more information see Administrative Office
of the United States Courts The Federal Court System in the United States: An Introduction for Judges and
Judicial Administrators in other Countries 4 ed 2016.
804
https://www.justice.gov/usao/justice-101/federal-courts (accessed 05-03-2018).
805
http://judiciallearningcenter.org/levels-of-the-federal-courts/ (accessed 05-03-2018).
806
https://www.justice.gov/usao/justice-101/federal-courts (accessed 05-03-2018) demonstrates how the ‘circuit
system’ works in the following manner: “The Fifth Circuit, for example, includes the states of Texas, Louisiana,
and Mississippi. Cases from the district courts of those states are appealed to the United States Court of Appeals
for the Fifth Circuit, which is headquartered in New Orleans, Louisiana. Additionally, the Federal Circuit Court
of Appeals has a nationwide jurisdiction over very specific issues such as patents”. For more information see
Administrative Office of the United States Courts The Federal Court System in the United States: An
Introduction for Judges and Judicial Administrators in other Countries 4 ed 2016.
807
808
This means that if a party lost his/her case in a District Court, s/he can appeal to a Court of Appeal if s/he “feels
the law has been inappropriately applied, but not if the losing party feels the facts were misinterpreted”. See
“The Federal Court System of the United States”
http://wpressutexas.net/cs378h/index.php?title=The_Federal_Court_System_of_the_United_States (accessed
05-03-2018).
107
Figure 4: The USA Dual Court Structure
The Delaware judiciary comprises of the Supreme Court, the Court of Chancery, the Superior
Court, the Family Court, the Court of Common Pleas, the Justice of the Peace Court and other
agencies.809 If likened to a pyramid, the Justice of the Peace Court would be located at the base of
the pyramid while the Supreme Court will be at the top.810 The Supreme Court is Delaware’s
appellate court which receives direct appeals from the Court of Chancery, the Superior Court, and
the Family Court. The Superior Court has original jurisdiction811 over all criminal or civil cases
809
“An Overview of the Delaware Court System” https://courts.delaware.gov/overview.aspx (accessed 05-03-
2018). The same official website of the Delaware judiciary names some of the agencies as the Child Death
Review Commission, the Child Placement Review Board, Office of the Child Advocate Law Libraries, and
Public Guardian.
810
2018).
811
This refers to power to hear certain cases before appeals.
108
except equity cases.812 The Court of Chancery has jurisdiction over all equity matters which are
largely corporate, fiduciary and contractual matters.813 It is also responsible for developing
Delaware case law814 on corporate law matters. Appeals from the Court of Chancery may be taken
to the Supreme Court.815
Unlike the USA and England, South Africa does not have a special court that is dedicated to
company law matters. As a result, most derivative actions are instituted in the High Court. It is
also pertinent to note that the South African High Court816 is geographically divided whilst the
English High Court system adopted a specialised approach. The critical question is whether the
absence of such a special court is a barrier to stakeholders’ access to justice through the derivative
remedy. With leave of the court, appeals can be filed with the Supreme Court of Appeal (SCA).
Due to its legal history, South Africa has adopted the stare decisis rule from England.
There are five types of courts in Japan, namely, the Supreme Court, High Courts, District Courts,
Family Courts and Summary Courts. In principle, Summary Courts are responsible for civil cases
involving claims which do not exceed 900,000 yen.817 The District Courts are the usual courts of
first instance for most types of civil and criminals cases.818 In Japan, High Courts handle appeals
from the district, family and summary courts.819 The highest court is the Supreme Court which is
responsible for appeals filed against the high courts’ decisions.820 Similar to South Africa, it seems
that Japan also does not have a court that is dedicated to deal with company law matters. 821 The
reason could be that, as a civil law jurisdiction, Japan’s legislation is sufficiently expansive to
cover all the substantive and procedural rules relating to company law in general and derivative
812
2018).
813
Ibid.
814
Case law is an indispensable source of law in a common law jurisdiction.
815
2018).
816
For example, the Eastern Cape High Court has divisions in Grahamstown, Port Elizabeth, East London, Mthatha
and Bhisho.
817
The Secretariat of the Judicial Reform Council “The Japanese Judicial System”
https://japan.kantei.go.jp/judiciary/0620system.html (accessed 05-03-2018).
818
Ibid.
819
Ibid.
820
Ibid. The two types of appeals heard by the Supreme Court are Jokoku-appeals and special Kokoku appeals.
821
However, article 848 of the Japanese Companies Act 86 of July 26 2005 provides that an action for pursuing the
Liability of a company “shall be under the exclusive jurisdiction of the district court having jurisdiction over the
location of the head office of the Stock Company”.
109
remedies in particular. This and other related questions will form part of the discussions in the later
chapters of this thesis.
4 2 4 Primary beneficiaries of directors’ fiduciary duties

It is noteworthy to identify the primary beneficiaries of directors’ fiduciary duties as it may affect
the locus standi of other stakeholders. It has been submitted that the level of protection for minority
shareholders in a given jurisdiction depends on whether it is a common law or civil law
jurisdiction.822 The problem with this legal fact is that it is not clear whether there is, a proven
causal link between the nature of a legal system and the level of minority shareholder protection
available. First, the above submission was not backed by any statutory provision or judicial
precedents. Second, although the submission was alleged to have been based on empirical
evidence, the data classifications thereof have been criticised as unreliable.823
It is submitted that a three-step approach would be vital in determining the level of minority
shareholder protection available.824 First, it is necessary for one to ask whether the given
jurisdiction is inclined to the shareholder primacy,825 the ESV826 or the stakeholder theory
approach.827 If, for example, it is found that a jurisdiction prefers the shareholder primacy model,
the next step would be to enquire whether the shares are widely held or closely held. In doing so,
it will be necessary to examine the extent to which institutional investors influence a company’s
course of action. If a jurisdiction adopts the ESV approach, the second stage requires an
identification of the main source of corporate finance. If the prevailing tradition is that companies
822
823
Shishido 2000 Del. J. Corp. L. 196 footnote 20.
824
It must be noted that a consideration of fiduciary duties undertaken in this study relates to incumbent directors.
For a discussion of post-resignation fiduciary duties of directors see Cassim R “Post-Resignation Duties of
Directors: The Application of the Fiduciary Duty not to Misappropriate Corporate Opportunities” 2008 South
African Law Journal 731-753.
825
Esser and Du Plessis 2007 SA Merc L.J. 347-348 consider the shareholder primacy view to mean that “directors
should hold company property for the sole benefit of shareholders and that the exclusive obligation of directors
[is] the maximisation of shareholders’ property”. For more on the shareholder primacy theory see Macey and
Miller “Corporate Stakeholders: A Contractual Perspective” 1993 University of Toronto Law Journal 401; Berle
“For Whom Corporate Managers Are Trustees: A Note” 1932 Harvard Law Review 1365-1372; and Nwafor
2012 Macquarie J. Bus. L 160.
826
In the words of Havenga “Regulating Directors’ Duties and South African Company Law Reform” 2005 Obiter
618, the ESV approach “reflects traditional company law in giving primacy, but not exclusivity, to shareholders’
interests”.
827
Havenga 2005 Obiter 618 contends that “the pluralist theory dictates that companies should be run in such a way
that wealth and welfare are maximised for a number of different constituencies, each with a legitimate stake in
the company’s development and activities”.
110
are mainly financed through equity, then minority shareholders’ interests stand a better chance of
being protected.828 If, on the other hand, creditors are the main providers of finance, then minority
shareholders’ interests are likely to be undermined. In jurisdictions that are more inclined to the
stakeholder theory, the second step would comprise a determination of the dominant stakeholders.
This would include an enquiry into the historical and existing corporate climate. Japan is a typical
example of a stakeholder inclined jurisdiction that prioritises a certain group of stakeholders, that
is, employees.
For a pro-shareholder primacy jurisdiction, the last step would be an enquiry into the availability
of other effective minority shareholder remedies under the common law, equity or statutory
provisions, apart from the exit option. It is only at this final stage that one may refer to the
distinction between the common law and civil law in relation to the level of minority shareholder
protection in a given jurisdiction.
The USA corporate governance system is based on the pursuit of shareholder wealth
maximisation.829 In Jackson’s words, “the U.S. is often seen as being the paradigmatic case of the
shareholder-oriented or market-based approach to corporate governance”.830 Typical of a highly
capitalist state, shareholder interests are prioritised when it comes to company decision making in
the USA.831 Under the Japanese corporate governance model, directors individually owe fiduciary
828
Sakai and Asaoka 2003 Center for Policy and Economy Mitsubishi Research Institute 2 highlight a divergence
of stakeholders’ interests which might result in a conflict of interests. While shareholders are interested in profit
maximisation, creditors are concerned about the sustainability of a company.
829
Allen and Zhao “The Corporate Governance Model of Japan: Shareholders are not Rulers” 2007 1. Raza
“Corporate Governance: USA Versus Europe” http://www.valuewalk.com/2013/01/corporate-governance-usa-
versus-europe/ (accessed 05-03-2018); Padfield “The Role of Corporate Personality Theory in Opting out of
Shareholder Wealth Maximization” 2017 Transactions: The Tennessee Journal of Business Law 415 417; Siems
“Shareholder Protection around the World (Leximetric II)” 2008 Delaware Journal of Corporate Law 111 113.
However, Nyombi 2018 International Journal of Law and Management 144 observed that there has been a shift
towards the ESV in about forty states of the USA.
830
Jackson 2010 Arbeitspapier 9.
831
111
duties to the company.832 If the traditional,833 though debatable,834 definition of the company being
equated to the shareholders as a whole835 is accepted, it means that directors may not act in the
best interests of a single shareholder836 if such conduct is contrary to the best interests of the
shareholders as a whole.837 England had adopted the ESV approach.838
4 2 5 Regulatory instruments
Having identified the primary beneficiaries of directors’ fiduciary duties, this section discusses the
various regulatory instruments in England, USA, Japan and South Africa. It is pertinent to establish
a jurisdiction’s regulatory instruments as it may determine the source and efficiency of minority
shareholders’ remedies including derivative claims. As will become apparent, a jurisdiction that
has codified the derivative remedy is more likely to provide efficient protection to aggrieved
832
Shishido 2000 Del. J. Corp. L. 199. See also Siems “Private Enforcement of Directors’ Duties: Derivative
Actions as a Global Phenomenon” 2012 3 available at: http://ssrn.com/abstract=1699353 (accessed 28-06-2018);
Black et al “Legal liability of directors and company officials part 2: Court procedures, indemnification and
insurance, and administrative and criminal liability (Report to the Russian Securities Agency)” 2008 Columbia
Business Law Review 1 25-26; Riches and Allen Keenan and Riches’ Business law 10 ed (2011) 192.
833
Da Silva v CH Chemicals (Pty) Ltd 2008 6 620 (SCA) para 18; Parke v Daily News Ltd 1962 2 All ER 948 and;
834
It is argued that company law has evolved from the shareholder primacy view to the enlightened shareholder
value (ESV) approach, which, according to Nwafor 2012 Macquarie J. Bus. L 168 entails balancing short term
and long term interests of all the stakeholders which however remain subordinate to shareholders’ interests.
Another South African commentator, Havenga 2005 Obiter 618 notes concerning the ESV that “it seems unlikely
that this duty will be interpreted as a general obligation to consider other stakeholder interests”. There are other
scholars who argue that company law has even shifted towards the stakeholder or pluralist approach which entails
that shareholders are just but one group among the many constituencies whose interests need to be considered in
decision making. See Nwafor 2012 Macquarie J. Bus. L 174; Esser 2005 Obiter 720-721; Wiese Corporate
Governance in South Africa with International Comparisons 2 ed (2016) 9. Ramnath and Nmehielle
“Interpreting Directors’ Fiduciary Duty to Act in the Company’s Best Interests through the Prism of the Bill of
Rights: Taking Other Stakeholders into Consideration” 2013 Speculum Juris 106-107 argue that directors are
not allowed to favour shareholder interests when exercising their discretion on what they regard to be the best
interests of the company. See also the discussions by Velasco “Fiduciary Principles in Corporate Law” 2018
Notre Dame Law School Legal Studies Research Paper No. 1933 8-9 available at
https://ssrn.com/abstract=3374505 (accessed 15-10-2019) and Lin L “Mandatory Corporate Social
Responsibility? Legislative Innovation and Judicial Application in China” 2018 American Journal of
Comparative Law 46.
835
In the Australian case of Kinsela v Russell Kinsela (Pty) Ltd 1986 4 NSWLR 722, it was held that “the proprietary
interests of the shareholders entitle them as a general body to be regarded as the company when questions of the
duty of directors arise”. See also Chen 2017 Asian Journal of Comparative Law 281; Shishido 2000 Del. J. Corp.
L. 199; Ajibo “A Critique of Enlightened Shareholder Value: Revisiting the Shareholder Primacy Theory” 2014
Birkbeck Law Review 44; and Rousseau “The Duties of Directors of Financially Distressed Corporations: A
Quebec Perspective on the Peoples Case” 2004 Canadian Business Law Journal 380.
836
In an early leading English case of Percival v Wright 1902 2 421 (Ch) Eady J held that directors owe fiduciary
duties to the company and not the individual shareholders.
837
Millstein et al 2018 Journal of Applied Corporate Finance 18 who emphasised that directors’ duties are owed
to all the shareholders even if they were appointed by one shareholder.
838
Nyombi 2018 International Journal of Law and Management 139.
112
stakeholders. England’s corporate governance model relies heavily on the provisions of the
Companies Act,839 the Amended Civil Procedure Rules840 and the United Kingdom (UK)
Corporate Governance Code 2016.841 The compliance philosophy behind the UK code is “comply
or explain”.842 This internationally respected approach that encourages flexibility in compliance843
and recognises the dynamics of a changing economic environment 844 has been in operation since
the Cadbury Report.845 On the other hand, the main regulatory instruments in the USA are the
Sarbanes Oxley Act,846 the American Bar Association’s Model Business Corporation Act,847 the
Federal Rules of Civil Procedure and the American Law Institute’s (ALI) Principles of Corporate
Governance.848 However, for the purposes of this study, the MBCA and the Delaware State, which
is home to most of the largest companies in the USA849 and has extensive judicial activity850 on
derivative actions, will be used as the representative for USA law although jurisprudence from
other states will also be considered.851 Generally, the USA system of corporate governance regime
839
2006.
840
2007.
841
Hereinafter referred to as the UK Code. The Code was developed and adopted by the UK’s Financial Reporting
Council. For more on corporate governance codes or self-regulation see Mukwiri and Siems 2014 Journal of
Law and Society 67-71.
842
The UK Code 4. This approach has been hailed to be the original thinking of the King Committee.
843
The UK Code 4.
844
It can be argued that by allowing companies to explain those cases of non-compliance, directors can undertake
worthwhile but risky business decisions that are unique to and in the best interests of their company. What is
important is obedience to the spirit of the code and not just the letter thereof. See
https://www.valuewalk.com/2013/01/corporate-governance-usa-versus-europe/ (accessed 16-03-2018).
Therefore, not all cases of non-compliance with the Code are treated as infractions of the Code’s principles.
845
of Corporate Governance Chaired by Sir Adrian Cadbury 1992.
846
2002.
847
1984 (Revised 2016). The MBCA is described “as a free-standing general company legislation that can be
enacted substantially in its entirety by a state legislature”. At the end of 2016, thirty-two states had adopted all
or substantially all of the MBCA as their general corporations statute. Many other states have adopted selected
provisions of the Model Act. See https://www.americanbar.org/publications/blt/2017/01/08_mbca.html
(accessed 06-09-2018).
848
1994. Although the ALI principles lack statutory enforcement, they have significantly influenced the
development of state-based company law as courts have persistently referred to them. See Baum and Puchniak
“The derivative action: An economic, historical and practice-oriented approach” in Puchniak et al (eds) The
849
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 75 reveal that at least
50% of the New York Stock Exchange (NYSE) listed companies close to 60% of the Fortune 500 companies are
Delaware corporations. The Business dictionary http://www.businessdictionary.com/definition/Fortune-
500.html (accessed 19-03-2018) defines Fortune 500 companies as an annually published list of 500 of the USA’s
largest companies. The companies are ranked by revenue.
850
Mainly from the Delaware Court of Chancery.
851
The Delaware General Corporation Law (DCGL) is the statute law that governs the directors of a corporation.
The Delaware Court of Chancery, a special court that dedicated to company law matters, has played a leading
113
relies more on hard law whereas England depends more on “soft law self-regulatory
mechanisms”852 such as the Codes.
In Japan, the main regulatory instruments are the Japanese Companies Act, 853including its
subordinate rules, and the Corporate Governance Code.854 The Asian state follows England’s
“comply or explain” approach.855 The Code recommends that listed companies appoint at least two
independent directors.856 Optionally, at least a third of the directors should be independent.857
In South Africa, the lead regulatory instruments are the Companies Act,858 the Companies
Regulations,859 the Financial Markets Act,860 the King IV861 and the Johannesburg Stock Exchange
(JSE) Listing Requirements.862 The South African Code of Corporate Governance has moved from
the “apply or explain” approach to the “apply and explain” approach.863
An important distinguishing feature between Japan and the other three jurisdictions that make up
this comparative study is that the former is a civil law country whilst the latter are common law
states.864 In general, the common law approach is procedurally flexible due to its reliance on
role in the creation of the common law that governs Delaware directors. Therefore, in Delaware, directors’
conduct is regulated by both statute and common law. See Block and Gerstner 2016 Comparative Corporate
Governance and Financial Regulation 11.
852
Jackson 2010 Arbeitspapier 9; Mukwiri and Siems 2014 Journal of Law and Society 67-71.
853
86 of July 26 2005.
854
2015.
855
Japanese Code 33. The Code recognizes that each company’s manner of implementation “may vary depending
on industry, company size, business characteristics, company organization and the environment surrounding the
company. The Code’s principles should be applied in accordance with each company’s particular situation”.
856
Principle 4.8.
857
Ibid.
858
71 of 2008.
859
2011.
860
19 of 2012.
861
2016.
862
Wiese Corporate governance in South Africa with international comparisons 2 ed (2016) 25-26 asserts that
South African companies also have a duty to either directly or indirectly comply with other statutes which impose
certain governance obligations on them and their directors. Some of these pieces of legislation include the Banks
Act 124 of 1993, the Competition Act 89 of 1998, the Consumer Protection Act 68 of 2008, the National
Environmental Management Act 107 of 1998, the Public Finance Management Act 1 of 1999 and the Promotion
of Access to Information Act 2 of 2000. See also Hendrikse and Hefer Corporate governance handbook:
Principles and practice 3 ed (2019) 72-81 and Loubser et al Company secretarial practice Revision service 2
2018 7-26 to 7-27.
863
King IV 7; Loubser et al Company secretarial practice Revision service 2 2018 7-2.
864
114
judicial development of the law through case law.865 On the other hand, Japanese law is less
flexible as it relies more on statutory provisions.866 Shishido argues that:
“From a procedural point of view, it is easier for American shareholders to pursue legal remedies than
for Japanese shareholders, who must choose an action from their respective Commercial Code.867
American shareholders also enjoy procedural advantages in pre-trial discovery, and the relatively easy
availability of equitable remedies and class action lawsuits”.868
It can, therefore, be anticipated that in the following discussions, most of the case law referred to
may originate from the common law jurisdictions whilst statute-based arguments may form the
basis for most of the assessment of derivative actions in Japan. Having understood the pertinent
regulatory instruments in the selected jurisdictions, the next section presents a discussion of the
two models of board structures.
4 2 6 Board structure
Directors being the people in charge of a company’s decision-making process, board structure may
affect the manner and rate at which a company responds after being served with a demand. 869
There are essentially two types of distinguishable board structures in company law. 870 The first
one, usually associated with the Anglo-American871 model of corporate governance, is known as
865
Shishido 2000 Del. J. Corp. L. 195 explains that “In Japanese law suits involving corporations, the complaint
must be modified to fit into one of the existing categories of suits provided under the Japanese Commercial Code.
Japanese courts are bound to address only the legal issues raised by the parties themselves, and are thus bound
by the plaintiffs’ request for relief. Courts are unable to balance conflicting interests of the parties except through
the procedures of an agreed settlement. The American system, on the other hand, is much more flexible. Plaintiffs
may bring a variety of suits against the corporation and courts may use equitable doctrines to provide relief
whenever the law does not readily provide. Furthermore, American courts may provide relief beyond that
requested in the parties' pleadings and raise motions on their own”.
866
867
However, the fact that one jurisdiction is based on common law and the other is a civil law one should not on its
own be the deciding factor. There could be other extra-legal factors that may hinder Japanese shareholders from
invoking the derivative remedy apart from the provisions of the Commercial Code. Therefore, the pertinent
question is whether Japan’s adoption of civil law is in itself a barrier to stakeholders’ use of the derivative
remedy? One of the aims of this study is to identify such barriers and suggest ways to make the derivative remedy
a more effective and efficient remedy being wary of scrupulous complainants who may abuse it. The following
discussions in this study will test the validity of claims such as the one by Shishido.
868
Shishido 2000 Del. J. Corp. L. 195. See also Gelter “Mapping Types of Shareholder Lawsuits across
Jurisdictions” 2017 ECGI Working Paper Series in Law 30-31 available at: https://ssrn.com/abstract=3011444
(accessed 21-11-2019).
869
The demand requirement shall be discussed in greater detail in chapter six below.
870
Wiese Corporate governance in South Africa with international comparisons 2 ed (2016) 28.
871
The system is so-called because it has its roots in England and was transplanted to the USA. The Cambridge
Dictionary https://dictionary.cambridge.org/dictionary/english/anglo-american (accessed 05-03-2018) explains
that the phrase is used to refer to “something involving [England] and US”.
115
the unitary or one- or single-tier board system.872 In the unitary board system, the board of directors
performs both supervisory and managerial functions.873 Some of the advantages of a single-tier
board structure include the effective flow of information, quick and responsive decision-making
and a deeper understanding of the business that comes through “involvement in the business by
the board”.874 On the other hand, critics of the one-tier board structure have raised concerns over
the model’s potential to “compromise the independence of the non-executive directors [which]
dilutes their oversight role”.875
In England, the Chief Executive Officer (CEO) is in charge of the daily management of the
business876 whereas an independent board chairman877 advises and checks the activities of the
CEO.878 This is relevant as it is a move to avoid the concentration of power in a single individual.
When unregulated power is invested within one person it is vulnerable to abuse. 879 However, it
must be noted that the law does not prevent the chair of the board of directors from being the
872
Mayer “Stakeholder approach towards Governance: Focus on Shareholders, Employees and Clients” 2013
succinctly captured the difference between a single-tier and a two-tier board structure as follows: A two-tier
board structure is bifurcated into a management board and a supervisory board. The management board refers to
the executive wing of an organization. It is responsible for the day-to-day affairs of the company and it represents
the organization. On the other hand, the supervisory wing is not involved in the daily business of an organization.
It plays an oversight role to check management’s activities. Additionally, the supervisory board plays a pivotal
role in developing strategy and acts as a watchdog of the company’s interests. Therefore, it follows that the CEO
heads the management board whilst the Chairman leads the supervisory board.
873
Block and Gerstner 2016 Comparative Corporate Governance and Financial Regulation 6.
874
Block and Gerstner 2016 Comparative Corporate Governance and Financial Regulation 19. See also Professor
Skae’s analysis of the recent Steinhoff scandal in relation to its board structure, available at:
https://citizen.co.za/talking-point/1798603/did-steinhoffs-board-structure-contribute-to-the-scandal/ (accessed
17-03-2018).
875
17-03-2018).
876
According to Black et al “Legal Liability of Directors and Company Officials Part 1: Substantive Grounds for
Liability (Report to the Russian Securities Agency)” 2007 Columbia Business Law Review 614 798, a CEO can
also be referred to as the general manager or general director.
877
The chairman is usually a non-executive director and for that matter is customarily referred to as an “outsider”.
Shepherd and Ridley Company Law: Key Facts Key Cases (2015) 174 further explain that non-executive
directors are in most cases contracted on a part time basis and should essentially “provide an independent view
to the board of directors on matters of strategy, performance and remuneration of executive directors. The UK
Code 2016 also states that “as part of their role as members of a unitary board, non-executive directors should
constructively challenge and help develop proposals on strategy”.
878
See UK Code 2016 5.
879
Bourne Company Law 200 posits that it is generally accepted that most of the corporate debacles in England and
USA are credited to “breakdowns in internal control”. The UK Code provides that “there should be a clear
division of responsibilities at the head of the company between the running of the board and the executive
responsibility for the running of the company’s business. No one individual should have unfettered powers of
decision making”.
116
CEO.880 On this note, it can be argued that the system of self-regulation through the UK Code runs
parallel with English law. As has been observed, “self-regulation and not statutory enforcement is
an adequate way to put pressures on [companies] to improve their governance strategies”.881
The second distinguishable board structure is the two-tier board system where the management
and supervisory boards exist concurrently.882 This model has been criticised for information
asymmetry between the management board and the supervisory board.883 Because the supervisory
board is not so much involved in the daily management of the company, this may result in ill-
advised decisions.
However, in the USA although the board is a single-tier884 board just as in England,885 it is common
that one of the executive directors,886 who in most cases will be the board Chairman, is also the
CEO.887 Block and Gerstner have observed that approximately 50% of companies in the USA have
a designated board chairman whilst for the remaining half, the CEO acts as both the CEO and
chairman.888 Clarke points out that although the responsibility of the company is placed into the
hands of the board of directors, the influence of CEOs has resulted in a marginalised role for the
880
http://www.developmentwork.net/chapter-7-one-tier-board-attributes-in-the-uk/244-72-corporate-governance-
in-the-uk (accessed 15-08-2018).
881
Cadbury Report.
882
Szantho “One and two-tier corporate governance systems”
http://www.internationallawoffice.com/Newsletters/Company-Commercial/Hungary/Nagy-s-Trcsnyi/One-and-
two-tier-corporate-governance-systems (accessed 06-03-2018). See also Black et al “Legal Liability of Directors
and Company Officials Part 1: Substantive Grounds for Liability (Report to the Russian Securities Agency)”
2007 Columbia Business Law Review 614 799.
883
17-03-2018).
884
885
Burnhill 2013 CFI Governance Working Group Presentation 2.
886
Burnhill 2013 CFI Governance Working Group Presentation 3 calls them “insiders”.
887
usa-versus-europe/ (accessed 05-03-2018). Clarke 2009 Comparative Research in Law & Political Economy
Research Papers 4 asserts that the question whether the CEO should not be the Chairman as well is still regarded
as a “transitional arrangement”. However, Burnhill 2013 CFI Governance Working Group Presentation 3 points
out that such leadership duality can “either increase board responsiveness or reduce board independence”. This
corroborates Raza “Corporate Governance: USA Versus Europe”
http://www.valuewalk.com/2013/01/corporate-governance-usa-versus-europe/ (accessed 05-03-2018)’s view
that it is impossible to separate morality and ethics from corporate governance. The question whether it is
effective to have the Chairman and CEO positions being held by one person largely depends on the skills of the
concerned person. It is possible that s/he can abuse the power. This could be the reason why under the two-tier
regime an individual cannot hold those two positions concurrently. It is also possible that the CEO/Chairman has
good leadership skills and delegates most of the executive functions to the management, which may increase
efficiency, and accountability.
888
117
board of directors.889 A feature of the unitary board in the USA is the constitution of several board
committees that oversee the activities of company management.890 The managers are in most cases
executive directors themselves. Such an arrangement can be problematic and result in regulatory
arbitrage as executive directors become strategists and monitors891 of their own decisions.
The Japanese Companies Act892 does not require companies to separate the duties of the chairman
and CEO. Prima facie, concern may be raised over the independence of the CEO and whether or
not such an approach will result in over-concentration of power in one individual. In determining
whether to file a derivation action, it has been argued that USA boards have more authority than
Japanese ones.893 Could this be justified by the fact that USA boards are more independent than
their Japanese counterparts?894
There is authority for the view that Japan, just like South Africa and England, has adopted a single-
tier model of the board of directors.895 However, there is also evidence of dissenting scholarly
writings and commentaries. Further, an examination of the Japanese Companies Act does not
suggest the prevalence of the unitary board system in Japan.896 This divergence of opinions
pertaining to the Japanese corporate governance structure could be a result of the time period
covered by this study. Generally, the evolution of the Japanese corporate governance model is
divided into phases.897 Contrary to the Anglo-American systems discussed above, post-war Japan
possessed its own unique corporate governance model. The model was framed around firms
889
Clarke 2009 Comparative Research in Law & Political Economy Research Papers 3-4.
890
usa-versus-europe/ (accessed 05-03-2018)
891
892
86 of July 2005.
893
Shishido 2000 Del. J. Corp. L. 197-198 contends that a rejection by independent directors of the shareholders’
demand for the board to institute action is one of the factors that the courts heavily rely upon when exercising
their discretion to determine whether the suit should either continue or commence.
894
895
896
Under the Japanese Companies Act, two types of two-tier board structures are also allowed. The first one is a
committee type structure which consists of the board of directors with the audit, nomination and compensation
committees. The second one can be referred to as an audit type committee structure. This structure consists of
the board of directors and an audit committee whose members are elected separately as such by the shareholders.
Therefore, it can be concluded that the single-tier board structure is the conventional model in Japan, but it has
to be highlighted that companies are allowed to choose between the two structures.
897
Ahmadjian “Japan’s Evolving Corporate Governance System: Is There a New Model of Japanese Management?”
2008 Japan Spotlight 10.
118
dependent on banks for financing,898 permanent employer-employee relationships,899 cross-
holdings and large boards which were mostly dominated by insiders.900
However, Pejovic argues that Japan has only adopted the legal form of the Anglo-American model
but continues to do things in its own way under the mantra “‘Japanese spirit, Western skills’
(wakon yosai)”.901 This statement should not be viewed as an underestimation of the extent to
which American law has influenced Japanese company law. Of course, one would not expect a
total “Americanisation”902 of Japanese company law considering that legal norms and business
practices are not affected only by legal texts and judicial precedent. A jurisdiction’s non-legal
features903 such as history,904 tradition, culture and even religious beliefs can influence policy-
making which ultimately conceives and gives birth to legal norms. Therefore, it is a significant
development that Japan has adopted the Anglo-American model. Furthermore, once a system has
been exposed to market forces, all the other pieces will naturally begin to fall into place. The
revolution began when the Japanese corporate governance style was emancipated from the
shackles of the ‘Main Bank’ being the main provider of company financing.
The concept of corporate governance was introduced into South African company law in 1994.905
It has to be noted that the King Reports and Codes are not law.906 However, this does not mean
that the King Code can be easily disregarded. Voluntary codes such as the King Code may be
considered by the courts when determining the appropriate standard of care for directors and
898
Ahmadjian 2008 Japan Spotlight 10. This probably explains why shareholders were not regarded as primary
beneficiaries of directors’ duties. Also, this fact is in sharp contrast to the Anglo-American system discussed
above where firms heavily depend on shareholders’ equity for finance.
899
This contrasts sharply with the shareholder-oriented Anglo-American system which places emphasis on the
directors’ duty to maximise shareholder value. See Ahmadjian 2008 Japan Spotlight 10 arguing that in the USA,
employees are simply regarded as assets that can be hired and fired.
900
In contrast, American boards are dominated by independent directors whose main responsibility is taking care
of shareholders’ interests.
901
Pejovic 2012 Yonsei Law Journal 193.
902
A term that is also used by Abe and Nottage “Japanese Law” in Smits (ed) Elgar Encyclopedia of Comparative
Law (2006) 357.
903
Pejovic “Japanese Corporate Governance: Behind legal Norms” 2011 Penn St. Int'l. L. Rev. 483.
904
For example the practice of cross-shareholding and long term employment preferences have more to do with
Japan’s historical roots. See Pejovic 2011 Penn St. Int'l. L. Rev. 483.
905
The idea was captured in that year’s first publication of the King Report on Corporate Governance for Southern
Africa (King I).
906
King IV 35. However, it should be noted that the King IV Code is binding on all listed companies See paragraph
3.84 of the JSE Listings Requirements available at
https://www.jse.co.za/content/JSESpecificationsItems/Guidelines%20to%20Listing%20on%20the%20JSE.pdf
accessed 06-07-2020).
119
corporate functionaries.907 Some of the recommended practices are widely adopted and the more
widely they are embraced, the more likely it is that a court would regard conduct conforming to
these practices as meeting the required standard of care.908 Through that process, the principles
contained in such voluntary codes find their way into company law jurisprudence and thereby
become part of the common law.909 As a result, “failure to meet an established corporate
governance practice, albeit not legislated, may invoke liability”. 910 South Africa has adopted a
hybrid corporate governance model whereby “some good practices of corporate governance have
been legislated in parallel with the voluntary King codes of governance”.911
4 2 7 Cause of action
Establishing the cause of action upon which an aggrieved stakeholder can invoke derivative actions
is vital as it affects how flexible the remedy is and the possible defences that may be raised by a
defendant in each of the jurisdiction under discussion in this study. In the USA, shareholders are
empowered to institute a derivative suit in instances where the board of directors has failed to
pursue a valid cause of action or to “enforce a right which may properly be asserted by it”.912 There
is no numerus clausus with respect to the exact instances where shareholders have standing to
institute derivative claims. However, some of these cases include situations where the wrongdoer
controls directors to an extent that the directors cannot properly exercise their business judgment
and those where directors have been involved in injurious transactions such as the appropriation
of corporate opportunities and payment of excessive director remuneration.913
Section 260(4) of the UK Companies Act states that “[i]t is immaterial whether the cause of action
arose before or after the person seeking to bring or continue the derivative claim became a member
of the company”.914 The recognised causes of action are an actual or proposed act or omission
907
Ibid.
908
Ibid.
909
Ibid.
910
Ibid.
911
Ibid.
912
Delaware Chancery Court Rule 23.1.
913
Fischel 1976 U. Chi. L. Rev. 193-194.
914
The rationale advanced for this is that the interests being pursued are those of the company, not the shareholder’s.
See Baum and Puchniak “The derivative action: An economic, historical and practice-oriented approach” in
Puchniak et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 78-79.
120
involving negligence,915 default, breach of duty or breach of trust by a director of the company”.916
The current regime has broadened the scope of possible incriminating behaviour.917 Under the
common law derivative actions could only be brought in terms of the fraud on the minority
exception.918 The conduct complained of had to be that which the majority of shareholders could
not ratify.919 A literal interpretation of section 260 of the UK Companies Act920 means that a
derivative remedy may be unavailable in instances where “the company has a cause of action
arising in some other way (e.g. a claim against a non-directorial employee)”.921 In that case, those
empowered by a company’s articles of association will be required to make the decision to
litigate.922
In South Africa, section 165 of the 2008 Companies Act is concerned with the protection of a
company’s legal interests.923 The section does not specify the wrongs against which derivative
litigation can be instituted.924 The Act empowers a complainant to commence or continue legal
proceedings to protect the legal interests of the subject company.925 A company’s “legal interests”
915
This is a very novel provision because the “fraud on the minority” exception implied proof of intention. The
provision also effectively removes the requirement that the complainant must first establish wrongdoer control.
Consequently, the prima facie scope of derivative litigation is broadened. See Baum and Puchniak “The
derivative action: An economic, historical and practice-oriented approach” in Puchniak et al (eds) The derivative
action in Asia: A comparative and functional approach (2012) 82. On the other hand, this provision can be seen
as a recognition of the court’s concern raised in Daniels v Daniels [1978] 2 All ER 89. In that case, it was held
that there should be no reason why cases of fraud ought to be treated differently from cases where there is no
fraud but the directors’ negligence confers some benefit upon the directors and majority shareholders at the
expense of the company. See also Mayson et al Company law 33 ed (2016) 560-561; Bourne Bourne on company
law 6 ed (2013) 229; McLaughlin Unlocking company law 2 ed (2013) 316.
916
917
Goehre “Is the Demand Requirement Obsolete? How the United Kingdom Modernized its Shareholder
Derivative Procedure and What the United States Can Learn From It” 2010 Wisconsin Int’l L. J. 141 157 has
argued that section 260 of the UK Companies Act avails the derivative remedy for directors’ breach of the duty
to exercise reasonable care, skill, and diligence, regardless of whether the director has benefited personally. See
also Bourne Bourne on company law 6 ed (2013) 230.
918
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 79. Goehre 2010
Wisconsin Int’l L. J. 157.
919
920
2006.
921
922
Ibid.
923
Stoop 2012 SALJ 535; Cassim MF The new derivative action under the Companies Act: Guidelines for judicial
discretion (2016) 16.
924
925
121
seem to be wider than its rights.926 Unlike England, section 165 of the South African Companies
Act927 does not specify the type of legal interest or cause of action. 928 Also, England’s model is
restrictive in that it only allows breaches of directors’ duties as a basis for commencing
litigation.929 The pertinent provisions under South Africa’s 1973 Companies Act did not require
the alleged wrongdoers to have benefited from their actions.930 Therefore, section 165 has the
effect of widening the cause of action931 "and corresponds with the Australian and American
models that are phrased to accommodate the enforcement of any legal rights that the company may
have”.932 Furthermore, the scope of section 165 goes beyond derivative litigation “based on breach
of directors’ duties” to include actions against third parties or brought by third parties against the
company.933 However, Stoop warns that if one intends to bring an action against a third party, the
supplementary provisions of section 165 create further safeguards against abuse.934 In Japan, a
shareholder will be barred from instituting derivative remedy if the action is intended to “pursue
unlawful interest of this shareholder or a third party, or to harm the company”.935
4 2 8 Double or multiple derivative actions

A question of the legality of multiple derivative actions has direct consequences upon a
jurisdiction’s corporate governance as it affects the locus standi of some shareholders in groups of
companies. A multiple or double derivative action936 arises in the context of groups of companies
and holding companies when a shareholder in a parent company institutes litigation on behalf of a
926
Ibid. Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 585.
927
71 of 2008.
928
929
Stoop 2012 SALJ 535.
930
931
Cassim FHI et al Contemporary company law 2 ed (2012) 781; Coetzee “A Comparative Analysis of the
Derivative Litigation proceedings under the Companies Act 61 of 1973 and the Companies Act 71 of 2008” 2010
Acta Juridica 290 300.
932
933
Cassim FHI et al Contemporary company law 2 ed (2012) 781. See also Stoop 2012 SALJ 536.
934
Stoop 2012 SALJ 536. The possibility of abusing a derivative remedy was also raised by Black et al “Legal
liability of directors and company officials part 2: Court procedures, indemnification and insurance, and
administrative and criminal liability (Report to the Russian Securities Agency)” 2008 Columbia Business Law
Review 1 28.
935
Art 847(1) of the Japan Company Act 2005.
936
Alan and Lowry Company law: Core texts and series 8 ed (2014) 194 opine that an action by a shareholder of a
parent company on behalf of a subsidiary is called a double action. But, if action is brought on behalf of a second-
tier subsidiary it is a triple derivative action. Collectively, these are termed multiple actions. See also Velasco
“Fiduciary Principles in Corporate Law” 2018 Notre Dame Law School Legal Studies Research Paper No. 1933
30 available at https://ssrn.com/abstract=3374505 (accessed 15-10-2019).
122
subsidiary or associated company.937 A double or multiple derivative action is plausible because it
may compensate an injured company938 and deter possible wrongdoing in the future.939 It was
almost certain that multiple derivative actions can no longer be brought under England’s statutory
derivative scheme which excludes the common law940 until the court’s decision in Universal
Project Management Services Ltd v Fort Gilkicker Ltd.941
Unlike England, the South African Companies Act942 grants standing to shareholders, directors
and prescribed officers of the company’s subsidiaries,943 holding companies and any other
companies related944 to it.945 Cassim MF explains how multiple derivative actions occur in practice
in the following words;
“where a wrong is perpetrated on Company S, a shareholder in Company S may apply to institute a

direct derivative action on behalf of Company S, while a shareholder in its holding Company H or in
937
938
Tsang “International Multiple Derivative Actions” 2019 Vanderbilt Journal of Transnational Law 75 77 argues
that multiple derivative actions are brought in the interests of justice.
939
Chun “Multiple Derivative Actions: Debates in Korea and the Implications for a Comparative Study” 2018
Berkeley Business Law Journal 306.
940
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 78. See also Girvin et
al Charlesworth’s company law 18 ed (2010) 517; Kershaw Company law in context: Text and materials 2 ed
(2012) 629-630.
941
[2013] EWHC (Ch) 348. See also Tsang “International Multiple Derivative Actions” 2019 Vanderbilt Journal
of Transnational Law 75 76-77; Mayson et al Company law 33 ed (2016) 560. In contrast, multiple derivative
schemes have been recognised by Hong Kong’s Court of Final Appeal because that jurisdiction uses the common
law. Reference can be made to Baum and Puchniak “The derivative action: An economic, historical and practice-
oriented approach” in Puchniak et al (eds) The derivative action in Asia: A comparative and functional approach
(2012) 67 note 223 referring to Waddington Ltd v Chan Chun 2008 HKEC 1948; Tsang 2019 Vanderbilt Journal
of Transnational Law 76.
942
2008.
943
Section 3 of the 2008 Act provides that “a company is- (a) a subsidiary of another juristic person if that juristic
person, one or more other subsidiaries of that juristic person, or one or more nominees of that juristic person or
any of its subsidiaries, alone or in any combination- (i) is or are directly or indirectly able to exercise, or control
the exercise of, a majority of the general voting rights associated with issued securities of that company, whether
pursuant to a shareholder agreement or otherwise; or (ii) has or have the right to appoint or elect, or control the
appointment or election of, directors of that company who control a majority of the votes at a meeting of the
board; or (b) a wholly-owned subsidiary of another juristic person if all of the general voting rights associated
with issued securities of the company are held or controlled, alone or in any combination, by persons
contemplated in paragraph (a)”.
944
Section 2(1)(c) of the 2008 Act provides that “a juristic person is related to another juristic person if- (i) either
of them directly or indirectly controls the other, or the business of the other, as determined in accordance with
subsection (2); (ii) either is a subsidiary of the other; or (iii) a person directly or indirectly controls each of them,
or the business of each of them, as determined in accordance with subsection (2). The fourth category invites
some debate”.
945
Section 165(2)(a) and (b) of the Companies Act 2008.
123
related Company R may apply to bring a multiple derivative action on behalf of Company S. A double
derivative claim is one brought by a shareholder in a holding company in respect of a wrong done to
the company’s subsidiary, while a claim on behalf of a sub-subsidiary is a triple derivative action, and
so forth”.946
With respect to the USA, multiple derivative actions have been received in most of the states from
around the 19th century.947 However, regardless of the acceptance of double or multiple derivative
actions in the USA, the underlying bases for such actions were neither clear nor consistent.948
Some of the justifications that have been proffered to justify double or multiple derivative actions
include the theory of piercing of the corporate veil and the theory of common control. 949 Courts
have also struggled to determine the amount of “ownership the parent company must have over
the subsidiary in order to justify double derivative suits”.950 Unlike courts in other states such as
California and New York that have pronounced that a derivative claim can be instituted and
maintained even when the parent company owns less than 100% in the subsidiary, Delaware has
been silent on this issue.951
It is argued that the provision for multiple derivative suits is a welcome development that
recognises the reality of prevalent contemporary corporate group structures.952 Without the
possibility of multiple derivative actions, erring parent company directors would be unfairly
protected from liability for their wrongdoing as a result of the control they exercise on the group
structure.953 A holding company’s control954 of a subsidiary may influence decision making
including the unwillingness to litigate.955 Therefore, multiple derivative actions are in the interests
of justice. In cases where a shareholder in a holding company initiates derivative litigation on
946
Cassim MF 2018 South African Law Journal 118.
947
Chun 2018 Berkeley Business Law Journal 323.
948
949
Ibid.
950
951
952
953
Ibid.
954
Section 2(2)(a)(ii) of the 2008 Companies Act provides that “a person controls a juristic person, or its business,
if- (ii) that first person together with any related or inter-related person, is- (aa) directly or indirectly able to
exercise or control the exercise of a majority of the voting rights associated with securities of that company,
whether pursuant to a shareholder agreement or otherwise; or (bb) has the right to appoint or elect, or control
the appointment or election of, directors of that company who control a majority of the votes at a meeting of the
board”.
955
124
behalf of a subsidiary, it seems that both the subsidiary and the holding company should be
defendants in the derivative proceedings.956 Due to the nature of multiple derivative proceedings,
it is argued, in consonance with Cassim MF, that a court should consider whether the boards of
both the wronged subsidiary and the holding company unjustifiably refused to litigate.957
43 SUMMARY AND PRELIMINARY CONCLUSION

This chapter has presented a discussion of selected conceptual and institutional corporate
governance issues that have an influence on stakeholders’ access to justice through the mechanism
of derivative actions. The primary aim was to provide a conceptual and institutional prelude for
arguments that will follow in the next chapters. It was indicated that the need for this chapter was
triggered by the significant differences between the subject jurisdictions. The first part was
dedicated to an analysis of the concept of corporate governance. It was found that there is no
universal definition for the term ‘corporate governance’. However, regardless of how diverse the
semantics employed in defining this concept can be, themes such as performance management,
determination of directors’ compliance with their duties and accountability constitute the essential
thread running through the various definitions. It was also established that the derivative remedy
forms part of corporate governance. Hence it was thought necessary to provide the reader with
some understanding of how certain corporate governance principles are applied and interpreted in
the selected jurisdictions. The ultimate purpose is to facilitate making an informed judgment on
whether such conceptual and institutional differences affect stakeholders’ access to justice through
derivative actions.
It was further established that although England, USA and South Africa are common law
jurisdictions while Japan is a civil law one, all four of them recognise the concept of separation of
ownership and control. The only difference is that while shareholders are regarded as owners in
the common law countries, employees are considered owners of Japanese companies. Another
feature that was found common to all the four jurisdictions is that most large companies are
predominantly widely held. However, it was also noted that the interests of minority shareholders
in most widely held companies are likely to receive secondary preference relative to those of
institutional investors.
956
957
125
It was also made clear that this study is going to focus on the activities of directors, shareholders,
creditors, employees and institutional investors as the key players in corporate life. Lastly, the
chapter provided some insight into the relevant regulatory instruments and institutions in the
jurisdictions under study. It is hoped that the concepts discussed in this chapter have provided a
sufficient foundation for discussions pertaining to the substantive and procedural aspects of the
derivative remedy in the following chapters. The next chapter is a deliberation on the stakeholders’
locus standi to commence derivative litigation.
126
CHAPTER FIVE
The requirement of legal standing in derivative actions

51 INTRODUCTION
This chapter is mainly dedicated to a discussion of derivative plaintiffs’ locus standi. The
endeavour will also include a short deliberation on derivative defendants’ legal standing. Before a
court can decide on the merits of any case, the complainant is required to show that s/he has the
requisite ‘standing’, namely, the capacity to institute legal action958 or the legal right to appear
before a court.959 In this study, the phrases “legal standing” and its Latin equivalent locus standi960
will be used interchangeably. The doctrine of legal standing has the effect of narrowing the parties
to a case and the cases that can be heard by a court.961 If a party lacks the standing or fails to show
that s/he possesses the relevant locus standi, a court may not proceed to hear and later on decide
on the merits of that party’s case. Since not anyone can approach a court of law at any time, it
stands to reason that those who do so must show cause to “stand” before one.962 In the words of
Justice Powell of the Supreme Court of the United States of America, “[i]n essence, the question
of standing is whether the litigant is entitled to have the court decide the merits of the dispute or
of particular issues”.963
Legal standing is one of the restrictions that courts have constructed to limit participation in
derivative litigation only to those whose interest in the concerned corporation is recognised and
deemed adequate.964 The doctrine of legal standing has significant consequences as it restricts the
number of stakeholders who may initiate derivative proceedings. For example, if a minority
shareholder alleging that company directors have abused their authority and apportioned to
themselves pecuniary benefits at the expense of the company, decides to institute a derivative
claim, one of the most significant preliminary requirements is to prove that s/he possesses the
required standing. Failure to do so may result in the court not attempting to listen to the alleged
958
“What is standing?” http://www.rotlaw.com/legal-library/what-is-standing/ (accessed 05-03-2018).
959
Merriam Webster “Locus standi” https://www.merriam-webster.com/dictionary/locus%20standi (accessed 05-
03-2018).
960
The literal meaning of this phrase is “place of standing”.
961
“What is standing” http://www.adfmedia.org/files/WhatIsStanding.pdf (accessed 05-03-2018).
962
Ibid.
963
Warth v Seldin 422 U.S. 490 (1975).
964
Coffee Jr. and Schwartz 1981 Columbia Law Review 310.
127
issues. It is therefore pertinent to identify the stakeholders who may bring derivative claims in the
United States of America (USA), England, Japan and South Africa.
It will be interesting to note how the requirement of legal standing affects various derivative
stakeholders’ access to justice. The key question is whether the substantive and procedural
requirements attached to the doctrine of locus standi, cumulatively constitute a barrier to
stakeholders’ pursuit of access to justice. By comparing the South African, England, the USA and
Japanese legal systems, it is hoped that possible regulatory crevices in these jurisdictions will be
identified. Consequently, this will make it possible for one to suggest ways of using derivative
litigation to reduce corporate exploitation by greedy directors, especially in South Africa through
the lens of the enhanced accountability perspective.
A historical account of the development and assimilation of derivative litigation presented in

Chapter 2 above revealed that, originally, derivative suits were only brought as exceptions to the
proper plaintiff rule.965 The potential plaintiff was required to satisfy the fraud on the minority
requirement.966 However, due to the onerous nature967 of the fraud on the minority rule,
contemporary company law has responded by eliminating this hurdle.968 For example, Australia
introduced a statutory derivative remedy after “perceived deficiencies in the common law
[imposed] restrictive standing requirements on shareholders”.969 Most jurisdictions no longer
require the potential complainant to prove that the wrongdoer engaged in some fraudulent conduct
that affected the minority.970
965
See Pavlieds v Jensen 1956 Ch 565; Daniels v Daniels 1978 2 All E.R. 89; Gambotto v WCP Ltd 182 CLR 432
(1995).
966
Daniels v Daniels 1978 2 All E.R. 89.
967
Griggs “A Statutory Derivative Action: Lessons that may be Learnt from its Past" 2002 University of Western
Sydney Law Review 65 notes that under the Foss v Harbottle (1843) 67 ER 189 exception it was not clear what
constituted control by the alleged wrongdoers and that fraud was difficult to define.
968
Cheffins “Reforming the Derivative Action: The Canadian Experience and British Prospects” 1997 Company,
Financial and Insolvency Law Review 229-231 describes the fraud on the minority exception as “complex and
arcane”. In Ramsay and Saunders’ words “the two limbs of the rule in Foss v Harbottle (1843) 67 ER 189 created
‘considerable, sometimes insurmountable, barriers to any shareholder or interested party seeking to enforce a
cause of action vested in the company and had a ‘leaden impact’ on shareholder litigation”. See Ramsay and
Saunders “Litigation by Shareholders and Directors: An Empirical Study of the Statutory Derivative Action”
2006 Journal of Corporate Law Studies 408 quoting Watkins “The Common Law Derivative Action: An
Outmoded Relic?” 1999 Cambrian Law Review 40.
969
Ramsay “Corporate governance, shareholder litigation and the prospects for a statutory derivative action” 1992
UNSW Law Journal 150.
970
For example, South Africa and Australia.
128
This chapter is designed to serve a dual purpose. First, it is intended to identify cramping provisions
that discourage or bar stakeholders form invoking derivative claims thereby negatively affecting
corporate governance at large. Due to the advantageous position and the privileges enjoyed by
company directors, stakeholder remedies should be “given teeth” to effectively protect the
intended beneficiaries without opening gates of abuse of the same remedies. The requirement of
standing must play a filtering role in limiting the number of frivolous and unmeritorious suits.971
Achievement of such a state of equilibrium leads to an effective corporate governance framework
which may increase investor confidence.972 Ramsay and Saunders have observed that if derivative
action standing requirements are not monitored, “genuine grievances go unremedied”.973
Similarly, Keay has acknowledged the need to make the derivative remedy more accessible
without compromising on its effectiveness.974
Immediately after this introduction follows a discussion on the general requirements for legal
standing. An extensive discussion of the controversial contemporaneous ownership rule will
follow thereafter. That discussion will look at the nature, scope, rationale, criticisms and
exceptions to the rule. After that, a deliberation on the contentious continuing wrong doctrine
nature, justifications and attacks that have been levelled against it will be explored. An analysis of
the continuous ownership doctrine completes a discussion of aspects of shareholders’ standing.
Preceding the conclusion is a discussion of the concept of legal standing in relation to other
corporate stakeholders such as creditors, directors and employees.
52 GENERAL REQUIREMENTS FOR LEGAL STANDING

To differentiate between locus standi in the context of derivative actions and general civil
procedure requirements, a brief discussion of the US general rules for legal standing is explored.
It is appropriate that more attention is paid to the US law relating to standing since it has provoked
serious academic and judicial debates. This is true especially in the context of the controversial
contemporaneous ownership rule which will be discussed in detail below. In the USA, the
971
Oda 2011 ECFR 343. This remains pertinent under the envisaged enhanced accountability perspective.
972
Stoop “The Derivative Action Provisions in the Companies Act 71 of 2008” 2012 SALJ 528.
973
974
2016 Journal of Corporate Law Studies 39.
129
requirement of legal standing is rooted in equity. 975 This rule is traditionally bifurcated into
constitutional requirements and prudential limitations.976 On one hand, prudential limitations are
flexible, take into consideration the circumstances of each case and are subject to the laws of
Congress.977 On the other hand, the US Supreme Court has construed constitutional requirements
to “impose certain essential unalterable demands of the constitution”.978 As preconditions of
constitutional standing, it is required that “the party has suffered injury, the injury is caused by the
conduct complained of in court and the injury is remediable by the court”. 979 From this, the three
prerequisites for constitutional standing which are an injury in fact, causation and redress, can be
deduced. With respect to the requirement of injury in fact, the US Supreme Court has further
developed a complementary requirement to the effect that the injury must be “particularised” and
that it should “affect the plaintiff in a personal and individual way”.980 Coined and applied this
way, the principle makes it difficult if not impossible for a plaintiff to bring representative actions
before the courts. The reasoning behind this principle is that other political processes may provide
more appropriate remedies and that other governmental institutions may be more competent to
address such questions of public interest.981 Having broadly outlined the requirements for locus
standi in general US civil law, the next section initiates a discussion focussed on the doctrine of
legal standing in the context of derivative litigation.
975
Kelly “Reassessing Standing in Hollingworth v Perry: The Shareholder Derivative Suit as a Model for Public
Interest Litigation” 2015 Chap. L. Rev. 895 910. See also In Cohen v Beneficial Industrial Loan Corp. 337 U.S.
541 (1949) where it was held that “equity came to the relief of the [shareholder], who had no standing to bring
civil action at law against faithless directors and managers. Equity, however, allowed him to step into the
corporation's shoes and to seek in its right the restitution he could not demand on his own.... [W]hen, as was
usual, those who perpetrated the wrongs also were able to obstruct any remedy, equity would hear and adjudge
the corporation's cause through its [shareholder].... This remedy born of [shareholder] helplessness was long the
chief regulator of corporate management and has afforded no small incentive to avoid at least grosser forms of
betrayal of [shareholders'] interest. It is argued, and not without reason, that without it there would be little
practical check on such abuses”.
976
Kelly 2015 Chap. L. Rev. 910.
977
Kelly 2015 Chap. L. Rev. 910. According to Encyclopedia Britannica “Congress of the United States”
https://www.britannica.com/topic/Congress-of-the-United-States (accessed 23-02-2018), in the USA, the term
‘Congress’ refers to the bicameral legislature of that jurisdiction which consists of the Senate and House of
Representatives.
978
979
Kelly 2015 Chap. L. Rev. 910 referring to Lujan v Defenders of Wildlife 504 U.S. 1992 555 560-561 where it
was held that “[o]ur cases have established that the irreducible constitutional minimum of standing contains three
elements. First, the plaintiff must have suffered an ‘injury in fact’.... Second, there must be a causal connection
between the injury and the conduct complained of.... Third, it must be ‘likely,’ as opposed to merely
‘speculative’, that the injury will be ‘redressed by a [favourable] decision’”.
980
981
Kelly 2015 Chap. L. Rev. 910-911.
130
There are two prerequisites that a party must meet for her/him to be accorded locus standi in
ordinary civil litigation cases in South Africa.982 One must have a direct and substantial interest in
the matter and the concerned party must possess the legal capacity to litigate.983 Since both natural
and legal persons like companies have the capacity to litigate, for the purposes of this study, more
attention will be paid to the first limb of the two requirements of legal standing. A discussion of
the direct and substantial interest requirement can be undertaken under the common law position,
which is regarded as the general rule, and also under the Constitution.984
Under the common law, the person who intends to institute civil proceedings must have a direct
and substantial interest in the right(s) in question and in the outcome of the litigation.985 A financial
interest alone is not sufficient.986 Furthermore, the plaintiff/applicant’s interest “must not be too
far removed, … must be actual, … not abstract or academic and must be a current interest and not
a hypothetical one”.987 Given the above requirements, it is argued that derivative litigants would
not have qualified to institute actions on behalf of a company because they lack a substantial
interest in the outcome of the suit.988 Pete et al explain that the right of an aggrieved shareholder
who owns one per cent of the shares in a public company would not pass the direct and substantial
interest muster.989 It will be regarded as an indirect financial interest. However, the authors noted
that the Companies Act990 provides an exception which allows shareholders to commence
litigation on behalf of their companies.991
The advent of the Constitution of the Republic of South Africa extended the scope of potential
applicants and plaintiffs. Under section 38 of the Constitution,992 “anyone acting in their own
interest, anyone acting on behalf of another person who cannot act in their own name, anyone
acting as a member of, or in the interest of, a group or class of persons, anyone acting in the public
982
Pete et al Civil Procedure: A Practical Guide 3 ed (2017) 35.
983
Ibid.
984
Constitution of the Republic of South Africa 1996.
985
Pete et al Civil Procedure: A Practical Guide 3 ed (2017) 35. See also United Watch and Diamond Co (Pty) Ltd
v Disa Hotels Ltd 1972 4 SA (C) 415.
986
987
Ibid.
988
Derivative actions are brought in the interests of the company. See Cassim FHI et al Contemporary company
law 2 ed (2012) 775; Nwafor “Shareholder Derivative Action- Nigerian Statutory Innovation -Not Yet a Victory
for the Minority Shareholder” 2010 Macquarie J. Bus. L 215.
989
990
71 of 2008. See Section 165 of the Companies Act 71 of 2008.
991
992
131
interest and an association acting in the interest of its members” has the locus standi to approach
a competent court. While this provision allows anyone acting on behalf of another person who
cannot act in their own name, it has to be noted that the application of this section is strictly limited
to rights contained in the Bill of Rights.993 Derivative actions are rarely instituted to enforce
freedoms provided for in the Bill of Rights. Therefore, it can be submitted that derivative litigants
would suffer the same fate under section 38 of the Constitution as under the common law.
53 LEGAL STANDING IN DERIVATIVE LITIGATION

It is important to note that after successfully satisfying the demand requirement, it is not automatic
that a complainant becomes immediately entitled to institute a derivative action.994 As a matter of
law, the complainant is required to demonstrate his standing to sue.995 Citing Stadin v Union Elec
Co,996 Fischel has argued that legal standing is the “sine qua non of the shareholders’ right to
sue”.997 In the Ramsay and Saunders’ empirical study report, the two scholars revealed that one of
the main differences between the English and Australian judicial approaches lie in the fact that
while the former considers the question of standing to be a preliminary matter, the latter, usually,
does not.998 The general understanding is that standing has not been much of a hurdle to potential
derivative suitors in Australia as it has been in other jurisdictions.999
In the English case of Prudential Assurance Co Ltd v Newman Industries Ltd,1000 minority
shareholders commenced an action alleging that the defendants had fraudulently induced the
company to enter into a transaction that was not in its interest.1001 The court held that the question
whether the plaintiffs had the right to commence derivative litigation on behalf of the company
ought to have been determined as a preliminary issue.1002 This decision was heavily criticised by
the Australian Supreme Court in Hurley v BGH Nominees Pty Ltd.1003 The facts of this case,
993
Section 38 of the Constitution of the Republic of South Africa 1996.
994
Fischel 1976 U. Chi. L. Rev. 191. In the case of Swanson v Traer 354 U.S. 114 (1957), even though the
complainant had satisfied the exhaustion of remedies requirement, which is also known as the demand
requirement, the court proceeded to enquire whether “this suit is of that exceptional character which
[shareholders] may bring”.
995
Federal Rule of Civil Procedure 23.1.
996
373 U.S. 915 (1963).
997
Fischel 1976 U. Chi. L. Rev. 192.
998
999
Ibid; Ramsay 1992 UNSW Law Journal 150.
1000
(No 2) [1982] 1 All ER 354.
1001
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 All ER 354.
1002
1003
[1982] 1 ChD 221-222.
132
shortly-stated, are that the appellant alleged that one of the defendant directors acted in breach of
his fiduciary duty when he negotiated the purchase of company premises for his personal benefit.
It was further alleged that the company did not benefit from the transaction. The issue was whether
the plaintiff had the standing to bring the derivative action on behalf and for the benefit of the
company.1004 The court held that the decision in
Prudential Assurance Co Ltd v Newman Industries Ltd1005 should not be followed in all
circumstances and that “the procedure for the determination of the issue of locus standi ought to
be determined in each individual case according to what appears to be just and convenient in the
circumstances of that case”.1006
It is submitted that South African courts have been influenced by English jurisprudence. The
question of standing is usually decided as a point in limine before the merits of the case are
considered.1007 In Mouritzen v Greystones Enterprises (Pty) Ltd,1008 which was the first derivative
action to be heard by a South African court under the 2008 Companies Act, the plaintiff’s standing
was not disputed. The only preliminary technical point related to the manner of service of the
demand upon the company.1009 However, in Lewis Group Limited v Woollam,1010 the court treated
the question of the applicant’s standing as a preliminary issue.1011 In Mbethe v United Manganese
of Kalahari (Pty) Ltd,1012 the issue of the plaintiff’s locus standi was also attended to before the
court turned to the merits of the plaintiff’s claims. The court explained that a company’s notice of
refusal to comply with a demand confers full locus standi upon a complainant.1013 In such
circumstances, the independence of an investigator’s report becomes irrelevant.1014
1004
Hurley v BGH Nominees Pty Ltd [1982] 1 ChD 221-222.
1005
(No 2) [1982] 1 All ER 354.
1006
Hurley v BGH Nominees Pty Ltd [1982] 1 ChD 221-222.
1007
See Lewis Group Limited v Woollam 2016 ZAWCHC para 19; Mbethe v United Manganese of Kalahari (Pty)
Ltd 2016 5 SA 414 (GJ) para 51.
1008
2012 5 SA 74 (KZD).
1009
1010
2016 ZAWCHC.
1011
See Lewis Group Limited v Woollam 2016 ZAWCHC para 19 where it was stated that “[a] preliminary question,
however, is whether a person is able to proceed derivatively for the given relief when that person is given standing
under the Act to proceed for such relief personally”.
1012
2016 5 SA 414 (GJ) paras 51-52.
1013
Mbethe v United Manganese of Kalahari (Pty) Ltd 2016 5 SA 414 (GJ) para 51.
1014
Ibid.
133
Unlike the general standing requirements in the USA, derivative actions are in principle a form of
representative litigation1015 where the complainant institutes legal action against, in most cases,
alleged miscreant directors on behalf of the company.1016 Absent derivative remedies in the USA,
shareholders would lack the required standing as individuals to bring an action for want of personal
and particularised injury.1017 In Hawes v Oakland,1018 it was explained that;
“‘[s]tanding’ in the context of derivative actions is not to be confused with its more traditional meaning
as defining when an individual can challenge governmental action. As used in the present context,
standing defines when minority shareholders can sue despite the opposition of the board of directors
or a majority of the shareholders”.1019
However, since the electoral procedures and voting processes do not always sufficiently hold
management accountable, the USA Supreme Court created an exception to the particularised injury
requirement for derivative litigation.1020 Therefore, a complainant bringing derivative claims
before the court does not need to satisfy all of the general requirements of locus standi.1021
In the USA, the doctrine of standing in federal courts is regulated by Rule 23.1 of the Federal
Rules of Civil Procedure1022 (hereinafter, Rule 23.1) which is divided into, inter alia,
prerequisites1023 and pleading requirements.1024 To effectively establish that a complainant
1015
For more information on representative litigation see Chapter 2 under part 2 2 above and the authorities cited
therein.
1016
TWK Agriculture Limited v NCT Forestry Co-operative Ltd 2006 6 SA 20 (N). See also Farrar and Hannigan
Farrar’s company law 4 ed (1998) 430; Mongalo et al Forms of business enterprise: Theory, structure and
operation (2004) 273.
1017
1018
104 U.S. 450 (1881).
1019
1020
1021
Ibid.
1022
2014.
1023
Rule 23.1(a) provides that: “This rule applies when one or more shareholders or members of a corporation or an
unincorporated association bring a derivative action to enforce a right that the corporation or association may
properly assert but has failed to enforce. The derivative action may not be maintained if it appears that the
plaintiff does not fairly and adequately represent the interests of shareholders or members who are similarly
situated in enforcing the right of the corporation or association”.
1024
Rule 23.1(b) provides that; “[t]he complaint must be verified and must:
(1) allege that the plaintiff was a shareholder or member at the time of the transaction complained of, or that the
plaintiff’s share or membership later devolved on it by operation of law;
(2) allege that the action is not a collusive one to confer jurisdiction that the court would otherwise lack; and
(3) state with particularity:
(A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if
necessary, from the shareholders or members; and
(B) the reasons for not obtaining the action or not making the effort”.
134
possesses the required locus standi, s/he is required to prove why a board’s decision or failure to
institute an action in the name and on behalf of the company should be disregarded by the court.1025
The four requirements that must be satisfied by the plaintiff to have standing as set out in Rule
23.1, are that s/he must bring a verified complaint1026 that “fairly and adequately represents the
interests of shareholders1027 or members who are similarly situated in enforcing the rights of the
corporation”, “allege that the plaintiff was a shareholder or member at the time of the transaction
complained of”1028 and “allege that the action is not a collusive one to confer jurisdiction that the
court would otherwise lack”.1029 The last provision of Rule 23.1 requires a plaintiff to satisfy the
demand requirement. This will be discussed in detail in chapter six below.
It has been argued that judicial construction of the “pro-defendant” Rule 23.1 reveals a deep desire
to protect the interests of the company and not those of the shareholders.1030 First, it is contended
that Rule 23.1 reveals an acceptance of the fact that shareholders’ interests are not always
reminiscent of the company’s interests. Second, it is also in sharp contrast with the prevalence of
the shareholder primacy theory in the USA. In principle, Rule 23.1 applies to both minority and
majority shareholders because it does not specifically indicate applicability to any group.
However, in practice it would seem that the derivative remedy is usually invoked by minority
1025
Fischel “The Demand and Standing Requirements in Stockholder Derivative Actions” 1976 U. Chi. L. Rev. 191.
1026
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 76 submit that the
requirement that the complaint needs to be verified is not regarded as a serious barrier to invoking derivative
actions. Also, courts have not religiously required verification of the complaint. Hence, an in-depth discussion
of this requirement will not be undertaken in this study.
1027
Section 7.41(2) of the MBCA provides that the complainant should properly represent the company’s interests.
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 76 prefer how the
requirement is couched in the MBCA considering that in a derivative action the plaintiff derives his standing
from that of the company which is the proper plaintiff. Derivative actions are not direct claims. However, Rule
23.1’s “interests of the shareholders” approach is justifiable when considering that in the USA, shareholders’
interests are both given primacy and equated with those of the company. However, the requirement that
shareholders must fairly and adequately represent a company’s interests is unique to the USA. Japan, England
and South Africa do not have such a provision. See Kawashima and Sakurai “Shareholder Derivative Litigation
in Japan: Law, Practice, and Suggested Reforms” 1997 Stanford J. Int'l L. 2 29-32 who drew links between this
requirement and class action theory. Japan does not recognise class actions.
1028
Fischel 1976 U. Chi. L. Rev. 193 – 196 discussed some of the transactions or conduct wherein shareholders have
been granted leave by the court to sue derivatively. These include instances where directors have abused their
control or cases of conflict of interest and participation in illegal transactions, negligence in failing to assert a
clear cause of action and the company’s failure to pursue a constitutional claim.
1029
Rule 23.1.
1030
Wells “Maintaining Standing in a Shareholder Derivative Action” 2004 U.C. Davis L. Rev. 349.
135
shareholders whose voice as expressed through their vote at a shareholders’ meeting is generally
not loud enough to influence the outcome of the vote.1031
54 THE CONTEMPORANEOUS OWNERSHIP RULE

Of all the requirements of standing mentioned above, it is the fact that the plaintiff has to prove
that s/he was a shareholder at the time of the transaction complained of1032 that has attracted the
most judicial1033 and academic attention in the USA.1034 This rule has crystalised into the famous
contemporaneous ownership rule/requirement. The rule is a product of the USA Supreme Court
decision in Hawes v Oakland.1035 In that case, a shareholder of the Contra Costa Waterworks
Company (the company) brought a claim in equity on his and other shareholders’ behalf against
the City of Oakland, the company and its directors. The claim alleged that the company was
illegally providing the city with water at no cost.1036 The appellant further claimed that the directors
ignored his request to discontinue the impugned conduct which resulted in the company’s
reduction in value as reflected in the “reduction of dividends due to him and other shareholders
and a drop in the value of their shares”.1037 It must be noted that the appellant was a resident of
New York whilst the company was incorporated in California. The defendants objected to the
appellant’s claims and argued that the latter had no capacity (standing) to sue since, should there
be any injury, it will be the company itself in whom the right to sue will vest. 1038 In other words,
the defendants contended that the proper plaintiff for wrongs done to a company would be the
company itself since it is a legal person vested with full capacity to commence litigation and be
sued in its own name.1039
1031
Shishido “Japanese Corporate Governance: The Hidden Problems of Corporate Law and their Solutions” 2000
Del. J. Corp. L. 192.
1032
Wells 2004 U.C. Davis L. Rev. 345; Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave”
2009 11 who assert that this is usually governed by state law. The commentators also said that the
contemporaneous ownership rule has also been invoked in cases of inconsistent state law.
1033
Hawes v Oakland 104 U.S. 450 (1881).
1034
Wells 2004 U.C. Davis L. Rev. 345; Fischel 1976 U. Chi. L. Rev. 192; Coffee Jr. and Schwartz “The Survival of
the Derivative Suit: An Evaluation and a Proposal for Legislative Reform” 1981 Columbia Law Review 310;
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 11- 20.
1035
104 U.S. 450 (1881).
1036
1037
Ibid.
1038
Ibid.
1039
This argument mirrors the proper plaintiff rule which was first established in the English in the case of Foss v
Harbottle (1843) 67 ER 189.
136
In addition to the exceptions to the proper plaintiff rule,1040 the court in the case of Hawes v
Oakland1041 held that before a shareholder is allowed to commence litigation in his own name,
s/he should;
“show to the satisfaction of the court that he has exhausted all the means within his reach to obtain,
within the corporation itself, the redress of his grievances, or action in conformity to his wishes.1042 …
[and allege that the] complainant was a shareholder at the time of the transactions of which he
complains, or that his shares have devolved on him by operation of law, and that the suit is not a
collusive one to confer on a court of the United States jurisdiction in a case of which it could otherwise
have no cognisance,1043 should be in the bill, which should be verified by affidavit.”1044
After considering that there were “no allegation[s] of fraud or of acts ultra vires, or of destruction
of property, or of irremediable injury of any kind”1045 and that “the directors [were] better able to
act understandingly on this subject than a [shareholder]1046 residing in New York”,1047 the appeal
was dismissed for lack of standing.
The contemporaneous ownership rule is also woven into the fabric of the Model Business
Corporation Act1048 (MBCA). Under the MBCA, for one to commence or maintain derivative
litigation, s/he should have been a “shareholder of the corporation at the time of the act or omission
complained of or became a shareholder through transfer by operation of law from one who was a
shareholder at that time”.1049 Also, such a shareholder should fairly and adequately represent the
company’s interests.1050 The official comment on section 7.41 of the MBCA expounds that by
1040
The rule and its exceptions were examined at length in Chapter 2 under part 2 4 above.
1041
104 U. S. 460 – 461.
1042
This is what has crystalised into the modern demand requirement. This explains why in the USA the demand
requirement is also known as the exhaustion of internal remedies rule.
1043
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 75 explain that since it
is generally thought that federal courts are quicker and more reliable than many state courts, complainants prefer
instituting action in the former.
1044
Hawes v Oakland 104 U. S. 460 – 461.
1045
Hawes v Oakland 104 U. S. 462.
1046
Interpreted to mean that the board had made a legitimate business judgment decision. The business judgment
rule will be the subject of discussion in Chapter 7 below.
1047
Hawes v Oakland 104 U. S. 462.
1048
1984 (Revised 2016).
1049
Section 7.41(i) of the MBCA 1984 (Revised 2016). See also Barsalona “Litigation Supply should not Exceed
Shareholder ADR Demand: How Proper Use of the Demand Requirement in Derivative Suits can Decease
Corporate Litigation” 2012 Oregon Law Review 773 779.
1050
Section 7.41(ii) of the MBCA 1984 (Revised 2016).
137
referring both to the commencement and maintenance of the proceedings, it is clear that “the
[action] should be dismissed if, after commencement, the plaintiff ceases to be a shareholder or a
fair and adequate representative”.1051 Wells has also argued that a non-contemporaneous
shareholder “constantly operates with an eye toward eventual maximisation of profit”. 1052 One
ceases to be a fair or adequate representative of shareholders’ interests if s/he commenced or
maintained the suit for personal benefit.1053
Nevertheless, it is argued that in the interests of justice, American courts have allowed one or more
other shareholders an opportunity to continue with the litigation.1054 An injustice will be done to a
company if litigation is aborted merely because the shareholders who initiated the litigation have
ceased to be shareholders in the subject company. Such an approach would further hurt the
company for three reasons. First, the company, due to its fictitious nature, cannot approach a court
of law for legal recourse. Second, “rational” miscreant directors cannot sue on behalf of the
company because they will be suing themselves. Third, shareholders, who due to various reasons
cannot maintain that status through the duration of the suit are denied standing.
For example, this means that an aggrieved contemporaneous shareholder must continue holding
shares in the subject company until the pending litigation is brought to finality. It must not be
forgotten that shareholders are also entrepreneurs who take risks to make profit. In fact, profit
maximisation is at the core of corporate ownership.1055 Thus, shareholders must be free to pull out
of unprofitable business ventures at any time. In a free market economy, a sound system of
corporate governance must promote flexibility of transfer of ownership. Denying derivative
standing to shareholders for the sole reason that they should maintain their share ownership
throughout the suit will result in fewer shareholders willing to commence derivative litigation. It
will cost more to attempt to seek legal recourse on behalf of a company in which one owns shares.
This will promote free riders. With time, the threat of personal liability that accompanies derivative
1051
Official comment on section 7.41 of the MBCA 1984 (Revised 2016).
1052
Wells 2004 U.C. Davis L. Rev. 365.
1053
Official comment on section 7.41 of the MBCA 1984 (Revised 2016). This provision is similar to Japan’s abuse
of rights doctrine contained in article 847(1) of its Companies Act 86 of July 26 2005. Japanese courts have used
this doctrine to curb greedy shareholders’ frivolous claims.
1054
1055
Macquarie J. Bus. L 158 and 160; Esser and Du Plessis “The Stakeholder Debate and Directors’ Fiduciary
Duties” 2007 SA Merc L.J. 347-348.
138
litigation will gradually vanish. When that happens, directors will have one less restraint curbing
their misconduct.
Already, shareholders are not direct beneficiaries of successful derivative suits. If they lose
standing in seeking to save their investments from greedy directors, shareholders will be forced
into a complex dilemma that is simply a result of regulatory failure. On the one hand, assuming
that a company’s share value continues to drop, which is usually the case during derivative
litigation if a shareholder maintains share ownership s/he risks losing her investment in the
company with little chance of receiving compensation. On the other hand, if the plaintiff decides
to sell her/his shares, s/he loses derivative standing. This results in very little prospects of the
injured company accessing justice.
Additionally, allowing other shareholders to proceed with the derivative litigation after the initiator
has lost her/his standing falls short of what is required to ensure the continuity of the proceedings
as it is not clear how the other shareholders are notified of the pending action since they may not
be aware of it. Also, the process of notifying other shareholders may result in further delays. The
Japanese Commercial Code did not require a derivative plaintiff to notify other shareholders of the
pending suit. As a result of this inadequacy, many Japanese shareholders were denied the
opportunity to intervene and maintain derivative suits.1056 However, other jurisdictions may learn
from the Japanese Companies Act under which shareholders can intervene in derivative
proceedings either as a co-party or to assist either of the parties provided that such intervention
“shall not apply when it will unduly delay the court proceedings or impose an excessive
administrative burden on the court”.1057 This is further reinforced by the fact that any company
that receives notice of the filing of derivative proceedings against it is obliged to give public notice
to that effect or give notice thereof to its shareholders without delay.1058
Section 165(10)1059 and (15)1060 of the South African Companies Act imply that intervening in
derivative litigation is allowed. Unlike Japan, the South African statute does not require companies
1056
See Kawashima and Sakurai 1997 Stanford J. Int'l L. 9 33.
1057
1058
Article 849(3) and (4) of the Japanese Companies Act 86 of July 26 2005.
1059
The relevant part reads “…a court may make any order it considers appropriate about the costs of the following
persons in relation to proceedings brought or intervened in with leave under this section…”
1060
The section provides that “proceedings brought or intervened in with leave under this section must not be
discontinued, compromised or settled without the leave of the court”.
139
to notify their shareholders of the institution of derivative proceedings against them. In England,
section 264 of its Companies Act allows a shareholder to continue a derivative claim brought by
another member.1061 Likewise, the English Companies Act is silent regarding issuing a public
notice of the commencement of derivative litigation. Therefore, it is submitted that if the
contemporaneous ownership rule is to be maintained, a position which is nevertheless argued
against in this thesis, companies legislation needs to clearly outline how other shareholders will be
notified in instances where the one who commenced litigation has ceased to be a shareholder.
The contemporaneous ownership rule or the denial of standing to those shareholders who acquired
that status after the date of the alleged wrong1062 is a practical example of how the courts determine
whether the complainant’s interest1063 in the company is recognised and adequate.1064 Although
Aronson et al agree that “financial stake is immaterial” in a derivative suit,1065 Wells sharply
opposes this position.1066 By requiring the shareholders to prove that they owned shares at the time
when the challenged conduct took place, the contemporaneous ownership rule potentially wards
off such malicious claims as may result from purchased grievances.1067 Having defined the nature
of the contemporaneous ownership rule, the next section presents some of the key policy rationales
for the existence and/or adoption of the rule.
5 4 1 Rationale for the contemporaneous ownership rule

It has been advanced that the contemporaneous ownership rule was created to “prevent purchased
grievances”.1068 It has also been argued that courts developed the contemporaneous ownership rule
1061
According to section 264(2) of the said Act, this is only possible if;
“(a) the manner in which the proceedings have been commenced or continued by the claimant amounts to an
abuse of the process of the court,
(b) the claimant has failed to prosecute the claim diligently, and
(c) it is appropriate for the applicant to continue the claim as a derivative claim”.
1062
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 56. See also Wells 2004
U.C. Davis L. Rev. 345.
1063
To prove this, one has to show that s/he owned shares before the conduct complained of occurred or that
thereafter s/he acquired them by devolution. See Coffee Jr. and Schwartz 1981 Columbia Law Review 312.
1064
1065
1066
1067
1068
In re: Bank of New York Derivative litigation 320 F.3d 291 2003 para 23. See also Wells “Maintaining Standing
in a Shareholder Derivative Action” 2004 U.C. Davis L. Rev. 347; Robinson Jr. “A New Interpretation of the
Contemporaneous Ownership Requirement in Shareholder Derivative Suits: In re Bank of New York Derivative
Litigation and the Elimination of the Continuing Wrong Doctrine” 2005 Brigham Young University Law Review
234; and Kawashima and Sakurai 1997 Stanford J. Int'l L. 9 31.
140
to minimise the activities of “professional plaintiffs”.1069 Such plaintiffs hunt for shares in
companies that have suffered harm. These companies are usually identified by their depressed
share value. A professional plaintiff would then commence derivative litigation as if s/he was a
shareholder at the time the wrongful conduct took place.1070
However, with specific reference to the Delaware State Corporation Law, Laster has questioned
why an after-acquiring shareholder should not be allowed to pursue derivative litigation.1071 The
scholar has argued that there is nothing wrong with the transfer of the right to sue as “equitable
claims for breach of fiduciary duty, such as those typically asserted in derivative actions, are freely
assignable under Delaware [State] law”.1072 Furthermore, the transfer of the right to sue as an
incident of the transfer of shares should not be discouraged because “the right to sue passes from
the person who held shares as of the date of injury to ‘their transferees, successors, and
assigns’”.1073 If the right to benefit is transferable then why should it be regarded as wrong to
transfer the right to sue also?1074 It is not clear that when one buys shares, which are by definition
bundles of rights,1075 which of those rights must immediately pass to the purchaser and which ones
should be restricted? Also, the law does not specify the time that it should take for the right to sue
to pass to the acquirer. Therefore, it is submitted that the “prevention of purchased suits” argument
is not a compelling rationale for the contemporaneous ownership rule. If this justification is to
stand as a competent rationale for the rule, there is a need for more explanation concerning the
issues raised above.
1069
1070
Ibid.
1071
Laster 2008 Delaware Journal of Corporate Law 680. In the case of In re New Valley Corp. Derivative Litigation
No. 17 649-NC 2004 Del. Ch the court allowed the law firm representing the plaintiff to proceed with the
litigation after the plaintiff was dismissed. Regardless of the reasons for dismissal, it is contended that the fact
that the court recognised the law firm’s standing in this case proves that derivative claims are brought to protect
the interests of a company rather than those of the litigating shareholder.
1072
Laster 2008 Delaware Journal of Corporate Law 680.
1073
Laster 2008 Delaware Journal of Corporate Law 690. On footnote 37, the same scholar argues that generally a
right of action is transferable if it would survive the death of the assignor and pass to his personal representative.
Additionally all causes of action, except actions for defamation, malicious prosecution, or upon penal statutes
shall survive.
1074
1075
Cassim FHI et al Contemporary company law 2 ed (2012) 213-214 quoting Lord Wrenbury’s dictum in Bradbury
v English Sewing Cotton Co Ltd 1923 AC 744 (HL) 746. See also Cooper v Boyes 1994 4 SA (C) 535.
141
Furthermore, it has been argued that the rule was meant to deal with strike suits.1076 A strike suit
occurs when a complainant institutes derivative litigation for the sole purpose of forcing a
company into a settlement of the litigation out of which s/he stands to receive some personal
benefits.1077 In practice, an applicant may agree to discontinue derivative proceedings in exchange
for “a purchase of his or her shares at above-market prices”.1078 Generally, companies do not want
to be involved in legal battles especially if they are lengthy as this can negatively affect their
reputation.1079 In an effort to minimise the potential exploitation of companies through strike suits,
USA courts developed the contemporaneous ownership rule.1080
However, from the definition of strike suits above, it is patent that both contemporaneous and non-
contemporaneous shareholders can engage in unjust enrichment conduct through strike suits. A
strike suit has more to do with the motive of the litigator rather than the timing of one’s acquisition
of shares in a company. Also, it is not clear how the contemporaneous ownership rule seeks to
limit strike suits that are initiated by those shareholders who owned shares before the conduct
complained of took place.1081 Cassim MF asserts that the contemporaneous ownership rule is not
necessary to prevent strike suits.1082 Therefore, it is submitted that “the prevention of strike suits”
justification is misdirected. It is a solution in search of a problem and should fall away.
It has also been postulated that the contemporaneous ownership rule was developed to prevent
individuals from purchasing shares with litigious motives.1083 Coined this way, the rule would
prevent the judiciary from becoming parties to speculative suits against companies.1084 The rule
would also filter out unmeritorious derivative claims. However, the problem with this supposed
justification is that statutory provisions elaborating the rule are silent on the shareholders’ intention
at the time of share purchase.1085 It can, therefore, be argued that this rationale is not fully
substantiated although it is conceded that a model of the contemporaneous ownership rule that
1076
Wells 2004 U.C. Davis L. Rev. 349 and 357 – 358.
1077
Cassim MF 2018 South African Law Journal 107; Wilder “The Demand Requirement and the Business Judgment
Rule: Synergistic Procedural Obstacles to Shareholder Derivative Suits” 1985 Pace L. Rev. 633 634.
1078
1079
Eccles et al “Reputation and Its Risks” https://hbr.org/2007/02/reputation-and-its-risks (accessed 12-09-2018).
1080
1081
1082
Cassim MF 2018 South African Law Journal 107 while making reference to American Bar Association Model
Business Corporation Act: Official Text with Official Comment and Statutory Cross-References (2002).
1083
1084
Ibid.
1085
Ibid.
142
takes into consideration a complainant’s motive would enhance accountability. Some of the criteria
that can be employed in trying to determine the shareholder’s motive include the complainant’s
account of his participation in derivative litigation previously.
Another suggested policy rationale behind the contemporaneous ownership rule is that
“[shareholders] should not be able to [‘]buy law suits[’], and unjust enrichment may result if the
shareholder seeking recovery bought his shares at a discounted price that already reflected the
injury”.1086 This is known as “the windfall doctrine”.1087 According to this doctrine, shareholders
who buy a company’s shares after the wrong has been done should not be allowed to institute legal
proceedings on behalf and in the name of the company because they would have bought the shares
at a discounted price and should they succeed in the derivative suit, they will receive an increase
in the market value1088 of their shares.1089
However, it has to be noted that not every wrongdoing automatically results in a diminution of a
company’s share price. For example, if there had been no public disclosure of the wrongdoing, the
share prices may not reflect any discount.1090 Additionally, even in such instances when the wrong
has been disclosed to the public, the share prices do not always fully reflect the harm.1091 Laster
1086
Coffee Jr. and Schwartz 1981 Columbia Law Review 312. See also Baum and Puchniak “The derivative action:
An economic, historical and practice-oriented approach” in Puchniak et al (eds) The derivative action in Asia: A
comparative and functional approach (2012) 56; Laster “Goodbye to the Contemporaneous Ownership
Requirement” 2008 Delaware Journal of Corporate Law 688.
1087
1088
Paragraph 31(1)(g) of the Eighth Schedule to the Income Tax Act 1962 defines market value as “the price which
could have been obtained upon a sale of the asset between a willing buyer and a willing seller dealing at arm’s
length in an open market”.
1089
1090
Ibid. In CSARS v Stepney Investments (Pty) Ltd 2015 (ZASCA) 138 it was held that “establishing the market
value of shares (or any other property) at a given point in time is, inherently, a hypothetical and somewhat
speculative inquiry into what a notional purchaser would have paid in an open market on a particular date”.
1091
This is so because the share price may take into consideration the possibility that the company may recover from
the pending legal action. Although it is true that, in a capitalist environment market forces of demand and supply
make a significant contribution to the valuation of a company’s shares, the method of share valuation employed
by a company should be taken into consideration as well. In CSARS v Stepney Investments (Pty) Ltd 2015
(ZASCA) 138, the Supreme Court of Appeal had an opportunity to explain some of the different methods that
are used to determine the market value of shares in a private company. The first one was the Net Asset Value
(NAV) method according to which regard is had to a company’s assets less its liabilities. The resultant value is
then divided by the number of the company’s issued shares to determine the value per share. However, as was
highlighted in that case, the application of this method may be limited to property-holding companies and
liquidation proceedings. The second method was the income approach which takes into account the future
revenue that may be generated by a company. If demand for a company’s product is high, then its shares may be
highly priced beyond its rather static asset net worth. The court also deliberated on the Discounted Cash-Flow
method (DCF), which “entails valuing the business in question on the basis of its forecast future cash flow,
discounted back to present day values through the application of a discount factor”. The last two methods are
143
argues that the market value for shares that are publicly traded does not only comprise of the
diminution resulting from the harm but also “the asset value of the contingent derivative claim”.1092
In Cassim’s words:
“The windfall argument loses sight of the foundational principle that the purpose of a derivative action
is to redress a wrong done to the company, and that a shareholder who takes the initiative of bringing
a derivative action acts for the company and not for himself or herself personally. Whether the
shareholder makes an indirect windfall or whether the shareholder acquired the shares before or after
the wrong inflicted on the company, should consequently have no bearing on the vindication of the
company’s right”.1093
Furthermore, it can be argued that the contemporaneous ownership rule is an arbitrary principle.
It forbids non-contemporaneous shareholders from making a windfall by commencing derivative
litigation while allowing the same to make a windfall when contemporaneous shareholders
successfully institute derivative proceedings on behalf of the company.1094 The point is that when
those shareholders who owned shares before the wrong was inflicted, are successfully awarded
derivative remedy, the market responds by an upward valuation of the company’s shares. The share
valuation increase will not discriminate between contemporaneous and non-contemporaneous
shareholders. In this sense, the latter will equally make a windfall that they would have made had
they instituted derivative remedy themselves. Therefore, it is submitted that the windfall rationale
is illogical and baseless. It cannot be expressed better than the way Cassim MF put it, “the windfall
rationale … is fallacious”.1095
more responsive to market conditions and hence subject to being affected by the public disclosure of directorial
and management wrong doing. It is, therefore, submitted that Cassim’s view that share prices do not always
reflect the damage suffered or that will be suffered by a company is plausible.
1092
Laster 2008 Delaware Journal of Corporate Law 685. The same author further elaborates that the value of a
contingent derivative claim consists of the net potential recovery (that is net of attorneys' fees and other costs)
discounted by the likelihood of success which is determined by taking into account all potential defenses. When
a shareholder divests, the value he receives takes into account the value of this contingent claim. When a
purchasing shareholder buys “he pays the fair market value for the right to participate in the potential upside. An
after-acquiring [shareholder] does not receive a ‘windfall’ if the corporation is able to recover on the claim any
more so than he receives a ‘windfall’ if the corporation is able to beat its projected operating results”. A derivative
claim is recognised as a company’s asset and like any other assets, has a value.
1093
1094
Ibid.
1095
Ibid. See also Bateson v Magna Oil Corp 414 F.2d 1969 128 para 12.
144
Additionally, the contemporaneous ownership doctrine was also intended to eliminate forum
shopping from American derivative litigation.1096 Essentially, the rule prevents the use of
American Federal Courts to litigate purchased grievances.1097 Also, it makes derivative claims
viable.1098 The rule was crafted as a matter of equity to prevent companies from “manufacturing
diversity jurisdiction for claims against third parties”.1099 Companies were abusing the jurisdiction
of federal courts. Instead of resorting to state courts1100 whose laws they were created under,
companies colluded to create federal jurisdiction. This is the only rationale that gives meaning to
the language of Rule 23.1 which, inter alia, requires one to “allege that the action is not a collusive
one to confer jurisdiction that the court would otherwise lack”.1101 Accordingly, it is argued that
the prevention of companies from colluding to create federal jurisdiction is the only true rationale
for the contemporaneous ownership rule. However, this does not apply to Delaware’s adoption of
the rule as its courts do not depend on the complainants’ citizenship for jurisdiction.1102
5 4 2 Exceptions to the rule

Like most of the general rules, the application of the contemporaneous ownership rule is subject
to certain exceptions. This section will deliberate on three exceptions namely; legislative
exceptions, the interests of justice and public interests exceptions. The continuing wrong doctrine
is another exception but for convenience, it is examined as a separate rule in part 5 5 below.
Some states in the USA have enacted legislation that provides for exceptions to the
contemporaneous ownership rule. For example, section 607.07401(1) of the Florida Business
Corporation Act1103 provides that;
“[a] person may not commence a proceeding in the right of a domestic or foreign corporation unless
the person was a shareholder of the corporation when the transaction complained of occurred or unless
1096
Robinson Jr 2005 Brigham Young University Law Review 234. See also Hawes v Oakland 104 U.S. 450 (1881).
1097
Bateson v Magna Oil Corp 414 F.2d 1969 128 para 12; Hawes v City of Oakland 1882 104 U.S. 450 26 L.Ed
827; Robinson Jr 2005 Brigham Young University Law Review 234 footnote 32.
1098
Robinson Jr “2005 Brigham Young University Law Review 234.
1099
1100
These are their natural, lawful and appropriate forum.
1101
Rule 23.1.
1102
Laster 2008 Delaware Journal of Corporate Law 679 who went on to explain that the Delaware Chancery Court
has jurisdiction over derivative actions in respect of any company incorporated in Delaware regardless of the
residence of the complainant shareholder.
1103
1963 (2014 Revision).
145
the person became a shareholder through transfer by operation of law from one who was a shareholder
at that time”.
The above-quoted provision allows a complainant who at the time of the transaction or conduct
complained of was not a shareholder but became one by a transfer of shares from someone who
was a shareholder at that time. This provision suggests that the right to sue goes together with the
right of ownership. As a caution against abuse of this pro-shareholder provision, courts do not
simply apply the exception in all cases of post-transaction shareholders. Some of the factors that
the courts consider before granting leave to proceed with the suit include the presence of a strong
prima facie case in favour of the claim, the likelihood of a similar action commencing, whether
the plaintiff-shareholder purchased her/his shares in the company before public disclosure of the
alleged transaction,1104 whether the defendant(s) will be permitted to retain ill-gotten gains if the
suit does not go forward and the possibility of unjust enrichment to the shareholder should the suit
proceed.1105 An excellent example of how this exception is applied in practice is found in the case
of Lynn v Martin County Marine Corp.1106
The contemporaneous ownership rule can also be vacated in the interests of justice.1107 In
Pennsylvania, if the complainant establishes a strong prima facie case and that barring the action
would result in serious harm to the company, the State courts are empowered to overlook the fact
that the litigator was not a shareholder at the time the alleged wrong was done. 1108 Besides
establishing a prima facie case, the California General Corporation Law1109 also requires that there
should be no similar action that is likely to be commenced.1110 The non-contemporaneous
shareholder should have bought the shares before s/he became aware or before public disclosure
of the impugned wrongdoing.1111 The purpose of the law is to serve justice.1112 If justice is better
1104
Cassim MF 2018 South African Law Journal 106; Baum and Puchniak “The derivative action: An economic,
1105
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 12 15.
1106
980 So. 2d 536 (Fla. App. 4 Dist. Apr. 2 2008).
1107
1108
Section 1782(b) of the Pennsylvania Business Corporation Law.
1109
1982.
1110
Section 800(b)(1) of the California General Corporation Law 1982.
1111
Cassim MF 2018 South African Law Journal 106 making reference to section 800(b)(1) of the California General
Corporation Law 1982.
1112
Jennings Business: Its legal, ethical and global environment 9 ed (2012) 6-7.
146
served by the adoption of certain exceptions to a rule that are not cast in stone then that is the
direction that law reform ought to follow.
California legislation1113 and German corporate law1114 substitute the time of public disclosure for
the time of the alleged wrong when determining whether the shareholder has the required legal
standing.1115 According to this doctrine, a plaintiff would lack standing if they purchased their
shares in the company after the date when public disclosure of the impugned conduct was made.
The public disclosure doctrine is laudable because it is easier to ascertain the date of public
disclosure for eligibility “than trying to parse out which events were ‘wrongs’ and which were
merely ‘after effects’”.1116
It has been argued that the contemporaneous ownership rule is based on a fallacy and an untested
assumption that all shareholders who purchased shares after the wrong complained of had
knowledge of the wrongdoing.1117 Clearly, a blanket application of the contemporaneous
ownership rule does not consider non-contemporaneous shareholders who genuinely intended to
commence or continue derivative litigation but only acquired shares before public disclosure was
made. Such complainants should be allowed access to justice. Adoption of the public disclosure
exception “protects unlucky shareholders who acquired their shares in good faith” 1118 during that
window period.
5 4 3 Criticisms of the contemporaneous ownership rule

Although the contemporaneous ownership rule has been widely accepted in the USA as being
based on Rule 23.1, some concerns have been raised over the consistency of the former with the
latter. Wells argues that when the USA Congress codified the contemporaneous ownership rule,
they “did not match the strict ownership requirements with equally strict guidelines for adequate
1113
Section 800(b)(1) of the California General Corporation Law 1982.
1114
In Germany, the prospective complainant is required to prove that they acquired the shares before they knew or
before they ought to have known of the alleged impugned injurious conduct. See Baum and Puchniak “The
derivative action: An economic, historical and practice-oriented approach” in Puchniak et al (eds) The derivative
action in Asia: A comparative and functional approach (2012) 56. It is not clear whether the test for determining
whether one ought to have known of the conduct that injured the company is subjective or objective.
1115
1116
Wells 2004 U.C. Davis L. Rev. 369-370.
1117
1118
147
shareholder representation”.1119 This could be a result of the fact that the current Rule 23.1 which
governs derivative actions was originally codified together with class action suits.1120 This
inconsistency defeats one of the policy rationales behind the contemporaneous ownership rule
which is “ensuring adequate representation and personal interest in continuing zealous
litigation”.1121 Also, Rule 23.1 is inconsistent with the contemporaneous ownership rule in that it
does not address the problem of the possibility of purchased or strike suits.1122 The inconsistency
between the rule and what it is intended to achieve was also recognised in Delaware corporate
law.1123
Additionally, the contemporaneous ownership rule does not clearly delineate the boundaries of
wrongful conduct.1124 In most cases, the impugned conduct involves directors and other external
1119
1120
Ibid. Previously the doctrine was contained in Rule 23(b).
1121
1122
Wells 2004 U.C. Davis L. Rev. 366. The same author argues that Rule 23.1 does not contain any threshold
requirements for the number of shares that a plaintiff must own in demonstration of the “desire and ability” to
institute legal action on behalf of and in the name of the company. This is not the position in jurisdictions such
as Germany, Sweden, Austria, Italy and Spain that require that a plaintiff should own a certain amount of shares
to properly commence a derivative action in the name and on behalf of a company. However, the omission of
shareholder quorum requirements can be viewed as an advantage rather than a demerit of the contemporaneous
ownership doctrine as that might preclude minority shareholders who have genuine concerns from obtaining
possible recourse on behalf of the company. Threshold share ownership requirements might also encourage
directors especially those in closely held companies who might also be majority shareholders in the same
company to make self-interested decisions which are ultra vires the interests of the company. Even though
minority shareholders might have personal recourse through other mechanisms such as the oppression remedy,
the company as a legal person would have been injured. The nexus drawn between the number of shares that one
owns and the genuineness of the application needs to be qualified. Does it imply that the more shares one owns
in a company the less frivolous and unmeritorious their applications are likely to be? Not all majority
shareholders institute derivative action in good faith. Whether or not one is acting in good faith is a different
issue which will be considered below in Chapter 8. Therefore threshold share ownership requirements should
not be used to determine one’s standing as the derivative action is not a personal action but one which is brought
on behalf of and for the benefit of the company. It is further submitted that application of such threshold
requirements might blur the distinction between personal and indirect/derivative actions. It is therefore submitted
that the USA, England, Japan and South Africa should not adopt any threshold requirements. See also Tang “The
anatomy of Singapore’s statutory derivative action: why do shareholders sue – or not?” 2019 Journal of
Corporate Law Studies 12; Erickson “The Gatekeepers of Shareholder Litigation” 2017 Oklahoma Law Review
237 242; Gelter “Mapping Types of Shareholder Lawsuits across Jurisdictions” 2017 ECGI Working Paper
Series in Law 24-26 available at: https://ssrn.com/abstract=3011444 (accessed 21-11-2019).
1123
Section 327 of the Delaware General Corporation Law provides that “in any derivative suit instituted by a
[shareholder] of a corporation, it shall be averred in the complaint that the plaintiff was a [shareholder] of the
corporation at the time of the transaction of which such [shareholder] complains or that such [shareholder's share]
thereafter devolved upon such [shareholder] by operation of law”. Laster 2008 Delaware Journal of Corporate
Law 676 criticised the wording of this section by arguing that the provision is focused on the shareholder
instituting the claim whereas derivative litigation belongs to the company not the suing shareholder. See also
Foss v Harbottle (1843) 67 ER 189; Siems “Abuse of shareholder rights” in Siems and Cabrelli (eds)
Comparative company law: A case-based approach 2 ed (2018) 365.
1124
Robinson Jr 2005 Brigham Young University Law Review 234.
148
stakeholders. It is not clear whether the word “transaction” refers to the creation, organisation and
implementation of the transaction or conclusion of an agreement if any, as evidenced through the
parties affixing their signatures or any other accepted gesture. As a result of this uncertainty, courts
have reached differing conclusions pertaining to whether a shareholder who institutes a derivative
action should own shares in the concerned company throughout the duration of the series of events
that constitute the wrongful transaction, own shares during a certain period of the events and
whether s/he should be a shareholder when the effects of the wrongful transaction continue.1125
Another criticism that has been levelled against the contemporaneous ownership doctrine is that
Rule 23.1 does not define exactly what conduct constitutes a transaction.1126 Robinson Jr. suggests
that a transaction is “an event or series of events that create a legal right on behalf of the
corporation”.1127 It has also been argued that the rule is harsh on shareholders who unknowingly
buy shares after the misconduct has happened.1128 It has further been suggested by Lowry and
Reisberg that the contemporaneous ownership rule is flawed in that it unfairly restricts
complainants who seek to genuinely advance the company’s interests. 1129 The duo further argue
that “incoming” shareholders have a legitimate right to institute derivative litigation as they will
also, “quite naturally, suffer from past mistakes that affect the company”.1130 On this view, the
time at which one became a member is immaterial.1131
Whilst it is understandable that the policy rationales for the contemporaneous ownership rule were
without malicious intent, it can be argued that a wholesale application of the rule in a dynamic
legal and business environment may result in the rule imposing undesirable barriers on
shareholders’ access to justice. The courts should, therefore, look beyond the letter of the rule and
consider the spirit thereof as well.1132
1125
Robinson Jr. 2005 Brigham Young University Law Review 229.
1126
Robinson Jr. 2005 Brigham Young University Law Review 235.
1127
Ibid.
1128
Kawashima and Sakurai 1997 Stanford J. Int'l L.32.
1129
1130
Ibid.
1131
Ibid.
1132
For example, a recognition of this principle is found in the Japanese Code, according to which “…parties confirm
and share the aim and spirit of the principles and review their activities against the aim and spirit, not against the
literal wording of the principles, even where the principles may look abstract and broad on the surface. For this
reason, the terminology used in the Code is not strictly defined as is the case with laws and regulations”.
https://www.valuewalk.com/2013/01/corporate-governance-usa-versus-europe/ (accessed 16-03-2018).
149
As a result of the shortcomings of the contemporaneous ownership rule, there have been calls for
the rule to be completely disregarded.1133 It is submitted that Wells’ suggestion that in order to
limit the risk or threat of strike suits, plaintiffs may be asked to prove that they incurred actual
harm as a result of the wrongdoing is both plausible and welcome.1134 The law has to be crafted in
such a way that it requires plaintiffs to disclose their recent involvement in derivative suits,
imposing personal liability for “frivolous suits” and “malicious use of process” 1135 and further
provide that the lead plaintiff should not be entitled to any pecuniary benefit “by granting only
reasonable costs at the courts' sole discretion and a pro-rata share of any recovery”.1136
From the above discussion, it is clear that most of the policy rationales upon which the
contemporaneous ownership rule is premised are very weak. Moreover, critics of the rule have
advanced persuasively strong disapproval of the rule.1137 Also, the outcome of an empirical
research conducted by Hoffman showed that the contemporaneous ownership rule makes USA’s
standing requirements restrictive.1138 Another empirical study has revealed that the rule is a barrier
to potential derivative plaintiffs.1139 A summation of all these factors provides a sufficiently
compelling basis for a submission that the rule must be abolished.1140 A better standard would be
for courts in the USA to determine non-contemporaneous shareholders’ standing by reference to
1133
1134
1135
However, this may deter genuine plaintiffs from instituting derivative actions for fear of personal liability should
they fail to prove a prima facie case. This requirement has the possibility of putting plaintiffs under pressure to
prove at least a prima facie case at all costs, a do or die situation. Either they win or they sink. Considering that
already, some shareholders are not motivated to bring derivative actions because passive shareholders free ride
on the benefits of a successful derivative action, the threat of imposition of personal liability to the plaintiffs may
do more harm than good and discourage more shareholders from instituting derivative actions. It is submitted
that if this idea is adopted, then courts would first place the burden of proof onto the one that sues the shareholder
who commenced the attempted derivative suit. Second, the procedure should fall under criminal law which
requires the standard of proof to be beyond a reasonable doubt as compared to a civil action’s proof on a balance
of probabilities. Third, it must be emphasised that not all failed derivative suits should result in personal liability.
Fourth, courts should retain their discretion in determining which scenarios warrant personal liability. In the
absence and these and more incentives on the suitor, it is not necessary to overburden the already overloaded
plaintiff. See also Velasco “Fiduciary Principles in Corporate Law” 2018 Notre Dame Law School Legal Studies
Research Paper No. 1933 32 available at https://ssrn.com/abstract=3374505 (accessed 15-10-2019).
1136
1137
Tang 2019 Journal of Corporate Law Studies 12; Erickson 2017 Oklahoma Law Review 237 242;Wells 2004
U.C. Davis L. Rev. 347; Robinson Jr. 2005 Brigham Young University Law Review 235.
1138
Hofmann “The Statutory Derivative Action in Australia: An Empirical Review of its Use and Effectiveness in
Australia in Comparison to the United States, Canada and Singapore” 2004 Corporate Governance Journal 4.
1139
Garth et al “Empirical Research and the Shareholder Derivative Suit: Toward a Better-Informed Debate” 1985
Law and Contemporary Problems 139.
1140
The rule does not promote responsible management in contemporary corporate governance.
150
whether or not they have a prima facie case1141 and whether or not the corporate law rules and
policies in question advance the promotion of adequate monitoring of fiduciary conduct as well as
ensuring that dishonest fiduciaries are held accountable.1142 However, regardless of all the sharp
criticisms that have been levelled against the contemporaneous ownership rule, Baum and
Puchniak assert that the archaic doctrine was adopted in Germany less than fifteen years ago.1143
There is no explicit contemporaneous ownership rule in England under the current statutory
derivative remedy scheme.1144 The rule was held to be inappropriate under the previous English
common law regime as evident in Smith v Croft1145 where minority shareholders holding a voting
interest of 14.44% commenced legal proceedings against the defendants who were the majority
shareholders of the company.1146 These majority shareholders were also the executive directors in
the company. The plaintiffs alleged, inter alia, that the executive directors had paid themselves
excessive remuneration which were ultra vires and that the payments were made in fraudulent
breach of the executive directors’ fiduciary duties.1147 Although the plaintiffs were barred from
bringing their action for reasons which are not the subject of this discussion, the court held that a
minority shareholder was “able to assert a cause of action which arose before he became a
1141
See section 800(b)(1) of the California General Corporation Law 1982 which provides that “no action may be
instituted or maintained in right of any domestic or foreign corporation by any holder of shares or of voting trust
certificates of the corporation unless both of the following conditions exist: The plaintiff alleges in the complaint
that plaintiff was a shareholder, of record or beneficially, or the holder of voting trust certificates at the time of
the transaction or any part thereof of which plaintiff complains or that plaintiff’s shares or voting trust certificates
thereafter devolved upon plaintiff by operation of law from a holder who was a holder at the time of the
transaction or any part thereof complained of; provided, that any shareholder who does not meet these
requirements may nevertheless be allowed in the discretion of the court to maintain the action on a preliminary
showing to and determination by the court, by motion and after a hearing, at which the court shall consider such
evidence, by affidavit or testimony, as it deems material, that (i) there is a strong prima facie case in favor of the
claim asserted on behalf of the corporation, (ii) no other similar action has been or is likely to be instituted,
(iii) the plaintiff acquired the shares before there was disclosure to the public or to the plaintiff of the wrongdoing
of which plaintiff complains, (iv) unless the action can be maintained the defendant may retain a gain derived
from defendant’s willful breach of a fiduciary duty, and (v) the requested relief will not result in unjust
enrichment of the corporation or any shareholder of the corporation”.
1142
1143
1144
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 56. See also Lowry and
Reisburg Pettet’s company law: Company law and corporate governance 4 ed (2012) 254.
1145
(No 2) 1987 3 All ER 909.
1146
Smith v Croft (No 2) 1987 3 All ER 909.
1147
Ibid.
151
shareholder because it is the company’s and not his substantive right that is being enforced”.1148
In other words, the court was in favour of the prima facie rule as the standard for awarding standing
to the plaintiff. Under the current derivative scheme, on the face of it, England seems to have
broadened the scope for derivative litigation1149 which can potentially improve corporate
accountability. Whether that has translated into increased derivative litigation in practice can be
judged by judicial evidence.1150
Baum and Puchniak argue that the requirement of good faith1151 and a determination of whether
the shares were purchased with or without knowledge of the wrongdoing forming the subject of
the suit can be more effective mechanisms to filter out unmeritorious and frivolous actions.1152
This is quite similar to the approach adopted in Germany. However, unlike most civil jurisdictions,
there is no stipulated minimum number of shares required for one to initiate derivative litigation
in England.1153
It is important to note that the UK Companies Act1154 makes reference to “members” in respect of
stakeholders who can bring derivative litigation.1155 Baum and Puchniak were concerned that the
employment of this word may create practical barriers for would-be complainants as “often
equitable shareholders are not members”.1156 Keay has also opined that the reference to “members”
1148
Smith v Croft (No 2) 1987 3 All ER 946. See also Seaton v Grant 1867 LR 2 Ch App 459. Cassim MF 2018
South African Law Journal 106 argues that “although the South African Act has now abolished the common-law
derivative action, it is submitted that the underlying reasoning in [Smith v Croft] is no less relevant to the statutory
derivative action under s 165 of the Act”.
1149
Derivative Procedure and What the United States Can Learn From It” 2010 Wisconsin Int’l L. J. 141 157.
1150
Reisberg “Derivative claims under the Companies Act 2006: Much ado about nothing?” 2008 UCL Centre for
Law and Economics 16 and 47 where reference was made to Hansard HL Vol 450 (Official Report) (17 October
2006) col 832 (the Solicitor-General).
1151
This requirement will be discussed in-depth in Chapter 8.
1152
1153
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 78. Compare with
Article 152 of the Chinese Company Law 2005 which provides that a shareholder must own at least one percent
of the company’s total shares at the time the suit is filed. See also Wang Company in law in China: Regulation
of Business Organisations in a socialist market economy (2014) 231.
1154
2006.
1155
Section 260(5)(c) provides that “[a] member of a company include a person who is not a member but to whom
shares in the company have been transferred or transmitted by operation of law”. MacIntyre Business law 4 ed
(2008) 571 defines “members” to mean shareholders of a company limited by shares. See also Kershaw Company
law in context: Text and materials 2 ed (2012) 610.
1156
152
in the English statute is restrictive.1157 On the other hand, it can be argued that the term “members”
includes those persons who are not yet registered and do not appear in the company’s register but
“to whom shares have been transferred or who are members by operation of law”.1158 This flexible
approach to determining qualification as a ‘member’ is laudable because it allows such
unregistered shareholders access to derivative litigation especially in the context of quasi-
partnership companies in which directors have a wide discretion to refuse to register new
members.1159
In South Africa, unlike the old Companies Act1160 which allowed shareholders alone to have
standing, the current Companies Act1161 provides for a wider scope of plaintiffs who can apply for
leave to institute an action in the name and on behalf of a company.1162 Section 165 (2) provides
that;
“[a] person may serve a demand upon a company to commence or continue legal proceedings, or take
related steps, to protect the legal interests of the company if the person- is a shareholder or a person
entitled to be registered as a shareholder, of the company or of a related company; is a director or
prescribed officer of the company or of a related company; is a registered trade union that represents
employees of the company, or another representative of employees of the company; or has been
granted leave of the court to do so, which may be granted only if the court is satisfied that it is necessary
or expedient to do so to protect a legal right of that other person”.
1157
Keay 2016 Journal of Corporate Law Studies 50. This is not the position in other common law jurisdictions such
as New Zealand and South Africa that allow other stakeholders such as directors to act as complainants in
derivative suits. In Australia, derivative actions can even be brought by former members and officers of the
company concerned.
1158
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 78. Section 260(5)(c)
of the UK Companies Act 2006.
1159
1160
Section 266(1) provided that “where a company has suffered damages or loss or has been deprived of any benefit
as a result of any wrong, breach of trust or breach of faith committed by any director or officer of that company
or by any past director or officer while he was a director or officer of that company and the company has not
instituted proceedings for the recovery of such damages, loss or benefit, any member of the company may initiate
proceedings on behalf of the company against such director or officer or past director or officer in the manner
prescribed by this section notwithstanding that the company has in any way ratified or condoned any such wrong,
breach of trust or breach of faith or any act or omission relating thereto”.
1161
71 of 2008.
1162
Section 165(2) of the 2008 Companies Act. See also Cassim MF The new derivative action under the Companies
Act: Guidelines for judicial discretion (2016) 14.
153
Section 165(2) of the 2008 Companies Act is very vital as it specifies the stakeholders who have
derivative legal standing in South Africa. This section determines the extent to which tenets of the
enhanced accountability perspective, which inter alia, advocates for the extension of standing to
other stakeholders besides shareholders, have been adopted in South Africa. From the section
165(2) provision above, it is clear that there are four classes of complainants who can have standing
in South African derivative proceedings.1163 These are shareholders, directors or prescribed
officers, registered trade unions or another employee representative1164 and those who are granted
leave at the court’s discretion. Therefore, it can be argued that the current version of derivative
proceedings avails the remedy to a much wider audience than that contemplated in the 1973
Companies Act.1165 It is clear that for one to invoke the remedy provided for in section 165 s/he
has to be a shareholder at the time the application is made.1166 Two issues have been raised
pertaining to shareholders’ standing as provided for in section 165(2) of the Companies Act.1167
First, it has been questioned whether a shareholder can commence or continue legal proceedings
for wrongs done before s/he became a shareholder in the affected company? 1168 Second, should
the shareholder remain as such for the duration of the legal proceedings? In other words, is a
shareholder allowed to sell her/his shares during the litigation?
With respect to the first issue, unlike the USA, the South African legislative framework does not
contain any specific provision on the contemporaneous ownership doctrine.1169 As submitted by
Cassim MF, the courts have a discretion on whether or not to introduce the doctrine into South
African company law.1170 As discussed above, courts in the USA still struggle to define a
transaction for the purposes of ascertaining the actual time at which a potential shareholder bought
a company’s shares.1171 Also, South African derivative litigants are not engaging in forum
shopping which, as submitted above was the only true rationale behind the rule. The differences
1163
Section 165(2) of the 2008 Companies Act; Cassim FHI et al Contemporary company law 2 ed (2012) 779.
1164
Cassim MF The new derivative action under the Companies Act: Guidelines for judicial discretion (2016) 15
noted that the extension of derivative standing to the said category is unique to South African law. See also
Hendrikse and Hefer Corporate governance handbook: Principles and practice 3 ed (2019) 371-372 and
1165
Coetzee “A Comparative Analysis of the Derivative Litigation proceedings under the Companies Act 61 of 1973
and the Companies Act 71 of 2008” 2010 Acta Juridica 290 300.
1166
1167
Cassim MF 2018 South African Law Journal 103 and 110.
1168
This question will address whether South Africa recognises the contemporaneous ownership doctrine.
1169
1170
Cassim MF 2018 South African Law Journal 104-105.
1171
154
between South Africa’s court system and the USA’s federal court system also ease the possibility
of forum shopping. Therefore, considering these and other criticisms concerning the doctrine’s
inefficiency and its potential to unnecessarily restrict shareholders’ access to judicial redress, it is
contended that South Africa should not adopt the contemporaneous ownership doctrine.1172
Like England, the scope of shareholders who can initiate derivative proceedings in South Africa
is also extended to persons that are entitled to be registered as shareholders. 1173 Examples of
persons who qualify to have standing under this category include those who acquired their shares
by operation of law, for instance by inheritance or upon insolvency. 1174 In principle, the 2008
Companies Act grants standing to all shareholders. However, in practice, courts usually grant leave
only to minority shareholders and not to majority shareholders.1175 The rationale for this practice
is that majority shareholders have other viable means of accessing justice. For example, majority
shareholders can use their voting power to secure the election of a new board that can institute a
derivative action in the name and on behalf of the company.1176
Having explored the contemporaneous ownership rule in the USA, South Africa and England, the
rule will now be examined from a Japanese perspective. In Japan, the enactment of the Companies
Act1177 effectively saw Japanese company law divorced from the Commercial Code.1178 The
Japanese Companies Act refers to derivative litigation as an “action for pursuing the liability”.1179
A shareholder who has owned shares in the company concerned for at least six consecutive months
can initiate derivative litigation.1180 Eisen argues that this requirement should not in any way be
1172
Cassim MF 2018 South African Law Journal 105-107 explains that the USA has a more litigious culture when
compared to South Africa. Furthermore, the Companies Act 71 of 2008 contains several threshold tests of good
faith and best interests of the company that effectively limit strike suits.
1173
Section 165(2)(a) of the Companies Act.
1174
1175
Ibid.
1176
Ibid.
1177
86 of July 26 2005.
1178
Oda “Shareholder's Derivative Action in Japan” 2011 ECFR 334 341.
1179
Art 847(1) of the Companies Act 86 of July 26 2005.
1180
Art 847(1) of the Companies Act 86 of July 26 2005. See also Puchniak “The Complexity of derivative actions
in Asia” in Puchniak et al (eds) The derivative action in Asia: A comparative and functional approach (2012)
101 and Oda 2011 ECFR 334 341; Ono “Directors Liabilities” 11 available at
https://www.jurists.co.jp/sites/default/files/tractate_pdf/ja/200901_ono.pdf (accessed 28-05-2018); Siems
“Private Enforcement of Directors’ Duties: Derivative Actions as a Global Phenomenon” 2012 7 available at:
http://ssrn.com/abstract=1699353 (accessed 28-06-2018); Iglesias-Rodriguez “Obligations of directors in
takeovers” in Siems and Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018) 158.
155
interpreted as the Japanese version of the contemporaneous ownership rule.1181 Additionally, the
requirement is not linked with knowledge of the alleged breach by a director, statutory auditor,
incorporator or liquidator.1182 A strict literal interpretation of this provision suggests that even if
the shareholder bought the shares after the alleged wrongdoing had happened, and with knowledge
of it,1183 s/he can still commence derivative litigation by simply waiting until the six months have
passed.1184 Accordingly, the contemporaneous ownership rule is not required for one to institute
derivative litigation in Japan.1185
Calls for the adoption of the USA-made contemporaneous ownership rule in Japan have been
strongly resisted.1186 The Asian country’s authorities are of the view that because derivative
litigation is in its infancy, the contemporaneous ownership rule is undesirable.1187 Unlike common
law jurisdictions1188 that have well-established jurisprudence on the screening of derivative
actions, Japan’s only filtering mechanism against frivolous and unmeritorious suits is by way of
the courts requiring the plaintiff “to place a deposit when initiating an action before the case is
heard on its merit”.1189 Oda argues that the lack of an effective filtering mechanism may result in
derivative actions that are not in the interests of the company continuing and that such proceedings
are likely to take long before they are finalised.1190 However, this is highly unlikely as the Japanese
Companies Act clearly prohibits actions that “seek unlawful gains of such shareholder or a third
party or to inflict damages on such Stock Company”.1191 On their part, Kawashima and Sakurai
have suggested that Japan should repeal the six months ownership requirement in favour of the
continuous ownership rule.1192
1181
Eisen “Limitations on Derivative Actions in Germany and Japan to Prevent Abuse” 2012 Journal of Japan Law
199 215.
1182
Eisen 2012 Journal of Japan Law 199 215.
1183
Kawashima and Sakurai 1997 Stanford J. Int'l L. 9 31.
1184
Oda 2011 ECFR 341.
1185
Ibid.
1186
Oda 2011 ECFR 341.
1187
Oda 2011 ECFR 341. Due to this legislative shortcoming, Kawashima and Sakurai 1997 Stanford J. Int'l L. 9 31
are of the opinion that Japan has not been successful in curbing the potential abuse of derivative suits.
1188
English and South Africa’s derivative actions are subject to the leave of the court whilst in the USA, the
complainant is required to fairly and adequately represent the company.
1189
Oda 2011 ECFR 343.
1190
Oda 2011 ECFR 345.
1191
Art 847(1). See also Eisen 2012 Journal of Japanese Law 199 216.
1192
Kawashima and Sakurai 1997 Stanford J. Int'l L. 9 32. The continuous ownership rule will be discussed below
under section 5 6.
156
55 CONTINUING WRONG DOCTRINE
The continuing wrong doctrine has been treated as an alternative to the contemporaneous
ownership rule.1193 For that reason, it qualifies to be discussed as a feature of locus standi. A
continuing wrong has been defined as one “that is incomplete or has not terminated prior to [the]
plaintiff's acquisition of [shares]”.1194 According to this equitable1195 doctrine, plaintiffs are
awarded legal standing if they are able to demonstrate that the alleged conduct and its effects
though it might have happened before the plaintiff became a shareholder in the company
concerned, “continued even after the acquisition of [shares]”.1196
Although there is a considerable number of American states that either continue to follow or echo
the same or similar wording like Rule 23.1, it cannot be denied that there has been a shift in
preference against the contemporaneous ownership rule in favour of the continuing wrong
doctrine.1197 States such as California1198 and Pennsylvania1199 provide specific exceptions to the
contemporaneous ownership rule. Rhode Island does not require the rule at all and Minnesota is
completely silent on the issue.1200 These four states have attempted to expand the categories of
1193
1194
Wells 2004 U.C. Davis L. Rev. 357 while making reference to the case of Bateson v Magna Oil Corp 414 F.2d
(1969).
1195
In In re: Bank of New York Derivative litigation 320 F.3d 291 2003 para 25 “the continuing wrong doctrine is
frequently considered to be an equitable exception to the contemporaneous ownership rule”.
1196
Wells 2004 U.C. Davis L. Rev. 346. Robinson Jr. 2005 Brigham Young University Law Review 245 explains that
the contemporaneous ownership requirement is met “if the complainant suffers injury as a result of a transaction
that ‘spans the plaintiff’s ownership’ of shares in the corporation, ‘if new elements in a pattern of wrongful
conduct occur after’ the plaintiff acquires shares in the corporation, or if the direct effects of the wrongful
transaction continue unremedied when the plaintiff acquires shares in the corporation”.
1197
Wells 2004 U.C. Davis L. Rev. 350-351 points out that “[t]he states whose statutes mirror Federal Rule 23.1 are
Alaska, California, Georgia, Kentucky, Maine, Michigan, Nebraska, Nevada, New York; North Carolina,
Oklahoma, South Carolina, Tennessee, and Wisconsin. Connecticut, North Carolina, and Rhode Island are the
exceptions to this mirroring trend”.
1198
Section 800(b)(1) of the California General Corporation Law provides that “[n]o action may be instituted or
maintained in right of any domestic or foreign corporation by any holder of shares or of voting trust certificates
of the corporation unless both of the following conditions exist: (1) [t]he plaintiff alleges in the complaint that
plaintiff was a shareholder, of record or beneficially, or the holder of voting trust certificates at the time of the
transaction or any part thereof of which plaintiff complains or that plaintiff’s shares or voting trust certificates
thereafter devolved upon plaintiff by operation of law from a holder who was a holder at the time of the
transaction or any part thereof complained of”.
1199
Section 1782(b) of the Pennsylvania Business Corporation Law provides that “any shareholder or person
beneficially interested in shares of the corporation who, except for the provisions of subsection (a), would be
entitled to maintain the action or proceeding and who does not meet such requirements may, nevertheless in the
discretion of the court, be allowed to maintain the action or proceeding on preliminary showing to the court, by
application and upon such verified statements and depositions as may be required by the court, that there is a
strong prima facie case in favour of the claim asserted on behalf of the corporation and that without the action
serious injustice will result”.
1200
157
plaintiffs eligible for standing and prevent the misuse that courts fear when a derivative suit is
filed.1201
There have been concerns over whether adherence to the continuing wrong doctrine has the
potential to open the floodgates of frivolous litigation.1202 Laster concedes that there is a risk of
unmeritorious litigation but takes the view that the danger is outweighed by the intended
benefits.1203 As long as the application is not a personal one and is brought in the corporate’s name
then it should be allowed.1204
Robinson Jr adopts an effects-based approach to the requirements of standing under the continuing
wrong doctrine.1205 He has argued that the two conditions that must be met for plaintiffs to obtain
standing in federal courts under the continuing wrong doctrine are; (i) the effects of the wrongful
conduct should span the plaintiff’s ownership of shares; and (ii) the shareholder must have suffered
harm as a result of the effects of wrongful conduct.1206 The second requirement calls for the
plaintiff to establish a nexus between the challenged conduct and the loss suffered. Simply put, the
plaintiff must show what the disputed conduct resulted in. For example, the alleged wrongdoing
could result in a diminution in the market value of the plaintiffs’ shares. One of the problems with
Robinson’s submissions is that the scholar does not clarify how this second requirement can be
satisfied in practice.1207 Robinson’s effects-based approach contrasts sharply with Wells’ time-
based conferral of federal standing under the continuing wrong doctrine. The latter argues that a
continuing wrong is determined by the timing of the transaction rather than when its effects are
felt.1208
1201
Ibid.
1202
1203
Ibid.
1204
Ibid. See also Barsalona 2012 Oregon Law Review 778.
1205
Robinson Jr 2005 Brigham Young University Law Review 235-236.
1206
Ibid.
1207
Unlike South African criminal law, for example, where the requirement of causation requires the prosecution to
fulfil both the factual and legal causation tests. An extensive discussion of the principles of South African
criminal law relating to causation falls outside the scope of this study, but for more information about this see
Snyman Criminal Law 6 ed (2014) 79-94.
1208
158
5 5 1 Rationale and application of the continuing wrong doctrine
Some of the main purposes for the continuing wrong doctrine are to thwart strike suits1209 and to
compensate for the strict standing requirements of Rule 23.1.1210 The application of the doctrine
was clearly demonstrated in the case of Palmer v Morris.1211 In that case, the appellants appealed
against the trial court’s dismissal of the derivative suit which they had brought against the company
and its directors in terms of the then Rule 23(b)1212 of the Federal Rules of Civil Procedure. In
reaching its decision, the trial court had, inter alia, relied on the fact that the complainants’ claims
related to transactions which took place before they became shareholders in the company.1213 The
alleged wrong consisted of purported exorbitant and excessive payments which the company made
for services which were allegedly for the defendants’ benefits rather than the company’s interests.
The subject of the plaintiff’s complaint “was not against the initial transaction but against the
payments currently being made pursuant to them”.1214 Chief Judge Tuttle reversed the trial court’s
decision and held that since the conduct complained of was not “dealing only with transactions
that had completely occurred and been terminated prior to plaintiff's acquisition of his [shares]”1215
the plaintiff’s alleged illegality of the transactions ought not to be dismissed.
5 5 2 Criticisms of the continuing wrong doctrine

The continuing wrong doctrine does not come without its criticisms. A definition of the continuing
wrong doctrine that is solely based on the time of the transaction is short-sighted and problematic
to apply in practice.1216 First, in many of the corporate scandals, an investigation of the wrongful
conduct or transactions is preceded by the effects. Due to the naturally weak supervisory
mechanism of the unitary board that prevails in the USA, it is usually difficult to detect wrongdoing
before the effects are manifest1217 through an unusual drop in shareholder value, insolvency and
liquidity problems. Second, marrying the continuing wrong doctrine with the time of transaction
1209
1210
Robinson Jr. 2005 Brigham Young University Law Review 246 who has argued that “the continuing wrong
doctrine loosens the standing restrictions imposed on shareholders by Rule 23.1”.
1211
316 F.2d 649 (5th Cir. 1963).
1212
Currently the relevant rule is Rule 23.1.
1213
Palmer v Morris 316 F.2d 649 (5th Cir. 1963)649-650. The Rule 23(b) required that the complainant be a
shareholder at the time of the impugned transaction(s).
1214
Palmer v Morris 316 F.2d 649 (5th Cir. 1963) 651.
1215
Palmer v Morris 316 F.2d 649 (5th Cir. 1963) 650.
1216
1217
Wells 2004 U.C. Davis L. Rev. 360 highlights that “much of the off-the books accounting and officer
mismanagement occur years before independent auditors or shareholders are able to uncover the crime”.
159
has the potential effect of facing the same criticisms that have been levelled against the
contemporaneous ownership rule.1218 In particular, the proponents of the latter doctrine assume
that all shareholders who purchased shares in a company after the wrongdoing has taken place
were aware of it. Third, American courts have had a hard time defining the term “transaction”.1219
Furthermore, as Wells puts it “every wrongful transaction is continuing until it is righted”.1220 It is
therefore suggested that as far as validation of the continuing wrong doctrine is concerned, courts
should consider both the time-based and the effects-based approaches. Such an inclusive approach
would enable the courts to at the least make an enquiry into whether the shareholder was aware of
the wrongdoing before purchasing the company’s shares since it is difficult, in practice, for the
effects of a wrongdoing to be felt without the stakeholders being informed. Actually, it is the
information that triggers the effects.
A few points have to be noted here. First, it is difficult if not impossible to completely separate
effects from time. For example, the date on which a company’s shares started to decline in value
can be easily determined. Second, derivative litigation is not a personal action but one that is
brought in the interests of the company.1221 If the above two premises are accepted, it is not clear
why standing should be restricted to those shareholders who owned shares at the time when the
challenged conduct took place.1222 It is submitted that standing should be extended even to those
shareholders who were not shareholders at the time when the impugned conduct took place but
felt the effects of such wrongful acts or omissions. To avoid the risk of opening the floodgates of
purchased grievances, such shareholders should have acquired their shares before public disclosure
of the wrongful conduct was made.1223 Thirdly, American courts have already struggled to define
what exactly constitutes a wrongful transaction.1224 Therefore, determining a plaintiff’s standing
based on the time of the wrongful conduct will simply give more trouble to the courts. For these
reasons, it is submitted that if the continuing wrong doctrine is to be sustained, then American
courts, in determining shareholders’ standing, have to consider those plaintiffs that were
1218
1219
Ibid.
1220
Ibid.
1221
See Estmanco (Kilner House) v Greater London Council 1982 1 WLR; Cassim FHI et al Contemporary company
1222
1223
1224
160
shareholders before public disclosure was made and who also felt the effects of the challenged
conduct.
Also, there have been challenges with defining the exact scope of a continuing wrong. The question
is whether a continuing wrong should be defined according to time or with respect to the effects.
In Wells’ view, courts determine a continuing wrong in relation to the time of the transaction as
opposed to when the effects are felt.1225 Furthermore, it has been argued that the continuing wrong
doctrine still does not prevent the threat of “strike suits and purchased litigation”. 1226 Wells has
suggested that “plaintiffs could purchase shares at a lowered price, reflecting the true value of the
corporation, and still have standing to sue if the wrongs were, indeed, continuing”.1227 Referring
to the case of Ensign Corp. S.A. v Interlogic Trace Inc,1228 Wells argued that refusing standing to
a plaintiff who has knowledge of the wrongdoing can alleviate the risk of strike suits and purchased
litigation.1229 However, proof of knowledge of the wrongdoing can be problematic. It is suggested
that American courts should also refuse standing where the wrongdoing has been published. In
such instances, the test ceases to be a subjective one of whether the plaintiff knew of the
wrongdoing. Rather, what applies would be an objective test that takes account of the existing
circumstances of the plaintiff at the time the purchase was made and asks whether given such
circumstances s/he ought to have known the of the wrongdoing.1230
American courts have also not been able to define a continuing wrong in a consistent manner. The
following cases will be discussed to illustrate this inconsistency. In Bateson v Magna Oil
Corporation,1231 the appellants, through derivative litigation, sought to recover, on behalf of the
company, damages which were a result of the directors’ fraud, conspiracy and breach of fiduciary
duty. Five of the six transactions complained of were alleged to be continuous in that even though
they commenced before the appellant acquired shares in the company, the transactions spanned
through the time of filing of the suit.1232 Interestingly, the appellant once sold all of his shares and
1225
1226
1227
Ibid.
1228
1990 U.S Dist 2-4.
1229
1230
1231
414 F2d 1969 128.
1232
Bateson v Magna Oil Corp 414 F.2d 1969 128 para 2.
161
then bought some again in the same company within hardly three months for the purpose of filing
his “long-planned [derivative] suit”.1233
The appellants claimed that the requirements of the contemporaneous ownership rule were
satisfied by the application of the continuing wrong doctrine. In response, the defendants argued
that the lower court’s decision should be upheld and that the appellants did not qualify to have
standing since they had knowledge of the alleged wrongs at the time they re-acquired shares in the
company “regardless of whether the conduct complained of amounted to ‘continuing wrongs’”.1234
The USA Court of Appeals in the case of Bateson v Magna Oil Corp adopted a purposive approach
to interpreting Rule 23.1 and explained that the object of the rule was to “prevent the federal court
from being used to litigate purchased grievances or from becoming a party to speculative suits
against corporations”.1235 The court concluded that since the appellant could not be called a
“speculative litigator” who bore “no resemblance to the outsider who finds out about intracorporate
misconduct and buys [shares] to foment litigation” but was apparently “concerned with the
management of the company, and had planned to bring a derivative suit”1236 and was not
“[litigating] a purchased grievance”, he should have standing to maintain the derivative suit.1237
Accordingly, the court applied principles of the continuing wrong doctrine and overturned the trial
court’s order.
In the case of In re: Bank of New York Derivative litigation1238 (BONY), the appellants brought an
appeal alleging that certain officers and directors of BONY committed systematic wrongs in the
early and mid-1990s. The plaintiff-appellants acquired their shares in BONY on 21 July 1998.
Federal and state investigations culminated in two of BONY’s employees pleading guilty to federal
crimes that had occurred in 1999. Additionally, on 19 August 1999, the New York Times published
on its front page some of the illegal conduct perpetrated by BONY’s directors. Two other separate
derivative suits by different shareholders1239 on substantially the same claims and against
1233
1234
1235
Ibid.
1236
The court differentiated the position of the appellant and that of a stranger who buys shares in a company having
known of the wrong doing. The latter could not be awarded standing. See Bateson v Magna Oil Corp 414 F.2d
1969 128 para 12.
1237
1238
320 F.3d 291 2003.
1239
One of them had been a BONY shareholder since 1985, see para 12.
162
substantially the same defendants were commenced in the New York State Supreme Court in 1999.
These suits were consolidated on 29 June 2000 and were still pending at the time of the decision
under discussion.
The plaintiffs commenced derivative litigation on 23 September 1999 alleging directorial breach
of fiduciary duty. The defendants contended that the plaintiffs’ claim should be dismissed for want
of locus standi as required by Rule 23.1 and section 626(b) of the New York Business Corporation
Law.1240 Both provisions stipulate that for a shareholder to have standing in a derivative suit, s/he
should have owned shares at the time the wrong(s) complained of took place.1241 The plaintiffs
argued that they had fulfilled the requirements of the contemporaneous ownership rule by virtue
of the defendants’ illegal conduct continuing until after they had acquired shares in the company.
In other words, the continuing wrong doctrine granted them standing, so they claimed. Although
it was conceded that the illegal scheme was primarily implemented between 1992 and 1996, the
plaintiffs produced evidence to the effect that the wrongful conduct and transactions persisted into
2000.1242
The plaintiff-appellants’ appeal was dismissed. In its ratio decidendi, the court held that, first, even
if the continuing wrong doctrine was to be recognised, the plaintiffs’ case would still fail as “the
supposed acts of wrongdoing that occurred after July 21, 1998, are either effects of prior
wrongdoing or separate incidents altogether”.1243 The court attempted to explain the rule in the
following words;
“a plaintiff must have owned [shares] in the corporation throughout the course of the activities that
constitute the primary basis of the complaint. This is not to say that a plaintiff must have owned
[shares] in the company during the entire course of all relevant events. It does mean, however, that a
proper plaintiff must have acquired his or her [shares] in the corporation before the core of the allegedly
wrongful conduct transpired”.1244
1240
1961.
1241
In re: Bank of New York Derivative litigation 320 F.3d 291 2003 para 2.
1242
In re: Bank of New York Derivative litigation 320 F.3d 291 2003 paras 10 and 11.
1243
In re: Bank of New York Derivative litigation 320 F.3d 291 2003 para 18. However, it has to be noted also that
at the heart of the appellant’s complaint was the Prokutki scheme, which by the court’s language is implied to
be a continuous transaction.
1244
163
However, the supposed explanation did more harm than good as the court made reference to “the
primary basis of the complaint” but made no effort to explain what that meant. The court’s apparent
elaboration has also given birth to the controversial core of the conduct doctrine which has been
criticised for establishing a more onerous interpretation of the contemporaneous ownership
rule.1245 Furthermore, the definition of the word “core” was not provided by the court.1246 In other
words, what activity or series of activities1247 would amount to the core of wrongful conduct?1248
Secondly, the court reasoned that, as a matter of equity, the plaintiffs were not a fair representation
of the shareholders whose interests had been adversely affected by the directors’ alleged
wrongdoing because their share purchase only took place after all the impugned conduct had
occurred.1249 Additionally, the court held that the plaintiffs failed to show how the dismissal would
prejudice them since other derivative plaintiffs had commenced an identical action on behalf of
BONY in another state court.1250
The reasons for the court’s decision and ultimately the decision itself are quite contentious. To
begin with, the court held that “post-acquisition” acts were either mere effects of prior wrongdoing
or separate incidents altogether. However, it is quite arbitrary that the court identified the effects
of the wrongdoing without first indicating when the conduct terminated. As Wells puts it “every
wrongful transaction is continuing until it is righted”.1251 Also, the court opined that “the plaintiffs
did not fairly represent the injured shareholders…”. This sounds like a conceptual
misunderstanding of what derivative remedy entails. Derivative suits are brought on behalf of the
1245
1246
1247
Bank of New York II 320 F.3d at 298 n 4 differentiates between continuous and discrete wrongful actions. See
also Robinson Jr 2005 Brigham Young University Law Review 247-248.
1248
Robinson Jr 2005 Brigham Young University Law Review 247. The formulation of the core conduct doctrine
may suffer the same fate suffered by the judiciary and company law commentators in their attempt to determine
the exact point in time when directors’ duties to creditors arose. A lot of concepts including “the vicinity of
insolvency”, “near insolvency”, “doubtful insolvency”, “risk of insolvency”, among others were suggested. For
an in-depth discussion of these and other related issues see Nicholson v Permakrafi (NZ) Ltd (in liq) 1985 3
ACLC 453 459; Brady v Brady 1987 3 BCC 553; In Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler
1994 122 ALR 531 550; BTI 2014 LLC v Sequana S.A 2016 EWHC 1686 (Ch) para 474-477; Keay “The
director’s duty to take into account the interests of company creditors: When is it triggered?” 2001 Melbourne
University LR 327.
1249
1250
In re: Bank of New York Derivative litigation 320 F.3d 291 2003 paras 19-20.
1251
164
company.1252 Therefore, it is submitted that it is not necessary that the plaintiff fully represents
other shareholders. Lastly, the court’s view that the plaintiffs’ interests would not be prejudiced
since an identical action was taking place in another state court was unjustified as the court also
did not show how the shareholder interests would be adequately protected in the identical action.
Furthermore, the court’s reliance on that other action was against the interests of justice because
the New York Supreme Court case had been pending for at least two years. It is in the interests of
justice that “effective remedies … be practically enforced within [a] reasonable timeframe”.1253
A purposive approach would have assisted the court to consider whether the appellants had
purchased the grievance or whether a judgment in favour of the appellants would advance the case
for purchased grievances, strike suits or encouraged forum shopping. It is highly unlikely that the
court would have made a determination that the appellants were speculative litigators considering
the circumstances of the case. Wells has also extensively criticised the decision in BONY for the
court’s reliance on outdated case law1254 and its reliance on lower court decisions to support the
rule.1255 Therefore, it is submitted that the court wrongfully denied justice to the appellants in re
BONY.
However, regardless of the shortcomings of the continuing wrong doctrine enumerated above, it
can also be argued that the doctrine remains a desirable exception to the contemporaneous
ownership rule for the following reasons. First, the continuing wrong doctrine “satisfies the
statutory mandate of Rule 23.1”.1256 Second, Rule 23.1 makes no mention of the contemporaneous
ownership rule but rather a reference to proprietary interests in the relevant company. 1257 This
leaves room for the court to interpret Rule 23.1 “to include ownership during the continuing
wrongs, as opposed to the date they commenced”.1258 Further, Rule 23.1 is silent on any specific
cut-off date for the commencement or termination of a wrong.1259 Under this interpretation, it
1252
Estmanco (Kilner House) v Greater London Council 1982 1 WLR; Cassim FHI et al Contemporary company
for the Minority Shareholder” 2010 Macquarie J. Bus. L 215; Laster 2008 Delaware Journal of Corporate Law
676.
1253
1254
1255
Ibid.
1256
1257
Ibid.
1258
Ibid.
1259
165
would seem that any shareholder during the time the conduct complained of took place would
satisfy the requirements of the continuing wrong doctrine.1260 Also, it has been argued that the
continuing wrong doctrine is the only mechanism that satisfies standards of justice and shareholder
compensation1261 since “all shareholders incur losses and have adequate incentive to represent the
corporation”,1262 “market information is imperfect and late-coming plaintiffs may purchase
without knowledge of wrongdoing”1263 and “plaintiff recovery through increased [share] price and
reimbursement of legal fees gives any plaintiff incentive to effectively litigate”.1264
56 CONTINUOUS OWNERSHIP RULE

England has adopted the continuous ownership rule1265 which is considered to be a better substitute
for the USA’s contemporaneous ownership requirement. The continuing ownership rule requires
a member1266 to own shares in the company at the time of filing the action. 1267 In some extreme
instances, the plaintiff shareholder might be required to own shares at the time when judgment is
entered. Baum and Puchniak explain that the continuing ownership rule is premised on the policy
rationale that “only a plaintiff shareholder with an ongoing interest in the company will properly
represent the interests of all shareholders”.1268 It is debatable whether this is a valid rationale.
Although the rather outdated shareholder primacy approach equates the interests of the company
with those of its shareholders as a whole,1269 it has to be realised that most jurisdictions have
adopted or are shifting towards the enlightened shareholder value (ESV) approach. 1270 Some are
1260
Ibid.
1261
Ibid.
1262
1263
1264
1265
Section 260(1) and 260(5)(c) of the UK Companies Act 2006. Davies and Worthington Gower’s principles of
modern company law 10 ed (2016) 600 explain that “a former member cannot sue even in respect of a matter
which occurred when he was a shareholder [and] once membership is relinquished, so is the interest in the
company…:”.
1266
In this context, “member” includes “a person who is not a member but to whom shares in the company have
been transferred or transmitted by operation of law”. See section 260(5)(c) of the UK Companies Act 2006.
1267
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 56. The same is true for
South Africa. See Cassim MF 2018 South African Law Journal 120.
1268
1269
Da Silva v CH Chemicals (Pty) Ltd 2008 6 620 (SCA) para 18; Parke v Daily News Ltd 1962 2 All ER 948; and
1270
Section 172(1) of the UK Companies Act provides that directors are to consider the interests of employees,
suppliers, customers, the community and the environment when determining the best interests of the company.
In South Africa, the King IV Report on Corporate Governance for South Africa IODSA 2016 (King IV Report)
166
even moving towards the stakeholder approach.1271 The interests of shareholders and the company
are not always the same. For example, it has been persuasively argued that the only goal of
shareholders is profit maximisation1272 whilst in reality, a company may not always pursue
profitability.1273 Sometimes companies may sacrifice profitability for market growth and other
long-term goals. It may not make commercial sense for a company to declare dividends at the
expense of paying debts that would have become due.1274 Again, this rationale reflects a deep
conceptual misunderstanding as derivative litigators do not commence an action on behalf of the
other shareholders, but on behalf of the company.1275
Also, it has been argued that plaintiffs who would have ceased to be shareholders may abuse the
derivative remedy by invoking it for their personal benefit and disregard the interests of the
company.1276 Giving standing to former shareholders may also open floodgates of unmeritorious
frivolous actions and strike suits. It is a necessary hurdle which plays a pivotal filtering role.
Accordingly, it is submitted that the only compelling rationale for the continuous ownership rule
is to protect a company’s interests.
adopted the stakeholder approach. Although the Report and Code are not law, it does not mean that they can be
disrespected as the principles contained in such voluntary codes find their way into jurisprudence and form part
of the common law.
1271
See Cassim MF 2018 South African Law Journal 116. Also, one of the underpinning philosophies of the King
IV Report is stakeholder inclusivity.
1272
Macquarie J. Bus. L 158 and 160; Esser and Du Plessis “The Stakeholder Debate and Directors’ Fiduciary
Duties” 2007 SA Merc L.J. 347-348; Macey and Miller “Corporate Stakeholders: A Contractual Perspective”
1993 University of Toronto Law Journal 401; Berle “For Whom Corporate Managers Are Trustees: A Note”
1932 Harvard Law Review 1365 -1372.
1273
Esser Recognition of Various Stakeholder Interests in Company Management (Unpublished LLD thesis,
University of South Africa, 2008) 30.
1274
Section 46(1)(b) and (c) state that “a company must not make any proposed distribution unless- (b) it reasonably
appears that the company will satisfy the solvency and liquidity test immediately after completing the proposed
distribution; and (c) the board of the company, by resolution, has acknowledged that it has applied the solvency
and liquidity test, as set out in section 4, and reasonably concluded that the company will satisfy the solvency
and liquidity test immediately after completing the proposed distribution”.
1275
for the Minority Shareholder” 2010 Macquarie J. Bus. L 215; Laster 2008 Delaware Journal of Corporate Law
676.
1276
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 57; Koh “Reconstructing
the Reflective Loss Principle” 2016 Journal of Corporate Law Studies 373 399 while making reference to
sections 260(1) and 265(1) of the UK Companies Act 2006.
167
Laster has echoed the same sentiments as South Africa’s Cassim MF that the plaintiff should not
voluntarily divest her/his shares during derivative litigation.1277 Only interested shareholders are
empowered to institute the action.1278 Cassim MF mentions a situation whereby “the shareholder
is forced to relinquish his or her shares in a merger to which he or she did not acquiesce,
particularly where the purpose of the merger was fraudulent or illegal or where the merger was
directed at ousting the shareholder”1279 as a possible exception to the continuous ownership
requirement. However, it is submitted that the courts should restrict the scope of such exceptional
instances as shareholders can invoke other remedies such as an application to declare a director
delinquent1280 and the oppression remedy1281 lest the difference between personal and indirect
actions becomes blurred.
The 2008 Companies Act is silent on whether the complainant must remain a shareholder
throughout the duration of the derivative litigation. A strict literal interpretation of section 165 of
the Companies Act does not in any way require a shareholder to continue owning shares
throughout the derivative proceedings.1282 However, even though the Act is silent on this issue,
there are convincing arguments for the view that the courts should require a shareholder to
maintain “a continuing interest” throughout the litigation process.1283 Cassim MF argues that a
shareholder who divests her/his shareholding is likely to act for an improper purpose and lacks
sufficient interest to bring derivative litigation.1284 According to this scholar, such a shareholder is
unlikely to pass the good faith muster under section 165(5)(b)(i) of the Companies Act.1285
1277
Cassim MF 2018 South African Law Journal 120. See also Laster 2008 Delaware Journal of Corporate Law
673. It is submitted that this is a necessary internal limitation against possible unmeritorious suits which promotes
responsible and accountable management.
1278
1279
1280
Section 162 of the South African Companies Act 71 of 2008.
1281
Section 163 of the South African Companies Act 71 of 2008.
1282
Cassim MF 2018 South African Law Journal 110 who argued that “section 165(2)(a) states that ‘[a] person may
serve a demand upon a company ... if the person is a shareholder’ while s 165(5) states merely that ‘A person
who has made a demand in terms of subsection (2) may apply to a court for leave’”.
1283
1284
Ibid.
1285
Cassim MF 2018 South African Law Journal 110. On page 112, the scholar makes reference to the case of Jacobs
Farm Ltd v Jacobs (1992) OJ No 813 (Ont Gen Div) where it was held that “it could not have been the intention
of the Legislature ... to clothe every former shareholder ... with the status of a complainant for the purposes of
bringing a derivative action”.
168
However, due to the inclusion of the aforementioned provision, it can be argued that a continuing
interest is not necessary for derivative litigation in South Africa as it is covered by the good faith
test.1286 It is patent that the drafters of the South African Companies Act1287 borrowed some of the
statute’s provisions from the UK Companies Act. The exclusion of the continuous ownership or
continuing interest requirement from the 2008 Companies Act seems to be a deliberate act rather
than a regrettable omission.1288 However, unlike South Africa, the UK Companies Act’s scope of
derivative applicant shareholders is clearly extended to non-contemporaneous shareholders.1289
With respect to those shareholders who divest their shareholding after they have obtained the leave
of the court, Cassim MF argues that such shareholders should be barred from continuing with
derivative proceedings but at the same time the court should allow the action to proceed by
permitting another eligible applicant since it is in the best interests of the company “whose legal
rights are being enforced”.1290 It is submitted that this scholar’s submissions are laudable. Allowing
divesting shareholders to continue with derivative proceedings may introduce strike suits into
South African derivative actions because those shareholders are more tempted to act for their
personal benefit than those who still own shares in the company.1291
57 NON-SHAREHOLDER COMPLAINANTS
The above discussion has been, to a larger extent, limited to shareholders’ use of the derivative
remedy. However, since a company consists of various internal and external stakeholders, there is
a need to discuss the legal standing of other stakeholders in the context of derivative litigation.
There is merit in extending derivative standing to non-shareholder complainants given “the
presently low-powered incentives to bring derivative claims for shareholders in most
jurisdictions”.1292 Generally, USA corporate law does not permit holders of convertible debentures
to institute derivative litigation on behalf of the debtor company. 1293 A literal reading of section
7.41 of the MBCA reveals that non-shareholder complainants such as creditors and holders of
1286
1287
2008.
1288
1289
1290
Cassim MF 2018 South African Law Journal 110. However, it is not clear how the other shareholders are to be
informed of the pending derivative suit.
1291
1292
Koh “Reconstructing the Reflective Loss Principle” 2016 Journal of Corporate Law Studies 398.
1293
169
options, warrants, or conversion rights are not allowed to commence a derivative proceeding.1294
Furthermore, due to the fact that Delaware law does not generally allow creditors to sue
derivatively whilst the debtor company remains solvent, creditor participation in derivative suits
has been very rare.1295
5 7 1 Creditors
Creditors’ restricted participation in derivative suits has been justified by a number of theories and
principles. The first of these is the principle of proprietory interest.1296 This principle limits
creditors’ participation in derivative actions holding that the right to sue derivatively is an
ownership right just like dividend participation and voting.1297 However, the same principle fails
to explain how company directors and officers can institute derivative action regardless of the fact
that they are not owners.1298 This proves that the law awards standing to more stakeholders “than
the principle of proprietory interest would admit”.1299 Creditors may commence or continue
derivative proceedings when a company becomes insolvent.1300 Proponents of the proprietory
interest doctrine argue that the restriction of derivative standing to shareholders is justified because
corporate mismanagement injures shareholders.1301 It has also been argued that restricting the
derivative right to holders of proprietary interests “ensures that plaintiffs have a personal stake in
the outcome of derivative litigation, and thereby encourages diligent prosecution of the
corporation's cause of action”.1302 However, a convincing challenge to this assumption is worth
reproducing here:
“Mismanagement depletes corporate assets, upon which creditors rely for repayment. As the creditors'
‘cushion’ shrinks, their risk increases. Within reasonable limits, most creditors could be compensated
for increased risk-bearing by an increase in the rate of return, but, unless they are able to renegotiate
their contracts, this is not possible. The injury that creditors suffer thereby is thus comparable to a
decline in the rate of return. But available remedies do not reflect this fact. A change in the rate of
1294
1295
However, see also an interesting decision in Quadrant Structured Products Company Ltd v Vincent Vertin et al
CA No 6990-VCL, mem op. (Del Ch. May 4 2015).
1296
“Creditors' Derivative Suits on Behalf of Solvent Corporations” 1979 Yale Law Journal 1304.
1297
Ibid.
1298
Section 165(2)(b) of the 2008 Companies Act.
1299
1300
1301
1302
Ibid. This shows another misconception of the nature of derivative litigation. The suit is instituted for the interests
of the company not for the shareholders’ personal benefit.
170
return confers upon creditors a right of action against directors. A change in risk-bearing does not do
so; creditors are instead required to sit by until they suffer ‘real’ injury.”1303
Some of the conduct that may result in the depletion of a company’s asset include excessive
director compensation and sale of corporate property at less than value considerations. 1304 It is
therefore submitted that a creditors’ derivative action that covers all forms of conduct that result
in asset depletion will improve director accountability which is pertinent to a sound corporate
governance system.
Creditors’ derivative litigation has been criticised on the grounds that creditors have enough
contractual protection.1305 However, this assertion is not always true. First, smaller creditors cannot
effectively obtain such contractual protection as they lack the required “economic bargaining
power”.1306 Second, in closely held companies where directors are usually majority shareholders
as well, it is possible for creditors’ interests to be injured without shareholders experiencing such
injury.1307 Third, contractual terms and security agreements do not effectively protect creditors in
the same way the derivative remedy does.1308 Contractual agreements are entered into before the
harm occurs as opposed to derivative litigation which in most cases commences after the wrongful
conduct has happened. Contractual clauses may be inflexible to cover all forms of conduct
actionable under a derivative remedy because humans lack perfect knowledge about the future.1309
Derivative remedy, therefore, enables the complainant to sue for a better approximation of the
damages. It is true that the amount of risk that creditors anticipate can be expressed in terms of the
1303
1304
Ibid.
1305
Keay “The director’s duty to take into account the interests of company creditors: When is it triggered?” 2001
Melbourne University LR 316.
1306
“Creditors' Derivative Suits on Behalf of Solvent Corporations” 1979 Yale Law Journal 1307. See also Keay
“The director’s duty to take into account the interests of company creditors: When is it triggered?” 2001
Melbourne University LR 319.
1307
“Creditors' Derivative Suits on Behalf of Solvent Corporations” 1979 Yale Law Journal 1307. There is
significant overlap between ownership and control in closely held companies. It is possible that the majority of
shareholders or all of them may also be directors in the same company.
1308
1309
“Creditors' Derivative Suits on Behalf of Solvent Corporations” 1979 Yale Law Journal 1308. The note went on
to explain that in a closely held company, “creditors' disabilities are magnified because the corporation's
shareholders and directors are likely to be the same people, and hence shareholders' suits are improbable”.
171
interests rates1310 and repayment periods attached to the loan.1311 In general, the greater the risk,
the higher the interest rates. However, it must not be forgotten that creditors are also in business
where they face fierce competition from their competitors as well. Higher interest rates may push
them out of business.
It is submitted that restricting derivative litigation to shareholders on the grounds that creditors
have enough contractual protection is not justified. A creditors’ derivative action will allow them
to control mismanagement more effectively.1312 Extension of a derivative suit to creditors might
also deter potential wrongdoers and increase the possibility of closer debtor supervision.1313
English company law does not provide for creditor derivative litigation.1314 Furthermore, unlike
South Africa and other common law jurisdictions where creditors have access to alternative relief,
England does not.1315 On this basis, it is submitted that English company law is narrow and needs
to provide other non-shareholder stakeholders with derivative standing. Shareholders do not
commence action unless either they are convinced of benefiting from the litigation or that the
impugned conduct was likely to harm them.1316 Furthermore, shareholders are poor monitors of
corporate affairs in the sense that they are usually not aware of some of the things happening in
the company.1317 Broadening the scope of derivative standing to other stakeholders such as
employees who might be aware of some wrongdoing, will most likely increase the chances of
1310
Inserting contractual provisions that deal with asset depletion does not provide the solution because creditors
will have to overcome the information asymmetry hurdle and the possibility of a company’s financial statements
and reports being window dressed. See “Creditors' Derivative Suits on Behalf of Solvent Corporations” 1979
Yale Law Journal 1310.
1311
“Creditors' Derivative Suits on Behalf of Solvent Corporations” 1979 Yale Law Journal 1310 added that “every
‘bad’ loan weakens the lender's portfolio and ultimately lessens his chance of competitive success. It is small
comfort that losses on a given loan may be recovered by charging higher interest rates, since competing creditors
who are more successful in anticipating, detecting, and controlling mismanagement can charge lower rates”.
1312
1313
Ibid. Wrongful conduct has to be detected first before it is prosecuted.
1314
Sections 260 and 261 of the UK Companies Act specifically make reference to “members of a company”.
1315
In South Africa, according to section 165(2)(d) of the Companies Act, creditors may invoke the derivative
remedy “if the court is satisfied that it is necessary or expedient to do so to protect a legal right of that other
person”. However, it is regrettable that the wording of this section renders the provision ineffective. Section 1324
of the Australian Corporations Act (Cth) No. 50 2001 empowers a creditor to bring an injunction if “the
insolvency of the company is an element of the contravention” of the Act. Section 238 of the Canada Business
Corporations Act which deals with remedies, offences and punishment provides that “In this Part, “‘complainant’
means … (d) any other person who, in the discretion of a court, is a proper person to make an application under
this Part”. Canadian creditors may therefore have derivative standing subject to the court’s discretion.
1316
Keay 2016 Journal of Corporate Law Studies 52.
1317
Ibid.
172
protecting a company’s interests.1318 Extension of derivative standing to creditors has been argued
for since they might be “in receipt of better relevant information than that available to other
‘outsiders’”.1319
5 7 2 Directors and officers

To facilitate whistle-blowing by management, the South African Companies Act 1320 specifically
provides that directors and prescribed officers also have derivative standing. 1321 The Canadian
provision is wider1322 as its scope of stakeholders with derivative standing covers not only the
company’s directors but also former directors or officers of a company or any of its affiliates. 1323
Used in the context of South African derivative action, the term “director” includes former
directors as well as shadow directors.1324
5 7 3 Employees
Trade unions and representatives of employees also have derivative standing in South Africa.1325
This innovative legislative provision is welcome as it promotes social justice and accords with the
contemporary shift in corporate governance towards the stakeholder approach.1326 Of all the
jurisdictions that form part of this comparative study, South Africa is the only one that specifically
provides for the trade union and employees’ representatives derivative standing. “Corporate
misconduct and mismanagement” puts employees’ jobs and sustenance in jeopardy. 1327 This
makes trade unions and employee representatives deserving of derivative plaintiff status.1328
Further, the inclusion of employees’ representatives as potential derivative suitors advances
director accountability through the threat of litigation. Also, employees have a definite interest in
1318
Ibid.
1319
Ramsay 1992 UNSW Law Journal 165.
1320
71 of 2008.
1321
1322
1323
Section 238(b) of the CBCA.
1324
Section 260(5) of the UK Companies Act. A shadow director is defined in section 251 of the UK Companies Act
2006 as “a person in accordance with whose directions or instructions the directors of the company are
accustomed to act”.
1325
Section 165(2)(c) of the 2008 Companies Act.
1326
1327
Ibid.
1328
Ibid.
173
the wellbeing of a company and at times they might be aware of some director misconduct which
may not be known to shareholders.1329
5 7 4 Discretionary complainants
South African derivative complainants also include a category that is allowed standing at the
discretion of the court.1330 Leave of the court in such instances can be granted “only if the court is
satisfied that it is necessary or expedient to do so to protect a legal right of that other person”.1331
Cassim MF is of the view that this catch-all phrase is desirable as it;
“recognises that unique circumstances may arise in which [a company’s interests] would be best served
by permitting derivative litigation to be commenced by … any other stakeholder not contemplated in
the listed classes of applicants in the statutory provision”.1332
However, it is regrettable that the Act does not make reference to the interests of the injured
company but refers to the protection of a legal right of that other person.1333 It is trite that derivative
proceedings are not brought to protect personal or direct rights but those of the injured
company.1334 The Companies Act contains several provisions that can be invoked to vindicate
personal rights.1335 In light of these feasible personal rights actions, it is inconceivable that the
legislature intended to provide for the protection of personal rights via derivative remedy. It is
submitted, in tandem with Cassim MF, that the wording of section 165(d) of the 2008 Act is both
vague and unnecessary.1336 Despite this blatant legislative error, there are a couple of desirable
elements that section 165(2)(d) introduces into South African derivative proceedings. First, the
discretionary category “ensures that the pool of derivative applicants does not become stagnant
1329
Ibid.
1330
Section 165(2)(d) of the 2008 Companies Act.
1331
Ibid.
1332
1333
1334
1335
For example section 161 empowers all holders of a company’s issued securities to protect their rights by making
an application to court. Also, according to section 162 “a company, a shareholder, director, company secretary
or prescribed officer of a company, a registered trade union that represents employees of the company or another
representative of the employees of a company may apply to a court for an order declaring a person delinquent or
under probation”; section 164 provides for a dissenting shareholder’s appraisal rights; section 218(2) provides
that “any person who contravenes any provision of this Act is liable to any other person for any loss or damage
suffered by that person as a result of that contravention”.
1336
Cassim MF 2018 South African Law Journal 117 has argued that the provision is “illogical and wholly
ineffective”.
174
over time”.1337 Second, the category advances the deterrence objective of derivative litigation.1338
Unlike its progenitor, the English counterpart provision which contains a numerus clausus of
potential derivative complainants, this open-ended discretionary category represents a notable
advancement in South African derivative litigation.1339
The primary aim of this chapter was to assess whether current locus standi requirements in the
USA, England, Japan and South Africa are a barrier to stakeholders’ institution of derivative
litigation or whether the rules are vulnerable to abuse by potential litigators. The chapter
commenced with a brief contrast between the USA’s general requirements for standing and that
jurisdiction’s requirements for locus standi in the particular context of derivative litigation. It was
noted that whilst complainants in ordinary civil cases have to prove that they suffered
particularised injury, derivative standing is unique in the sense that the suit is brought on behalf of
the injured company.
Shareholder derivative standing in all four comparator jurisdictions was largely discussed under
three headings namely; the contemporaneous ownership rule, the continuing wrong doctrine and
the continuous ownership requirement. Various policy rationales such as the need to avoid strike
suits and purchased grievances and the rule against non-contemporaneous shareholders’
unjustified enrichment or the windfall doctrine were suggested as justifications for the
contemporaneous ownership rule. However, after tracing the rule back to the Hawes case, it was
submitted that the only true purpose for the rule was to prevent collusive conduct which may be
engaged in by derivative plaintiffs to confer federal jurisdiction that the court would otherwise
lack.1340 The other rationales were disregarded mainly because they manifest inherent ignorance
of the fact that derivative actions are instituted in the interest of the company. Although the rule
which originated in the USA Supreme Court decision in Hawes v Oakland1341 has been adopted in
other American states including Delaware, it was submitted that the rule imposes an unnecessary
1337
1338
Ibid.
1339
Ibid. One of the cornerstones of the enhanced accountability perspective is that all victims of directorial
misconduct should be allowed to bring litigation on behalf of the company. However, this does not automatically
transform into directors owing fiduciary duties to all stakeholders.
1340
1341
104 U.S. 450 (1881).
175
hurdle upon shareholders because it makes derivative actions remain too onerous. The continuing
wrong doctrine, a potential substitute to the former rule, is also cramped with uncertainty as courts
are not clear on the definition of “transaction”. The continuing interest or ownership, though not
without its critics, was found to be a necessary requirement that filters out unmeritorious and
frivolous suits. However, the rule requires a qualified application. It was also found that although
England equitably allows unregistered shareholders to institute derivative proceedings, the
employment of the word “members” in section 260(5)(c) may create practical barriers to potential
complainants as “often equitable shareholders are not members”.1342
It was also shown that some legislative provisions are only available on paper as courts do not
always follow them religiously. For example, although the USA, England and South African rules
and legislation apparently allow access to derivative remedy to both majority and minority
shareholders, in practice courts only usually allow minority shareholders to invoke the remedy.
Thereafter the discussion focussed on the position of non-shareholder complainants with respect
to derivative standing. It can be concluded that of the four jurisdictions under study, South Africa
has the most progressive standing requirements in terms of the scope of potential plaintiffs. The
sub-Saharan nation not only affords registered shareholders standing, but it also includes those that
are not yet registered. Directors and company officers, trade unions and employee representatives
can also pursue derivative litigation in South Africa. As submitted by Cassim MF, other
stakeholders such as creditors, who are not specifically mentioned may invoke the discretionary
provision in section 165(2)(d) of the 2008 Companies Act to institute derivative litigation.1343 This
is in sharp contrast with England and Japanese provisions that allow only members and
shareholders, respectively, to initiate derivative proceedings.
Furthermore, unlike England, double and multiple derivative claims are also recognised in South
Africa. It would appear that English derivative standing requirements are the most restrictive.
However, England must be commended for expanding the potential causes of action to include
negligence. Although USA company law still applies the controversial contemporaneous
ownership rule, that has not stopped American shareholders from being the most litigious in terms
of invoking derivative remedies. Japan’s experience with derivative claims adjudication is still
1342
1343
MF Cassim 2018 South African Law Journal 114.
176
growing. However, shareholders in that Asian nation still have to deal with their own version of
the contemporaneous ownership rule which requires shareholders to have owned shares in the
company for at least six uninterrupted months before commencing litigation. This rule is
vulnerable to abuse by unscrupulous shareholders because all they have to do is to wait until the
six months have passed and then commence derivative proceedings. Recommendations for English
law reform in regard to the question of standing for derivative litigation are presented in chapter
nine below.
As for South Africa, for reasons outlined above, it is strongly recommended that it should not
import the contemporaneous ownership rule into its derivative remedy framework. Similarly, the
continuing wrong doctrine, which is technically an exception to the contemporaneous ownership
rule would also not be welcome in South Africa. It is further submitted that the continuing interest
requirement is not necessary for South African derivative litigation as it is covered by the good
faith enquiry provided for in section 165(5)(b) of the Companies Act 71 of 2008.
On the other hand, it was argued that section 165(2)(d) of the 2008 Companies Act which provides
that leave of the court can be granted “only if the court is satisfied that it is necessary or expedient
to do so to protect a legal right of that other person”1344 is erroneous. Derivative claims are not
brought to protect personal or direct rights but those of the injured company. 1345 It is regrettable
that the Act made reference to the interests of the injured company but refers to the protection of
a legal right of that other person.1346 Recommendations for law reform in this regard are articulated
in chapter nine below.
1344
1345
1346
177
CHAPTER SIX
Assessing the requirement of demand on directors from the enhanced accountability

perspective
61 INTRODUCTION
A key feature of corporate governance that has contributed significantly to the modelling of
contemporary derivative litigation is the separation of ownership and control.1347 According to this
principle, managerial powers are directors’ prerogatives1348 whilst shareholders are generally
viewed as the legitimate owners of companies.1349 Separation of ownership and control leads to a
presumption that directors and officers of a company are vested with all the decision-making
powers regarding the day-to-day running of companies.1350 Such decisions include a determination
of whether, inter alia, it is in the company’s best interests to pursue litigation on its behalf.1351 It is
generally argued that directors are better placed to be in control of a company’s litigation than
shareholders because the former have access to all the relevant information and are also under an
obligation to act in the best interests of a company. 1352 Stickells opines that “the normal body to
determine corporate action is the board of directors”.1353 As a result, shareholders who intend to
1347
This principle was discussed at length in chapter 4 above. See part 4 2 1 and the authorities cited thereunder for
more information.
1348
Marshall L. Rev. 571 572; DeMott “Demand in Derivative Actions: Problems of Interpretation and Function”
1986 University of California L. Rev. 461 485.
1349
Davies and Worthington Gower’s principles of modern company law 10 ed (2016) 40 and Farrar and Hannigan
Farrar’s company law 4 ed (1998) 9. In the words of DeMott 1986 University of California L. Rev. 462, the rule
preserves a company’s “basic internal allocation of power”.
1350
Section 66(1) of the South African Companies Act 71 of 2008 provides that “the business and affairs of a
company must be managed by or under the direction of its board, which has the authority to exercise all of the
powers and perform any of the functions of the company, except to the extent that this Act or the company’s
Memorandum of Incorporation provides otherwise”. In a similar vein, Article 348(1) of the Japanese Companies
Act 86 of July 26 2005 provides that “the directors shall execute the operations of the Stock Company unless
otherwise provided in the articles of incorporation”.
1351
1352
Fischel “The Demand and Standing Requirements in Stockholder Derivative Actions” 1976 U. Chi. L. Rev. 168
171-172; Goehre “Is the Demand Requirement Obsolete? How the United Kingdom Modernized its Shareholder
Derivative Procedure and What the United States Can Learn From It” 2010 Wisconsin Int’l L. J. 141 151; Baum
(eds) The derivative action in Asia: A comparative and functional approach (2012) 48. In providing some options
on who can be best entrusted with the decision to litigate, Davies and Worthington Gower’s principles of modern
company law 10 ed (2016) 592 explains that if the decision is left to the board, then it will form part of its
standard management prerogatives.
1353
Stickells “Derivative Suits: The Requirement of Demand upon the Stockholders” 1953 Boston University L. Rev.
435 435-436. Emerson 1986 John Marshall L. Rev. 572 expresses this fundamental principle in the following
words: “the board of directors is, under normal circumstances, the body vested with the power to assert the legal
rights of any [company]”. In the words of Hemraj “The Business Judgment Rule in Corporate Law” 2004
178
commence derivative litigation are, as a matter of law and policy, required first to “attempt to
secure corporate action through a demand to the board that it initiates the litigation”. 1354 This is
known as the demand requirement/rule. Before instituting a derivative action, a shareholder must
first request the board of directors to rectify the conduct complained about.1355 It is a pre-suit
requisite that a “potential” plaintiff should serve a demand on the board or any other comparable
authority before the complainant can legally assert a company’s rights.1356 This rule is an American
legal export which is also a progeny of the rule in Foss v Harbottle.1357
A “demand rule” that is overly technical and onerous has the effect of limiting or delaying
stakeholders’ access to derivative litigation. For that reason it is vital to interrogate the nature of
the current demand rules in light of the Enhanced Accountability Perspective which seeks to
reduce obstacles faced by an applicant when invoking the derivative remedy. The demand rule was
International Company & Commercial. L. Rev. 192 192-193 as quoted by Goehre 2010 Wisconsin Int’l L. J. 145
the board of directors is the “brain and nerve centre of the corporate body”. See also Stoop “The Derivative
Action Provisions in the Companies Act 71 of 2008” 2012 SALJ 530.
1354
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 20. Cassim MF The new
derivative action under the Companies Act: Guidelines for judicial discretion (2016) 16. Eisen “Limitations on
Derivative Actions in Germany and Japan to Prevent Abuse” 2012 Journal of Japanese Law 199 215 insists that
before the complainant files a derivative suit, s/he is required to make a request on the company, which is the
proper plaintiff for wrongs done to it. The company has the right to commence action “for the alleged breach or
damage”. See also Seitz Jr. and Sirkin “The Demand Review Committee: How It Works, and How It Could
Work Better” 2018 The Business Lawyer 305 306; Erickson “The Gatekeepers of Shareholder Litigation” 2017
Oklahoma Law Review 237 264; Velasco “Fiduciary Principles in Corporate Law” 2018 Notre Dame Law School
Legal Studies Research Paper No. 1933 29 available at https://ssrn.com/abstract=3374505 (accessed 15-10-
2019); Branson “The American Law Institute Principles of Corporate Governance and the Derivative Action: A
View from the other Side” 1986 Wash. & Lee L. Rev. 399 402-403.
1355
Act 71 of 2008 (Part 1)” 2014 South African Mercantile Law Journal 1 7; Scarlett 2008 Florida L. Rev. 596;
Melbinger and Moore “Lawsuits against Directors over Their Own Compensation” 2017 Benefits Law Journal
5 7; Black et al “Legal liability of directors and company officials part 2: Court procedures, indemnification and
insurance, and administrative and criminal liability (Report to the Russian Securities Agency)” 2008 Columbia
Business Law Review 1 29; Erickson 2017 Oklahoma Law Review 237 264. Gelter “Mapping Types of
Shareholder Lawsuits across Jurisdictions” 2017 ECGI Working Paper Series in Law 26 available at:
1356
Casarino and Greene “Back to Basics: Board & Special Litigation Committee Investigations” 2019 The
Corporate Governance Advisor 16; Lain “On the Scope of Economic Efficiency in Judicial Reasoning. A Pattern
Derived from U.S. Case Law on Corporations” 2018 Lincoln Law Review 53 71; Goehre 2010 Wisconsin Int’l
L. J. 145; Kawashima and Sakurai “Shareholder Derivative Litigation in Japan: Law, Practice, and Suggested
Reforms” 1997 Stanford J. Int'l L. 45; Kim “The Demand on Directors Requirement and the Business Judgment
Rule in the Shareholder Derivative Suit: An Alternative Framework” 1981 Journal of Corporation Law 512.
1357
(1843) 67 Eng. Rep. 189. In that case it was famously held that a company is the proper plaintiff for harm
suffered by it and that directors, as corporate managers have the discretion to pursue recovery.
179
created by the Supreme Court of the United States of America (hereinafter, “USA”) in Hawes v
Oakland1358 where it was held that:
“Before the shareholder is permitted in his own name to initiate and conduct a litigation which usually
belongs to the corporation, he should show to the satisfaction of the court that he has exhausted all the
means within his reach to obtain, within the corporation itself, the redress of his grievances, or action
in conformity to his wishes. He must make an earnest, not a simulated effort, with the managing body
of the corporation, to induce remedial action on its part, and this must be made apparent to the court....
and he must show a case, if this is not done, where it could not be done, or it was not reasonable to
require it”.1359
The demand requirement was initially codified in Federal Equity Rule 94. 1360 The Rule was later
codified into Federal Rule of Civil Procedure 23(b) before its elaboration in its current form as
Federal Rule of Civil Procedure 23.11361 in 1966.1362 The rule is provided for in two of the USA’s
most influential sources of company law which are Delaware Law1363 and the Model Business
Corporation Act,1364 hereinafter MBCA. Discussions of the demand requirement in the USA will
be based on these two authorities. However, consideration will be given to other American state
laws. The demand rule has also won legislative recognition in South Africa.1365 In Japan, the rule
is contained in article 847(1) of the Companies Act.1366 England has adopted a uniquely interesting
approach which does not require the plaintiff to first request the board to act upon the queried
transactions.1367
1358
104 U.S. 450 (1882).
1359
1360
Wilder “The Demand Requirement and the Business Judgment Rule: Synergistic Procedural Obstacles to
Shareholder Derivative Suits” 1985 Pace L. Rev. 635 footnote 9.
1361
The rule provides that “[t]he complaint shall also allege with particularity the efforts, if any, made by the plaintiff
to obtain the action he desires from the directors or comparable authority and the reasons for his failure to obtain
the action or for not making the effort”.
1362
Wilder 1985 Pace L. Rev. 635 footnote 9. Kim 1981 Journal of Corporation Law 511 512.
1363
Rule 23.1 of the Court of Chancery of the State of Delaware.
1364
See section 7.42 of the MBCA 1984 (2016 Revision).
1365
See section 165(2) of the Companies Act 71 of 2008 which reads “[a] person may serve a demand upon a
company to commence or continue legal proceedings, or take related steps, to protect the legal interests of the
company if the person…”. Cassim MF The new derivative action under the Companies Act: Guidelines for
judicial discretion (2016) 16 argues that despite the use of the word “may” the requirement of serving a demand
is mandatory. Therefore, section 165(2) has to be read together with section 165(5) of the Act.
1366
86 of July 26 2005.
1367
Goehre 2010 Wisconsin Int’l L.J. 142.
180
By exploring the substantive and procedural components of the demand requirement, this chapter
seeks to ascertain whether the rule is potentially vulnerable to abuse1368 by vexatious shareholders
or constitutes an unnecessary hurdle in the institution of meritorious derivative claims. On the one
hand, abuse of process by shareholders for personal financial gain at the expense of the company
is not in the best interests of the latter.1369 On the other hand, a complex and ineffective system of
derivative litigation protects errant directors and decreases investor confidence.1370 There is,
accordingly, a need to strike a balance between directors’ need to retain control and the
shareholders’ interest in corporate accountability. 1371 Goehre puts it this way: “[a]lthough no
system is impervious to some inequities, the goal is to reduce those inequities and inconsistencies
as much as possible”.1372 Also, corporate governance principles ought to be interpreted in light of
contemporary company law needs and developments.
The chapter is structured as follows; immediately after this introductory note, comes a discussion
of the nature and scope of the demand requirement. In that section, issues such as the form which
a demand should take, the manner of service and the recipients or addressees of a demand will be
examined. Thereafter, the requirements for adequately satisfying the demand rule in the four
jurisdictions under study will be discussed. A discussion of the possible options or ways in which
a board of directors may respond to a demand will then follow. That section is of significant
importance because, as shall be seen later, the way in which a board responds to a demand may
either determine whether the complainant stands any chance of accessing an effective remedy1373
or complicate the process of accessing the intended redress. The next section is dedicated to an
1368
While derivative remedy is specially meant for minority shareholders and other complainants with legal standing,
there is a serious risk in allowing minority shareholders to bring suit on behalf of the company. Fischel 1976 U.
Chi. L. Rev. 168 explains that “the alleged cause of action may be without merit, or the costs of litigation coupled
with the adverse effect on the business relationship between the [company] and the party to be sued may outweigh
any recovery which could be gained. The derivative suit may also be abused by the filing of ‘strike’ or ‘blackmail’
suits. In these situations a suit will be contrary to the best interests of the corporation”.
1369
Stoop 2012 SALJ 528; Davies and Worthington Gower’s principles of modern company law 10 ed (2016) 595.
1370
Stoop 2012 SALJ 528. Branson 1986 Wash. & Lee L. Rev. 413.
1371
Bainbridge “Director Primacy and Shareholder Disempowerment” 2006 Harv. L. Rev. 1735 1748. See also
Wilder 1985 Pace L. Rev. 650. In Zapata Corp. v Maldonado 430 A.2d 779 787 (1981), the court expressed the
desire to find a balance so that “bona fide stockholder power to bring corporate causes of action cannot be
unfairly trampled on by the board of directors, but the corporation can rid itself of detrimental litigation”.
However, this is not an easy task as noted by Goehre 2010 Wisconsin Int’l L. J. 155.
1372
1373
Stickells 1953 Boston University L. Rev. 436 points out that if the board of directors acts within its powers, the
plaintiff cannot proceed to maintain derivative litigation. But, if the directors “abuse [their] powers, act in bad
faith or violate [their] fiduciary duties, or wrongfully refuse, the act of the board may not be controlling”.
181
examination of those circumstances that may justify excusal of the demand accompanied by the
relevant tests. Consideration of a number of challenges encountered in the quest to satisfy the
demand requirement is then provided before the chapter’s preliminary conclusions are delivered.
62 NATURE AND SCOPE OF THE DEMAND REQUIREMENT

DeMott has noted that a precise determination of the nature of a demand is usually a torrid task
due to the manner in which applicable statutes and rules have been interpreted.1374 A demand is a
request on the board to rectify the disputed decision or the impugned conduct.1375 In the words of
Ndlovu J, the demand “qualifies to be treated on the same basis as a document initiating application
proceedings”.1376 The demand requirement is not just a formality necessitated by procedure.1377 It
is a substantive requirement of derivative litigation.1378 The demand rule1379 “recognises the right
of the corporate directory to corporate control; in other words, to make the corporation paramount,
even when its rights are to be protected or sought through litigation”. 1380 The requirement places
“control of the derivative litigation in the hands of the board of directors”.1381
6 2 1 Form of the demand

With respect to the USA, both the Delaware Chancery Court Rules and the MBCA do not prescribe
any specific form that a demand should take. Section 7.42 of the MBCA only prescribes that the
1374
DeMott 1986 University of California L. Rev. 463.
1375
Scarlett 2008 Florida L. Rev. 596.
1376
1377
1378
Ibid.
1379
Company law recognises two different types of demands. A demand can be served on shareholders and also on
directors or the board of directors. This study is deliberately restricted to an analysis of the demand on directors.
It is believed that a comprehensive examination of a demand on shareholders, which was eliminated in most
parts of the USA, is unnecessary because there is usually no time to bring all the shareholders together to act.
Briefly put, the demand on shareholders requirement was intended to shield companies from multiple suits filed
by various complainants which originate from the same grievances. Also, the rule was anchored by the “non-
interventionist judicial philosophy which is more inclined to empowering shareholders as a collective body rather
than empowering individual champions of the [company’s] interests”. However, as DeMott 1986 University of
California L. Rev. 476 argued, arguments that have been advanced in support of the demand on shareholders
requirement turn a blind eye to the complexities of shareholder decision-making especially in large public
companies. For more on the demand on shareholders requirement see Stickells 1953 Boston University L. Rev.
437 and Branson 1986 Wash. & Lee L. Rev. 405.
1380
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 20 while making reference to
Delaware & Hudson Co. v Albany & Susquehanna R.R. Co. 213 U.S. 435 447 (1909). In DeMott’s tone, the rule
“reinforces [the] basic norms of corporate governance”. See also Fischel 1976 U. Chi. L. Rev. 171.
1381
Spiegel v Buntrock 571 A.2d 767 773 (Del. 1990). See also Casarino and Greene 2019 The Corporate
Governance Advisor 16; Erickson 2017 Oklahoma Law Review 237 238-239; Wang Company Law in China:
Regulation of Business Organisations in a Socialist Market Economy (2015) 238.
182
demand should be in writing.1382 It is argued that the language used in the USA’s statutory, judicial
and academic commentaries does not accommodate an oral demand. The MBCA provides that, in
some instances, a demand may be electronically served on the board. 1383 The plaintiff can,
therefore, satisfy the requirement by mailing a copy of the complaint to the board of directors.1384
In light of scant legislative guidance concerning the form of a demand, 1385 reliance on case law
and academic commentary is inevitable. In the case of Khanna v McMinn,1386 it was held that there
are no “magic words [that establish] that a communication is a demand for purposes of Court of
Chancery Rule 23.1”.1387 A demand does not need to “assume a particular form . . . [or] be made
in any special language”.1388 The demand must “fairly and adequately apprise the directors of the
potential cause of action so that they, in the first instance, can discharge their duty of authorising
actions that in their considered opinion . . . [are] in the best interests of the corporation”. 1389
Furthermore, the demand must typically “identify the alleged wrongdoers, describe the factual
basis for the allegations, describe the harm caused to the corporation and describe the request for
relief”.1390 It is submitted that the fact that there is no prescribed form for a demand in Delaware
is plausible. This approach allows for flexibility and encourages access to justice in that
meritorious demands will not be shot down by the court for mere technical deficiencies. The
approach is efficient and less onerous and therefore accords with the enhanced accountability
1382
Official comment on section 7.42 of the MBCA 1984 (Revised 2016) 147.
1383
Section 1.40 of the MBCA defines the terms “deliver” or “delivery” to mean “any method of delivery used in
conventional commercial practice, including delivery by hand, mail, commercial delivery, and, if authorised in
accordance with section 1.41, by electronic transmission”. Section 1.41(d) states that “a notice or other
communications may be delivered by electronic transmission if consented to by the recipient or if authorised by
subsection 1.41(j)”. Section 1.41(j) reads: “a notice or other communication may be in the form of an electronic
transmission that cannot be directly reproduced in paper form by the recipient through an automated process
used in conventional commercial practice only if (i) the electronic transmission is otherwise retrievable in
perceivable form, and (ii) the sender and the recipient have consented in writing to the use of such form of
electronic transmission”.
1384
1385
The official comment on section 7.42 of the MBCA 1984 (Revised 2016) 147 supports the lack of a detailed
explanation on the demand form. The official comment states that there is no need for detailed pleading as the
company can contact the shareholder for clarification if there are any questions.
1386
Khanna v McMinn 2006 WL 1388744 (Del. Ch. May 9 2006) 13.
1387
Ibid. In Aronson v Lewis 473 A.2d 805 808 (1984), the court noted the similarity between Federal Rule of Civil
Procedure 23.1 and Delaware Chancery Court Rule 23.1.
1388
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 21; Stoop 2012 SALJ 537.
1389
Khanna v McMinn 2006 WL 1388744(Del. Ch. May 9 2006) 13. See also Stoop 2012 SALJ 537-538; Cassim
MF The new derivative action under the Companies Act: Guidelines for judicial discretion (2016) 17.
1390
183
perspective. It allows a potential derivative plaintiff to save time by focusing more on the merits
than worrying about compliance with mechanical formalities.
Unlike the USA, South African law states that a demand must be inscribed on a standard prescribed
form.1391 A literal interpretation of regulation 7(1)1392 of the Companies Regulations1393 read
together with section 6(10)1394 and (11)1395 of the Companies Act1396 affirms that a demand can
also be sent electronically. It is sufficient for the plaintiff to prepare or complete a demand in a
form that satisfies all of the substantive requirements of the prescribed form. 1397 Fears that
prescribing a certain form for a demand would unnecessarily restrict derivative litigation are
allayed by the fact that deviation from the design or content of the prescribed form does not
invalidate the action taken by the person preparing or completing a demand.1398 The legislature
saw it fit that there should be a considerable degree of flexibility with respect to the form of a
demand.1399 However, the action may be set aside if the deviation negatively and materially affects
the substance of the document or is such that it would reasonably mislead a person reading it.1400
It is not clear why the South African legislature chose to prescribe the form that a demand should
take. Major common law jurisdictions, such as the USA which is the birthplace of the demand
1391
Regulation 36(1) of the Companies Regulations 2011 provides that “a person who holds any securities of a
company may give notice to the company for any purpose contemplated in section … 165 (2) by delivering a
completed Form CoR 36.1 to the company, except to the extent that the requirements of a central securities
depository provide otherwise”. However, Cassim MF The new derivative action under the Companies Act:
Guidelines for judicial discretion (2016) 17 is of the opinion that the Act is silent regarding the form of the
demand.
1392
This regulation provides that “a notice or document to be delivered for any purpose contemplated in the Act or
these regulations may be delivered in any manner contemplated in section 6 (10) or (11); or set out in Table CR
3”. Table CR 3 deals with methods and times of deemed delivery of documents. See also Henochsberg on the
1393
2011.
1394
This section provides that “it is sufficient if the notice is transmitted electronically directly to that person in a
manner and form such that the notice can conveniently be printed by the recipient within a reasonable time and
at a reasonable cost”.
1395
It is not necessary to quote this section as it specifically deals with those documents that need to be returned to
the sender which is not necessarily the case with a demand.
1396
71 of 2008.
1397
1398
Ibid. See also Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 42.
1399
This is in line with some of the purposes of the 2008 Companies Act enshrined it section 7(b)(ii) and (i) which
refer “to creating flexibility and simplicity in the formation [and] maintenance of companies and balance the
rights and obligations of shareholders and directors within companies”. See also Hendrikse and Hefer Corporate
governance handbook: Principles and practice 3 ed (2019) 186.
1400
Section 6(8) of the Companies Act 71 of 2008; Henochsberg on the Companies Act 71 of 2008 Vol 1 Service
Issue 2 2012 42.
184
rule, do not have such a prescription of form. England, which is a point of reference for many
common law jurisdictions, shunned the demand on the board requirement in its entirety. It is
possible that the South African legislature preferred legal certainty1401 over judicial development
of the law since it was South Africa’s first attempt at introducing a statutory derivative remedy of
this nature. It is also probable that it was thought wise that since England, a bellwether in company
law, excluded the rule from its 2006 Companies Act,1402 it would be a great inconvenience to
follow other comparable common law jurisdictions such as Australia and Canada which are federal
states.
The manner of service of a demand was at issue in the South African case of Mouritzen v
Greystones Enterprises (Pty) Ltd.1403 The application was made in terms of section 165(5) of the
2008 Companies Act. The applicant and second respondent were brothers and the only directors
of the first respondent company. The two were paid equal monthly salaries by the company. The
two brothers had their personal credit cards which were issued in their names linked to the
company’s First National Bank (FNB) account to the effect that any transaction that took place
using those credit cards would be automatically debited to and paid by the company. The applicant
alleged that the second respondent grossly abused the credit card to the detriment and prejudice of
both the company and its shareholders. He therefore sought an order granting him leave to institute
action in the name of the company against the second respondent.1404
The applicant, through his attorneys, delivered the letter of demand to the respondent company by
post.1405 At the lapse of seven days, the second respondent reacted to the demand by sending an
email to the plaintiff’s attorney. The second respondent claimed that the plaintiff’s letter did not
meet the requirements of a demand as envisaged in section 165(2) of the 2008 Act because it was
“merely posted by ordinary mail to a postal address”.1406 The second respondent understood the
word “serve” to mean “service on the company at its registered office or at its principal place of
1401
Section 7(l) of the Companies Act 71 of 2008 provides that a predictable and effective environment for the
efficient regulation of companies is one of the core objectives of company law in South Africa.
1402
South Africa’s Companies Act was enacted hardly two years after the UK’s which was enacted in 2006. The
King III Report on Corporate Governance for South Africa 2009 5 shows how English company law influenced
the shaping of South Africa’s corporate governance model.
1403
2012 5 SA 74 (KZD).
1404
Mouritzen v Greystones Enterprises (Pty) Ltd 2012 5 SA 74 (KZD) 2-3.
1405
1406
185
business”.1407 It was further submitted that the fact that the demand came to the notice of the second
respondent was irrelevant because he had received it in his personal capacity. Counsel for the
plaintiff refuted the second respondent’s claims arguing that the only purpose for service of the
demand was to apprise the respondent to attend court. It was argued that upon satisfaction of the
court that the company received the document, the technicalities of how it was served are
irrelevant.1408
The court adopted a purposive approach1409 in interpreting the provision at issue and held that
“there is no legal or logical basis to read into section 165(2) words to the effect that service of the
demand must be made necessarily ‘at its registered office or principal place of business’ when the
ordinary grammatical reading of the section does not support such suggestion”.1410 Had it been the
legislature’s intention for a demand to be served only on the subject company’s registered office
or its principal place of business, it would have said so as it did with section 345(1)(a)(i)1411 of the
1973 Companies Act.1412 The court reiterated that serving a demand is simply intended “to notify
the person intended to be served of the nature, contents and exigency of the process of court and
to return to the court proof of such service in the manner prescribed by the law”.1413 The court also
rejected the second respondent’s claims that he had received the demand in his personal capacity
since copies thereof were sent to the company’s postal address and emailed to the company’s
attorneys.1414
This was a very welcome and ground-breaking decision, the first ever derivative action case to be
decided by a South African court after the coming into effect of the 2008 Companies Act. The
case set a pro-shareholder precedent that ensures that access to justice is not barred by unnecessary
technicalities. The judgment also minimises the opportunity for undue delays by unscrupulous
1407
Ibid.
1408
1409
1410
1411
The section provided that “[a] company or body corporate shall be deemed to be unable to pay its debts if a
creditor,… has served on the company, by leaving the same at its registered office, a demand requiring the
company to pay the sum so due…”.
1412
1413
Mouritzen v Greystones Enterprises (Pty) Ltd 2012 5 SA 74 (KZD) para 28. The court also referred to S v Watson
1969 (3) SA 405 (A) where it was held that the term “‘served’ … has the ordinary connotation of ‘legally
delivered’, i.e. delivered in accordance with the law so as to notify the person on whom it is served of its
contents”.
1414
186
directors which in turn encourages “the efficient and responsible management of companies”.1415
Responsible management of corporate affairs is one of the key facets of the enhanced
accountability perspective.
In Japan, the Commercial Code1416 did not specify the content of the demand, but the general
consensus among corporate law commentators was that it should “request the [company] to sue
the named directors and should state facts pointing to the directors’ alleged liability.1417 Similar to
section 7.42 of the MBCA, the Japanese Companies Act1418 specifically prescribes that the demand
should be in writing. Although it is not clear whether an aggrieved shareholder may serve the
demand by electronic means, it can be argued that it is permissible to do so since an applicant can
also serve a demand by any other method prescribed by the applicable ordinance of the Ministry
of Justice.1419 Furthermore, electronic communication is not new to Japanese company law since
articles of incorporation prepared by “electromagnetic records”1420 are admissible.1421
63 THE PURPOSE FOR THE DEMAND RULE

A consideration of the policy rationales behind the demand requirement is vital because a court’s
conception of the primary function of a demand determines the decisions it might make on issues
pertaining to the rule.1422 For example, if the primary purpose for the demand is viewed as
respecting directors’ managerial prerogatives,1423 which enhance basic corporate governance
principles, then the rule’s interpretation will likely favour the “allocation of substantive power over
transactions within the [company]”.1424 Consequently, if, in the absence of exceptional
circumstances, the directors reject a plaintiff’s demand, then the courts will exercise deference1425
to the board’s decision. That will effectively preclude the plaintiff from maintaining her/his
1415
Section 7(j) of the Companies Act 71 of 2008.
1416
48 of March 9 1899.
1417
1418
Article 847(1) of the Japanese Companies Act No. 86 of July 26 2005.
1419
Ibid.
1420
According to article 847(1) electromagnetic records refers to records produced by electronic forms, magnetic
forms, or any other forms unrecognizable by human senses, which are for computer data-processing use as
prescribed by the applicable ordinance of the Ministry of Justice.
1421
Article 26(2) of the Japanese Companies Act No. 86 of July 26 2005.
1422
DeMott 1986 University of California L. Rev. 473-474.
1423
Seitz Jr. and Sirkin 2018 The Business Lawyer 306.
1424
DeMott 1986 University of California L. Rev. 485. In Zapata Corp. v Maldonado 430 A.2d 779 (1981) 785-786,
it was held that “the demand requirement itself evidences that the managerial power is retained by the board”.
1425
Goehre 2010 Wisconsin Int’l L. J. 153 states that this deference is partly born out of fear that directors’
managerial prerogatives might be usurped by minority shareholders.
187
derivative suit.1426 In the same postulation, the plaintiff will only be excused from placing the
demand if the board “lacked authority to make dispositive decisions” concerning the disputed
transactions.1427
On the other hand, if the demand is viewed as a key device in the resolution of intra-corporate
disputes, then the rule will favour an interpretation that conserves company resources rather than
merely allocating managerial power.1428 As a result, the requirement will not answer substantive
issues raised during the litigation. Should the board refuse to act upon the plaintiff’s request, its
decision will not be decisive in determining whether or not the plaintiff continues with the
litigation.1429 As a sequel to this, demand excusal will most probably be successful if the “board
appear[s] unlikely to favour the litigation proposed by the plaintiff for some reason other than its
merits”.1430
In light of the potentially conflicting outcomes that may be triggered by interpretation of the rule’s
purpose, it is pertinent to know when a court should adopt which interpretation. Fischel proposed
a cure to this problem. First, the scholar noted that ignorance of the demand rule’s history and
policies leads to a misunderstanding in its application.1431 Referring to Hawes v Oakland,1432
(hereinafter, Hawes) the author concluded that the original purpose for the rule was to preclude
courts from interfering in the internal affairs of private companies by requiring that shareholders
first exhaust all the available internal remedies.1433
Historically, the demand rule was created by the USA Supreme Court in Hawes to “protect federal
court[s] against collusively manufactured federal jurisdiction”.1434 With the passage of time,
several secondary justifications for the rule were formulated by both the courts and academic
commentators. It has been argued that the rule was designed to encourage aggrieved shareholders
to first exhaust all the available internal remedies before commencing action on behalf of the
1426
1427
Ibid.
1428
Ibid.
1429
DeMott 1986 University of California L. Rev. 485-486.
1430
1431
1432
104 U.S. 450 (1882).
1433
1434
DeMott 1986 University of California L. Rev. 473. See also Federal Rule of Civil Procedure 23.1 which states
that “the complaint must be verified and must allege that the action is not a collusive one to confer jurisdiction
that the court would otherwise lack”.
188
company.1435 Coffee and Schwartz opine that “the demand on directors is a universal requirement,
grounded in part on the desire to avoid unnecessary litigation”1436 thereby advancing corporate and
judicial efficiency.1437 The pair also attest that the rule encourages intra-corporate settlements.1438
The requirement affords the subject company an opportunity to make a decision between pursuing
the suit as its own or engage internal remedies.1439 A demand on the directors is intended “to give
the derivative corporation itself the opportunity to take over a suit which was brought on its behalf
in the first place, and thus to allow the directors the chance to occupy their normal status as
conductors of the corporation's affairs”.1440 The demand requirement also seeks to afford the
subject company the opportunity to decide whether to invest the resources of the company1441 in
litigation.1442 The rule also acts as a filtering mechanism that filters out such derivative actions that
would “result in a waste of corporate assets”.1443 Most importantly, the requirement fends off strike
suits.1444
1435
1436
Coffee Jr. and Schwartz “The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative
Reform” 1981 Columbia L. Rev. 261. See also Spiegel v Buntrock 571 A.2d 767 773 (Del. 1990); Aronson S et
al “Shareholder Derivative Actions: From Cradle to Grave” 2009 47. Kawashima and Sakurai 1997 Stanford J.
Int'l L. 9 46 further explain that the rule “serves judicial economy by saving courts from hearing cases that are
not ripe for decision or that may be mooted by subsequent board action. [The rule] protects the [company] from
the harassment of litigious shareholders by allowing the [company] to reject the proposed action, or if it is filed,
to seek its early dismissal”.
1437
1438
Coffee Jr. and Schwartz 1981 Columbia L. Rev. 315. See also Emerson 1986 John Marshall L. Rev. 572; Fischel
1976 U. Chi. L. Rev. 172.
1439
Cassim FHI et al Contemporary company law 2 ed (2012) 782; Coffee Jr. and Schwartz 1981 Columbia L. Rev.
262; DeMott 1986 University of California L. Rev. 485.
1440
Kaster v Modification Sys. Inc. 731 F.2d 1014 1017 (2d Cir. 1984); Fischel 1976 U. Chi. L. Rev. 171. Stickells
1953 Boston University L. Rev. 436 emphasises that it is important that the board be given the chance to decide
whether or not the company should sue for a wrong done to it. Cahn and Donald Comparative Company Law:
Text and Cases on the laws governing corporations in Germany, the UK and the USA (2010) 609 argue that in
the USA, the demand requirement is used as means of addressing the danger of “excessive or disruptive
shareholder derivative litigation”. See also Wang Company Law in China 234; Cassim FHI et al Contemporary
company law 2 ed (2012) 782.
1441
According to Daily Income Fund Inc v Fox 464 U.S. 523 533 (1984), these resources include company
information, personnel, funds and counsel behind the suit. See also Seitz Jr. and Sirkin 2018 The Business Lawyer
306; Riches S and Allen V Keenan and Riches’ Business law 10 ed (2011) Emerson 1986 John Marshall L. Rev.
572.
1442
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 47 while making reference to
Spiegel v Buntrock 571 A.2d 767 773 (Del. 1990).
1443
Emerson 1986 John Marshall L. Rev. 572. See also Lewis Group Limited v Woollam 2016 ZAWCHC para 47;
Stickells 1953 Boston University L. Rev. 437.
1444
Emerson 1986 John Marshall L. Rev. 572. According to Cohen v Beneficial Industrial Loans Corporation 337
US 541 548 (1949) a strike suit refers to litigation that is usually initiated for no valid claim but solely to compel
inflated settlement or generate exorbitant legal fees. For more on this see Garner et al Black’s law dictionary 8
ed (2004) 1475; Tang “The anatomy of Singapore’s statutory derivative action: Why do shareholders sue – or
189
It is indisputable that the demand rule was originally created in the USA to “protect federal court[s]
against collusively manufactured federal jurisdiction”.1445 However, it is submitted that there are
various factors that justify a departure from this proposition. First, the question whether a federal
or a state court has jurisdiction over a case only arises in the context of federal jurisdictions. But
South Africa, which is at least a quasi-federal state,1446 does not have such a challenge. Second,
the circumstances that existed when the question originally arose are different from those
prevailing in the current business world. Most of the common law jurisdictions have now codified
their derivative proceedings. The legal certainty brought by codification will surely assist in
identifying the competent courts for derivative actions. For those jurisdictions that have not yet
codified their derivative suits, it can also be argued that there is now enough judicial precedent to
easily determine the competent court in any given scenario.
Adopting a functional approach to the rationale behind the demand rule reveals that the notice is
significant due to the consequences it generates.1447 For example, if the board chooses to take over
and pursue the litigation, it may require the company to assist in resolving the dispute without
litigation1448 or it may authorise the company to invest its resources in the dispute.1449
64 SATISFYING A DEMAND
Before a plaintiff proceeds with derivative litigation s/he must establish that the board will not
institute the suit on behalf of the company or that its refusal was wrongful.1450 The complainant
must request the directors to enforce the subject company’s rights and inform them that failure to
do so would result in the plaintiff instituting derivative litigation.1451 For the plaintiff to proceed
with derivative litigation s/he must secure the board’s refusal and in some circumstances, its failure
to respond within a reasonable time suffices.1452
not?” 2019 Journal of Corporate Law Studies 6; Wilder 1985 Pace L. Rev. 634-635; and Fischel 1976 U. Chi.
L. Rev. 171.
1445
DeMott 1986 University of California L. Rev. 473. See also Federal Rule of Civil Procedure 23.1.
1446
1447
1448
Ibid; Wilder 1985 Pace L. Rev. 640; Tang 2019 Journal of Corporate Law Studies 13.
1449
Wilder 1985 Pace L. Rev. 640 explains that once a company accepts the complainant’s request, it must be
prepared to place a company’s assets behind the suit”. Cassim R “The Launching of Delinquency Proceedings
under the Companies Act 71 of 2008 by means of the Derivative Action: Lewis Group Limited v Woollam 2017
(2) SA 547 (WCC)” 2017 Obiter 673 682 explains the filtering role of the demand.
1450
Stickells 1953 Boston University L. Rev. 436.
1451
1452
Section 7.42 of the MBCA 1984 (2016 Revision); Fischel 1976 U. Chi. L. Rev. 172.
190
6 4 1 The USA
Throughout the USA, the demand requirement is recognised either as a statutory provision or as a
matter of judicial interpretation.1453 In Delaware, to satisfy the demand requirement, the plaintiff
must “state with particularity any effort by the plaintiff to obtain the desired action from the
directors or comparable authority and, if necessary,1454 from the shareholders or members; and the
reasons for not obtaining the action or not making the effort”.1455 Essentially, the Delaware
approach entails a two-stage process. First, the complainant requests the board of directors to
institute action on behalf of the company.1456 The second part depends on the board’s response to
the plaintiff’s request. If the board is of the opinion that a valid claim has been served on it, which
it rarely does,1457 then it would commence action to protect the subject company’s interests.1458
In general, the aggrieved shareholder must send a letter, draft complaint or “comparable
communication” to the board of directors.1459 Delaware Chancery Court Rule 23.1 also allows the
demand to be served on persons who are of comparable authority.1460 These people do not
necessarily need to be directors. Aronson’s analysis of case law in determining what “comparable
authority” means was not fruitful. In the case of Kaster v Modification Sys. Inc,1461 a demand was
served on the president and board chairman who owned 71% of voting shares. The same person
had also nominated all the other directors except one. It was held that the president and board
chairman could not be regarded as “comparable authority”.1462 The case was appealed after the
1453
Wilder 1985 Pace L. Rev. 635.
1454
DeMott 1986 University of California L. Rev. 464 claims that some courts have been reluctant to interpret the
phrase “if necessary” literally. See also Casarino and Greene 2019 The Corporate Governance Advisor 16-18;
Siems “Abuse of shareholder rights” in Siems and Cabrelli (eds) Comparative company law: A case-based
approach 2 ed (2018) 365.
1455
Delaware Chancery Court Rule 23.1. See also Emerson 1986 John Marshall L. Rev. 575. Similar wording is also
found in other USA states. Section 800(b)(2) of the California Corporations Code 1982 provides that the plaintiff
must “allege in the complaint with particularity plaintiff’s efforts to secure from the board such action as plaintiff
desires, or the reasons for not making such effort”. Section 626(c) of the New York Business Corporation Law
1963 provides that “the complaint shall set forth with particularity the efforts of the plaintiff to secure the
initiation of such action by the board or the reasons for not making such effort”.
1456
1457
1458
1459
1460
The rule states that “[the] complaint shall also allege with particularity the efforts, if any, made by the plaintiff
to obtain the action the plaintiff desires from the directors or comparable authority…”. See also Siems “Abuse
of shareholder rights” in Siems and Cabrelli (eds) Comparative company law: A case-based approach 2 ed
(2018) 365.
1461
31 F.2 d 1014 1017-1019 (2d Cir. 1984).
1462
Kaster v Modification Sys. Inc. 731 F.2d 1014 1017-1019 (2d Cir. 1984).
191
lower court dismissed the plaintiff’s complaint for failure to allege with particularity that a demand
had been made on the directors, or provide adequate facts to excuse a demand as required by
Federal Rule of Civil Procedure 23.1.1463 The court reasoned that appellants failed to “plead ‘with
particularity’ their efforts to obtain action from the directors, the complaint did not supply any
information on the timing, circumstances, or manner of the alleged demands or on the response of
the directors”.1464 Furthermore, the court held that a demand on the president and board chairman
did not constitute a demand on a “comparable authority” under Rule 23.1 because “[he] was not
invested with the full powers of the board of directors”.1465 It can therefore be argued that persons
who qualify as “comparable authority” ought to be endowed with the board’s full powers.
However, in Kaster v Modification Sys. Inc,1466 the court did not provide guidance as to the
meaning of being invested with the full powers of the board of directors. It is not clear whether the
“board’s full powers” is synonymous with a power of attorney to act on behalf of the company.
Secondly, should every board member agree that certain individuals can make decisions binding
the board or a particular ascertainable majority suffices? Thirdly, how should such “full powers”
be obtained and established? Should it be reduced to writing during board meetings, or would oral
communication accompanied by a consideration of circumstances prevailing at the time suffice?
In another USA case of Greenspun v Deb E. Webb Corp,1467 a demand that was served on an
individual who was president, director, and general counsel of the company was held to be
insufficient. The court explained that a determination of whether a plaintiff’s demand adequately
complied with the requirements of Rule 23.1 involves a consideration of both “the sufficiency of
the content of the demand and the sufficiency of the authority of those to whom the demand is
presented”.1468 Simply put, the plaintiff must address her/his demand with sufficient content to the
directors or comparable authority. The court, in this case, held that the plaintiff failed to satisfy the
requirements of Rule 23.1 by “not seeking relief from the board of directors of Webb Corp. before
1463
Kaster v Modification Sys. Inc. 731 F.2d 1014 1015 (2d Cir. 1984).
1464
Ibid.
1465
Ibid.
1466
31 F.2 d 1014 1017-1019 (2d Cir. 1984).
1467
634 F.2d 1204 1209 (9th Cir. 1980).
1468
Greenspun v Deb E. Webb Corp 634 F.2d 1204 1209 (9th Cir. 1980).
192
filing suit [and] that the audience to whom Greenspun presented his demands … was not an
authority comparable to the board of directors”.1469
The term “comparable authority” is also not defined in the MBCA rules. However, the official
comment on section 7.42 of the MBCA states that a demand can be served on the board of
directors, chief executive officer or secretary at the corporation’s principal office. 1470 The use of
the disjunctive “or” shows that the above mentioned are competent alternative recipients of a
demand.1471 If the MBCA’s approach is adopted then it can be argued that Delaware Chancery
Court Rule 23.1’s “comparable authority” may mean chief executive officer or secretary based at
the company’s principal office. This interpretation makes sense since there may be cases, such as
a decision to sue a third party for an injury to the company, in which the taking of or refusal to
take action would fall within the authority of company officers.1472
6 4 2 South Africa
In order to understand South Africa’s current law with respect to the demand requirement, it is
pertinent to first look at the provisions of the 1973 Companies Act.1473 According to the old regime,
a member was required to serve a written notice on the company1474 requesting it to institute action
within one month from the date of service of the notice and stating that if the company failed to
do so, an application to the court will be made1475 in terms of section 266(2)(b) of the Companies
Act.1476 The notice was also supposed to show that if the company failed to commence the required
action within a month, the aggrieved member would request the court to appoint a provisional
curator ad litem for the company.1477 The curator was tasked with instituting and conducting
1469
Ibid.
1470
1471
See Nova Property Group Holdings v Cobbett 2016 3 All SA 32 (SCA) para 30 during South Africa’s Supreme
Court of Appeal’s historical analysis of section 26 of the Companies Act 71 of 2008, held that the word “and” is
a conjunctive whilst the word “or” is a disjunctive.
1472
1473
61 of 1973.
1474
1475
Section 266(2)(a) of the Companies Act 61 of 1973. See also Stoop 2012 SALJ 531.
1476
61 of 1973.
1477
Section 266(2)(a) and (b) of the Companies Act 61 of 1973. See also Coetzee “A Comparative Analysis of the
Derivative Litigation proceedings under the Companies Act 61 of 1973 and the Companies Act 71 of 2008” 2010
Acta Juridica 290 296. See also Cassim MF The new derivative action under the Companies Act: Guidelines for
judicial discretion (2016) 19; Coetzee “A comparative analysis of derivative litigation proceedings under the
Companies Act 61 of 1973 and Companies Act 71 of 2008” in Mongalo (ed) Modern company law for a
competitive South African economy (2010) 295.
193
proceedings “against the director, past director or officer on behalf of the company”.1478 For the
court to exercise its discretion to appoint a curator, it had to be satisfied that the company had not
instituted proceedings, that “there were prima facie grounds for proceedings to be instituted, and
that an investigation into the grounds and the desirability of the institution of proceedings would
be justified”.1479 The curator’s powers were derived from the Companies Act1480 and the court was
allowed to grant her/him express powers.1481 The curator was vested with so much power that the
Act made it an offence for a duly summoned individual to fail, without sufficient cause, to attend
to the curator’s call.1482 Section 260 of the 1973 Companies Act also provided for interrogation
procedures that were not directed at finding guilt.1483 The provisional curator ad litem would report
the outcome of her/his investigation to the court on the return day of the interim order. 1484 On the
return day, the court would either confirm the appointment of the curator ad litem or discharge the
provisional order.1485 The court would, as it deemed necessary, “issue such directions as to the
institution of proceedings in the name of the company and the conduct of such proceedings on
behalf of the company by the curator ad litem”.1486 It would also make an order to the effect that
“any resolution ratifying or condoning the wrong, breach of trust or breach of faith or any act or
omission in relation thereto shall not be of any force or effect”.1487
1478
Section 266(2)(b) of the Companies Act 61 of 1973. See also Stoop 2012 SALJ 531; Coetzee 2010 Acta Juridica
290 297; Coetzee “A comparative analysis of derivative litigation proceedings under the Companies Act 61 of
1973 and Companies Act 71 of 2008” in Mongalo (ed) Modern company law for a competitive South African
economy (2010) 295.
1479
1480
61 of 1973.
1481
Section 267(1) provided that “in addition to the powers expressly granted by the Court in connection with the
investigation, proceedings and enforcement of a judgment, [a provisional curator ad litem shall] have the same
powers as an inspector under section 260, and the provisions of that section shall, subject to the provisions of
subsection (2) of this section, apply mutatis mutandis to the provisional curator ad litem and to the curator ad
litem and to the directors, officers, employees, members and agents of the company concerned”. Under section
260, an inspector could, inter alia, “summon any director, officer, employee, member or agent of the company
or other body corporate to appear before him at a time and place specified in the summons, to be interrogated or
to produce any book or document so specified”. Furthermore, section 260(1) of the 1973 Companies Act
provided that “[a]ny director, officer or agent of a company or other body corporate whose affairs are being
investigated by an inspector under this Act, shall at the request of such inspector produce to him all books and
documents of or relating to the company or other body corporate, in his custody or under his control, and afford
the inspector such assistance within his power in connection with the investigation as the inspector may require”.
1482
See section 260(4) of the 1973 Act.
1483
Coetzee 2010 Acta Juridica 297. Stoop 2012 SALJ 531 stated that the curator’s enquiry was a private
investigation and not a judicial enquiry.
1484
Section 266(3).
1485
Section 266(4). See also Stoop 2012 SALJ 531 and Coetzee 2010 Acta Juridica 296.
1486
Section 266(4).
1487
Ibid.
194
Furthermore, it was not mandatory for a notice served under the 1973 Companies Act to specify
the amount being claimed or to provide a precise description of the events that led to corporate
injury.1488 However, it had to be clear enough for the company to understand what action it was
being called upon to take.1489 Arguably, this reasoning can be imported into the current derivative
litigation scheme.1490
In an effort to strike a balance between directors’ autonomy and shareholders’ need for access to
justice,1491 the 2008 Companies Act1492 introduced the demand requirement into South Africa’s
statutory derivative litigation scheme.1493 According to the current regime, a demand may1494 be
served by a shareholder or a person entitled to be registered as a shareholder of the company or of
a related company;1495 a director or prescribed officer of the company or of a related company; a
registered trade union that represents employees of the company, or another representative of
1488
1489
Ibid.
1490
Ibid. However, the same scholar warned that since the 1973 Act notice gave rise to different consequences when
compared to the 2008 Companies Act demand rule, care has to be taken and comparison might be inappropriate.
1491
According to section 7(i) of the Companies Act 71 of 2008, one of the purposes of this piece of legislation is to
“balance the rights and obligations of shareholders and directors within companies”. Regarding the balancing
effect of the demand requirement, see also Seitz Jr. and Sirkin 2018 The Business Lawyer 307.
1492
See section 165(2) of the 2008.
1493
1494
Contrary to the traditional discretionary connotations attached to the word “may”, in Mouritzen v Greystones
Enterprises (Pty) Ltd 2012 5 SA 74 (KZD) para 24, it was held that the use of “may” was not intended to confer
some discretion on the prospective applicant. The court further explained that given the observation that a
demand is a prerequisite to the institution of derivative litigation, “it is imperative and compulsory that a
prospective applicant must comply with the service requirement before proceeding in terms of section 165(5)”.
Also, Coetzee 2010 Acta Juridica 300 argued that “the interests of the company that the provision aims to protect
would suggest that the statutory derivative remedy provided for in s 165 will be the only remedy of its nature
available and that the plaintiff would be compelled to serve the letter of demand when making use of this
remedy”. However, it is contended that the court erred in its interpretation of the provision. Adoption of a
contextual approach may lead to different conclusions. The word “may” must be accorded its literal meaning. It
is submitted that in this context the word was awarding discretionary powers to prospective applicants who may
qualify to be exempted from serving a demand as contemplated by section 165(6) of the 2008 Act.
1495
Section 2(1)(c) of the 2008 Companies Act provides that “a juristic person is related to another juristic person
if- (i) either of them directly or indirectly controls the other, or the business of the other, as determined in
accordance with subsection (2); (ii) either is a subsidiary of the other; or (iii) a person directly or indirectly
controls each of them, or the business of each of them, as determined in accordance with subsection (2)”. The
fourth category invites some debate. Further, section 3 of the 2008 Act provides that “a company is a subsidiary
of another juristic person if that juristic person, one or more other subsidiaries of that juristic person, or one or
more nominees of that juristic person or any of its subsidiaries, alone or in any combination (i) is or are directly
or indirectly able to exercise, or control the exercise of, a majority of the general voting rights associated with
issued securities of that company, whether pursuant to a shareholder agreement or otherwise; or (ii) has or have
the right to appoint or elect, or control the appointment or election of, directors of that company who control a
majority of the votes at a meeting of the board; or (b) a wholly-owned subsidiary of another juristic person if all
of the general voting rights associated with issued securities of the company are held or controlled, alone or in
any combination, by persons contemplated in paragraph (a)”.
195
employees of the company or anyone who has been granted leave of the court. 1496 Any of such
persons with standing can serve a letter of demand on the subject company requesting it to
commence or proceed with derivative litigation or take related steps to protect the interests of the
company.1497 The authors of Henochsberg contend that the right of a person in terms of section
165(2) may be exercised “by that person directly or by the Commission or Panel, or another person
on behalf of that first person”.1498 Section 165(2) of the 2008 Companies Act merely shows that a
demand is served on the company.
A literal reading of section 66(1) of the 2008 Companies Act suggests that unless a company’s
Memorandum of Incorporation or the Act1499 provides otherwise, a demand shall be served on the
director or board of directors only.1500 Section 66(1) of the Companies Act1501 represents a
significant shift in “the philosophy of the balance of power between the directors and
shareholders”.1502 Both the 1926 Companies Act and the 1973 Companies Act did not confer
original powers on directors.1503 The board’s powers were delegated to it by “the shareholders in
the then articles of association of the company”.1504 As Cassim R has argued, “the enactment of
section 66(1) of the Companies Act [grants the] original power to manage the business and affairs
of the company, for the first time, … to the board of directors”.1505 This power includes the
prerogative to decide whether or not to commence litigation in the name and/or on behalf of the
company.1506 The directors’ decision to litigate is a commercial one as it not only affects the legal
sustainability of the claim but also the commercial feasibility1507 thereof since litigation can
potentially “interfere with the conduct of the company’s business”.1508
1496
Section 165(2) of the Companies Act 71 of 2008. See also Coetzee 2010 Acta Juridica 300.
1497
1498
Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 (2012) 586 while making reference to
section 159 of the Companies Act 71 of 2008.
1499
Companies Act 71 of 2008.
1500
Section 66(1) of the 2008 Companies Act 71 of 2008.
1501
71 of 2008.
1502
Fundamina 37 47.
1503
1504
Ibid.
1505
1506
Cassim MF 2013 South African Mercantile Law Journal 310; Mitchell and Hobbs (UK) Ltd v Mill [1996] 2
BCLC 102; Fusion Interactive Communication Solutions Ltd v Venture Investment Placement Ltd [2005] 2
BCLC 571.
1507
Cassim MF 2013 South African Mercantile Law Journal 173; Scarlett 2008 Florida L. Rev 626.
1508
Cassim MF 2013 South African Mercantile Law Journal 173.
196
Similar to the notice under the 1973 Act, a demand must “fairly and adequately apprise the
directors of the potential cause of action so that they, in the first instance, can discharge their duty
of authorizing actions that, in their considered opinion . . . [are] in the best interest of the
corporation”.1509 The demand must at least identify the alleged wrongdoers and set out the factual
basis for the allegations.1510 Also, it must describe the particular harm suffered by the company,1511
the relief sought by the plaintiff and “cannot rest solely on suspicions and foregone
conclusions”.1512 After being served with a demand, the board must appoint an individual or
committee to investigate the merits of instituting an action if either the company did not make an
application to the court to set aside the demand or the court did not set it aside.1513
The South African legislature would have done better by providing more guidelines to the demand
rule in the 2008 Companies Act.1514 A more comprehensive demand requirement would have
provided “a predictable and effective environment for the efficient regulation of companies”.1515
These factors are a good breeding ground for responsible management, a key feature for promoting
accountability. However, Stoop has argued that in its current form, the “approach allows for
flexibility1516 and ensures that the process is not more technical than is necessary”.1517
Furthermore, “a more precise definition in the Act could have had a restrictive effect, leading to
proceedings failing on overly technical grounds… [T]he provision offer[s] the courts the
opportunity to approach the matter on a case-by-case basis and to apply a substance-over-form
approach, using the stated aims of the 2008 Act as a guideline”.1518
1509
Stoop 2012 SALJ 538 while making reference to Khanna v McMinn 2006 WL 1388744 (Del Ch May 9 2006)
13. See also Cassim FHI et al Contemporary company law 2 ed (2012) 782.
1510
1511
It is argued that it is very difficult for a potential plaintiff to describe harm suffered by the company with
particularity. Derivative plaintiffs are victims of pre-suit information asymmetries. This makes it extremely
difficult for them to describe with particularity both the nature of the alleged wrongdoing and the extent to which
the alleged conduct injured the company. Therefore, it is submitted that this requirement it too onerous and does
not take into consideration the plaintiffs challenges to accessing relevant information.
1512
1513
Section 165(4)(a) of the Companies Act 71 of 2008.
1514
1515
See section 7(l) of the Companies Act 71 of 2008.
1516
This is in line with section 7(b)(ii) of the Companies Act 71 of 2008 which provides that the Act seeks to
“promote the development of the South African economy by creating flexibility and simplicity in the formation
and maintenance of companies”.
1517
Stoop 2012 SALJ 538. In the same vein, Cassim MF The new derivative action under the Companies Act:
Guidelines for judicial discretion (2016) 18 states that a demand “should not be too technically construed”.
1518
197
6 4 3 Japan
In Japan, a shareholder with standing1519 may;
“demand a stock company, in writing or by any other method prescribed by the applicable Ordinance
of the Ministry of Justice, to file an action for pursuing the liability of an incorporator, Director at
Incorporation, Company Auditor at Incorporation, Officer or liquidator, an action seeking the return
of the benefits set forth in Article 120(3) or an action seeking payment under the provisions of Article
212(1) or Article 285(1)”.1520
A shareholder may not exercise this right to seek unlawful personal gains. 1521 Auditors or
kansayaku generally represent Japanese companies in derivative suits.1522 These auditors are
elected at a shareholders’ meeting. Unlike the USA, Japan’s system is commendable in that courts
do not give deference to auditors’ decisions, regardless of the amount of time taken in conducting
the investigations.1523 Also, unlike their USA counterparts, Japanese shareholders are not burdened
with the onus to prove wrongful refusal. Knowledge of this fact encourages auditors to carry out
their mandate objectively or else their decisions would be nullified by the courts. Furthermore,
judicial interference at an early stage during derivative actions allows an independent and truly
uninterested party to decide whether or not the litigation should continue. This enhances access to
justice as shareholders can be more willing to trust the judiciary, rather than interested directors,
to control the litigation. In most cases, these boards would have rejected the applicant’s demand.
Kawashima and Sakurai have argued that fears that the auditors may be influenced either by
directors or their personal ambitions are better addressed by promoting auditor independence than
introducing Special Litigation Committees (SLCs) into Japanese derivative litigation. 1524 These
two scholars further argued that since auditors are the guardians of shareholders,’ they are better
positioned to determine when derivative suits are desirable since they have a better knowledge of
the companies than the courts.1525 Furthermore, it can be argued that auditors are more independent
1519
The locus standi of derivative plaintiffs was the subject of chapter 5 above.
1520
Article 847(1) of the Japan Companies Act 86 of July 26 2005.
1521
Ibid. It is submitted that this an important internal limitation in the promotion of responsible management.
1522
1523
Ibid. Wholesale deference to auditors’ decisions may not effectively promote enhanced accountability. Indeed,
it is submitted that such an approach may inadvertently yield results similar to what the abstention doctrine’s
presumption has produced, namely, as Bainbridge pointed out, exclusion of the courts from deciding whether
directors violated their duty of care or not. This violates one of the main facets of enhanced accountability which
is responsible management. See Bainbridge 2004 Vand. L. Rev 102.
1524
1525
Kawashima and Sakurai 1997 Stanford J. Int'l L. 49 and 52.
198
than directors because they are not involved in corporate decision making.1526 Kawashima and
Sakurai further argue that “an auditor recommendation should be treated as a sound assessment of
a derivative claim” subject to adequate judicial review in cases where auditors’ independence and
objectivity are compromised.1527
6 4 4 The English approach

Due to the “inadequacies of traditionally complex procedures and director control”, some countries
have revised their approach to derivative claims in general and the demand requirement in
particular.1528 Before enacting the current Companies Act,1529 England had no statutory derivative
provisions.1530 Instead, it relied on the common law principles of fraud on the minority and
wrongdoer control1531 as articulated in Foss v Harbottle.1532 A striking similarity between the
former English derivative regime and the current USA and South African approaches is that, even
when the complainant proved wrongdoer control, the board “could appoint an ‘independent organ’,
which could determine that the litigation should not proceed and effectively bar the claim”.1533
England’s Companies Act1534 reflects a clear departure from the traditional pro-director approach
which is prevalent in most common law jurisdictions. The current English system shifts the
decision-making powers of whether to institute1535 or continue1536 derivative litigation from the
board of directors to the judiciary.1537 Courts determine the validity of a derivative claim by
application of specific factors that incorporate several common-law principles.1538 The current
derivative remedy approach is premised upon the recommendations of the Law Commission which
1526
1527
Ibid.
1528
1529
2006.
1530
1531
Goehre 2010 Wisconsin Int’l L. J. 147-150.
1532
(1843) 67 Eng. Rep. 189. This case and the principles discussed therein were examined at length in Chapter 2
above.
1533
1534
2006.
1535
Section 261(1) of the UK Companies Act 2006 provides that “a member of a company who brings a derivative
claim under this Chapter must apply to the court for permission to continue it”.
1536
Section 262(2) of the UK Companies Act 2006 states that “a member of the company may apply to the court for
permission to continue the claim as a derivative suit on the ground that the manner in which the company
commenced or continued the claim amounts to an abuse of the process of the court, the company has failed to
prosecute the claim diligently, and it is appropriate for the member to continue the claim as a derivative claim”.
1537
1538
Ibid.
199
stated that there should be a “new derivative procedure with more modern, flexible and accessible
criteria for determining whether a shareholder can pursue an action”. 1539 To this end, unlike the
USA and SA, the English legislature has attempted to inject judicial discretion and transparency
into derivative proceedings.1540 The legislative revisions were intended to “preserve the substance
of the existing law where it worked and to implement improvements in areas that needed
reform”.1541 Goehre has suggested that the purpose of the current derivative regime is to “afford
greater protection to shareholders’ investments”.1542 England’s reforms represent a proactive
approach designed to align company law with the contemporary business climate.1543
England has introduced a system that depends on the court’s discretion to determine whether or
not derivative litigation continues.1544 This regime introduced a two-stage approach for leave to
proceed with derivative litigation.1545 First, the complainant must establish a prima facie case for
permission to continue.1546 This requirement was inserted in the Companies Act1547 by the English
Legislature against the wishes of the Law Commission which was of the opinion that “including
an express test on the merits could easily result in a time consuming and expensive mini-trial”.1548
Another serious challenge with the prima facie test is that it is too onerous as she shareholder
1539
Explanatory Notes to the UK Companies Act 2006 available at
http://www.legislation.gov.uk/ukpga/2006/46/notes/division/9/2 (accessed 13-07-2018). Hereinafter referred to
as the Explanatory Notes.
1540
1541
Goehre 2010 Wisconsin Int’l L. J. 156 while referring to Bovey “A Damn Close Run Thing – The Companies
Act 2006” 2008 Statute L. Rev. 11.
1542
Goehre 2010 Wisconsin Int’l L. J. 142. These factors, which are listed in section 263(2) and (3) of the UK
Companies Act 2006 will be discussed in detail in chapter 8 below.
1543
Goehre 2010 Wisconsin Int’l L. J. 157. The same scholar also mentioned that the reforms were intended to
“encourage parties to bring claims as derivative actions by modernising the procedure”.
1544
Sykes “The Continuing Paradox: A Critique of Minority Shareholder and Derivative Claims under the
Companies Act 2006” 2010 Civil Justice Quarterly 205 217.
1545
Goehre 2010 Wisconsin Int’l L. J. 157-158. See also Stoop 2012 SALJ 533-534; Tang “Shareholder Remedies:
Demise of the Derivative Claim?” 2012 UCL Journal of Law and Jurisprudence 178 180-181; Sykes 2010 Civil
Justice Quarterly 205 217; Lowry and Reisburg Pettet’s company law: Company law and corporate governance
4 ed (2012) 262; McLaughlin Unlocking company law 2 ed (2013) 317.
1546
Section 261(1) and (2) of the Companies Act 2006. See also Tang 2012 UCL Journal of Law and Jurisprudence
180; Alan and Lowry Company law: Core texts and series 8 ed (2014) 201-202; Lowry and Reisburg Pettet’s
company law: Company law and corporate governance 4 ed (2012) 257; Girvin et al Charlesworth’s company
law 18 ed (2010) 518-519; Kershaw Company law in context: Text and materials 2 ed (2012) 612.
1547
2006.
1548
Tang 2012 UCL Journal of Law and Jurisprudence 181 while making reference to Law Commission Shareholder
Remedies: Report on a Reference under Section 3(1)(e) of the Law Commissions Act 1965 No. 246 para 6.71.
200
suffers from information asymmetry.1549 Also, Lowry and Reisberg acknowledge that the prima
facie rule has been criticised for shifting corporate control from the directors to the judiciary.1550
On the other hand, Parliament believed that such a “front-line safeguard” was necessary so that
derivative actions do not open “a Pandora's Box to every disenchanted individual in the
country”.1551 Cheffins is of the opinion that this requirement can function well if judges do not
impose a heavy burden of proof upon derivative applicants.1552 It was further suggested that courts
had to be involved1553 at an earlier stage to avoid a flood of cases since the common law
requirements of fraud on the minority and wrongdoer control are no longer applicable under the
new statutory regime.1554 In the words of Sykes, business should not be stifled by “unmeritorious
or speculative claims”.1555
The pertinent question pertains to exactly what is required in order for one to satisfy the prima
facie test. Gibbs has proposed that one needs to merely establish more than a zero per cent chance
of success.1556 Relying on the English case of American Cyanamid Co v Ethicon Ltd,1557 Tang has
contradicted the proposal of Gibbs and argued that the courts “must be satisfied that there is a
serious question to be tried, and [that] fettering the court's discretion by a technical rule based on
whether the plaintiffs’ success lay above or below the 50 per cent mark was thought to be
inappropriate”.1558 In his view, rigid and mechanistic calculations should be avoided.1559 In the
Australian case of Swansson v R A Pratt Properties Pty Ltd,1560 it was held that a determination of
whether there is a serious question to be tried is more of a practical assessment as to whether a
1549
1550
1551
Tang 2012 UCL Journal of Law and Jurisprudence 181. See also Sykes 2010 Civil Justice Quarterly 205 211
while making reference to Lord Sharman Hansard HL Vol. 681 col.885 (May 9 2006).
1552
Cheffins “Reforming the Derivative Action: The Canadian Experience and British Prospects” 1997 Company,
Financial and Insolvency Law Review 245 as referred to by Tang 2012 UCL Journal of Law and Jurisprudence
182.
1553
Such involvement allows courts to dismiss frivolous suits early. According to Stoop 2012 SALJ 532, this makes
England’s approach more efficient and cost effective.
1554
Tang 2012 UCL Journal of Law and Jurisprudence 181. Sykes 2010 Civil Justice Quarterly 205 211 explains
that the court’s enhanced supervisory role was a result of government’s attempt to allay any fears of directors
being exposed to frivolous or vexations claims.
1555
Sykes 2010 Civil Justice Quarterly 205 211.
1556
Gibbs “Has the Statutory Derivative Fulfilled its Objectives? A Prima Facie Case and the Mandatory Bar: Part
1” 2011 Company Lawyer 42 as referred to by Tang 2012 UCL Journal of Law and Jurisprudence 182.
1557
[1975] AC 396 (HL).
1558
Tang 2012 UCL Journal of Law and Jurisprudence 182-183.
1559
1560
[2002] NSWSC 583 [25].
201
case should proceed.1561 Again, caution has to be exercised so that this stage does not run into a
mini-trial. The court should make its decision based on the applicant’s evidence only and should
require neither the defendant nor the company to bring any evidence at this stage. 1562 It is argued
that, contrary to the Law Reform Commission’s envisaged purpose of creating “a modern, flexible
and accessible criteria”,1563 the prima facie test presents an unnecessary impediment to applicants.
In practice, the test is a hurdle that deters potential applicants. Empirical evidence has also shown
that courts have either “bypassed or telescoped” the test.1564 Consequently, Tang predicts that the
prima facie test will be totally ignored in future.1565
However, the application stands to be dismissed if the applicant fails to disclose a prima facie
case.1566 Upon successfully making the case, a court can require the directors to provide evidence
opposing the request for continuation with the claim.1567 Unlike the USA and South African
approaches, England’s derivative proceedings involve the court at an early stage. This allows the
judiciary to effectively dismiss “unmeritorious claims [without] wasting corporate assets to defend
frivolous claims”.1568 The court’s “gatekeeping” role affords it, as an independent party, the
opportunity to separate wasteful claims from valid ones.1569
The second stage involves the judiciary’s consideration of factors listed in section 263(2) and (3)
of the UK’s 2006 Companies Act.1570 Tang claims that subsection (2) is mandatory whilst
subsection (3) is discretionary.1571 Accordingly, England’s current legislative derivative
1561
Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583 [25]. See also Henochsberg on the Companies Act
71 of 2008 Vol 1 Service Issue 2 2012 586(1).
1562
Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch). See also Sykes 2010 Civil Justice Quarterly 205 217.
1563
1564
Ibid. For example see Stimpson v Southern Private Landlords Association Ltd [2009] EWHC 2072 and Bridge
v Daley [2015] EWHC 2121 where the courts combined the two stages.
1565
1566
Section 261(2) of the Companies Act 2006. See also Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch);
Sykes 2010 Civil Justice Quarterly 205 217. The position in England is in sharp contrast with Chinese company
law where, apparently, the court may not dismiss a derivative claim on any other grounds except for non-
compliance with procedural preconditions. This means a court does not have the power to review the merits of
a case. See Wang Company Law in China 238.
1567
Goehre 2010 Wisconsin Int’l L. J. 158. Tang 2012 UCL Journal of Law and Jurisprudence 180-181; Sykes 2010
Civil Justice Quarterly 205 217.
1568
Goehre 2010 Wisconsin Int’l L. J. 158. See also Tang 2019 Journal of Corporate Law Studies 13.
1569
1570
Tang 2012 UCL Journal of Law and Jurisprudence 181; Lowry and Reisburg Pettet’s company law: Company
law and corporate governance 4 ed (2012) 262; Girvin et al Charlesworth’s company law 18 ed (2010) 520-
521; McLaughlin Unlocking company law 2 ed (2013) 317.
1571
202
framework is largely decided by the court’s interpretation of the factors outlined in the above-
mentioned sections.1572 Of further interest is the open-ended nature of section 263(3) factors
“which makes them inherently uncertain”.1573 In this connection, Tang has expressed concern that
there is a high probability that section 263(3) could be expanded by the courts.1574
However, generally, England’s current system has been criticised for violating some fundamental
corporate governance principles. First, it has been contended that England’s approach is out of
step with the engraved doctrine which stipulates that corporate managerial powers vest in the
directors.1575 Secondly, England’s system is at odds with the need for complainants to exhaust
intra-corporate remedies.1576 Furthermore, the prima facie test applied during the first stage of the
two-step procedure has been condemned for the reason that it may turn into a costly mini-trial.1577
Small companies are most likely to be adversely affected by this. The codification of directors’
duties in its 2006 Companies Act further complicates application of England’s prima facie test.1578
Additionally, England’s approach has not consistently yielded the anticipated positive results in
dealing with “protracted battles relating to standing”.1579 Also, Fischel has expressed some
profound concerns with the application of judicial discretion.1580 The scholar’s view is that the
standard is ambiguous and as a result, the judiciary has delivered inconsistent and confusing results
that provide insufficient guidance “when faced with the question of whether a demand on directors
is necessary”.1581
Regardless of the shortcomings outlined above, it is submitted that the system retains the
fundamental company law principle which states that a company is the proper plaintiff for wrongs
done to it.1582 The common law principles enunciated in Foss v Harbottle are no longer bright-line
rules but may be used as the starting point by the courts to determine whether or not to grant
1572
Ibid.
1573
Ibid.
1574
Ibid.
1575
1576
Ibid. Goehre 2010 Wisconsin Int’l L. J. 144 argued that the business judgment rule and the principle that
corporate management is the board’s prerogative “interweave the fabric of [USA] derivative procedure”.
1577
1578
Ibid. See also Sykes 2010 Civil Justice Quarterly 205 215.
1579
Stoop 2012 SALJ 533 while making reference to Gibbs 2011 The Company Lawyer 41 45 footnote 22.
1580
Fischel 1976 U. Chi. L. Rev. 170. Goehre 2010 Wisconsin Int’l L. J. 165 has also expressed some scepticism
over the substitution of the court’s discretion for the directors’ “business judgment and experience”. However,
this depends on how the courts will interpret the new procedure.
1581
1582
203
leave.1583 It is expected that England’s derivative litigation legislative reforms will afford
complainants “easier access to justice by giving the court more control”. 1584 It is also argued that
judicial discretion is more in line with contemporary company law than attempting to satisfy the
common law requirement of fraud on the minority1585 which was rigid, onerous and restrictive.1586
Also, the involvement of the court as an impartial third party is deemed better than having a
potentially interested board determine the validity of a claim.1587 Judicial control of the procedure
also increases the fairness and transparency of the system.1588 Recent corporate scandals in almost
all the major common law jurisdictions1589 are further evidence that there is a need for greater
shareholder protection.1590
However, England is not the first jurisdiction to afford greater control to the judiciary over
derivative proceedings. Goehre has observed that Canada enacted similar provisions in section
239(1) of the Canada Business Corporations Act1591 (CBCA). It is a fact that this provision
provides a statutory right to make an application to court for leave to institute derivative litigation
on behalf of the company.1592 However, it is inaccurate to conclude that this provision is similar
to that of England. First, it is clear that subsection (1) of section 239 must be read subject to
subsection (2).1593 Therefore, subsection (1) must not be read in isolation but in light of subsection
(2). Section 239(2) provides that:
“No action may be brought and no intervention in an action may be made under subsection (1) unless
the court is satisfied that (a) the complainant has given notice to the directors of the corporation or its
subsidiary of the complainant’s intention to apply to the court under subsection (1) not less than
1583
Ibid.
1584
Ibid.
1585
Ibid.
1586
Coetzee 2010 Acta Juridica 294.
1587
Goehre 2010 Wisconsin Int’l L. J. 167-168.
1588
1589
For example, in South Africa major scandals which easily come to mind are Regal Treasury, Regal Treasury
Bank, Fidentia and Masterbond. In the USA world class corporate debacles include Enron, WorldCom, Lehman
Brothers, AIG and Tyco. For England, examples include Polly Peck International, Maxwell Communications
Corporation, Equitable Life Insurance, MG River Group and Northern Rock.
1590
1591
R.S.C. 1985. The section states that “subject to subsection (2), a complainant may apply to a court for leave to
bring an action in the name and on behalf of a corporation or any of its subsidiaries, or intervene in an action to
which any such body corporate is a party, for the purpose of prosecuting, defending or discontinuing the action
on behalf of the body corporate”.
1592
Section 239(1) of the CBCA.
1593
Section 239(1) reads “subject to subsection (2)…”.
204
fourteen days before bringing the application, or as otherwise ordered by the court, if the directors of
the corporation or its subsidiary do not bring, diligently prosecute or defend or discontinue the
action”.1594
The above-quoted provision makes reference to a notice being served upon the directors before
commencing or continuing any action on behalf of the company. The word “notice” is used
interchangeably with demand. A literal interpretation of this provision makes it clear that serving
a notice or demand upon company directors is a prerequisite in derivative litigation. It has to be
noted that the CBCA is silent about whether the board of directors was required to appoint anyone
to investigate the complainant’s notice or whether the notice demanded any specific action from
the board.1595 Secondly, the heading of subsection (1) reads “commencing derivative action” whilst
the heading of subsection (2) reads “conditions precedent” (own emphasis added). According to
the Merriam Webster dictionary, as used in this context, the word precedent means “prior in time,
order, arrangement, or significance”.1596 It, therefore, follows that before commencing derivative
litigation, the CBCA requires a complainant1597 to serve a demand upon directors. Accordingly, it
is submitted that Goehre’s claim that Canada’s derivative procedure is similar to that of England
is incorrect because in Canada, a derivative complainant is required to serve a notice upon
directors1598 whilst the demand rule is non-existent in England.1599
A jurisdiction that provides for derivative litigation proceedings in a manner similar to England is
Australia.1600 According to the Australia Corporations Act,1601 a member, former member, or
person entitled to be registered as a member of a company or of a related body corporate or an
officer or former officer of the company may apply to the court for leave to bring, or to intervene
1594
Section 239(1) of the CBCA.
1595
The 1973 Companies Act used the word “notice”. According to section 266(2)(a), the notice called upon the
company to “institute such proceedings within one month from the date of service of the notice and stating that
if the company fails to do so, an application to the Court under paragraph (b) will be made”.
1596
Merriam Webster https://www.merriam-webster.com/dictionary/precedent (accessed 16-07-2018).
1597
As defined in section 238 of the CBCA, this refers to “a registered holder or beneficial owner, and a former
registered holder or beneficial owner, of a security of a corporation or any of its affiliates, a director or an officer
or a former director or officer of a corporation or any of its affiliates, the Director, or any other person who, in
the discretion of a court, is a proper person to make an application under this Part”.
1598
Section 239(2)(a) of the Canada Business Corporations Act R.S.C. 1985 c. C-44.
1599
Instead, the English derivative remedy uses the prima facie rule. See section 261(2) of the UK Companies Act
2006.
1600
Goehre 2010 Wisconsin Int’l L. J. 164; Stoop 2012 SALJ 534.
1601
50 of 2001.
205
in, proceedings.1602 In this regard, Australia’s approach to a greater extent resembles England’s
system and sharply contrasts with the USA and South Africa’s. Section 237(2) provides a list of
factors that a court will consider in determining the validity of the plaintiff’s claim. In like manner,
the Australian approach allows the court to filter out unmeritorious claims by considering factors
that are similar to those listed in the UK Companies Act.1603 Empirical evidence has shown that
Australia’s modernised statutory derivative regime has resulted in an increase in shareholder
litigation in comparison to the previous common law era.1604 Based on Australia’s experience,1605
it can be argued that “providing greater judicial control over shareholder derivative litigation, as
opposed to control by the board, is a more transparent process for determining whether the
litigation can continue”.1606 Greater judicial control over derivative litigation also builds
shareholder confidence in the remedy. However, this has not been the experience in England. The
anticipated rise in shareholder activism has not materialised.1607 Baker and Hacking are of the
opinion that this is because England’s bar for access to the derivative remedy has been set too
high.1608 Consequently, English minority shareholders would rather institute personal claims.
65 THE BOARD’S RESPONSE TO THE DEMAND

Having looked at what is expected of plaintiffs in derivative actions to satisfy the demand
requirement, it is now convenient to examine how and when the board should respond. In the USA,
after the plaintiff has served a demand on the board, the directors have to decide on the best way
by which they can be informed of the facts leading to the challenged conduct and the
accompanying costs of any potential litigation.1609 If the board decides that a factual investigation
1602
Section 236(1) read together with section 237(1). See also Stoop 2012 SALJ 534.
1603
Goehre 2010 Wisconsin Int’l L. J. 164 while referring to Huang “The Statutory Derivative Action in China:
Critical Analysis and Recommendations for Reform” 2007 Berkeley Business L. J. 227 245-247.
1604
Hofmann “The Statutory Derivative Action in Australia: An Empirical Review of its Use and Effectiveness in
Australia in Comparison to the United States, Canada and Singapore” 2004 Bond University Corporate
Governance eJournal 1 and 14 as cited by Goehre 2010 Wisconsin Int’l L. J. 164.
1605
The current system has been in operation for almost two decades now.
1606
1607
Baker and Hacking “Statutory Derivative Claim Regime: Ten Years On” https://gowlingwlg.com/en/insights-
resources/articles/2017/statutory-derivative-claim-regime-ten-years
on/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original (accessed 01-09-2018).
1608
Ibid. Consequently, it is submitted that the English derivative remedy does not conform to the tenets of the
enhanced accountability perspective.
1609
Official comment on section 7.42 of the MBCA 1984 (Revised 2016) 147. See also Spiegel v Buntrock 571 A.2d
767 (Del. 1990) 773.
206
is required, then the investigation must be conducted in good faith.1610 The board must also weigh
up any possible remedies at its disposal such as internal correction of the challenged conduct and
the merits of proceeding with litigation.1611 If an investigation is conducted, the plaintiff will only
be allowed to proceed derivatively if the board’s decision was either made mala fides or if it was
based on an unreasonable investigation.1612
The USA’s MBCA provides that a corporation is under no obligation to respond to a demand.1613
Unlike the Japanese system where it is known that upon receipt of a demand the board of auditors
investigates a demand, in Delaware, directors have to first determine who will respond to the
demand.1614 If there is a disinterested majority on the board, it can respond to the demand. But, if
such a majority is lacking, then there may be need to appoint an SLC.
Upon receipt of the demand, the board has several options.1615 The directors may opt to take over
and pursue the litigation,1616 resolve the grievance internally and avoid litigation or they can reject
the demand.1617 No neutrality is allowed. However, the courts have not been consistent in
delineating situations where a board that has been served with a demand assumes a position of
neutrality.1618 In some cases, a board’s inability to take action has been “viewed as tacit approval
for the continuation of the litigation thus excusing demand” in which case the demand will be
irrelevant.1619 Elsewhere, in a USA case of Benak v Alliance Capital Mgmt L.P,1620 the court held
that the mere fact that the board of directors is neutral does not automatically entitle or authorise
it to reject the demand.1621
1610
Section 7.44 of the MBCA 1984 (Revised 2016). The requirement of good faith will be examined in detail below
in chapter eight.
1611
Weiss v Temporary Inv. Fund Inc. 692 F.2d 928 (3d Cir. 1982) 941.
1612
See Stepak v Addison 20 F.3d 398 (11th Cir. 1994); Miller v Thomas 656 N.E.2d 89 (Ill. App. 1995).
1613
1614
1615
Goehre 2010 Wisconsin Int’l L. J. 146; Baum and Puchniak “The derivative action: An economic, historical and
practice-oriented approach” in Puchniak et al (eds) The derivative action in Asia: A comparative and functional
approach (2012) 49.
1616
Daily Income Fund Inc v Fox 464 U.S. 523 (1984) 533. The board will do so only if it satisfied that such action
is in the best interests of the company.
1617
Weiss v Temporary Inv. Fund, Inc. 692 F.2d 928 (3d Cir. 1982) 941.
1618
Ibid.
1619
See Kaplan v Peat, Marwick, Mitchell & Co. 540 A.2d 726 729 (Del. 1988).
1620
2005 WL 1285652.
1621
Benak v Alliance Capital Mgmt L.P 2005 WL 1285652.
207
In South Africa, once a demand has been served, directors only have two options. The board may
approach a court for the demand to be rejected on the grounds that it is frivolous and vexatious.1622
Alternatively, it can opt to investigate the merits of the demand1623 which will require the board to
select an impartial person or committee to investigate the alleged issues. 1624 The investigator’s
report must be well prepared, “rational and reasonable in its conclusions”.1625 The way the
legislature structured section 165(3) and (4) of the 2008 Companies Act ensures that shareholders
do not become victims of directors’ neutrality. Courts do not have to make another determination
whether or not in a given scenario board neutrality warrants refusal of a demand.
In the South African case of Lewis Group Limited v Woollam,1626 an application was brought
before the court in terms of section 165(3) of the 2008 Companies Act1627 for an order setting aside
a demand in terms of section 165(2) served on the applicant company by the first respondent.1628
The applicant, Lewis Group Limited, was a public company listed on the Johannesburg Stock
Exchange (JSE). The first respondent, David Woollam, was entitled to be registered as a
shareholder of the applicant company. He had requested the company to institute action for a
declaration of delinquency in respect of four of the company’s respondent directors, an application
usually the subject of section 162.1629 The court noted that the principal difference between section
162 of the 2008 Companies Act1630 and its counterparts in other jurisdictions1631 is that the former
1622
Section 165(3) of the Companies Act 71 of 2008. Cassim FHI et al Contemporary company law 2 ed (2012) 782
states that this provision is an important policy consideration which ensures that “suitable checks and balances
[are] built into the derivative action in order to prevent abuse of right to bring derivative actions”. See also
1623
Section 165(4) of the Companies Act 71 of 2008. See also Stoop 2012 SALJ 538.
1624
Ibid; Cassim FHI et al Contemporary company law 2 ed (2012) 782; Cassim MF “When Companies are Harmed
by Their own Directors: The Defects in the Statutory Derivative Action and the Cures (Part 2)” 2013 South
African Mercantile Law Journal 301 313; Cassim MF 2014 South African Mercantile Law Journal 1 7.
1625
1626
2016 ZAWCHC.
1627
According to this section, “a company that has been served with a demand … may apply … to a court to set
aside the demand only on the grounds that it is frivolous, vexatious or without merit”.
1628
Lewis Group Limited v Woollam 2016 ZAWCHC para 1.
1629
Lewis Group Limited v Woollam 2016 ZAWCHC para 4.
1630
The section reads “a company,… may apply to a court for an order declaring a person delinquent or under
probation”.
1631
See section 5 of the Companies Act 71 of 2008. The jurisdictions referred to include England, Australia and New
Zealand.
208
grants standing for companies to commence proceedings for the disqualification of both current
and former directors.1632
The question was “whether a person is able to proceed derivatively for the given relief when that
person is given standing under the Act to proceed for such relief personally”. 1633 The applicant’s
counsel contended that the first respondent’s demand on the company was vexatious because he
could seek the relief personally.1634 In the end, the court declined the first respondent leave to
proceed derivatively for relief that he could have claimed personally.1635 It was held that his resort
to section 165 was vexatious because, inter alia, “the abolition of the common law in terms of
section 165(1) has left unaffected the standing of shareholders to litigate directly in respect of
matters affecting their personal, as distinct from their corporate, rights as shareholders…”.1636 This
is a very significant decision by the Western Cape High Court which pronounced that one cannot
use the derivative action proceedings to declare a director delinquent under section 162 of the 2008
Companies Act.1637
In Japan, it is not the directors who are obliged to respond to a plaintiff’s demand. Instead, auditors
or the board of auditors1638 respond to shareholders’ requests of this nature.1639 The company has
sixty days to respond.1640 If the company fails to respond within the stipulated “grace period”, then
the shareholder can proceed to file “an Action for Pursuing Liability1641 on behalf of the Stock
Company”.1642 Also, the aggrieved shareholder can also request reasons why the company could
not institute action. The company must respond to the person who made the request in writing or
by any other method prescribed by the applicable Ordinance of the Ministry of Justice.1643
1632
2016 ZAWCHC para 10.
1633
1634
1635
1636
1637
1638
It has to be noted that not every Japanese company is obliged to have a board of auditors. Article 328(1) of the
Japanese Companies Act 86 of July 26 2005 provides that “[e]very large company, excluding a company which
is not a public company and a company with committees, is obliged to have a board of company auditors and an
accounting auditor.” For more see Chapter 4 above under part 4 2 3 2.
1639
1640
Article 847(3) of the Japan Companies Act 86 of July 26 2005. See Iglesias-Rodriguez “Obligations of directors
in takeovers” in Siems and Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018) 158.
1641
This is Japan’s equivalent of derivative litigation.
1642
1643
209
The critical question appertains to which party the law should entrust with the power to determine
whether litigation to enforce a company’s rights should commence or not. Davies and Worthington
provide other possible solutions besides directors as alluded to above.1644 Among the other options,
the two authors suggest that the decision can be made by a select group of shareholders. 1645 This
system has been applied extensively in Germany.1646 However, there could be a challenge in
determining the appropriate percentage or quorum requirements.1647 Davies and Worthington also
suggest a rather radical and unlikely approach whereby the decision to sue is left to some
individuals outside the company.1648 These may include liquidators and administrators. It is
submitted that this option should be discouraged due to its inherent challenges. First, it is very
difficult to identify an outsider with a legitimate interest to commence litigation. 1649 Secondly, it
is doubtful if liquidators and administrators can make such a determination in the context of viable
companies.1650
6 5 1 Special litigation committees

When a board receives the demand, it may either review it as a whole or it may opt to constitute a
committee to investigate the facts underlying the plaintiff’s allegations.1651 Such a committee is
known as a Special Litigation Committee (SLC). It has to be noted that these committees are only
used as part of the system in the USA, and hence the discussion hereunder is largely about the
position in that jurisdiction. Employment of an SLC is one of the ways by which Delaware
directors exercise control over derivative litigation.1652 Usually, members of an SLC will not be
part of the board upon which the demand was served. To that end, the investigative process requires
the company to increase the number of its directors.1653 Such directors, who are loosely known as
1644
Davies and Worthington Gower’s principles of modern company law 10 ed (2016) 596-597.
1645
1646
See section 148 of the Germany Law on Corporations (Aktiengesetz) 2005.
1647
1648
Ibid.
1649
Ibid.
1650
Ibid.
1651
Seminaris v Landa 662 A.2d 1350 (Del. Ch. 1995). See also Weidner “Dissatisfied Members in Florida LLCs:
Remedies” 2019 Florida State University Business Review 1 6; Erickson 2017 Oklahoma Law Review 266;
1652
Abbey v Computer & Comm. Tech. Corp. 457 A.2d 368 (Del. Ch. 1983); Spiegel v Buntrock 571 A.2d 767 (Del.
1990); Casarino and Greene 2019 The Corporate Governance Advisor 16.
1653
Abbey v Computer & Comm. Tech. Corp. 457 A.2d 368 (Del. Ch. 1983); Scarlett 2008 Florida L. Rev. 598.
210
extension directors, should not be connected in any way to the underlying wrongdoing. 1654 The
committee is entitled to retain independent counsel/law firm during the course of the
investigation.1655 The hired law firm should prepare periodic reports which are presented to the
SLC. It will also engage the SLC members at crucial stages. The law firm must fully and
thoroughly investigate the shareholders’ factual allegations underlying the derivative suit 1656 and
conduct research on the applicable law.1657
The SLC must then prepare a report of its findings of fact and conclusions of law. The report
should address the merits of the plaintiff’s claims and provide sufficient information to
demonstrate that the investigation was reasonable and thorough.1658 Empirical research in the USA
has shown that in almost all cases, the SLC will move for summary judgment to dismiss the
shareholder’s demand for not being in the best interests of the company. 1659 An SLC that is
properly constituted has the power to suspend derivative litigation for a reasonable period of
time.1660 Members of the committee should be “vested with full and unconditional authority to act
on behalf of the board to investigate the allegations and to determine if litigation is in the
company’s best interest”; they should be independent and disinterested, 1661 act in good faith and
have reasonable bases for their recommendations.1662
Moreover, in the majority of cases, courts follow the recommendations of an SLC.1663 As a result,
derivative plaintiffs are left powerless to maintain their claims.1664 It is submitted that there is,
1654
Abbey v Computer & Comm. Tech. Corp. 457 A.2d 368 (Del. Ch. 1983); Casarino and Greene 2019 The
Corporate Governance Advisor 17; Seitz Jr. and Sirkin 2018 The Business Lawyer 313.
1655
Kanter v Barella 2007 U.S. App. Lexis 12220 18 23; In re Bristol-Myers Squibb Deriv. Litig. 2007 WL 959081
5 (S.D.N.Y. Mar. 30 2007); Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 62.
1656
In re Bristol-Myers Squibb Deriv. Litig. 2007 WL 959081 5 (S.D.N.Y. Mar. 30 2007).
1657
In re Bristol-Myers Squibb Deriv. Litig. 2007 WL 959081 5 (S.D.N.Y. Mar. 30 2007); Scarlett 2008 Florida L.
Rev. 598.
1658
1659
Scarlett 2008 Florida L. Rev. 598; Emerson 1986 John Marshall L. Rev. 572; Wilder 1985 Pace L. Rev. 637
states that in all cases, SLCs have recommended that action was not in the best interests of the company. It is
inconceivable if all suits are really against the best interests of the company.
1660
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 55 and 56.
1661
Melton v Blau 2004 WL 2095317 (Conn. Super. Ct. Aug. 26 2004) 6. See also Weidner 2019 Florida State
University Business Review 7; Scarlett 2008 Florida L. Rev. 598.
1662
In re Oracle Corp. Derivative Litig. 824 A.2d 917 (Del. Ch. 2003); Weidner 2019 Florida State University
Business Review 7.
1663
Finley v Superior Court 96 Cal. Rptr. 2d 128 132 (Ct. App. 2000); Cutshall v Barker 733 N.E.2d 973 978 (Ind.
Ct. App. 2000. See also Stoop 2012 SALJ 544 who says that American courts show a high degree of deference
to a committee’s recommendations.
1664
211
apparently, an unjustified presumption in favour of the impartiality of SLC members and the
validity of their recommendations.1665 This is a major blow for potential derivative plaintiffs. First,
it is not clear why committee recommendations should be accepted at face value. Second, the
standard that courts use to determine whether they should accept or reject a board’s motion to
dismiss based on the SLC’s recommendations is not clear.1666 Other courts have applied the
business judgment rule as a standard to dismiss plaintiffs’ claims without further judicial scrutiny
of an SLC’s recommendations.1667 In the words of Kim, the committee must provide “some
business reason to justify its conclusion that no legal action should be taken”. 1668 On the other
hand, some courts have been keen to first examine the committee’s independence and good faith
before granting the board’s motion to dismiss1669 as in the case of Zapata v Maldonado.1670
Additionally, SLC investigations can be inconveniently lengthy. Sometimes they may take as long
as 8 months.1671 The details of an SLC’s report may indicate whether an SLC acted in good
faith.1672 There is no bright-line rule to the question - when is an investigator’s report thorough?
The answer is arrived at on a case by case basis. In one interesting scenario, the court upheld the
investigator’s report that justified directors’ failure to pursue derivative litigation regardless of the
fact that the independent investigator had failed to interview all interested parties.1673 A deeper
discussion of the independence and disinterestedness of SLCs and the reasonableness of their
recommendations, as issues which require the court’s discretion, is reserved for chapter eight
below.
6 5 1 1 Special Review Committees

Some courts have decided that the appointment of an SLC impliedly means that the directors would
have conceded that the board was interested and lacked the required independence.1674 As a result,
some boards opt to make use of a Special Review Committee (SRC) or a Special Committee to
1665
1666
1667
Ibid.
1668
Kim 1981 Journal of Corporation Law 517. The same scholar claimed that it has been very easy for committees
to draft business reasons that justify their recommendations not to pursue litigation.
1669
1670
430 A.2d 779 (Del. 1981). See also Erickson 2017 Oklahoma Law Review 268.
1671
1672
1673
See Powell v First Republic Bank 274 F. Supp. 2d 660 669-671 (E.D. Penn. 2003).
1674
Abbey v Computer & Comm. Tech. Corp. 457 A.2d 368 (Del. Ch. 1983); Zapata Corp. v Maldonado 430 A.2d
779 (1981) 786.
212
review a demand instead of an SLC.1675 An SRC has many of the characteristics and all the
investigative powers of an SLC. It can make a recommendation to the board about whether to
pursue litigation or not but the board reserves the right to make the final decision.1676
6 5 2 Pursuing litigation
Acceptance of a demand places the board in control of the litigation process.1677 It is very rare for
boards in the USA to accept a plaintiff’s demand and take over litigation on behalf of the
company.1678 In the unlikely event that a company decides to address the grievances mentioned in
the demand, that should effectively terminate a plaintiff’s derivative suit. The board of directors
will take over the litigation and approach the court on behalf of the company. In South Africa, if a
company decides to institute the action, it must nevertheless appoint an investigator. The authors
of Henochsberg are of the view that appointing an investigator when the company has decided to
take over the litigation is unnecessary.1679 Contrasted with the position under the 1973 Companies
Act where the curator’s report was presented to the court and not to the board, the current system
involves the court at a later stage.1680
6 5 3 Internal resolution of the grievance

It has been plausibly argued that the MBCA provisions pertaining to the demand requirement are
informed by alternative dispute resolution policies.1681 Hence, the MBCA’s derivative action
framework is rated the universal panacea in reducing the number of class actions and the generally
congested volume of litigation between companies and shareholders.1682 By facilitating the internal
resolution of conflicts, the demand requirement provides a platform for an aggrieved shareholder
and the board of directors.1683 This offers directors an opportunity to correct the wrong or negotiate
intra-corporate settlements which usually cost much less than the amount a company would spend
in a strike suit.
1675
Seitz Jr. and Sirkin 2018 The Business Lawyer 307-310.
1676
1677
1678
1679
Henochsberg on the Companies Act 71 of 2008 586.
1680
1681
Barsalona “Litigation Supply should not Exceed Shareholder ADR Demand: How Proper Use of the Demand
Requirement in Derivative Suits can Decease Corporate Litigation” 2012 Oregon Law Review 773 776.
1682
Barsalona 2012 Oregon Law Review 776.
1683
Barsalona 2012 Oregon Law Review 777 and 781.
213
6 5 4 Rejection of the demand
In the State of Delaware, corporate boards will frequently reject shareholder demands on the
ground that they will not be in the best interests of the company. 1684 If the plaintiff wishes to
proceed with the derivative suit after the board’s rejection of her/his demand, the former will be
required to prove that the board’s decision was wrongful.1685 This onus placed on the plaintiff
shows that courts exercise significant deference towards board decisions. In order to prove that the
board’s rejection of the complainant’s demand was wrongful, the plaintiff has to overcome another
hurdle in the form of the business judgment rule1686 according to which, briefly stated,1687 directors
are presumed to have acted in good faith in the “honest belief that the action taken was in the best
interests of the company”.1688 The plaintiff has to show why the directors’ decision not to pursue
litigation1689 has to be disrespected and overturned by the court.1690 Conversely, under New York
law, directors act wrongfully if they fail to initiate litigation after a prospective plaintiff's
presentation of apparently serious charges.1691
In the USA, due to the fact that directors usually decide that pursuing the complainant’s request is
not in the best interests of the company, plaintiffs often opt not to serve a demand.1692 This problem
is compounded by the realisation that courts rarely alter directors’ decisions.1693 This explains why
there has been very little success for derivative suits proceeding against the board’s wishes.1694 A
board’s rejection of the demand also needs to be viewed in light of the number of directors who
considered it. If less than a majority of the directors deliberated on the demand, the question would
be whether their decision not to institute litigation is a true reflection of the company’s best
1684
1685
See Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 48 while making reference
to Miller v Thomas 656 N.E.2d 89 (Ill. App. 1995). It is regrettable that courts have not been able to define what
wrongful refusal means. Most decisions explain what is required of a plaintiff to overcome the hurdle of a board’s
refusal but they not really define what the phrase mean. See DeMott 1986 University of California L. Rev. 487;
1686
Goehre 2010 Wisconsin Int’l L. J. 146 stated that upon rejection of the shareholders’ demand, “the business
judgment rule solidifies” the board of directors’ decision not to sue.
1687
The business judgment rule is the subject of study of chapter 7.
1688
1689
Koh “Reconstructing the Reflective Loss Principle” 2016 Journal of Corporate Law Studies 373 385.
1690
1691
See Syracuse Television v Channel 9 Syracuse 51 Misc. 2d 188 273 N.Y.S.2d 16 (Sup. Ct. 1966); DeMott 1986
University of California L. Rev. 489.
1692
1693
Goehre 2010 Wisconsin Int’l L. J. 146. Wilder 1985 Pace L. Rev. 636-636 stated that it has been very rare for
courts to allow rejected demands to proceed.
1694
214
interests.1695 USA courts do not just look at the number of directors who have considered a
plaintiff’s demand. They also consider the surrounding circumstances including the type of
directors,1696 whether they were interested or not and the gravity of the charges.1697 In Abramowitz
v Posner1698 a decision by two disinterested directors who represented a minority of the board was
deemed by the court to be sufficient.
6 5 5 When the board agrees to disagree

Individual directors may not always agree on everything. There are instances where the board of
directors may find itself in a stalemate with respect to whether or not it should take over derivative
litigation as per the shareholder’s demand. This situation is usually referred to as corporate
deadlock. It is a state of corporate impasse or stand-off. Director deadlock is unhealthy for a
company not only in derivative actions but in all aspects because no key decisions can be made.1699
Stead explains that during a period of director deadlock the company “may continue to trade, but
the deadlock hinders performance, and ultimately has a detrimental effect on profits”.1700 Director
deadlock also stifles the growth of the company.
However, it is submitted that the question of director deadlock will only arise in the context of
jurisdictions that do not have a statutory or codified derivative remedy. Jurisdictions that have
codified their derivative proceedings usually specify a certain time period at the lapse of which the
shareholder is allowed to proceed with the suit.1701 This does not disregard the fact that the court
may exercise its discretion and grant the company an extension time. As a result, company law
statutes in the jurisdictions that are the subject of this study do not address instances of director
deadlock in the context of derivative remedies.
However, the key question is: How do common law jurisdictions that do not have a statutory
derivative remedy, such as the USA, deal with director deadlock? Stead has suggested that
1695
1696
This refers to whether they were outside directors or not.
1697
See the New York’s Supreme Court decision in Syracuse Television v Channel 9 Syracuse 51 Misc. 2d 188 273
N.Y.S.2d 16 (Sup. Ct. 1966).
1698
672 F.2d 1025, 1032 (2d Cir. 1982).
1699
Stead “Deadlock: if directors and shareholders fail to agree, what can be done?” available at
https://www.linkedin.com/pulse/deadlock-directors-shareholders-fail-agree-what-c:an-done-george-stead
(accessed 31-08-2018).
1700
Ibid.
1701
As evident above, both South Africa and Japan provide for a waiting period of sixty days.
215
companies that experience director deadlock can appoint a non-executive director to resolve the
issue so that “day-to-day decision making can be restored”.1702 It is submitted that this is cold
comfort. What if the directors disagree also on who the non-executive director should be, a case
of deadlock upon deadlock? Another possible option is to appoint an expert in the field of the
company’s business to decide on the outstanding issues for the parties.1703 But this may also be
affected by the director deadlock. However, the last suggestion may be given teeth if it is rooted
in the company’s Memorandum of Incorporation. For example, a company may provide in its
constitution that whenever directors are in a deadlock and cannot agree on certain issues, any
member of the board can approach specific persons who are regarded as experts in the concerned
area, to decide for the parties.
As already mentioned, plaintiffs are no longer required to first serve a demand on the board of
directors in England. As a result, the question of whether directors agree or not to commence action
as per the plaintiff’s demand is now alien to English company law. However, in insolvent
companies, English insolvency law empowers the court to make an administration order in cases
of director deadlock.1704 It appears the question of how a demand should be handled in cases of
director deadlock is yet to be decided by a USA federal or state court. A possible reason as to why
the question has not been addressed by the courts could be that most boards comprise of odd
numbers of directors. However, Malaysia which is also a federal jurisdiction recently decided on
the question. In Perak Integrated Networks Services Sdn Bhd v Urban Domain Sdn Bhd1705 the
Malaysian Court of Appeal held that corporate deadlock does not preclude a derivative action
brought to protect the interests of the company.1706
6 5 6 Reasonable time to respond

According to Delaware State company law, there is no predetermined time frame within which the
board is obliged to respond to the plaintiff’s demand. The board only needs to respond within a
reasonable time.1707 The appropriate time to respond is determined by “the complexity of the
1702
https://www.linkedin.com/pulse/deadlock-directors-shareholders-fail-agree-what-can-done-george-stead
(accessed 31-08-2018).
1703
Ibid.
1704
See section 8 of the Insolvency Act 1986.
1705
W-02 (NCC) (W)-2442-11/2013.
1706
Perak Integrated Networks Services Sdn Bhd v Urban Domain Sdn Bhd W-02 (NCC) (W)-2442-11/2013.
1707
MacCoumber v Austin 2004 WL 1745751 (N.D. Ill. Aug. 2 2004).
216
technological, quantitative, and legal issues raised by the demand”.1708 As a result, courts have to
balance between “the company's needs to make a considered decision against the potential
temptation that the company may face to delay proceedings by engaging in idle ceremony”. 1709
However, the lack of a stipulated time frame to respond to a shareholder’s demand should not be
regarded as a wholly irrational and fatal deficiency. First, it can be argued that the time it takes for
a board to respond is difficult to predict because it depends on the nature of the demand and the
action sought.1710 Secondly, unlike the Japanese system where it is known that the board of auditors
investigates a demand, a Delaware board, upon receipt of a demand has to first determine who will
respond to the demand.1711 If there is a disinterested majority on the board, the board can respond
to the demand. But, if such a majority is lacking, then there may be need to appoint an SLC.
Regardless of who ends up investigating a shareholder’s demand, the board “should respond
without undue delay”.1712 Also, there are other en route adaptations such as a parallel criminal
investigation, which may delay the investigation of a demand.1713
Although the above may be used as justifications for Delaware’s general lack of a preset time for
the board to respond, it is submitted that there is room for improvement. First, it is submitted that
a predetermined time period subject to certain exceptions provides a useful guideline for enhancing
shareholder access to derivative justice. Such exceptions would work well if the burden to prove
why a board took more than the expected time, is placed upon the company. Additionally, a
predetermined time frame would enhance legal certainty and provide an indication of what would
be considered reasonable at first instance.1714 Also, mere reliance on undue delay may do more
harm than enhancing access to justice. How is undue delay to be measured if there is no due time
by which to judge? The lack of a predetermined time for the board to respond also allows
unscrupulous directors to frustrate derivative actions by engaging in delay tactics without any
threat of liability.1715
1708
1709
Ibid.
1710
1711
Ibid.
1712
Ibid.
1713
1714
Ibid.
1715
Ibid.
217
The USA’s MBCA prescribes that the board of directors should respond to the demand within 90
days.1716 It is believed that 90 days are enough for the board to fully investigate the challenged
conduct and make an informed decision.1717 If the company requires more time, it may either
request the shareholder’s counsel to delay filing suit until the investigation has been completed or,
if the suit has already commenced, the company can apply to the court for a stay under section
7.43 of the MBCA.1718
In South Africa, a company that has been served with a demand in terms of section 165(2) of the
2008 Companies Act may apply to a court within 15 business days to set aside the demand on the
grounds that it is frivolous,1719 vexatious1720 or without merit.1721 If a company does not make an
application to set aside the demand, or the court does not set aside the demand in terms of section
165(3), the company must “appoint an independent and impartial person or committee to
investigate the demand, and report to the board on any facts or circumstances that may give rise to
a cause of action contemplated in the demand; or that may relate to any proceedings contemplated
in the demand”.1722 The appointed person or committee must also report to the board on “the
probable costs that would be incurred if the company pursued any such cause of action or continued
any such proceedings; and whether it appears to be in the best interests of the company to pursue
any such cause of action or continue any such proceedings”.1723 It is submitted, in agreement with
the authors of Henochsberg, that the investigator’s or committee’s responsibilities depend on the
1716
MBCA 1984 (Revised 2016) 147.
1717
1718
Ibid. Section 7.43 of the MBCA provides that “if the corporation commences an inquiry into the allegations
made in the demand or complaint, the court may stay any derivative proceeding for such period as the court
deems appropriate”.
1719
Merriam Webster https://www.merriam-webster.com/dictionary/frivolous (accessed 26-08-2018) defines
frivolous to mean something having no sound basis in fact or law.
1720
According to Merriam Webster https://www.merriam-webster.com/dictionary/vexatious (accessed 26-08-2018)
the term “vexatious” refers to something intended to harass.
1721
Section 165(3) of the Companies Act 2008. See also Coetzee 2010 Acta Juridica 300; Henochsberg on the
1722
Section 165(4) of the Companies Act 2008. See also Hendrikse and Hefer Corporate governance handbook:
Principles and practice 3 ed (2019) 372; Cassim FHI et al Contemporary company law 2 ed (2012) 782; Cassim
R “The Launching of Delinquency Proceedings under the Companies Act 71 of 2008 by means of the Derivative
Action: Lewis Group Limited v Woollam 2017 (2) SA 547 (WCC)” 2017 Obiter 677.
1723
Section 165(4) of the Companies Act 2008. See also Cassim MF 2013 South African Mercantile Law Journal
313; Cassim R 2017 (2) SA 547 (WCC)” 2017 Obiter 677; Henochsberg on the Companies Act 71 of 2008 Vol
1 Service Issue 2 2012 586(1).
218
allegations contained in the demand since “they are required to report to the board on any facts or
circumstances that may give rise to a cause of action contemplated in the demand”.1724
Within sixty business days after being served with the demand, or within a longer time, a court,
on application by the company, may allow it either to initiate or continue legal proceedings, or
take related legal steps to protect the legal interests1725 of the company, as contemplated in the
demand; or serve a notice on the person who made the demand, refusing to comply with it.1726
Stoop has conceded that section 165 of South Africa’s 2008 Companies Act lacks detailed
guidelines as far as the exact scope of the demand requirement is concerned.1727 For example, both
the Act and its regulations do not provide any guidance as to the meaning of an independent and
impartial person or committee.1728 Furthermore, the Act does not specify the scope of such an
independent and impartial person’s or committee’s power. Section 165 of the Act is also silent on
what to do if the board of directors does not meet the required quorum to decide whether or not to
proceed with a demand. Hence Rehana Cassim has commended the approach adopted by the
MBCA to address this problem.1729
In Japan, an auditor or the board of auditors has sixty days to respond to a shareholder’s
demand.1730 If the company fails to respond within the sixty days, the applicant may proceed to
file a derivative action on behalf of the company.1731 However, Japanese boards of
1724
1725
Henochsberg on the Companies Act 71 of 2008 585 noted that the term “legal interest” is not defined, but is
extremely wide and covers not only rights and may include potential rights.
1726
Section 165(4)(b) of the Companies Act 2008. See also Hendrikse and Hefer Corporate governance handbook:
Principles and practice 3 ed (2019) 372; Cassim FHI et al Contemporary company law 2 ed (2012) 783; Cassim
MF The new derivative action under the Companies Act: Guidelines for judicial discretion (2016) 20; Cassim
MF “When Companies are Harmed by Their own Directors: The Defects in the Statutory Derivative Action and
the Cures (Part 1)” 2013 South African Mercantile Law Journal 168 178.
1727
1728
Stoop 2012 SALJ 544 states that the meaning of the term “independent” will depend on how the court will
interpret it. However, the term may arguably exclude in-house legal counsel.
1729
Cassim R “The Launching of Delinquency Proceedings under the Companies Act 71 of 2008 by means of the
Derivative Action: Lewis Group Limited v Woollam 2017 (2) SA 547 (WCC)” 2017 Obiter 673 678. According
to section 7.44 of the MBCA, the determination whether or not the maintenance of the derivative action is in the
best interests of the company shall be made by “[a] majority vote of qualified directors present at a meeting of
the board of directors if the qualified directors constitute a quorum; or a majority vote of a committee consisting
of two or more qualified directors appointed by majority vote of qualified directors present at a meeting of the
board of directors, regardless of whether such qualified directors constitute a quorum”. Furthermore, section
7.44(e) of the MBCA provides that “the court may appoint a panel of one or more individuals to make a
determination whether the maintenance of the derivative proceeding is in the best interests of the corporation”.
1730
1731
Ibid.
219
auditors/auditors need to overcome two major hurdles for them to function effectively and enhance
corporate accountability. First, the auditors’ work is most likely to be undermined by information
asymmetry. Auditors may not yet have access to all the relevant information by the time a
shareholder serves a demand on the company. Secondly, auditors’ efforts may be frustrated by
directors in the same way the latter can undermine an SLC’s outside directors’ efforts. 1732
66 EXCEPTIONAL CIRCUMSTANCES
6 6 1 Demand futility
In the USA, there are certain circumstances in which the demand requirement can be waived
because serving it would be futile, unavailing or useless.1733 Rule 23.1 of the Delaware Chancery
Court, and Federal Civil Procedure Rule 23.1 require a shareholder who fails to make a pre-suit
demand to plead with particularity reasons why a demand was not made.1734 Demand futility is a
result of judicial effort in trying to discourage directors and controlling shareholders 1735 from
blocking derivative litigation that implicates them in wrongdoing.1736 Importantly, demand futility
is to be measured at the time when the action was filed not afterwards with the benefit of
hindsight.1737 The plaintiff bears the burden of proving that a demand would be futile1738 and the
1732
Kawashima and Sakurai 1997 Stanford J. Int'l L. 49 provided a classic example where auditors faced substantial
resistance from the board of directors after the former tried to investigate some alleged acts of misconduct.
Unfortunately in that case, the auditors could not come to a meaningful conclusion because they received vague
responses from directors. The directors ignorantly feared that their answers to auditors’ questions could be used
against them in court. Consequently, the auditors failed to meet the thirty-day deadline. This reveals a serious
need for Japanese companies to educate their directors on the ambit of auditors’ investigations.
1733
Melbinger and Moore 2017 Benefits Law Journal 7; Seitz Jr. and Sirkin 2018 The Business Lawyer 306; Erickson
2017 Oklahoma Law Review 264; Rose “Cutting Class Action Agency Costs: Lessons from the Public Company”
2019 30 available at https://ssrn.com/abstract=3460585 (accessed 26-11-2019); Velasco “Fiduciary Principles
in Corporate Law” 2018 Notre Dame Law School Legal Studies Research Paper No. 1933 29 available at
https://ssrn.com/abstract=3374505 (accessed 15-10-2019); Stickells 1953 Boston University L. Rev. 437; Wilder
1985 Pace L. Rev. 636.
1734
See also Rose “Cutting Class Action Agency Costs: Lessons from the Public Company” 2019 29 available at
https://ssrn.com/abstract=3460585 (accessed 26-11-2019) who has argued that to establish futility, shareholders
“must usually plead with particularity facts showing that a majority of the board faces a substantial probability
of personal liability, or is beholden to another that does”.
1735
See Black et al “Legal Liability of Directors and Company Officials Part 1: Substantive Grounds for Liability
(Report to the Russian Securities Agency)” 2007 Columbia Business Law Review 614 798.
1736
Wilder 1985 Pace L. Rev. 636. See also Weidner 2019 Florida State University Business Review 6.
1737
1738
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 24; Black et al “Legal liability
of directors and company officials part 2: Court procedures, indemnification and insurance, and administrative
and criminal liability (Report to the Russian Securities Agency)” 2008 Columbia Business Law Review 1 29.
220
question whether the burden is met is largely a factual issue.1739 It has been held that “broad,
conclusory allegations against all directors of a corporation are insufficient to establish demand
futility”.1740 Also, “determination of the sufficiency of allegations of futility depends on the
circumstances of the individual case and is within the discretion of the district court”.1741
However, there has been a growing trend for states in the USA to adopt the universal demand
rule1742 according to which demand must be served prior to the beginning of every derivative
action, regardless of whether “the directors are independent with respect to the matter subject to
the demand”.1743
In practice, it is more convenient for plaintiffs to allege demand futility. 1744 If the plaintiff serves
a demand on the board and it is accepted, the latter will take over the litigation. If the board rejects
the demand, then the plaintiff must prove that the refusal was wrongful. If s/he succeeds in proving
that the refusal was wrongful then the derivative litigation will proceed. Failure to prove wrongful
refusal terminates the litigation. However, if the plaintiff fails to serve a demand on the board, s/he
must allege demand futility.1745 If s/he is successful then s/he proceeds to sue derivatively. But, if
s/he fails to prove demand futility, the plaintiff still has an opportunity to make a demand on the
board. This puts the plaintiff in the same position as one who is making an original demand on the
board, which, if rejected will still have a chance for legal remedy by proving that the rejection was
wrongful.1746 It has also been suggested that when there is a clear conflict of interests that impairs
the board’s ability to consider a demand objectively, the demand should be excused.1747 DeMott
argues that when the plaintiff makes a demand, s/he would have a predicament since in almost all
cases, directors reject it.1748 The plaintiff would also have lost control over the litigation and cannot
1739
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 25 referring to Kaster v
Modification Sys. Inc. 731 F.2d 1014 (2d Cir. 1984) 1014.
1740
Shields v Singleton 15 Cal. App. 4th 1611 1621 (1993).
1741
1742
1743
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 24. The demand futility was first
addressed by the USA Supreme Court in the case of Delaware & Hudson Co. v Albany & Susquehanna Railroad
Co 213 U.S. 435 (1909).
1744
Erickson 2017 Oklahoma Law Review 264.
1745
Casarino and Greene 2019 The Corporate Governance Advisor 17.
1746
Scarllett 2008 Florida L. Rev. 597.
1747
1748
221
insist that the demand be excused.1749 Furthermore by serving a demand on the board, the plaintiff
“may have foregone the chance of testing the availability of excuse”.1750
In one USA case it was held that;
“plaintiffs failed to meet Delaware’s pleading requirement that demand futility be supported by
particularised facts where allegations failed to specify board members who allegedly participated in
fraudulent transactions and lacked specific facts regarding the nature of the purported ‘systematic
failure’ to provide appropriate oversight and the ‘myriad’ of ‘red flags’ that were allegedly ignored;
without such facts, plaintiffs failed to show that directors faced the substantial likelihood of liability,
and therefore, lacked disinterest”.1751
6 6 2 Imminent irreparable harm

In South Africa, a person contemplated under section 165(2) of the 2008 Act may apply to a court
for leave to bring proceedings in the name and on behalf of the company without making a demand
or without affording the company time to respond to the demand in exceptional circumstances.1752
The court may grant leave only if it is satisfied that the following three prerequisites are met. First,
it must be satisfied that the time required for the procedures contemplated in section 165(3) to (5)
to be completed may either result in irreparable harm to the company; or substantial prejudice to
the interests of the applicant or another person.1753 Secondly, there should be a reasonable
probability that the company may not act to prevent that harm or prejudice, or act to protect the
company’s interests that the applicant seeks to protect.1754 Lastly, the plaintiff must satisfy1755 the
requirements of section 165(5)(b)1756 of the 2008 Companies Act.
Similarly, the Japanese Companies Act1757 provides that in cases where the company is likely to
suffer irreparable harm through the lapse of the sixty-day period, the aggrieved shareholder may
1749
Ibid.
1750
Ibid.
1751
Simon v Becherer 775 N.Y.S.2d 313 318 (1st Dept. 2004).
1752
Section 165(6)(a) of the Companies Act 2008.
1753
Section 165(6)(a); Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 587.
1754
Section 165(6)(b).
1755
1756
According to section 165(5)(b) of the 2008 Companies Act, the court should be satisfied that “the applicant is
acting in good faith, the proposed or continuing proceedings involve the trial of a serious question of material
consequence to the company; and it is in the best interests of the company that the applicant be granted leave to
commence the proposed proceedings or continue the proceedings, as the case may be”. The provisions of this
section shall be dealt with in detail below in chapter 8.
1757
86 of July 26 2005.
222
immediately commence derivative litigation on behalf of the company.1758 The MBCA also
recommends that a shareholder may proceed with litigation if waiting for the lapse of the
prescribed 90 days would result in irreparable harm to the company.1759
67 CRITICISMS OF THE DEMAND REQUIREMENT

Scholars have noted with concern the inconveniences caused by the demand requirement.1760 Due
to the complexities caused by the demand rule, derivative litigation has also been criticised in the
USA where the remedy has been used the most.1761 Goehre has expressed concern about the
remedy’s consistency and alignment with current “corporate and political atmosphere calling for
more transparency and greater shareholder protections from corporate wrongdoing”.1762 Similarly,
Scarlett has argued that the procedural requirements relating to shareholder litigation for breach of
fiduciary duty “make it difficult for shareholders to even bring an action challenging director
[mis]conduct”.1763 In Scarlett’s words, “the two most significant procedural hurdles that
shareholder-plaintiffs face are motions to dismiss based on the demand requirement or the
recommendation of a special litigation committee”.1764 On his part, Goehre has further bemoaned
the fact that, in certain circumstances, the demand requirement can leave minority shareholders
without recourse for corporate injury.1765 For example in the Chinese case of Hantang Co. v Chen
Shihwa,1766 although the factual elements presented by the plaintiff were clear enough to provide
a credible reason why the challenged transactions would have been conducted fraudulently, the
1758
See article 847(5) of the Japan Companies Act 86 of July 26 2005. Wang Company Law in China 234 states that
China, an Asian jurisdiction, has similar provisions with respect to exceptional circumstances. The demand will
be excused if the matter is urgent and where a delay would result in irreparable harm to the company. See also
Iglesias-Rodriguez “Obligations of directors in takeovers” in Siems and Cabrelli (eds) Comparative company
law: A case-based approach 2 ed (2018) 158 and Siems “Abuse of shareholder rights” in Siems and Cabrelli
(eds) Comparative company law: A case-based approach 2 ed (2018) 369.
1759
Section 7.42 of the MBCA 1984 (2016 Revision).
1760
Cassim MF 2013 South African Mercantile Law Journal 301 314; Coffee Jr. and Schwartz 1981 Columbia L.
Rev. 262; Goehre 2010 Wisconsin Int’l L. J. 146; Stoop 2012 SALJ 528; Emerson 1986 John Marshall L. Rev.
590.
1761
1762
Ibid.
1763
Scarlett “Confusion and Unpredictability in Shareholder Derivative Litigation: The Delaware Courts' Response
to Recent Corporate Scandals” 2008 Florida L. Rev. 589 595 footnote 26 while quoting Fairfax “Spare the Rod,
Spoil the Director? Revitalizing Directors' Fiduciary Duty through Legal Liability” 2005 Houston L. Rev. 416-
417. In the same footnote, the scholar also quoted Loewenstein “The Quiet Transformation of Corporate Law”
2004 SMU L. Rev. 362 who said “derivative actions are fraught with difficulties”.
1764
1765
1766
2006.
223
Beijing Number Two Intermediate Court dismissed the claim on the ground that the plaintiff had
failed to meet the prerequisites of a demand.
6 7 1 Information asymmetry
A plaintiff’s ability to efficiently access accurate information about her or his case is very
important in all forms of litigation.1767 Lack of access to the relevant information required may
lead to a plaintiff who might have a potentially meritorious action failing to meet the verification
standard required by Rule 23.1.1768 Derivative proceedings are a very unique form of litigation.
Information asymmetries exist not only between the plaintiff and defendant, but also between the
“two plaintiffs” which are, the shareholder seeking to sue derivatively and the company that
possesses the legal right to claim.1769 More so, in general, omissions in the plaintiff’s pleadings
which may potentially undermine her/his demand futility claim cannot be rehabilitated through
discoveries.1770
Section 220 of the Delaware General Corporation Law (DGCL) affords shareholders a
“mandatory” but not an absolute right to inspect company books and records.1771 However, for one
to inspect such documents, s/he must have standing.1772 In order to have standing, one must either
be a holder of record or the beneficial owner of the shares.1773 However, during a merger
transaction, shareholders who would have already tendered their shares might find it difficult to
successfully assert standing.1774 Shareholders bear the burden to prove that their demand to inspect
company books and records is for a proper purpose.1775 Some of the requests that have been held
to be for a proper purpose include investigating company mismanagement, “soliciting support for
1767
1768
Coffee Jr. and Schwartz 1981 Columbia L. Rev. 315. Baum and Puchniak “The derivative action: An economic,
1769
1770
1771
1772
Ibid.
1773
Section 220(a) of the Delaware General Corporation Law.
1774
1775
Section 220(b) of the DGCL defines a proper purpose as “a purpose reasonably related to such person’s interest
as a [shareholder]”. See also Huang and Thomas “The Law and Practice of Shareholder Inspection Rights: A
Comparative Analysis of China and the U.S” 2019 Vanderbilt Journal of Transnational Law 15.
224
derivative action [and] investigating the independence of special litigation committees”.1776 If the
shareholder’s request is denied or ignored, s/he may bring a claim against the company after five
days.1777 The requester’s burden is relatively light as s/he need only prove that there is a “credible
basis” of probable misconduct meriting further investigation.1778 However, the shareholders’ right
of inspection has an internal limit in that the judiciary tries to balance the shareholders’ rights and
those of the company.1779 Further, the right is restricted to inspection of the relevant books and
records.1780
In the State of Delaware, satisfying the demand rule is made more difficult by the requirement that
one must “allege facts with particularity…”.1781 Also, if the plaintiff fails to access relevant
information once litigation has commenced, s/he may not be awarded the desired settlements.1782
To this end, almost all legal systems have various mechanisms to regulate access to corporate
information. The purpose of all such regulatory devices is to balance the complainant’s right of
access to information at a reasonable cost with the defendant’s property and privacy
entitlements.1783 The two basic means by which the right of access to corporate information has
been provided for are through company law and civil procedure.1784 It is submitted, in agreement
with Baum and Puchniak, that the former is more convenient because the latter depends on one
being a litigant.1785 A complainant cannot access corporate information via the civil procedure
route before commencing litigation.
In most jurisdictions, shareholders have either a statutory or common law right to access corporate
information. The contours of this right differ in terms of the type of shareholders who can have
1776
1777
Section 220(c) of the Delaware General Corporation Law.
1778
State ex rel. Healy v Superior Oil Corp. 13 A.2d 453 (Del. Super. Ct. 1940) 456. See also the discussion of this
case by Huang and Thomas “The Law and Practice of Shareholder Inspection Rights: A Comparative Analysis
of China and the U.S” 2019 Vanderbilt Journal of Transnational Law 15.
1779
Klein v FPL Group Inc. 2003 WL 22768424 (S.D. Fla. Sept. 26 2003).
1780
Section 220(b) of the Delaware General Corporation Law.
1781
Delaware Chancery Court Rule 23.1(a).
1782
1783
Ibid.
1784
1785
Ibid.
225
access to information, the conditions under which access is granted and the scope of access.1786 In
Japan, access to company information is directly linked to share ownership thresholds.1787
Shareholders are generally denied access to necessary corporate information that enables them to
“effectively initiate and successfully prosecute a derivative claim”.1788 The fact that shareholders
in Japan can only proceed to sue derivatively after the company has decided not to pursue the
demanded action means that the relationship between the board of directors and the plaintiff
shareholders “is not conducive to the voluntary exchange of information”.1789
The main sources of information that are available to the public in Japan are media coverage of
directors' conduct and disclosure reports submitted to the Ministry of Finance by publicly held
corporations under the Securities and Exchange Law.1790 The Japanese Commercial Code provides
further access to company information. Owners of at least one share are eligible to “access articles
of incorporation, list of shareholders, records of all new subscription rights and records of bonds
… duplicates of the aforementioned at the place of business of the registered agent and records of
odd lots and forfeited shares…”.1791 Access is also provided for documents relating to shareholder
meetings, including minutes of meetings, proxies, a list of exercised voting rights,1792 and certain
financial and audit information.1793 In exceptional circumstances, a court may allow owners of a
single share to access board minutes and auditor meetings. 1794 However, such inspection will not
be permitted if it is injurious to the company, its parent or subsidiary.1795
1786
1787
This could be a result of fears that shareholders with a very small ownership may not always act in the best
interests of a company. See Davies and Worthington Gower’s principles of modern company law 10 ed (2016)
595. The two authors concluded that shareholders with a large ownership are less likely to act in their personal
interests. Therefore, the obstacles which obstruct such shareholders should consequently be low.
1788
Kawashima and Sakurai 1997 Stanford J. Int'l L 35.
1789
1790
1791
Art 263(1) of the Japanese Commercial Code 48 of March 9 1899.
1792
Kawashima and Sakurai 1997 Stanford J. Int'l L 35 while making reference to articles 244(4) and 239(6) of the
Japanese Commercial Code 48 of March 9 1899.
1793
Kawashima and Sakurai 1997 Stanford J. Int'l L 35 while referring to article 282(2) of the Japanese Commercial
Code 48 of March 9 1899.
1794
Article 260-264 of the Japanese Commercial Code 48 of March 9 1899.
1795
Article 264(5) of the Japanese Commercial Code 48 of March 9 1899.
226
Japanese shareholders of at least three per cent of a company’s outstanding shares have access to
corporate books and records.1796 Owners of at least ten percent of a company’s outstanding shares
may apply to a court to appoint an inspector who will collect the relevant information on their
behalf.1797 Such requests can only be made for proper purposes. If the company fails to respond to
a shareholder’s request, then the latter must institute action for document production.1798 This may
add to the plaintiff’s financial costs and lead to further delays. However, Kawashima and Sakurai
argue that the Code of Civil Procedure's document production order is a very effective tool for
Japanese shareholders because they can compel a company to deliver, inter alia, “documents
quoted in the litigation, those that the filing party has the right to claim for delivery or inspection
[and] those that were drawn up for the benefit of the filing party”.1799
Furthermore, Art 263(2) of the Japanese Commercial Code provides that;
“shareholders, creditors of the company, holders of odd lots1800 and persons holding subscription rights
to new stock may, at any time during business hours, make the following requests, provided that
expenses designated by the company shall be necessary when making the requests in subsections (2)
and (4): when documents have been prepared pursuant to the articles of incorporation, a request to
inspect such documents; a request for duplicates or excerpts of the aforementioned documents; when
electromagnetic recordings have been made pursuant to the articles of incorporation, a request for
inspection of the contents of the information recorded, pursuant to those rules established by order of
the Ministry of Justice; and a request for furnishing by electronic means of information recorded in
the aforementioned electromagnetic recordings as designated by order of the Ministry of Justice, or a
request for excerpts of documents containing the contents of such information”.1801
Plaintiffs in the USA have more avenues to obtain information necessary to effectively initiate
derivative actions. Apart from the mass media, USA shareholders can make use of disclosure
options, namely, inspection of company books before filing the action and discovery1802 after the
1796
Articles 293-296 of the Japanese Commercial Code 48 of March 9 1899. For such shareholders to obtain records,
they need to show cause and specify the exact information they need.
1797
Article 294 of the Japanese Commercial Code 48 of March 9 1899. The inspector may be assisted by experts
such as accountants in examining a company’s financial activities.
1798
1799
Kawashima and Sakurai 1997 Stanford J. Int'l L 36-37.
1800
The NASDAQ https://www.nasdaq.com/investing/glossary/o/odd-lot (accessed 26-08-2018) defines an odd lot
as a trading order for less than 100 shares of stock.
1801
Art 263(2) of the Japanese Commercial Code 48 of March 9 1899.
1802
Discovery mechanisms such as depositions and interrogatories are unavailable to Japanese plaintiffs.
227
action is filed. Additionally, shareholders have a common law and/or statutory right to inspect
company books and records to protect their interests.1803 In general, the USA has less restrictive
rules regarding shareholder access to corporate information, when compared to European
jurisdictions.1804 In England, the Department of Trade and Industry (DTI) regulates the right of
access to company documents.1805
In South Africa, any person who holds or has a beneficial interest in any securities issued by a
profit company, or who is a member of a non-profit company, has a right to inspect and copy,
without any charge for any such inspection or upon payment of no more than the prescribed
maximum charge for any such copy, the information contained in certain records.1806 These records
include a company’s Memorandum of Incorporation and any amendments to it, any rules made by
the company, as mentioned in section 24(3)(a), the reports to annual meetings, and annual financial
statements, as mentioned in section 24(3)(c)(i) and the notices and minutes of annual meetings.1807
Regulatory authorities need to enhance a derivative complainant’s right of access to accurate
information as the deprivation of accurate information may have serious long term effects on a
company and its stakeholders.1808
In Nova Property Group Holdings v Cobbett1809 the statutory provision in issue was section 26(2)
of the 2008 Companies Act.1810 In that case, the court also demonstrated how the provision in
1803
Kawashima and Sakurai 1997 Stanford J. Int'l L 37. A company can refuse inspection if it proves a shareholder’s
improper purpose. The two authors further explain that improper purpose includes situations when demand is
made to obtain information regarding business secrets, to aid a competitor, to secure business prospects,
investment, or advertising lists, or to find technical defects in corporate transactions in order to bring abusive
suits for purposes of blackmail or extortion. See also Baum and Puchniak “The derivative action: An economic,
1804
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 46. European systems
generally do not provide for a pre-trial American discovery style.
1805
1806
1807
Ibid.
1808
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 44. Cassim MF
“Obstacles and Barriers to the Derivative Action: Costs Orders Under Section 165 of the Companies Act of 2008
(Part 2)” 2014 S. Afr Merc L.J 241.
1809
2016 3 All SA 32 (SCA).
1810
The section provides that “[a] person not contemplated in subsection (1) has a right to inspect or copy the
securities register of a profit company, or the members register of a non-profit company that has members, or
the register of directors of a company, upon payment of an amount not exceeding the prescribed maximum fee
for any such inspection”.
228
question relates to provisions of the Promotion of Access to Information Act1811 (PAIA) and the
South African Constitution.1812 The first respondent requested access to the appellants’ securities
register and to make copies thereof in terms of section 26(2) of the Act. Arguing that the second
respondent was solely purposed to discredit the appellants and to undermine their integrity, the
first respondent’s requests were not granted.
The applicants contended that an unqualified right of access violates a shareholder’s right to
privacy in terms of section 14 of the Constitution1813 and that the rights of access to information
and freedom of expression1814 must be weighed against this right since no right is absolute.1815 The
appellants further contended that a private company’s securities register contains sensitive and
personal information in the form of names and identities of individuals, their home and work
addresses which may be open to abuse if it falls into the hands of wrong people.
The court held that “the ‘motive’ with which a requester seeks access to a company’s share register
is irrelevant”.1816 Therefore, when a company fails or refuses to provide access, the requester is
entitled to an order compelling access.1817 The court further held that “an unqualified right of
access to a company’s securities register is essential for effective journalism and an informed
citizenry”.1818 Access to information is crucial to accurate reporting and thus to disseminate
accurate information to the public.1819 It was further held that “interference with the ability to
access information impedes the freedom of the press. The right to freedom of expression is not
1811
2 of 2000. The contentious provision is summarised here: Section 50(1)(a) and (b) of the PAIA provides that
“[a] requester must be given access to any record of a private body if that record is required for the exercise or
protection of any rights [and] that person complies with the procedural requirements in this Act relating to a
request for access to that record”.
1812
1996.
1813
The section reads “[e]veryone has the right to privacy, which includes the right not to have their person or home
searched; their property searched; their possessions seized; or the privacy of their communications infringed”.
This section must be read together with section 8(4) of the said Constitution which provides that “[a] juristic
person is entitled to the rights in the Bill of Rights to the extent required by the nature of the rights and the nature
of that juristic person”.
1814
Section 16(1)(a) and (b) of the South African Constitution states that “[e]veryone has the right to freedom of
expression, which includes freedom of the press and other media [and] freedom to receive or impart information
or ideas”.
1815
1816
Nova Property Group Holdings v Cobbett 2016 3 All SA 32 (SCA) paras 32-33.
1817
Section 26(5) of the Act; Regulation 24 of the Companies Regulations 2011 and Luiz “The Companies Act 71
of 2008 and the Disclosure of and Rights of Access to Information about Securities” 2014 SA MERC LJ 206.
1818
1819
Nova Property Group Holdings v Cobbett 2016 3 All SA 32 (SCA) para 37 referring to Brümmer v Minister for
Social Development 2009 6 SA 323 (CC) para 63.
229
limited to the right to speak but includes the right to receive information and ideas. Preventing the
press from reporting fully and accurately, does not only violate the rights of the journalist, but it
also violates the rights of all the people who rely on the media to provide them with ‘information
and ideas’”.1820
It is important to note that the right at issue is additional to any rights conferred under PAIA. 1821
The court disagreed with the appellants’ arguments for two reasons. First, the appellants did not
challenge the constitutionality of section 26(2) of the Companies Act on the grounds that it violates
the right to privacy.1822 The second reason was that the privacy and dignity rights of shareholders
are minimally implicated in the right of access conferred by section 26(2).1823 It is doubtful whether
it would have made any difference had the appellants challenged the constitutionality of the
impugned provision.
However, it is submitted that South Africa’s Supreme Court of Appeal (SCA) broadened the
plaintiff’s right of access to company information by scrapping the requirement to prove the
litigant’s motive. Although easy access to corporate information is essential1824 for an effective
derivative remedy, it is submitted that a wholesale approach to the issue is counterproductive.
Controlled access to information is in the best interests of a sound corporate governance system.
Such control can be achieved by requiring the applicant to act for a proper purpose or in good
faith.1825 The requirement to prove the sincerity of the applicant’s motive would have been a
reasonable filter against unwarranted malevolent applications.
In another South African case of Pretorius v PB Meat (Pty) Ltd,1826 the central issue was the degree
of the particularity required to be furnished by a company to a director who faces possible removal
on the ground, inter alia, that he or she has been “derelict in the performance of his or her functions
1820
Nova Property Group Holdings v Cobbett 2016 3 All SA 32 (SCA) para 37. See also Midi Television (Pty) Ltd
t/a E-TV v DPP (WC) 2007 5 SA 540 (SCA).
1821
Section 26(7) of the 2008 Companies Act. See also Luiz “The Companies Act 71 of 2008 and the Disclosure of
and Rights of Access to Information about Securities” 2014 SA Merc LJ 205.
1822
23 para 40.
1823
Ibid.
1824
Cassim MF 2014 S. Afr Merc L.J 241.
1825
Reference can be made to section 247A(3) of the Australian Corporations Act (Cth) No. 50 2001 which provides
that the Court may make an order authorising the applicant to inspect books of the company only “if it is satisfied
that the applicant is acting in good faith; and the inspection is to be made for a purpose connected with: Applying
for leave under section 237; or bringing or intervening in proceedings with leave under that section”.
1826
[2013] ZAWCHC 89. This case was scrutinised elsewhere, albeit, from a largely different perspective by Cassim
R “Contesting the Removal of a Director by the Board of Directors under the Companies Act” 2016 SALJ 133.
230
as director”.1827 Aggrieved at the fact that the company had supplied insufficient information, the
applicants made a ‘Request for Access to Record of Private Body’ in accordance with section
53(1) of the PAIA.1828 It must be noted that the request for company information in this case was
made by a director and not a shareholder as is common. The information requested included certain
original telephone recordings, Value Added Tax (VAT) invoices and financial statements. It was
contended that the documents constituted sensitive commercial information as envisaged by
section 68 of PAIA.1829 The court held that it was not necessary to consider the company’s defence
of sensitive commercial information. It further held that the applicants had already been provided
with sufficiently “detailed reasons to mount a response to the allegations levelled against
them”.1830
Although both cases referred to above do not involve derivative actions, they remain relevant to
this study in that they depict judicial attitude when faced with issues relating to access to company
records regardless of the purpose for which the request for access is made.
6 7 2 Overcoming the business judgment rule

This part is not intended to provide an in-depth analysis of the business judgment rule which is the
subject of discussion in Chapter 7 of this thesis. To that end, it suffices to note here that the business
judgment doctrine is generally a rule of judicial deference according to which “directors are
presumed to have acted in good faith in honest belief that the action taken was in the best interests
of the company”.1831 In following the rule, courts generally exercise deference towards the decision
of a board of directors not to commence or continue with derivative litigation.1832
Knowledge that a court will most likely exercise deference to a board’s decision may make it
difficult for directors to voluntarily prosecute a claim against one of them even though the alleged
wrongdoer’s actions and impugned transactions may have seriously harmed the company. 1833 It
1827
Pretorius v PB Meat (Pty) Ltd [2013] ZAWCHC para 1.
1828
2 of 2000 (‘PAIA’).
1829
1830
1831
1832
1833
231
has been argued that the rule effectively provides “greater deference to the board of directors than
it provides protection to the [company] and its shareholders”.1834
6 7 3 Proving directors’ lack of independence and interest

It has been argued that “by making a pre-suit demand upon the board, a shareholder concedes that
the board is able to function on that question and waives the right to challenge the independence
of a majority of the board to respond to the demand”.1835 Another related challenge is that
derivative suits expose boards of directors to several inherent conflicts of interest which may result
in them preventing potential litigation against any of their members. 1836 This is better known as
structural bias.1837 Such a state of affairs makes the plaintiff’s access to justice extremely
problematic.1838 Also, it is very difficult for the plaintiff to prove bias even though it exists since
board minutes and committee reports will most likely not contain evidence of bad faith.1839 The
USA’s Second Circuit opinion expressed in Lasker v Burks1840 is worth reproducing here: “It is
asking too much of human nature to expect that the disinterested directors will view with the
necessary objectivity the actions of their colleagues in a situation where an adverse decision would
be likely to result in considerable expense and liability for the individuals concerned”.1841
6 7 4 Complexity of the demand rule

Goehre has argued that the labyrinthine nature of the demand requirement can also escalate
litigation costs as the plaintiff battles to overcome the necessary hurdles.1842 According to Branson,
the rigidity of the demand requirement and its inherent bias towards retaining director control in
derivative litigation is a threat to proper enforcement of directors’ fiduciary obligations.1843 While
referring to the demand requirement, Bainbridge has also complained that procedural restrictions
on derivative proceedings “insulate boards of directors from shareholder litigation”.1844
Furthermore, Goehre has noted that, by affording directors an opportunity to determine whether
1834
Ibid.
1835
1836
1837
Goehre 2010 Wisconsin Int’l L. J. 153 argues that the demand rule is management friendly.
1838
1839
Kim 1981 Journal of Corporation Law 517.
1840
567 F.2d 1208 (2d Cir. 1978).
1841
Lasker v Burks 567 F.2d 1208 (2d Cir. 1978).
1842
1843
Branson 1986 Wash. & Lee L. Rev. 412-413.
1844
Bainbridge 2006 Harv. L. Rev. 1735 1748.
232
or not to continue with litigation, the demand requirement creates conflicts of interests among
board members.1845 The same scholar further argued that the complexities of derivative suits
potentially weaken its efficiency as a tool for corporate governance.1846 Three decades ago, Wilder
foresaw the emergence of this unsatisfactory state of affairs
“the high degree of self- interest required to excuse demand, combined with the deference given to a
board's request for dismissal of a derivative suit when demand has not been excused, have shifted the
balance in favour of corporate directors who can effectively use a procedural rule to preclude any
consideration of the merits of a shareholder action”.1847
Consequently, complainants with legitimate grievances risk being denied access to justice to
protect the interests of their companies.1848 These challenges could be some of the reasons why
derivative litigation has dwindled in the USA.1849 The same problems may be to blame for the few
derivative suits in South Africa.1850 In the long term, these challenges pose a serious threat to the
derivative remedy remaining an effective tool for corporate governance. 1851 The USA demand
requirement has been described as “the most substantial present-day barrier to derivative
litigation”.1852 Relying on empirical evidence, the demand requirement has been likened to
imposition of the death sentence on derivative litigation.1853
This chapter undertook an in-depth examination of the demand requirement in the USA, England,
Japan and South Africa. Occasional reference was made to other leading common law and civil
law jurisdictions such as Australia, Canada and China. The first part of the discussion was
1845
1846
Ibid. The author further quoted Black et al “Legal Liability of Directors and Company Officials Part 2: Court
Procedures, Indemnification and Insurance, and Administrative and Criminal Liability- Report to the Russian
Securities Agency) 2008 Colum. Business L. Rev. 1 and 29 who said that “the demand requirement imposes an
‘extremely complex’ procedure to determine when shareholder derivative litigation may proceed”.
1847
1848
Ibid.
1849
Goehre 2010 Wisconsin Int’l L. J. 152. However, regardless of the decline in derivative suits in the USA, the
remedy still remains a vital tool for minority shareholder protection.
1850
Goehre 2010 Wisconsin Int’l L. J. 153-154 contends that due to the intricate nature of proceedings involved in
the demand requirement, “there could be less litigation that the interests of the company require”.
1851
1852
1853
Branson 1986 Wash. & Lee L. Rev. 416. The scholar was so critical of the Delaware approach where the court
lacks the authority to review the merits of a committee’s recommendations not to pursue a shareholder’s demand.
233
dedicated to a consideration of the nature and scope of the demand rule. It can be concluded from
the discussion that the demand requirement largely remains a pro-director rule that reserves
corporate decision-making to the board of directors. Such decision-making includes a
determination of whether or not to institute derivative litigation.
With respect to the form, it was found that although South African company law prescribes a
special form on which a demand should be presented, the legislature was attentive enough to
provide for a flexible demand requirement. Deviation from the design or content of the prescribed
form does not invalidate the action taken by the person preparing or completing a demand. The
action may only be set aside if the deviation negatively and materially affects the substance of the
document or is such that it would reasonably mislead a person reading it. It can, therefore, be
argued that, in substance, South Africa’s codified demand form is just as flexible as its common
law counterparts.
The third part was devoted to a presentation of an analysis of the policy rationales behind the
demand requirement. It was shown that the primary purpose for the demand rule in the USA was
to “protect federal court[s] against collusively manufactured federal jurisdiction”.1854 Several other
secondary policy rationales for the rule that have developed in Japan and South Africa were also
discussed. Two of these secondary policy rationales for the rule were compared to show that policy
objective can influence a court’s application of the law to the facts. To avoid potential confusion
that may result from that reality, it was suggested that the courts adopt a case-by-case approach.
The chapter also shows that the current Delaware demand rule is too onerous and restrictive. The
restrictions which hinder effective derivative litigation are a manifestation of the suspicion that the
remedy has been treated with.1855 In the USA, if a plaintiff serves a demand, s/he would have lost
control over the litigation and cannot insist that the demand be excused. Therefore, s/he may have
missed the opportunity to test a demand excuse. Absent, a wrongful refusal, the board’s response
effectively terminates any possible litigation. In the case of a refusal, the plaintiff will still be
required to prove that the refusal was wrongful. If the plaintiff claims demand futility, s/he is
1854
DeMott 1986 University of California L. Rev. 473. See also Federal Rule of Civil Procedure 23.1 which states
that “the complaint must be verified and must allege that the action is not a collusive one to confer jurisdiction
that the court would otherwise lack”.
1855
234
required to prove it “with particularity…”.1856 In both cases of either demand refusal or demand
acceptance, the board can make use of SLCs to thwart any shareholder litigation which might lead
to potential liability. Coupled with this challenge is the stubborn fact that SLCs rarely find that any
shareholder suit is in the best interests of a company. Another notorious fact of judicial practice is
that courts also are reluctant to find against a board’s motion to dismiss a plaintiff’s claim
especially if it is based on the recommendations of an SLC.
Furthermore, the independence of SLCs in USA derivative actions remains debatable regardless
of whether the committee comprises of inside or outside directors. If the “independent” directors
were not appointed by any of the defendant directors, in most cases, the SLC depends on such
directors for information relevant to effectively conduct its investigation.1857 If members of an SLC
are selected from among the incumbent board, they are susceptible to a high risk of structural bias.
SLCs, therefore, have an inherent potential for abuse.1858
Also, the lack of a predetermined “waiting period” for the board to respond makes the rule
vulnerable to abuse by unscrupulous directors. This can be used to frustrate plaintiffs’ potentially
meritorious claims. The pertinent statutory provisions in South Africa and Japan ensure that
directors have sixty days to respond. The court can extend the waiting period, if necessary. The
standard for determining wrongful refusal is more restrictive in Delaware than in New York. In
the latter, in some instances, it is not necessary to prove director control and dominance. The
board’s failure to act upon apparently grave charges may suffice to prove wrongful refusal.1859
Additionally, in New York, proof of fraud, self-dealing or personal profit are not prerequisites for
demand futility claims1860 while Delaware has a narrow definition of grounds for demand excusal.
Additionally, this chapter also found that South Africa’s current demand requirement lacks
sufficient guidelines for both plaintiffs and defendants. Both the Act and its Regulations do not
provide any guidance as to the meaning of “an independent and impartial person or committee”.
Furthermore, the 2008 Companies Act does not describe the scope of such independent and
impartial person or committee’s power. Section 165 is also silent on what to do if the board of
1856
Delaware Chancery Court Rule 23.1
1857
1858
1859
1860
See Wilder 1985 Pace L. Rev. 647 who made reference to the leading case of Barr v Wackman 36 N.Y.S.2d 497
(1975).
235
directors does not meet the required quorum to decide whether or not to proceed with the litigation.
These deficiencies lead to legal uncertainty and at times arbitrary interpretations of the law. Due
to these inadequacies, Stoop concluded that the South African legislature may have missed a
golden opportunity to ensure that the investigation is conducted in a cost-effective, transparent and
reliable manner.1861
England’s current statutory derivative remedy does not require an aggrieved party to first serve a
demand on the board. This approach has been applauded for involving the courts, who are
presumed to be impartial and independent, at an earlier stage. On the other hand, the system’s two-
stage process has been criticised for requiring the plaintiff to first prove a prima facie case.
England’s increased judicial control over derivative suits has not automatically led to an escalation
in shareholder activism. Keay has suggested that England’s few derivative suits can be attributed
to the plaintiffs’ lack of financial incentive since all the proceeds of a derivative suit accrue to the
company, the inherent free-rider aspect and that more shareholders seem to be “using section 994
[of the 2006 Companies Act] petitions, alleging unfair prejudice against directors, rather than
initiating derivative proceedings, as the same facts might lead to a claim on either basis”.1862
Japan has to be applauded for empowering auditors to investigate a plaintiff’s demand. Although
auditors do not have full access to all the corporate information, at least they are part of the
business. Also, since auditors are custodians of shareholders’ interests in Japan, they can be trusted
to conduct a more honest investigation into a plaintiff’s demand. As a measure against excessive
shareholder litigation, courts in Japan are not obliged to exercise deference to auditors’
recommendations. Instead, the judiciary is allowed to review auditors’ reports/recommendations.
The following conclusions can, therefore, be made: Delaware’s demand requirement is outdated,
excessively onerous and restrictive. South Africa’s demand rule is flexible but it lacks both
substantive and procedural detail. Japan’s demand requirement is the most advanced and one that
is in line with contemporary corporate climate and the enhanced accountability perspective
advanced in this study. In the context of Delaware, the enhanced accountability perspective will
be able to ameliorate most of the challenges highlighted above by allowing derivative plaintiffs to
1861
Stoop 2012 SALJ 544. See also Cassim R 2017 Obiter 673 678.
1862
2016 Journal of Corporate Law Studies 43-44.
236
challenge the independence of the SLCs, doing away with the applicant’s requirement to “plead
with particularity” and introducing a predetermined “waiting period” for the board to respond
makes the rule vulnerable to abuse by unscrupulous directors. For South Africa, there is need for
legislative certainty regarding the meaning of “an independent and impartial person or committee”.
237
CHAPTER SEVEN
Managing the interplay between the business judgment rule and derivative actions
71 INTRODUCTION
One of the valid defences available to company directors when served with a demand to institute
or proceed with derivative actions is the business judgment rule (hereinafter, “the rule” or BJR). It
is trite that the BJR was originally developed as a common law rule1863 by American judges of the
Delaware State.1864 Corporate law scholars are unanimous that the rule is an American legal
export.1865 It developed together with the directors’ duty of care and skill.1866 Cassim FHI et al
point out that the rule is a “cornerstone of corporate law in the [United States of America] 1867 that
was adopted in Australia [and] Hong Kong but rejected in the United Kingdom1868 and New
Zealand”.1869 Canada has also adopted the BJR as a rule of deference “to managerial decision-
1863
Triem “Judicial Schizophrenia in Corporate Law: Confusing the Standard of Care with the Business Judgment
Rule” 2007 Alaska Law Review 23 27.
1864
Gurrea-Martinez “Re-examining the law and economics of the business judgment rule: Notes for its
implementation in non-US jurisdictions” 2018 Journal of Corporate Law Studies 418; Morales “Modernizing
Colombian Corporate Law: The Judicial Transplant of the Business Judgement Rule” 2018 Indon. J. Int'l &
Comp. L. 147 148; Cassim FHI et al Contemporary company law 2 ed (2012) 563; Havenga “The Business
Judgment Rule - Should We Follow the Australian Example” 2000 SA. Merc L.J. 25 27; Schoeman “How the
Companies Act Impacts on Directors” 2013 Without Prejudice 11; Bouwman “An Appraisal of the Modification
of the Director's Duty of Care and Skill” 2009 SA Merc LJ 523; Lee “Business Judgment Rule: Should South
African Corporate Law Follow the King Report's Recommendation” 2005 University of Botswana L.J. 53;
Cooksey and Hutchins “Offensive Application of the Business Judgment Rule to Terminate Non frivolous
Derivative Actions: Should the Courts Guard the Guards” 1981 Texas Tech L. Rev. 640; Stoop “The derivative
provisions in the Companies Act 71 of 2008” 2012 S. African L.J. 547; Neri-Castracane “Does the Business
Judgment Rule Help Promote Corporate Social Responsibility” 2015 Frontiers L. China 9.
1865
Rule under South Africa’s Companies Act 71 of 2008” 2019 Journal of African Law 1 2; Hamadziripi and Osode
“The Nature and Evolution of the Business Judgment and its Transplantation to South Africa under the
Companies Act of 2008” 2019 Speculum Juris 27 27; Ansari “Reminding State Owned Enterprises (BUMN)
Management Using the Principle of ‘Business Judgment Rule’: A Preliminary Note” 2019 Budapest
International Research and Critics Institute Journal 27; Gurrea-Martinez 2018 Journal of Corporate Law
Studies 418; Wang Company Law in China: Regulation of Business Organizations in a Socialist Market
Economy (2014) 213; Cassim FHI et al Contemporary company law 2 ed (2012) 563; Muswaka “Directors’
Duties and the Business Judgment Rule in South African Company Law: An Analysis” 2013 International
Journal of Humanities and Social Science 89; Schoeman 2013 Without Prejudice 11; Bouwman 2009 SA Merc
LJ 523.
1866
Bouwman 2009 SA Merc LJ 523.
1867
Hereinafter, the USA.
1868
Cassim FHI et al Contemporary company law 2 ed (2012) 563; Stoop 2012 S. African L.J. 548. Gurrea-Martinez
2018 Journal of Corporate Law Studies 419 argues that England has adopted a soft application of the rule. A
critical analysis of the reasons behind England’s shunning of the BJR will be undertaken in section 7 8 below.
1869
Cassim FHI et al Contemporary company law 2 ed (2012) 563. Watson “Almost codified almost 20 years on:
The effect of the Companies Act 1993 on the development of directors duties in New Zealand” in Paolini (ed)
Research handbook on directors’ duties: Research handbooks in corporate law and governance (2016) 117
238
making”.1870 There is no specific mention of the rule in Chinese company law statutes although
scholars have developed a strong affinity for it.1871 In the South African Companies Act,1872 the
rule is couched as a rebuttable presumption1873 that a director acts in the best interests of a company
if certain preconditions are met.1874
Despite the fact that the BJR has been in existence for a long time, the rule has no one precise
definition yet.1875 Corporate law scholars are also unanimous that despite the fact that the rule has
been pronounced upon by various courts, it remains misunderstood.1876 This presents a significant
argues that although New Zealand does not have a formal BJR, there is a “business judgment principle”
according to which courts are hesitant to review the directors’ decisions unless it is clear that they were arrived
at mala fides. However, in practice, the difference between “rule” and “principle” can turn out to be a matter of
semantics.
1870
MacIntosh “Directors’ duties in Canada: Paintings in a stream?” in Paolini (ed) Research handbook on directors’
duties: Research handbooks in corporate law and governance (2016) 61. See also Rukmono “Some Problems
in the Implementation of the Business Judgment Rule Principles to the Directors of State-Owned Enterprises in
Indonesia” 2019 Advances in Social Science, Education and Humanities Research 233 233; Pente Investment
Management Ltd v Schneider Corp. (1998) 42 O.R (3d) 177 and BCE Inc. v 1976 Debentureholders 2008 S.C.J
No. 37.
1871
Wang Company Law in China 213. The reference to China and other jurisdictions has been made to show how
different jurisdictions perceive the BJR.
1872
71 of 2008.
1873
Cassim MF The new derivative action under the Companies Act: Guidelines for judicial discretion (2016) 102-
103; Cassim MF “When Companies are Harmed by Their own Directors: The Defects in the Statutory Derivative
Action and the Cures (Part 1)” 2013 South African Mercantile Law Journal 172 and 174; Lee 2005 University
of Botswana L.J. 50 54; Stoop 2012 S. African L.J. 527 547; Branson “Business Judgment Rule for Incorporating
Jurisdictions in Asia” 2011 SAcLJ 687 689; Wang Company Law in China 213.
1874
Section 76(4) of the South African Companies Act 71 of 2008 and Davies et al Companies and other business
structures in South Africa 3 ed (2013) 124. See also Velasco “Fiduciary Principles in Corporate Law” 2018 Notre
Dame Law School Legal Studies Research Paper No. 1933 4; Millstein et al “Fiduciary Duties of Corporate
Directors in Uncertain Times” 2018 Journal of Applied Corporate Finance 17; Cassim MF The new derivative
action under the Companies Act: Guidelines for judicial discretion (2016) 105; Rosenberg “Supplying the
Adverb: The Future of Corporate Risk-Taking and the Business Judgment Rule” 2009 Berkeley Bus. L.J. 216
217.
1875
Mupangavanhu 2019 Journal of African Law 2. Giraldo “Factors affecting the Application of the Business
Judgment Rule: An Empirical Study of the US, UK, Australia and the EU” 2006 118 defines the BJR as “a
doctrine that protects officers and directors from personal liability only if they have acted in good faith, with due
care and within the officer’s or director’s authority”. According to Arsht “The Business Judgment Rule
Revisited” 1979 Hofstra Law Review 111 if directors acted in good faith and with due care then “a corporate
transaction that involves no self-dealing or other personal interest of the directors who authorized the transaction
will not be enjoined or set aside for the directors' failure to satisfy the standards that govern a director's
performance of his or her duties, and directors who authorized the transaction will not be held personally liable
for resultant damages”.
1876
Davies et al Companies and other business structures in South Africa 3 ed (2013) 125; Keay and Loughrey “The
Concept of Business Judgment” 2018 Legal Studies 3; McMillan “The Business Judgment Rule as an Immunity
Doctrine” 2012 William & Mary Business Law Review 524; Bainbridge “The Business Judgment Rule as
Abstention Doctrine” 2004 Vand. L. Rev 85; Branson “The Rule That Isn't a Rule- The Business Judgment Rule”
2002 Valparaiso University Law Review 631; Arsht 1979 Hofstra Law Review 93. The misunderstanding of the
rule could be attributed to the fact that the rule largely remains uncodified. To date, some of the very few
jurisdictions that have codified the rule include South Africa, Australia. Of these jurisdictions, only Australia
239
problem because of the dire need for legal certainty.1877 The necessity for specificity is heightened
when dealing with such influential legal transplants as the BJR1878 because “if the rule is not
specific enough for application, judges will have excessive discretion, which would negate one of
the original purposes of the transplantation”.1879
At the heart of company directors’ duties is the responsibility of decision-making.1880 Decision-

making involves taking risks, and since the decision maker lacks perfect knowledge about the
future,1881 whatever decision they make has some inherent limitations.1882 As a result, some of the
decisions that directors make may seem “stupid” ex post facto.1883 However, if the hands of time
were to be turned and one was to be placed in the position of the director or board of directors at
the time the decision was made, s/he might reach a different conclusion. The pertinent question is:
When should directors be held liable for harm suffered by the company as a result of their
decisions?
Courts are not always wrong when they apply the rule to defer to company directors’ decisions.
The BJR can be correctly applied as an effective corporate governance tool to thwart frivolous
suits. Bainbridge argues that the rule is the panacea to the universal tension between director
authority and accountability.1884 Also, as Cooksey and Hutchins have argued, derivative suits can
includes an explicit statutory definition of the rule in section 180(3) of its Corporations Act 2001. Also, the
confusion surrounding the rule can also the attributed to its nature. The rule manifests in at least three forms. It
can be a standard of abstention, a standard of personal liability or as an immunity doctrine. These three
manifestations of the doctrine will be discussed below under 7 4 2.
1877
Keay and Loughrey 2018 Legal Studies 4.
1878
Gurrea-Martinez 2018 Journal of Corporate Law Studies 419.
1879
Weng “Assessing the Applicability of the Business Judgment Rule and the ‘Defensive’ Business Judgment Rule
in the Chinese Judiciary: A Perspective on Takeover Dispute Adjudication” 2010 Fordham International Law
Journal 123 145.
1880
Van Tonder “An analysis of the directors’ decision-making function through the lens of the business judgment
rule” 2016 Obiter 562 563; Sahu “Investors protection: The derivative action” 2017 International Journal of
Law 101 101.
1881
Yaru “The Business of Judging Directors’ Business Judgments in Singapore Courts” 2016 SAcLJ 428 428; Weng
2010 Fordham International Law Journal 129. Millstein et al 2018 Journal of Applied Corporate Finance 17;
Ruohonen “Company Directors’ Key Duties and Business Judgment Rule” in Kangas et al (eds) Leading change
in a complex world - Transdisciplinary perspectives (2019) 245. With respect to information, what is required
of directors is for them to make an informed decision.
1882
Directors are not fortune-tellers or prophets of future events, so it stands to reason that if their honest decisions
turn out to adversely affect the company, they must not be crucified for what a reasonable person placed in their
position could not have foreseen. See McLennan “Duties of Care and Skill of Company Directors and Their
Liability for Negligence” 1996 South African Mercantile LJ 95.
1883
In China, have been made for the adoption of the rule based on the imperfection of mankind. See Wang Company
Law in China 215.
1884
Bainbridge 2004 Vand. L. Rev 105.
240
be terminated when the possible amount to be recovered from the litigation is not proportional to
the high costs of litigation, when termination is justified by the potential disruption of business
activity, when it is highly probable that the derivative claim lacks merit, when the litigation may
result in substantial public damage of the company’s image, and when there are higher chances of
destroying relationships with creditors and suppliers. However, the main concern about the BJR is
that, when it is applied to terminate derivative litigation, the rule fails to sufficiently address the
conflict between meritorious claims, especially those instituted against company management1885
and the need for directors to run the company without unnecessary shareholder interference.1886
This chapter presents an examination of the BJR in the context of derivative actions. 1887 In
particular, the chapter is aimed at identifying those circumstances, if any, under which company
directors’ refusal to initiate or proceed with derivative litigation should enjoy the protection of the
rule. The study hereunder must also answer the question whether the BJR is a plausible corporate
governance tool or an unnecessary obstacle to derivative suitors especially minority shareholders.
After this introduction, the next section presents a historical account of the BJR, its evolution with
time and commercial needs and its adoption mutatis mutandis1888 by various jurisdictions around
the world. The historical exploration will focus on developments in the USA, which is the mother
jurisdiction as far as the rule is concerned. Thereafter, a consideration of the significance of the
rule will be presented. After that follows an analysis of the nature of the BJR. That endeavour will
delve deep into the basic elements or threshold requirements for the application of the BJR and the
1885
It should be noted that derivative suits can also be brought against third parties. This is not usually problematic.
However, it becomes a challenge when, as indicated in chapter 6 above, the shareholder derivative suits, initially
aimed at third parties, frequently become a vehicle for challenging director malfeasance. Cooksey and Hutchins
1981 Texas Tech L. Rev. 642 put it this way “[a] distinction, however, must be made between derivative suits
against third parties and those aimed at corporate management. When a derivative suit is brought against a third
party, the possibility of conflict of interest on the board is minimal, thereby preserving the integrity of the demand
requirement. There is an inherent conflict of interest when the fate of a lawsuit alleging misconduct by the
corporation's directors is placed in the hands of those who stand to benefit most from its termination”. See also
Wilder “The Demand Requirement and the Business Judgment Rule: Synergistic Procedural Obstacles to
Shareholder Derivative Suits” 1985 Pace L. Rev. 633 652.
1886
Cooksey and Hutchins 1981 Texas Tech L. Rev. 656.
1887
A discussion of the BJR in contemporary company law is pertinent as McNulty and Stewart “Making and
regulating business judgment: Judicial practice, logics, and orders” in Reay et al (eds) Perspectives on process
organisation studies: Institutions and organisations – A process view (2019) 174 have observed that “there is a
growing interest in the treatment of business judgment by the judiciary”.
1888
There is a need for legal transplants to be modified so that they fulfil the intended goal whilst taking into
consideration various nation-specific legal, political and socio-economic factors. These factors may affect the
compatibility of any given legal transplant. See Weng 2010 Fordham International Law Journal 144.
241
three manifestations of the rule. The sections that immediately follow will present the USA, South
African, Japanese and English BJR frameworks respectively. It is hoped that lessons to improve
the South African BJR framework, including pitfalls to be avoided, will be identified. Thereafter
an evaluation of the applicability of the BJR will be undertaken through the lens of judicial
reasoning in the jurisdictions under examination. The preliminary conclusions of this chapter will
be preceded by a discussion of the future of the rule in the context of derivative actions.
72 HISTORICAL OVERVIEW OF THE RULE

Scholars1889 agree that the earliest BJR case to be brought before the courts of law was Percy v
Millaudon.1890 In that case, the shareholders of a bank sued its directors alleging that the directors
were liable for the losses suffered by the company as a result of misappropriation of funds by the
bank’s president and cashier. The Louisiana Supreme Court held that:
“When the person who was appointed attorney-in-fact, has the qualifications necessary for the
discharge of the ordinary duties of the trust imposed, we are of the opinion that on the occurrence of
difficulties, in the exercise of it, which offer only a choice of measures, the adoption of a course from
which loss ensues cannot make the agent responsible, if the error was one into which a prudent man
might have fallen. The test of responsibility should be, not the certainty of wisdom in others, but the
possession of ordinary knowledge; and by showing that the error of the agent is of so gross a kind that
a man of common sense, and ordinary attention, would not have fallen into it”.1891
It is this formulation that later came to be known as the BJR.1892 Prima facie, it seems like the
court was clear in its judgment. However, it is its use of words and phrases like “ordinary
knowledge”, “gross”, and “ordinary attention” that is behind the confusion and misunderstanding
around the rule.1893 From the court’s ratio decidendi, the fallibility of man and the need to
encourage able persons to take up the office of director by allowing them reasonable room for error
are at the core of the BJR.1894
1889
See Arsht 1979 Hofstra Law Review 93; Bouwman 2009 SA Merc LJ 523; Sprague and Lyttle “Shareholder
Primacy and the Business Judgment Rule: Arguments for Expanded Corporate Democracy” 2010 Stan. J.L. Bus.
& Fin. 8; and Giraldo “Factors affecting the Application of the Business Judgment Rule: An Empirical Study of
the US, UK, Australia and the EU” 2006 120.
1890
8 Mart (ns) 68 (La 1829). See also Hamadziripi and Osode 2019 Speculum Juris 34.
1891
Percy v Millaudon 8 Mart (ns) 68 (La 1829).
1892
Arsht 1979 Hofstra Law Review 97.
1893
In fact, Arsht 1979 Hofstra Law Review 93-94 asserts that “the misunderstanding stems from the tendency of
courts to use loose language in expressing the rule”.
1894
242
The USA courts were not consistent on whether to apply the BJR as an abstention doctrine or as a
standard of liability. In the case of Shlensky v Wrigley,1895 the plaintiff shareholder brought a
derivative action against the board of directors of the Chicago Cubs. The Chicago Cubs was a
baseball team that used Wrigley Field as its home ground. The President of the Chicago Cubs, Mr
Wrigley, refused to install lights at the field for night games taking the view that baseball was a
daytime game and that “it would greatly deteriorate the neighbourhood if stadium lights were
installed”.1896 It has to be noted that at that time the Chicago Cubs was the only major league team
without lights on its field. The plaintiff alleged that other teams, for example, the Chicago White
Sox earned significant revenues through night games. Consequently, the plaintiff claimed that this
resulted in lower profits for the shareholders.
The issue before the court was whether the board of directors should be compelled to install lights
on Wrigley Field and award the plaintiff (Shlensky) damages.1897 It was held that the club President
was not liable for failing to maximise the team’s profits. The court was “not satisfied that the
motives [of the directors were] contrary to the best interests of the corporation and the
[share]holders… [because they] showed no fraud, illegality or conflict of interest in making that
decision”.1898 It was further highlighted that there was not enough evidence to prove that there was
a direct link between the financial position of other clubs and attendance of night games.
Furthermore, it was stressed that “the decision makers are professionals at what they do and most
judges would not have the proper knowledge to decide if it was right or not, and the fact that the
issue would be looked at after a bad decision was made it easier to pick apart. The courts [are]
involved when a crime or fraud has been committed by a fiduciary”.1899 From this statement, it can
be deduced that the American courts will not interfere with the decision of a director or board of
1895
95 Ill App 2d 173 237 NE 2d 776 (1968).
1896
Shlensky v Wrigley 95 Ill App 2d 173 237 NE 2d 776 (1968).
1897
Ibid.
1898
Shlensky v Wrigley 95 Ill App 2d 173 237 NE 2d 776 (1968) 237. See also Cooksey and Hutchins 1981 Texas
Tech L. Rev. 640 who argue that derivative litigation has been successful in instances where the purported
directors’ business judgment was tainted with, inter alia, fraud and bad faith.
1899
Shlensky v Wrigley 95 Ill App 2d 173 237 NE 2d 776 (1968) 237. See also Ramseyer and Tamaruya “Fiduciary
Principles in Japanese Law” Discussion Paper Prepared for the Oxford Handbook of Fiduciary Law and the
Harvard Conference on Fiduciary Duties (2017) 6.
243
directors unless the latter’s decision was influenced by fraud, breaches of duty of loyalty, 1900
illegality and/or personal interest.
In the case of Gimbel v The Signal Companies Inc,1901 the plaintiff was a shareholder of the
respondent company. The plaintiff brought an action before the Delaware Chancery Court seeking
injunctive relief to prevent the consummation of the pending sale by the respondent of all of the
outstanding shares of Signal Oil and Gas Company to Burmah Oil Incorporated. Signal Oil and
Gas Company was a wholly owned subsidiary of the respondent. The effective sale price which
exceeded 480 million dollars was approved at a special meeting of the respondent’s board of
directors towards the end of 1973. The plaintiff alleged that the special meeting was not properly
convened and that the proposed sale required authorisation by the majority of the outstanding
shares of the respondent.1902 The plaintiff further alleged that the 480 million dollars sale price was
insufficient and that certain directors had personal interests in the business decision.1903
In evaluating the merits of the allegation that the proposed sale price was inadequate, the court
noted that directors are presumed to have acted in good faith in the best interests of the
company.1904 It held that this evidentiary1905 presumption1906 is known as the BJR according to
which the court cannot “substitute its uninformed opinion for that of experienced board
members”.1907 Application of the rule depends on proof that informed directors actually made a
business judgment.1908 The court conceded that utilisation of the rule has been broadened with
special mention of cases involving the sale of corporate assets.1909 However, the presumption does
not constitute absolute protection of directors’ conduct. The courts will scrutinise the merits of the
1900
Rose “Cutting Class Action Agency Costs: Lessons from the Public Company” 2019 30 available at
1901
316 A 2d 599 (1974).
1902
Gimbel v The Signal Companies Inc 316 A 2d 599 (1974).
1903
Para 89.
1904
Paras 65 to 68.
1905
Harner “Navigating financial turbulence: Directors’ duties in the face of insolvency” in Paolini (ed) Research
handbook on directors’ duties: Research handbooks in corporate law and governance (2016) 274.
1906
Woodley et al Osborn’s Concise Law Dictionary 10 ed (2005) 312.
1907
Para 69. See also Nwafor “Shareholder Derivative Action-Nigerian Statutory Innovation - Not Yet a Victory for
the Minority Shareholder” 2010 Macquarie J. Bus. L.222.
1908
Gimbel v The Signal Companies Inc 316 A 2d 599 (1974); Davies et al Companies and other business structures
in South Africa 3 ed (2013) 124; Cassim FHI et al Contemporary company law 2 ed (2012) 564; Mupangavanhu
2019 Journal of African Law 17; Havenga 2000 SA Merc LJ 28; Bouwman 2009 SA Merc LJ 525.
1909
Gimbel v The Signal Companies Inc 316 A.2d 599 (1974).
244
decision of directors if the plaintiff can prove that the directors acted fraudulently or that the sale
price was clearly inadequate.1910
In Smith v Van Gorkom,1911 popularly known as “The Trans Union Case”, a company by the name
Marmon attempted a leveraged buy-out1912 of Trans Union. Trans Union's CEO, Van Gorkom
proposed a price of $55 a share. Van Gorkom and his CFO did not conduct any research about the
company’s actual worth nor was Trans Union's legal department informed about the transaction.
Moreover, it turned out that the $55 a share represented only about sixty per cent of what the
company was later appraised at. A derivative action against Trans Union’s directors was
commenced. The trial court found in favour of Van Gorkom stating that the latter’s actions “fell
within the business judgment rule [according to which] the courts should not second-guess
business decisions made by directors”.1913 On appeal, the decision of the trial court was reversed.
The Appellate Court concluded that;
“the business judgment rule was not a [valid] defence because the directors and Van Gorkom did not
use any ‘business judgment’ when they came to their decision. There is no protection for directors who
have made an unintelligent or unadvised judgment. Thus, the party attacking a board decision as
uninformed must rebut the presumption that its business judgment was an informed one”.1914
From these cases, it is clear that the question whether the rule should be applied as an abstention
doctrine or as a standard of liability is not just a contemporary company law problem.
73 THE SIGNIFICANCE OF THE BJR

In examining the significance of the business judgment rule, a differentiation will be made between
the rationale and purpose of the rule. Rationale refers to the underlying reason, basis or explanation
behind a particular belief or practice.]1915 On the other hand, “purpose” is defined as an objective,
1910
Ibid. See also Rukmono 2019 Advances in Social Science, Education and Humanities Research 233.
1911
488 A 2d 858 (Del 1985).
1912
According to Garner et al Black’s law dictionary 8 ed (2004) 213 a leveraged buy-out (LBO) refers to the
purchase of a publicly held company’s outstanding shares “by its management or outside investors, financed
mainly with funds borrowed from investment bankers or brokers and usually secured by the corporation’s
assets”.
1913
488 A 2d 858 (Del 1985). See also Wang Company Law in China 214; Siems “Private Enforcement of Directors’
Duties: Derivative Actions as a Global Phenomenon” 2012 4 available at: http://ssrn.com/abstract=1699353
(accessed 28-06-2018).
1914
488 A 2d 858 (Del 1985).
1915
The Merriam-Webster Dictionary https://www.merriam-webster.com/dictionary/rationale (accessed 09-03-
2019).
245
goal, end or a result to be attained.1916 In other words, a rationale explains the “why”, provides
justification and is backward looking whilst a purpose answers the “what” and is forward-looking.
However, a considerable degree of overlap between the two concepts is inevitable. The first part
of this section presents the purported rationales for the BJR and the purposes of the rule will
immediately follow.
7 3 1 Rationales for the adoption of the rule

The success or failure of a legal import may be hinged to its rationales. 1917 The judiciary,1918
scholars and commentators have suggested different rationales for the rule’s existence. First, it has
been argued that the rule exists because of information asymmetry.1919 Directors are presumed to
possess better knowledge of the day to day operations of the company and possess superior
experience of the economic and business world relative to judges.1920 The courts are simply “ill-
equipped to make business decisions and should not second-guess directors or substitute its
judgment for that of the directors”.1921 As a result, courts should be reluctant to “enter the
boardroom” and conclude that the directors’ decision not to litigate is not in the best interests of
the company.1922 It must, therefore, be presumed that the directors’ decision is better than the
1916
Garner et al Black’s law dictionary 8 ed (2004) 1271; Merriam-Webster’s Dictionary of Law (1996) 398.
1917
Weng 2010 Fordham International Law Journal 144.
1918
Dodge v Ford Motor Co. 1919 170 NW 668; Brehm v Eisner 746 A 2d 244 2000 Del.
1919
Hamadziripi and Osode 2019 Speculum Juris 28; McMillan 2012 William & Mary Business Law Review 529;
Australia and the EU” 2006 121.
1920
Gurrea-Martinez 2018 Journal of Corporate Law Studies 423. Steinberg “Application of the Business Judgment
Rule and Related Judicial Principles--Reflections from a Corporate Accountability Perspective” 1981 Notre
Dame Law Review 905; Siegel “The Problems and Promise of Enhanced Business Judgment” 2014 University
of Pennsylvania J. Bus. L. 47 51; Monroe-Sheridan “Substance Overload: A Comparative Examination of
Japanese Corporate Governance Law through the Lens of the Daiwa Bank Case” 2015 Washington International
Law Journal Association 320 345.
1921
Australia and the EU” 2006 121-122. The same scholar further argued that “the law supposes that it is the board
[of directors] in charge of running the company. Justices are lawyers and not business managers and thus are
incompetent to manage human and physical resources, financial portfolios or specific commercial transactions”.
See also Dodge v Ford Motor Co. 1919 170 NW 668; Siems “Private Enforcement of Directors’ Duties:
Derivative Actions as a Global Phenomenon” 2012 4 available at: http://ssrn.com/abstract=1699353 (accessed
28-06-2018); Bainbridge 2004 Vand. L. Rev 120-124; Branson 2002 Valparaiso University Law Review 637;
Havenga 2000 SA Merc LJ 29; McLennan 1996 South African Mercantile LJ 94; Bouwman 2009 SA Merc LJ
524.
1922
Cooksey and Hutchins 1981 Texas Tech L. Rev. 635-636.
246
judiciary’s.1923 Consequently, the BJR undermines the judiciary’s ability to review the merits of
claims brought before them.1924
However, whilst the courts’ hesitancy to replace directors’ business judgment with theirs may be
understandable,1925 such a stance may also effectively mean that “a valid claim remains
[unaddressed]”.1926 An indiscriminate application of the rule that is merely based on the
justification that directors are more knowledgeable than the courts potentially makes the rule
vulnerable to abuse by ill-willed directors. An experienced and influential director may deceitfully
commit prohibited acts knowing that the courts will exercise deference1927 to her/his decision
unless the plaintiff successfully rebuts the pro-director presumption.
However, there are other sophisticated fields such as medicine and technology which the law
governs and on which judges routinely adjudicate but there is no special presumption such as a
medical judgment rule1928 or a technological judgment rule. Also, if directors’ decisions are to be
respected merely because the courts do not have as much information as directors why do
unmarried judicial officers adjudicate on marriage and divorce matters? In fact, judges may
generally have better knowledge of business than medicine and technology. Yaru argues that
“while expert decisions in other fields can be examined by checking whether there was a proper
application of the correct practices, business decisions cannot be easily verified that way”. 1929
There is a high level of uncertainty in corporate decision-making and there is also no objective
standard by which one can measure the correctness or objectivity of management decisions.1930
1923
to Recent Corporate Scandals” 2008 Florida L. Rev 589 600; Hamadziripi and Osode 2019 Speculum Juris 28;
Yaru 2016 SAcLJ 434.
1924
Neri-Castracane 2015 Frontiers L. China 11; Cooksey and Hutchins 1981 Texas Tech L. Rev. 636. This may
potentially undermine the promotion of responsible management.
1925
When discharging their day to day duties, company directors need to exercise unfettered discretion. See also
Nwafor “Directors' Standard of Duties of Care and Skill in Company Management - Nigerian and Ethiopian
Positions - An Appraisal” 2007 Jimma U. J.L. 15 15.
1926
1927
McNulty and Stewart “Making and regulating business judgment: Judicial practice, logics, and orders” in Reay
T et al (eds) Perspectives on process organisation studies: Institutions and organisations – A process view (2019)
174 – 175 argue that judicial deference to directorial decisions has been the most contentious issue regarding
directorial accountability and authority.
1928
1929
1930
Ibid.
247
Therefore, it can be submitted that the actual issue is not necessarily about the expertise of the
directors, but, it is about the degree of uncertainty that surrounds the decision making process.1931
Bainbridge adds that the rule exists to protect directors and to encourage them to fully exercise
their powers.1932 Directors have the responsibility to manage the affairs of their companies.1933
Couched this way, the rule is plausible as it gives effect to section 66(1) of the Companies Act1934
in South Africa.1935 That Companies Act stipulates that it must be applied and interpreted in a way
that gives effect to its purposes as provided for in section 7 of the same statute.1936 Some of the
purposes of the Companies Act are to promote the development of the South African economy by
encouraging entrepreneurship and enterprise efficiency,1937 promote innovation and investment in
the South African markets,1938 and to balance the rights and obligations of shareholders and
directors within companies.1939 Also, in Brehm v Eisner1940 it was held that “if judges failed to
respect the decisions of directors made in good faith, this would have the effect that the courts
would become super directors measuring matters of degree in business decision making and
executive compensation”.1941
1931
Ibid; Keay and Loughrey 2018 Legal Studies 21.
1932
Bainbridge 2004 Vand. L. Rev 111; Neri-Castracane 2015 Frontiers L. China 11.
1933
Sharfman “The Importance of the Business Judgment Rule” 2017 New York University J.L. & Bus. 55; Cassim
R “The Power to Remove Company Directors from Office: Historical and Philosophical Roots” 2019 Fundamina
37 62; Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 247.
1934
71 of 2008. The section reads “[t]he business and affairs of a company must be managed by or under the direction
of its board, which has the authority to exercise all of the powers and perform any of the functions of the
company, except to the extent that this Act or the company’s Memorandum of Incorporation provides otherwise”.
See also Esser and Havenga’s discussion in Loubser et al Company secretarial practice Revision service 2 2018
8-1 to 8-2.
1935
Elsewhere, similar provisions are found in section 141(a) of the Delaware General Corporations Law, section
179(2) and 180(1) and (2) of Australia’s Corporations Act 2001 (Cth0 and article 348(1) of the Japanese
Companies Act 86 of July 26 2005.
1936
1937
Section 7(b)(i) of the Companies Act 71 of 2008.
1938
Section 7(c) of the Companies Act 71 of 2008.
1939
Section 7(i) of the Companies Act 71 of 2008.
1940
746 A 2d 244 2000 Del.
1941
Brehm v Eisner 746 A 2d 244 2000 Del.
248
Additionally, there is a need to avoid “the risk of stifling innovation1942 and venturesome business
activity”.1943 Risk-taking is an indispensable ingredient in wealth creation.1944 The need to
encourage responsible risk-taking by directors is the reason why the Delaware General Assembly
adopted section 102(b)(7) of Title 8 of the Delaware Corporation Law. 1945 Competition creates
innovation which in turn gives birth to risk. By definition, innovation refers to a new way of doing
things.1946 There is no guarantee that every innovative idea will be successful.1947 But, at the same
time for businesses to stay alive, there is a need for new products and services due to constantly
changing consumer tastes and choices. McLennan reasons that “in the normal course of events no
businessmen can avoid taking risks.1948 One of the main differences between directors and trustees
is that directors must, of necessity, take commercial risks. Even where the most careful
investigations and research have been carried out in advance, there is still the element of risk”.1949
So if perfection is required in decision making, only “Pharisees”1950 would be willing to assume
the office of director.1951
1942
Section 7(c) of the Companies Act 71 of 2008 encourages the adoption of innovative strategies and techniques
in South African markets.
1943
Morales 2018 Indon. J. Int'l & Comp. L. 176 argues that “the liability regime should not result in discouragement
to entrepreneurial activity”. See also Joy v North 692 F 2d 880 (1982); Bainbridge 2004 Vand. L. Rev 112;
Branson 2002 Valparaiso University Law Review 637; Havenga 2000 SA Merc LJ 29; Bouwman 2009 SA Merc
LJ 524; Rosenberg 2009 Berkeley Bus. L.J. 217; Davies et al Companies and other business structures in South
Africa 3 ed (2013) 125; and Cassim FHI et al Contemporary company law 2 ed (2012) 565.
1944
See section 7(b)(i) of the Companies Act 71 of 2008; Gurrea-Martinez 2018 Journal of Corporate Law Studies
420; Velasco 2018 Notre Dame Law School Legal Studies Research Paper No. 1933 3; Ruohonen “Company
Directors’ Key Duties and Business Judgment Rule” in Kangas et al (eds) Leading change in a complex world -
Transdisciplinary perspectives (2019) 245; Davies et al Companies and other business structures in South Africa
3 ed (2013) 124; Rosenberg 2009 Berkeley Bus. L.J. 221; Neri-Castracane 2015 Frontiers L. China 11.
1945
See In re Cornerstone Therapeutics Inc. Shareholder Litigation C.A. No. 564 2014 Del. 2015 15. In that same
case it was also held that the purpose of the said section was “to free up directors to take business risks without
worrying about negligence”.
1946
Hornby et al Oxford advanced learner’s dictionary 7 ed (2006) 769-770.
1947
Lee 2005 University of Botswana L.J. 53. See also Yaru 2016 SAcLJ 428.
1948
Weng 2010 Fordham International Law Journal 130 states that the rule encourages risk-taking by diligent
businessmen. See also Rosenberg 2009 Berkeley Bus. L.J. 217. See also Ruohonen “Company Directors’ Key
Duties and Business Judgment Rule” in Kangas et al (eds) Leading change in a complex world -
Transdisciplinary perspectives (2019) 245; Low and Low “The Business Judgment Rule: A Safe Harbour for
Directors?” 2019 3 available at: https://ssrn.com/abstract=3243291 (accessed 21-11-2019).
1949
McLennan 1996 South African Mercantile LJ 95. Bouwman 2009 SA Merc LJ 524 argues that there is need to
persuade competent persons to accept the office of director. See also Lee 2005 University of Botswana L.J. 50
51; Yaru 2016 SAcLJ 428.
1950
This idea is taken from the ancient belief that Pharisees, one of the religious groups during Jesus’ days, were
perfect and followed all the laws that Moses handed down.
1951
Gurrea-Martinez 2018 Journal of Corporate Law Studies 418; Davies et al Companies and other business
structures in South Africa 3 ed (2013) 125; Monroe-Sheridan 2015 Washington International Law Journal
Association 320 345.
249
7 3 2 Purposes of the BJR
According to Bainbridge, the purpose of the rule is to strike a compromise between two competing
values namely authority and accountability.1952 With respect to the new South African Companies
Act,1953 Muswaka posits that the BJR exists to further the objectives of the Act.1954 One of the
purposes of the South African Companies Act,1955 as provided for in section 7(i) thereof, is to
balance the rights and obligations of shareholders and directors within companies. Also, the
Preamble to the same Act reveals that the statute is aimed at, inter alia, defining the relationship
between shareholders and directors. A rule that seeks to establish the parameters of directorial
authority and accountability promotes attainment of the above-mentioned purpose and is therefore
welcome into the South African corporate governance system. However, Ponta challenges this
idea by asking to whom should corporate directors be accountable seeing that “the power to hold
accountable is ultimately the power to decide”?1956
In practice, the rule defines the roles of directors and shareholders by enforcing the principle that
decision-making is the directors’ prerogative. Centralised decision-making is key to a sound
system of corporate governance.1957 The rule ensures that the decision-making power is reserved
for directors and “prevents the judiciary from meddling in managerial decisions”.1958 However,
this idea is already entrenched in the famous separation of ownership and control principle. Other
than restating what this principle already says, the value of the BJR is questionable. Therefore, it
is submitted that if the rule exists solely for the purpose of defining the relationship between
directors and shareholders, then it is unnecessary as there already exists a less complicated and
probably more efficient company law principle that fulfils the same purpose.
1952
Bainbridge 2004 Vand. L. Rev 85. See also Ponta “The Business Judgement Rule - Approach and Application”
2015 Juridical Tribune 28 and 29.
1953
71 of 2008.
1954
Muswaka 2013 International Journal of Humanities and Social Sciences 92.
1955
71 of 2008. The authors of Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 45 point
out that the purposes of the Companies Act 71 of 2008 were founded on the guidelines provided in the South
African Company Law for the 21st century – Guidelines for Corporate Law Reform (Policy Paper) Government
Gazette 26493 June 2004 published by the Department of Trade and Industry. See also Wiese Corporate
governance in South Africa with international comparisons 2 ed (2016) 15.
1956
Ponta 2015 Juridical Tribune 35.
1957
Ponta 2015 Juridical Tribune 29.
1958
250
McMillan points out that the BJR seeks to protect directors who act in good faith even though ex
post facto their decisions might prove to be illogical.1959 Mongalo asserts that the purpose of the
rule is to prevent courts from second-guessing directors’ decisions.1960 Cassim FHI et al opine that
the rule was created “to protect directors from hindsight bias”.1961 Similarly, but in more general
terms, Havenga submits that the rule is there “to protect honest directors”.1962 Furthermore,
Rosenberg argues that it is important to protect directors from the risk of hindsight bias.1963
Hindsight refers to “understanding that you have of a situation only after it has happened and that
means you would have done things in a different way”.1964 In this context, it refers to judicial
officers and other stakeholders who, with the knowledge of events that took place after the decision
was made suggest that the directors were unreasonable, careless and negligent. In principle, for the
courts to be able to reasonably review directors’ decisions, they would need to “reconstruct the
factual environment at the moment of the business decision making”.1965 The BJR relieves the
courts of all this burden.
It is also argued that the rule has something to do with “respecting shareholders’ will”.1966 In other
words, there is a need to prevent shareholders from becoming managers of their company.1967 This
view is supported by the fact that first, directors are appointed by shareholders and secondly,
1959
McMillan 2012 William & Mary Business Law Review 527-528. See also Rose “Cutting Class Action Agency
Costs: Lessons from the Public Company” 2019 30 available at https://ssrn.com/abstract=3460585 (accessed 26-
11-2019); Wijaya “Implementation of the Doctrine of the Business Judgment Rule on Bankruptcy Law in
Indonesia” 2020 Yuridika 1 3.
1960
(2003) 159; Mongalo et al Forms of business enterprise: Theory, structure and operation (2004) 217. See also
Gurrea-Martinez 2018 Journal of Corporate Law Studies 418; Neri-Castracane 2015 Frontiers L. China 11;
at: http://ssrn.com/abstract=1699353 (accessed 28-06-2018).
1961
Cassim FHI et al Contemporary company law 2 ed (2012) 565. See also Lee 2005 University of Botswana L.J.
52; Gurrea-Martinez 2018 Journal of Corporate Law Studies 423; Rose “Cutting Class Action Agency Costs:
Lessons from the Public Company” 2019 30 available at https://ssrn.com/abstract=3460585 (accessed 26-11-
2019).
1962
Havenga 2000 SA Merc LJ 28. See also Cassim FHI et al Contemporary company law 2 ed (2012) 566; Klauberg
“General case on directors’ duties” in Siems and Cabrelli (eds) Comparative company law: A case-based
approach 2 ed (2018) 57; Wijaya 2020 Yuridika 3; Ponta 2015 Juridical Tribune 27; Lee 2005 University of
Botswana L.J. 52; Beyer D “Business Judgment Dismissal of Shareholder Derivative Suits by Board Litigation
Committees: An Expanded Role for the Courts” 1982 Vand. L. Rev. 235 241; Yaru 2016 SAcLJ 437.
1963
Rosenberg 2009 Berkeley Bus. L.J. 216 223. See also Scarlett 2008 Florida L. Rev. 600; Monroe-Sheridan 2015
Washington International Law Journal 320 345.
1964
Hornby et al Oxford advanced learner’s dictionary 7 ed (2006) 706.
1965
Neri-Castracane 2015 Frontiers L. China 11.
1966
Ibid; Giraldo “Factors affecting the Application of the Business Judgment Rule: An Empirical Study of the US,
UK, Australia and the EU” 2006 123.
1967
251
shareholders have a choice to invest or continue investing in the company that is being governed
by those directors1968 and they can diversify their portfolios.1969 This argument seems to suggest
that directors are agents of shareholders which is correct under the shareholder primacy model1970
according to which the directors’ fiduciary duty to act in the best interests of the company is owed
to shareholders as a whole.1971
Elsewhere, it has also been posited that the BJR encourages certainty in the decision-making
process.1972 This submission is contentious. As has been pointed out above, the actual content of
the rule varies from jurisdiction to jurisdiction and commentators unanimously agree that
regardless of the rule’s long life, it remains misunderstood.1973 Therefore, how can a vague rule
promote legal certainty?
Also, directors’ decisions need to be respected due to the principle of bounded rationality.1974 This
concept is defined by Bainbridge to mean “the natural limits on the ability of decision-makers to
gather and process information”.1975 The same scholar further opines that “all humans have
inherently limited memories, computational skills, and other mental tools …”.1976 All these factors
point to the imperfection and fallibility of human beings. Human fallibility, therefore, forms one
of the core values underlying the BJR.
1968
Australia and the EU” 2006 123 referring to Joy v North 692 F 2d 880 (1982).
1969
Gurrea-Martinez 2018 Journal of Corporate Law Studies 427 argues that the assumption that shareholders are
always able to diversify their investments may not be popular in those jurisdictions with “many family
businesses, concentrated ownership structures, and underdeveloped capital markets”.
1970
For more on this refer to chapter 3 under 3 5 1 1.
1971
Gurrea-Martinez 2018 Journal of Corporate Law Studies 426 questions the validity of this assumption. The
scholar argues that a company must also be identified with other stakeholders’ interests rather than shareholders
only and “unless the [legislature] consciously decides to switch part of its attention from the stakeholders to the
shareholders, the implementation of the business judgment rule may achieve an outcome potentially unwanted
by a particular jurisdiction”. The same author went on to argue that in such jurisdictions, it may be desirable for
directors to be risk averse and that management will only be concerned about the volatility of projects.
1972
Gurrea-Martinez 2018 Journal of Corporate Law Studies 423; Yaru 2016 SAcLJ 439.
1973
McMillan 2012 William & Mary Business Law Review 524.
1974
1975
1976
Ibid. See also Yaru 2016 SAcLJ 439.
252
74 THE NATURE OF THE BJR
The BJR is usually utilised in cases of derivative actions and reviews of acceptance of
takeovers.1977 The rule mostly applies in determining the procedural aspects of the directors’
decision or the decision-making process1978 and only in exceptional cases is it invoked to review
the merits of the decision.1979 Schoeman asserts that it is a “legal defence for directors challenged
with exercising their duties of care and skill”.1980 The concept of business judgment largely
remains a common law notion with the exception of a few jurisdictions which include Australia,
Germany and South Africa. Corporate lawyers and commentators agree that the BJR applies to
fiduciaries1981 of which directors are a part.1982
7 4 1 Elements of the BJR

7 4 1 1 Business Judgment or decision
The application of the rule is strictly limited to instances where the directors actually made a
business decision or judgment.1983 Australia is currently the only jurisdiction that has managed to
provide a statutory definition of the concept of business judgment.1984 The director or board of
directors have to make a conscious1985 informed decision.1986 This connotes positive action1987
1977
Branson 2002 Valparaiso University Law Review 647.
1978
Smith v Van Gorkom (The Trans Union Case) 488 A 2d 858 (Del 1985); Leach The Correct Understanding of
the Business Judgment Rule in Section 76(4) of the Companies Act 71 of 2008: Avoiding the American Mistakes
(Published Masters’ thesis, University of Cape Town, 2014) 29; Bainbridge 2004 Vand. L. Rev 101; Schoeman
2013 Without Prejudice 12.
1979
Arsht 1979 Hofstra Law Review 126.
1980
Schoeman 2013 Without Prejudice 11.
1981
Bainbridge 2004 Vand. L. Rev 89; Leach The Correct Understanding of the Business Judgment Rule in Section
76(4) of the Companies Act 71 of 2008: Avoiding the American Mistakes (Published Masters’ thesis, University
of Cape Town, 2014) 22; McMillan 2012 William & Mary Business Law Review 531.
1982
Garner et al Black’s law dictionary 8 ed (2004) 658 defines a fiduciary as a person who owes to another, the
duties of good faith, trust, confidence and candor or one who is expected to act in the interests of another.
1983
Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 298; Gurrea-Martinez 2018 Journal
of Corporate Law Studies 418; Scarlett 2008 Florida L. Rev 622; Weng 2010 Fordham International Law
Journal 129; Havenga 2000 SA. Merc L.J. 28.
1984
See section 180(3) of the Australian Corporations Act (Cth) No. 50 2001. See also Mupangavanhu 2019 Journal
of African Law 8.
1985
Scarlett 2008 Florida L. Rev 623.
1986
Section 76(4)(a)(i) of the South African Companies Act 71 of 2008; section 180(2) of the Australian
Corporations Act (Cth) No. 50 2001; Wang Company Law in China 214; Brehm v Eisner 746 A 2d 244 2000
Del footnote 100; Rukmono 2019 Advances in Social Science, Education and Humanities Research 233;
Bainbridge 2004 Vand. L. Rev 101; Branson 2002 Valparaiso University Law Review 639-640; Davies et al
Companies and other business structures in South Africa 3 ed (2013) 124; Cassim FHI et al Contemporary
company law 2 ed (2012) 564; Havenga 2000 SA Merc LJ 28; Bouwman 2009 SA Merc LJ 525.
1987
Lombard “Importation of a Statutory Business Judgment Rule into South African Company Law: Yes or No”
2005 THRHR 614 617.
253
which involves the board’s commitment to properly evaluate the risks involved.1988 Failure to act
is not covered by the BJR because it is regarded as an omission1989 but a decision not to act falls
within the ambit of the rule.1990 This element is sometimes referred to as the requirement of
independent judgment.1991 Automatic or mere approval of a decision, especially when it comes
from a controlling shareholder, without proper consideration does not suffice. 1992 Additionally,
decision-making is a process.1993 A business judgment consists of preparations to make a decision,
the decision itself and the execution.1994 It is not clear how the courts treat a scenario where some
of the procedural requirements are not met or complied with during the decision-making process.
Also, it is one thing to make a decision but it is another to make an informed decision.1995 The
latter implies that one commits himself to diligently seek relevant information before making a
decision.1996 It is this type of conduct that the rule is concerned with. This requirement does not
imply that the board must be reasonably informed of every fact.1997 Some of the factors considered
by the courts in determining whether directors were reasonably informed before they made the
decision include the quality of the decision and whether the directors had enough time to acquire
information about the impugned decision and the advice considered by the directors.1998 However,
it is argued that such a determination is only likely if the courts are allowed to review the board’s
decision. However, is it really possible to judge the quality of the decision without meddling into
1988
Smit The Application of the Business Judgment Rule in Fundamental Transactions and Insolvent Trading In
South Africa: Foreign Precedents and Local Choices (LLM-thesis, UWC, 2016) 29.
1989
handbook on directors’ duties: Research handbooks in corporate law and governance (2016) 275; Arsht 1979
Hofstra Law Review 112; Branson 2011 SAcLJ 696; Triem 2007 Alaska Law Review 26; Lombard 2005 THRHR
619.
1990
Bouwman 2009 SA Merc LJ 525; Scarlett 2008 Florida L. Rev 622 while referring to Aronson v Lewis 473 A.2d
805 813 (Del. 1984) where it was held that the rule does not apply “where directors have either abdicated their
functions, or absent a conscious decision, failed to act”. See also Branson 2011 SAcLJ 696 who asserts that “[a]
decision to make no decision is a decision for purposes of the rule's application”.
1991
Branson 2011 SAcLJ 696.
1992
Ibid.
1993
1994
1995
Gurrea-Martinez 2018 Journal of Corporate Law Studies 418; Harner “Navigating financial turbulence:
Directors’ duties in the face of insolvency” in Paolini (ed) Research handbook on directors’ duties: Research
handbooks in corporate law and governance (2016) 274; Cassim FHI et al Contemporary company law 2 ed
(2012) 564; Davies et al Companies and other business structures in South Africa 3 ed (2013) 124; Arsht 1979
Hofstra Law Review 120; Havenga 2000 SA. Merc L.J. 28.
1996
Lombard 2005 THRHR 617.
1997
Smit The Application of the Business Judgment Rule in Fundamental Transactions and Insolvent Trading In
South Africa: Foreign Precedents and Local Choices (LLM-thesis, UWC, 2016) 30.
1998
Ibid.
254
the merits or substance of thereof? Also, it is feared that for judicial officers to impartially judge
the quality of a decision, they will need to “reconstruct the factual environment at the moment of
the business decision making”.1999 It is submitted that such an exercise is not humanly possible
without one being influenced by hindsight bias.
7 4 1 2 Best interests of the company

In order to invoke the BJR, the decision-maker has to have acted in good faith in the best interests
of the company.2000 The meaning of “the best interests of the company” depends on the definition
of “the company”. An understanding of what constitutes the “company” for present purposes
requires knowledge of whether the jurisdiction concerned adopts the shareholder primacy
approach, the enlightened shareholder value (ESV) or the pluralist or stakeholder approach. The
shareholder primacy approach is founded on the traditional view that “the company” means
shareholders and therefore the company’s best interests must necessarily translate to shareholders’
best interests.2001 This traditional view equates or replaces “the company” with shareholders.2002
Derivative suitors in a jurisdiction that is more inclined to the shareholder primacy view are more
likely to face challenges having directors accept their demand since the best interests of the
company will be synonymous to shareholders’ will. Accordingly, fulfilling directors’ fiduciary
duty of good faith will basically consist of respecting shareholders’ main purpose even at the
expense of other stakeholders.2003 Shareholder value maximisation will be the major deciding
1999
Neri-Castracane 2015 Frontiers L. China 11.
2000
Section 76 of the South African Companies Act 71 of 2008; section 180(2) of the Australian Corporations Act
(Cth) No. 50 2001; Wang Company Law in China: 214; Harner “Navigating financial turbulence: Directors’
duties in the face of insolvency” in Paolini (ed) Research handbook on directors’ duties: Research handbooks
in corporate law and governance (2016) 274; Brehm v Eisner 746 A 2d 244 2000 Del footnote 100;
Mupangavanhu 2019 Journal of African Law 19; Ansari 2019 Budapest International Research and Critics
Institute Journal 28; Bainbridge 2004 Vand. L. Rev 101; Branson 2002 Valparaiso University Law Review 644;
Davies et al Companies and other business structures in South Africa 3 ed (2013) 124; Mongalo Corporate law
and corporate governance: A global picture of business undertakings in South Africa (2003) 159; Mongalo et al
Forms of business enterprise: Theory, structure and operation (2004) 217; Havenga 2000 SA Merc LJ 28;
2001
Greenhalgh v Ardene Cinemas Ltd 1951 291 (Ch); Nwafor “The Shifting Responsibilities of Company Directors
– How Desirable in Modern Times” 2012 Macquarie J. Bus. L 158 160.
2002
In the Australian case of Kinsela v Russell Kinsela (Pty) Ltd 1986 4 NSWLR 722, it was held that “the proprietary
interests of the shareholders entitle them as a general body to be regarded as the company when questions of the
duty of directors arise”. See also Percival v Wright 1902 2 421 (Ch); Ajibo “A Critique of Enlightened
Shareholder Value: Revisiting the Shareholder Primacy Theory” 2014 Birkbeck Law Review 44 and Rousseau
“The Duties of Directors of Financially Distressed Corporations: A Quebec Perspective on the Peoples Case”
2004 Canadian Business Law Journal 380; Nwafor “A Commentary on the Derivative Action under the Lesotho
Draft Companies Bill” 2007 U. Botswana L.J. 79 85.
2003
Nwafor 2012 Macquarie J. Bus. L. 158.
255
factor. Considering that pursuing derivative suits requires a company’s financial and human
resources which may reduce shareholder value, directors in a pro-shareholder primacy jurisdiction
will most likely reject the demand. One of the few fathomable potentially exceptional cases will
be an instance where the demand is brought for derivative claims against third parties and the
company stands to recover more than the expenses of the suit.
Esser asserts that the ESV approach dictates that “the primary role of the directors should be to
promote the success of the company for the benefit of the shareholders”.2004 On his part, Nwafor
argues that the ESV attitude entails balancing short term and long term interests of all the
stakeholders which however remain subordinate to shareholders’ interests.2005 Havenga posits that
the ESV approach “reflects traditional company law in giving primacy, but not exclusivity, to
shareholders’ interests”.2006 In principle, derivative plaintiffs are better off under the ESV approach
than those in a jurisdiction that adopts the shareholder primacy approach. In practice, such
plaintiffs may be subject to directorial bias towards shareholders. However, unlike pro-shareholder
jurisdictions, other stakeholder interests will receive more consideration in ESV inclined
jurisdictions.
According to the stakeholder theory, shareholders are just but one group among the many
constituencies whose interests need to be considered in decision-making.2007 Havenga notes that
“the pluralist theory dictates that companies should be run in such a way that wealth and welfare
are maximised for a number of different constituencies, each with a legitimate stake in the
company’s development and activities”.2008 On this view, directors should not favour shareholder
interests when exercising their discretion on what they regard to be the best interests of the
company.2009 Therefore, directors should not solely focus on profit-making but they must balance
shareholders’ interests with those of other stakeholders’ and take into account social and
environmental factors.2010
2004
Esser “The Enlightened Shareholder Value Approach versus Pluralism in the Management of Companies” 2005
Obiter 720.
2005
Nwafor 2012 Macquarie J. Bus. L 168.
2006
Havenga “Regulating Directors’ Duties and South African Company Law Reform” 2005 Obiter 618.
2007
Nwafor 2012 Macquarie J. Bus. L 174 and Esser 2005 Obiter 720-721.
2008
Havenga 2005 Obiter 618.
2009
Ramnath and Nmehielle “Interpreting Directors’ Fiduciary Duty to Act in the Company’s Best Interests through
the Prism of the Bill of Rights: Taking Other Stakeholders into Consideration” 2013 Speculum Juris 106-107.
2010
Ibid.
256
The Pluralist approach allows directors to consider all stakeholders’ interests by placing them on
the same footing. It is argued that this approach is in sync with the contemporary needs of corporate
governance. It also takes into consideration both short term and long term goals of a company. The
pluralist approach is the most reasonable as shareholder value maximisation cannot be the sole
objective or priority during a company’s lifetime. In principle, derivative suitors who make a
demand with meritorious claims in a pro-pluralist jurisdiction stand a better chance of directors
accepting it. However, in practice, such claims will be more successful if they are brought against
third parties. It is inconceivable that directors whose actions are in question will objectively
process a demand. As Cooksey and Hutchins opined “[t]here is an inherent conflict of interest
when the fate of a lawsuit alleging misconduct by the corporation's directors is placed in the hands
of those who stand to benefit most from its termination”.2011
7 4 1 3 Rationality
In order to enjoy the protection of the BJR, the decision also needs to be rational.2012 The actual
meaning of rationality has been the subject of debate. Some say this element requires a director’s
decision not to be “unwise, [lack] factual support or nonsensical”.2013 It has also been held that a
director’s decision needs to have a coherent explanation.2014 In determining the rationality of a
decision, the context of a company’s ordinary business is very important.2015 Therefore, the
directors’ or special litigation committee’s reason for terminating derivative litigation must have
a coherent explanation whilst taking the company’s ordinary business into account. It is argued
that in Australia, an investigation into the rationality of a decision may include an inquiry into
whether the decision was made for a proper purpose.2016 In South Africa, the proper purpose rule
does not form part of an enquiry into the rationality of a decision unless it is treated as a principle
which falls within the broad fiduciary duty to act in the best interests of the company.2017
2011
2012
Section 76(4)(a)(iii) of the South African Companies Act 71 of 2008; section 180(2) of the Australian Companies
Act 2001; Brehm v Eisner 746 A 2d 244 2000 Del footnote 100; Loubser et al Company secretarial practice
Revision service 2 2018 8-26; Cassim FHI et al Contemporary company law 2 ed (2012) 564; Mupangavanhu
2019 Journal of African Law 19; Bainbridge 2004 Vand. L. Rev 101; Branson 2002 Valparaiso University Law
Review 643; Cassim FHI et al Contemporary company law 2 ed (2012) 564.
2013
2014
Brehm v Eisner 746 A.2d 244 264-65 (Del. 2000).
2015
2016
See the Australian case of Swansson v RA Pratt Properties Pty Ltd 2002 42 ACSR 313 paras 36-37.
2017
257
7 4 1 4 Independence and disinterestedness
Furthermore, directors should be disinterested2018 and independent.2019 These two attributes are
also prerequisites for the application of the BJR.2020 A director or her/his related persons must not
have a direct pecuniary interest in the challenged transaction.2021 In South Africa, a “related
person” refers to
“an individual is related to another individual if they are married, or live together in a relationship
similar to a marriage; or are separated by no more than two degrees of natural or adopted consanguinity
or affinity; an individual is related to a juristic person if the individual directly or indirectly controls
the juristic person, as determined in accordance with subsection (2)”.2022
The UK legislature preferred the phrase “connected persons”.2023 The two pieces of legislation are
similar but simply make use of different wording. Akin to the South African statute, the director’s
family members2024 or legal entity with which the director is connected2025 are regarded as
interested parties.
Clearly, a director cannot enjoy the protections of the BJR if the impugned transaction involved
her/his spouse. Also, a director will be disabled from acting if the transaction involves her/his
business associates.2026 It is important to note that the plaintiff bears the burden to prove that the
defendant had a material personal interest in the transactions and that s/he was not independent.
2018
Weng 2010 Fordham International Law Journal 129; Havenga 2000 SA. Merc L.J. 28; Lombard 2005 THRHR
617.
2019
Brehm v Eisner 746 A 2d 244 2000 Del footnote 100; Bainbridge 2004 Vand. L. Rev 101; Branson 2002
Valparaiso University Law Review 641; Davies et al Companies and other business structures in South Africa 3
ed (2013) 124; Cassim FHI et al Contemporary company law 2 ed (2012) 564; Havenga 2000 SA Merc LJ 28;
2020
Pillay and Natesan “The Business Judgment Rule”
http://financialmarketsjournal.co.za/oldsite/18thedition/printedarticles/judgementrule.html (accessed 20-03-
2019).
2021
Cassim FHI et al Contemporary company law 2 ed (2012) 564; Branson 2011 SAcLJ 698.
2022
Section 1 read together with section 2(1)(a) and (b) of the Companies Act 71 of 2008.
2023
Section 252 of the UK Companies Act 2006.
2024
Section 253(2) of the UK Companies Act 2006 defines members of a director’s family as (a) her/his spouse or
civil partner, (b) any other person (whether of a different sex or the same sex) with whom the director lives as
partner in an enduring family relationship, (c) the director’s children or step-children; (d) any children or step-
children of a person within paragraph (b) (and who are not children or step-children of the director) who live
with the director and have not attained the age of 18; and (e) the director’s parents.
2025
Section 252(2)(b) read together with section 254 of the UK Companies Act 2006.
2026
258
Regrettably, the South African legislation does not explicitly include the requirement that directors
be independent.2027
7 4 2 Manifestations of the BJR

7 4 2 1 The BJR as an abstention doctrine
According to this view, the judiciary should refrain or be precluded from making business
decisions.2028 The BJR does not define the scope of directors’ liability.2029 As a result, Cassim FHI
et al call it a rule of restraint.2030 However, judges do not necessarily make business decisions. If
the judiciary can interpret and apply the law with respect to corruption, fraud and theft what stops
them from reviewing the merits of a decision made by directors? In South Africa, the courts and
scholars agree that the doctrine of abstention functions as a negative2031 rebuttable2032
presumption.2033 This presumption is not intended to create a standard of liability but rather that
courts should not review the merits and substance of directors’ decisions unless the plaintiff proves
the existence of exceptional circumstances such as fraud. 2034 However, in one of the scholarly
articles, Cabrielli argues that directors should demonstrate disinterest, independence and that they
were well informed.2035 The difference is that if the rule functions as a presumption, then the
plaintiff has the burden of proof, but when the directors have to prove disinterest and independence
it means that they have the burden of proof.2036
2027
Cassim MF “When Companies are Harmed by Their own Directors: The Defects in the Statutory Derivative
Action and the Cures (Part 2)” 2013 South African Mercantile Law Journal 308.
2028
(2003) 159; Mongalo et al Forms of business enterprise: Theory, structure and operation (2004) 217;
Hamadziripi and Osode 2019 Speculum Juris 30; Rukmono 2019 Advances in Social Science, Education and
Humanities Research 233.
2029
2030
Cassim FHI et al Contemporary company law 2 ed (2012) 563. See also Morales 2018 Indon. J. Int'l & Comp.
L. 148; Triem 2007 Alaska Law Review 27.
2031
Ponta 2015 Juridical Tribune 29-30.
2032
Furlow “Good Faith, Fiduciary Duties, and the Business Judgment Rule in Delaware” 2009 Utah Law Review
1084-1087; Cassim MF The new derivative action under the Companies Act: Guidelines for judicial discretion
(2016) 102-105; Stoop 2012 S. African L.J. 547.
2033
Gimbel v The Signal Companies Inc 316 A 2d 599 (1974); Cabrelli “The Reform of the Law of Directors’ Duties
in UK Company Law” 2008 Edinburgh Research Explorer 27-28; Branson 2002 Valparaiso University Law
Review 645 footnote 51; Arsht 1979 Hofstra Law Review 109; Schoeman 2013 Without Prejudice 11.
2034
Ponta 2015 Juridical Tribune 29-30; Stoop 2012 S. African L.J. 547; Morales 2018 Indon. J. Int'l & Comp. L.
148.
2035
Cabrelli 2008 Edinburgh Research Explorer 27-28.
2036
Furlow 2009 Utah Law Review 1093 emphasises that the burden of proof is on the plaintiff.
259
On the flip side of the coin, the presence of other factors precludes the utilisation of the BJR in
general and as a doctrine of abstention in particular. Proof of fraud, the illegality of the decision
made and conflict of interest on the part of the decision-maker displaces the BJR as a doctrine of
abstention.2037 Arsht adds bad faith, gross abuse of discretion, self-dealing and negligence to this
list.2038
The abstention doctrine precludes courts from deciding whether directors violated the duty of care
or not.2039 The doctrine has its own merits and demerits. Some of the benefits of the doctrine
include the conservation of judicial resources2040 by not wasting time and money on issues that the
courts will eventually refer back to the board of directors because the former simply does not have
enough information and experience thereon. The doctrine also helps maintain the board of
directors’ internal group dynamics.2041 Bouwman adds that market mechanisms favour the
abstention doctrine in the sense that “for directors to remain in the market and to continue to be
sought after to take office as director, they will have to make sure that they manage the company
successfully and abide by the rules”.2042
On the criticisms that have been levelled against the abstention doctrine, Schoeman wonders at
how the court determines the reasonableness of a decision without examining the decision
itself.2043 Furthermore, there is a risk that if the abstention doctrine is followed, the BJR may end
up being a mere determinant of which party bears the burden of proof.2044 This is nothing more
than a repetition of the general rule that when the plaintiff fails to prove a prima facie case the
defendant will be entitled to summary judgment.2045
2037
Cassim FHI et al Contemporary company law 2 ed (2012) 566; Bainbridge 2004 Vand. L. Rev 98; Arsht 1979
Hofstra Law Review 127.
2038
Arsht 1979 Hofstra Law Review 108-109. For some of the factors that are considered when proving bad faith see
the same article at 127 and Furlow 2009 Utah Law Review 1088.
2039
2040
2041
2042
2043
2044
However, it can be argued that the allocation of the burden of proof is just a consequence of the rule’s operation
and should not be regarded as its main purpose. See Ponta 2015 Juridical Tribune 34.
2045
See Cede & Co v Technicolor Inc 634 A 2d 345 (1993); Bainbridge 2004 Vand. L. Rev 103.
260
It is submitted that the validity of the abstention doctrine needs to be tested against the 2008 Global
Financial Crisis (hereinafter, the “GFC”)2046 and other modern corporate debacles.2047 While it is
appreciated that there is a myriad of factors that led to the 2008 GFC, it cannot be denied that
“mishandling of risk” was the most prominent one.2048 The disaster leaves one with more questions
than answers; one of the questions is: Whether, in light of the 2008 global director misfeasance,
should the principle of director liability be revisited? A corollary of this is how the law should
address risk-taking and under what circumstances should director decisions be reviewed?
7 4 2 2 The BJR as an immunity doctrine

The BJR has also been couched as an immunity doctrine.2049 Literally, the word “immunity” refers
to special privilege or to being exempted from any natural or usual liability. 2050 The effect of an
immunity is to protect the beneficiary of such from liability for conduct undertaken by persons
acting in certain capacities.2051 In this context, the immunity will apply to directors as long as they
are acting in their capacity as directors. The effect of the BJR is “to insulate directors from liability
for their business-related decisions”.2052 McMillan concludes one of his articles on the rule by
saying:
“when I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird
a duck. The business judgment rule ‘walks’ like an immunity, ‘swims’ like an immunity and ‘quacks’
like an immunity. It has the same policy underpinnings as an immunity, the same procedure as an
immunity and has the same effect as an immunity”.2053
2046
A discussion of the GFC falls outside the ambit of this study, but for more on this corporate ordeal, consult
Dullien et al United Nations Conference on Trade and Development: The Financial and economic crisis of 2008-
2009 and developing countries 2010; Ramskogler “Tracing the origins of the financial crisis” 2015 OECD
Journal: Financial Market Trends 47-59; Reserve Bank of Australia “The Global Financial Crisis”
https://www.rba.gov.au/education/resources/explainers/pdf/the-global-financial-crisis.pdf (accessed 26-03-
2019).
2047
Hill “Evolving directors’ duties in the common law world” in Paolini (ed) Research handbook on directors’
duties: Research handbooks in corporate law and governance (2016) 32 acknowledges that in the post-Enron
era the issue of stakeholder interests has become topical. One of the aims of the Sarbanex-Oxley Act of 2002 as
expressed in its Preamble is “[t]o protect investors by improving the accuracy and reliability of corporate
disclosures”.
2048
Rosenberg 2009 Berkeley Bus. L.J. 217.
2049
Mupangavanhu 2019 Journal of African Law 3; Hamadziripi and Osode 2019 Speculum Juris 32.
2050
http://www.dictionary.com/browse/immunity (accessed 21-03-2016).
2051
2052
2053
261
With respect to the immunity doctrine, the defendant bears the onus of proof2054 in that s/he must
prove that s/he qualifies for the immunity. Cassim FHI et al argue that by applying the immunity
doctrine, the BJR becomes a “safe harbour” from liability for directors.2055 It should be noted
however that what the directors are entitled to is qualified immunity and not absolute immunity.2056
7 4 2 3 The BJR as a standard of liability

The rule has also been applied by the courts and described by corporate law scholars as a standard
of liability.2057 According to this manifestation, the BJR will not apply if the decision-maker
violated her/his duty of care.2058 Such a standard of liability dictates how one should conduct
herself or how one is expected to play an assigned role.2059 In other words, there is a certain degree
of freedom or scope for making mistakes that can be allowed to role players in different settings
and capacities which when exceeded would result in liability being imputed onto the offender. In
this context, the role players are company directors. Viewed this way, the BJR can be said to be a
test applied by the courts to determine whether a director’s conduct gives rise to personal
liability.2060
It should be noted that grossly negligent decisions fall outside of the “grace” of the BJR.2061
However, the challenge will be in defining what gross negligence is and how it differs from mere
negligence. Is it in the amount of harm suffered by the company or is it about the unreasonableness
of the decision? In this respect Branson contends that the degree of care required is due care, not
some care or slight care or gross negligence.2062 In the American case of Cede & Co v Technicolor
Inc,2063 it was held, concerning the rule that, “as a rule of evidence, it creates a “presumption that
in making a business decision, the directors of a corporation acted on an informed basis, [that is]
2054
McMillan 2012 William & Mary Business Law Review 569; Giraldo “Factors affecting the Application of the
Business Judgment Rule: An Empirical Study of the US, UK, Australia and the EU” 2006 130; Lee 2005
University of Botswana L.J. 52.
2055
Cassim FHI et al Contemporary company law 2 ed (2012) 563. See also Gurrea-Martinez 2018 Journal of
2056
Leach The Correct Understanding of the Business Judgment Rule in Section 76(4) of the Companies Act 71 of
2008: Avoiding the American Mistakes (Published Masters’ thesis, University of Cape Town, 2014) 47.
2057
Hamadziripi and Osode 2019 Speculum Juris 33; McMillan 2012 William & Mary Business Law Review 529;
Furlow 2009 Utah Law Review 1083.
2058
2059
2060
Ibid.
2061
2062
2063
634 A 2d 345 (1993).
262
with due care, in good faith and the honest belief that the action taken was in the best interest of
the company”.2064
The standard of liability as a theoretical basis of the BJR is not without its critics. Bainbridge
claims that the standard of liability approach is tantamount to putting the cart before the horse in
the sense that the courts first seek evidence of misconduct and if they fail to find such they then
proceed to adopt the “hands-off policy”.2065 This approach would result in the courts becoming
more and more involved in reviewing directors’ decisions. Yaru puts it this way, the rule so
couched entails “some objective review of the quality of the board’s decision”.2066 However, a
review of directors’ decisions should be the exception rather than being the norm.2067 Such practice
could result in a situation whereby the courts usurp the authority of directors. The important
question then would be - who is the final decision maker in the company? The board of directors
or the court? In the words of Jackson J in Brown v Allen,2068 “we are not final because we are
infallible, but we are infallible only because we are final”.2069
75 THE BJR IN THE USA

In the USA, there are two main formulations of the rule. 2070 The first one is by the Delaware
Chancery Court which is couched as follows: “the business judgment rule is a presumption2071 that
in making a business decision the directors of a corporation acted on an informed basis, in good
faith and in the honest belief that the action taken was in the best interests of the company”. 2072
2064
Cede & Co v Technicolor Inc 634 A 2d 345 (1993). See also Triem 2007 Alaska Law Review 26; Millstein et al
2018 Journal of Applied Corporate Finance 18.
2065
Bainbridge 2004 Vand. L. Rev 94; McMillan 2012 William & Mary Business Law Review 534.
2066
Yaru 2016 SAcLJ 431 while quoting Bainbridge 2004 Vand. L. Rev 91.
2067
McMillan 2012 William & Mary Business Law Review 534. Yaru 2016 SAcLJ 432 argues that it is better if the
BJR is applied as an abstention rule rather than a standard of liability because the latter tends to make judicial
intervention a norm.
2068
344 US 443 540 (1953).
2069
Brown v Allen 344 US 443 540 (1953).
2070
Mupangavanhu 2019 Journal of African Law 6; Branson 2002 Valparaiso University Law Review 634; Giraldo
“Factors affecting the Application of the Business Judgment Rule: An Empirical Study of the US, UK, Australia
and the EU” 2006 121 and 129; Yaru 2016 SAcLJ 440; Branson 2011 SAcLJ 691; Neri-Castracane 2015 Frontiers
L. China 9; Triem 2007 Alaska Law Review 26.
2071
Gurrea-Martinez 2018 Journal of Corporate Law Studies 420; Yaru 2016 SAcLJ 442; Triem 2007 Alaska Law
Review 26.
2072
Aronson v Lewis 473 A 2d 805 812 (Del 1984). Branson 2002 Valparaiso University Law Review 635 submits
that this is the oft quoted statement by the Delaware Chancery Court; Scarlett 2008 Florida L. Rev 601. See also
Lee 2005 University of Botswana L.J.52.
263
The popularity of this definition makes the abstention doctrine2073 dominant in the USA. The
Delaware formulation effectively bars the judiciary from reviewing company management
decisions and, thereby, enables management “to avoid shareholder scrutiny”.2074 The Delaware
presumption can be rebutted by proving, inter alia, that the directors were not acting in the best
interests of the company.2075 The plaintiff bears the burden of proof.2076 Should the plaintiff fail to
rebut the evidentiary presumption,2077 the directors and their decision will enjoy business judgment
immunity.2078 The directors’ business judgment will be accepted “at the time made, irrespective of
the outcome”.2079 If the plaintiff successfully rebuts the presumption, the burden will shift to the
defendant directors to prove that their conduct was fair to the company in the circumstances.2080
As formulated by the Delaware Chancery Court, the BJR is problematic. First, the rule requires
the plaintiff to bear the burden of proof. However, in most cases, plaintiffs do not have adequate
information to support their case as they lack access to the relevant company books and records.2081
Derivative plaintiffs are, therefore, victims of pre-suit information asymmetry. As discussed in
Chapter 6 above, derivative proceedings are a very unique form of litigation. Information
asymmetries exist not only between the plaintiff and defendant but also between the “two
plaintiffs” which are, the shareholder who is seeking to sue derivatively and the company that
possesses the legal right to claim.2082 Therefore, the American Law Institute (ALI) was justified in
2073
The rule has been applied either as an abstention doctrine, as an immunity doctrine or as a standard of liability.
These three conceptions of the rule are not clear cut as there is some sizeable degree of overlap between them.
2074
Steinberg 1981 Notre Dame Law Review 903. See also Babbitt “Corporation Law: The Business Judgment Rule
in Derivative Suits against Directors” 1981 U. Dayton L. Rev. 263 263.
2075
Mupangavanhu 2019 Journal of African Law 6. An account of the other factors which the plaintiff can prove to
rebut the BJR presumption is presented below in section 7 8.
2076
Yaru 2016 SAcLJ 442; Lombard 2005 THRHR 617; Melbinger and Moore “Lawsuits against Directors over
Their Own Compensation” 2017 Benefits Law Journal 8.
2077
2078
Scarlett 2008 Florida L. Rev 602; Stoop 2012 S. African L.J. 547; Beyer VL “Judicial Development of a Business
Judgment Rule in Japan” 1993 Bond Law Review 209 209; Lombard 2005 THRHR 617.
2079
2080
handbook on directors’ duties: Research handbooks in corporate law and governance (2016) 275; Scarlett 2008
Florida L. Rev 602; Lombard 2005 THRHR 617.
2081
Reform” 1981 Columbia L. Rev. 261 315. Baum and Puchniak “The derivative action: An economic, historical
and practice-oriented approach” in Puchniak et al (eds) The derivative action in Asia: A comparative and
functional approach (2012) 43.
2082
264
that directors should bear the initial burden of proof during the pre-suit stage as they have access
to all the relevant company records.2083
Second, the rule cunningly shifts attention from the question of whether the directors were right in
their refusal to initiate or proceed with the litigation to the issue of whether the presumption has
been rebutted. This point cannot be better made than in the words of Cooksey and Hutchins when
they argued that “[t]he nature of a derivative suit … and not the business judgment rule, [should
determine] whether corporate directors have the authority to terminate a derivative action”.2084 As
a result, regardless of the fact that directors might have breached their fiduciary duties or
committed an act that may not warrant immunity by the rule, a wholesale adoption of the abstention
doctrine by the judiciary denies justice to a well-meaning plaintiff.2085 The abstention doctrine
effectively cuts off the litigation proceedings before even reviewing the merits of the board of
directors’ decision.2086
Furthermore, regardless of the purported global shift towards the enlightened shareholder value
approach,2087 shareholder profit maximisation remains the dominant idea in contemporary
company law.2088 However, in sharp contrast to this notion, the BJR fails to offer legal recourse
even in instances where directors have failed to maximise shareholder value. 2089 To that end,
Babbitt has contended that the BJR limits the institution of derivative actions.2090 Therefore, it is
submitted that the BJR’s presumption courtesy of the abstention doctrine is too onerous2091 and
does not take into consideration the plaintiffs’ challenges to accessing relevant information.
2083
Wilder 1985 Pace L. Rev. 653. See also Cooksey and Hutchins 1981 Texas Tech L. Rev. 659.
2084
Cooksey and Hutchins 1981 Texas Tech L. Rev. 656. See also Maldonado v Flynn 413 A.2d 1251 1257 (Del.
Ch. 1980).
2085
2086
2087
See section 172 of the UK Companies Act 2006; Cerioni “The Success of the Company in Section 172(1) of the
UK Companies Act 2006: Towards an ‘Enlightened Directors’ Primacy’?” 2008 OLR 1; Esser 2005 Obiter 722-
723 and Havenga 2005 Obiter 618.
2088
White Paper on Modernising Company Law Sixth Report of Session 2002–03 2003 House of Commons Trade
and Industry Committee London 7; Goddard “’Modernising Company Law’: The Government’s White Paper”
2003 Modern Law Review 405; Ajibo 2014 Birkbeck Law Review 44-47; and Esser and Du Plessis “The
Stakeholder Debate and Directors’ Fiduciary Duties” 2007 SA Merc L.J. 351.
2089
Sprague and Lyttle 2010 Stan. J.L. Bus. & Fin. 1 3.
2090
Babbitt 1981 U. Dayton L. Rev. 263.
2091
Rosenberg 2009 Berkeley Bus. L.J. 217 deplores this lamentable effect of the abstention doctrine by which
directors will not be held personally liable regardless of the waywardness of their decisions “unless the [plaintiff]
clears a very high standard”.
265
Consequently, the Delaware formulation fails to adequately balance the two competing interests
namely directorial authority and accountability.2092 Directors should not be allowed to use the BJR
as a weapon to terminate derivative actions. Such practice may be likened to sentencing the
derivative remedy to capital punishment.2093 The derivative remedy is a very important means of
ensuring legal recourse, especially for minority shareholders.2094 At the same time, directors should
not be barred from dismissing derivative suits as they might lead to a floodgate of frivolous
suits.2095
The second BJR formulation is by the ALI. Section 4.01c of the ALI Principles of Corporate
Governance (ALI Principles) provides that;
“a director who makes a business judgment in good faith fulfils the [duty of care] if [s/he] is not
interested in the subject of his business judgment, is informed with respect to the subject of the business
judgment to the extent the director or officer reasonably believes to be appropriate under the
circumstances and rationally believes that the business judgment is in the best interests of the
corporation”.2096
The ALI’s formulation was originally a draft for the codification of the BJR. It is not therefore
tantamount to codification but is a very persuasive instrument as evidenced by the numerous
references to it by various courts in different states of the USA. 2097 There are some aspects of the
ALI formulation of the rule that are noteworthy. First, unlike the Delaware formulation, the ALI
construction is not a presumption in favour of the directors.2098 In fact, it is the corporate decision
makers that bear the burden to prove that they made an informed decision before they can enjoy
the rule’s protections.2099 This approach is plausible as it “levels the ground” between directors
2092
See Yaru 2016 SAcLJ 429 who emphasises the need to balance directorial autonomy with accountability.
2093
2094
Ibid.
2095
2096
American Law Institute Principles of Corporate Governance: Analysis and Recommendations 1994. See also
Mupangavanhu 2019 Journal of African Law 6.
2097
For example see Rosenfield v Metals Selling Corp 643 A 2d 1994 (Conn) 1261; Omnibank v United States Bank
607 So 2d 1992 (Miss) 85; Cuker v Mikalauskas 692 A 2d 1997 (Pa) 1045-1046.
2098
Yaru 2016 SAcLJ 441 and 451. The ALI formulation has influenced other jurisdictions such as Japan, Australia
and Germany. For example, section 93(1) of Germany’s Stock Corporation Act states that “[i]n conducting
business, the members of the management board shall employ the care of a diligent and conscientious manager.
They shall not be deemed to have violated the aforementioned duty if, at the time of taking the entrepreneurial
decision, they had good reason to assume that they were acting on the basis of adequate information for the
benefit of the company”.
2099
266
and derivative claimants. As already alluded to, the latter usually suffer from information
asymmetry which makes it difficult if not impossible for them to satisfactorily prove their case on
a balance of probabilities. The shift in the burden of proof to the directors is therefore welcome.
Second, the director must rationally believe that he made a decision that was in the best interests
of the company.2100
The principles of the BJR have been included in sections 8.30b and 8.31 of the United States Model
Business Corporation Act (MBCA).2101 Triem suggests that these provisions of the MBCA
provide for a third BJR formulation.2102 Leach, however, contends that the model Act does not
codify the BJR2103 as the standard of care should not be equated to the BJR.2104 Triem explains that
“the standard of care defines ex ante the conduct to which directors must aspire while the BJR is
an ex post standard of review applied by the courts”.2105 Put differently, the standard of care is a
standard of expected conduct whilst the BJR is a standard of review.2106
The other factor that necessitated the rule is director sovereignty. 2107 However, there is some
confusion as to whether the rule only applies as far as the procedural aspects of the decision are
concerned or whether it extends to substantive issues as well. For example, in the cases of
McMullin v Beran2108 and Cede & Co v Technicolor Inc,2109 it was held that “the business judgment
rule operates as both a procedural guide for litigants and a substantive rule of law”. 2110 On the
other hand, there is overwhelming authority to support the view that the BJR only applies to the
procedural aspects of a decision.2111
2100
Ibid.
2101
2002.
2102
Triem 2007 Alaska Law Review 26.
2103
Leach The Correct Understanding of the Business Judgment Rule in Section 76(4) of the Companies Act 71 of
2008: Avoiding the American Mistakes (Published Masters’ thesis, University of Cape Town, 2014) 23.
2104
2105
Triem 2007 Alaska Law Review 29. See also Mupangavanhu 2019 Journal of African Law 3.
2106
Triem 2007 Alaska Law Review 29, who while quoting Cary and Eisenberg MA Cases and Materials on
Corporations 7 ed (1995) 602 further elaborates that a standard of conduct defines how an actor should conduct
a given activity or play a given role. On the other hand, a standard of review is tantamount to a judicial test
applied to review an actor’s conduct to determine whether or not to impose liability.
2107
2108
765 A 2d 910 (Del 2000) 916-917.
2109
634 A 2d 345 (1993).
2110
McMullin v Beran 765 A 2d 910 (Del 2000) 916-917; Cede & Co v Technicolor Inc 634 A 2d 345 (1993).
2111
Smith v Van Gorkom (The Trans Union Case) 488 A 2d 858 (Del 1985); Leach The Correct Understanding of
the Business Judgment Rule in Section 76(4) of the Companies Act 71 of 2008: Avoiding the American Mistakes
267
76 A UNIQUE SOUTH AFRICAN VERSION OF THE BJR?
The rule was introduced into South African company law by the Companies Act 71 of 2008.2112
However, it is imperative to look at the position under South African company law before the
enactment of the new Companies Act2113 and the process that led to the BJR’s codification. A good
starting point may be 1994, the year the first version of the King Report on Corporate Governance
was published. In that report, it was recommended that “a director should not be liable for a breach
of the duty of care and skill if he or she exercised a business judgment in good faith, the decision
was an informed one based on all the facts of the case, the decision was rational and there was no
self-interest”.2114 So according to the King I Report, the principles of the rule were good faith, an
informed decision, rationality and absence of self-interest. Bouwman comments that the purpose
of this recommendation was “to encourage the competitiveness of South African companies, to
encourage entrepreneurship and persons with skill and reputation to accept appointments as
directors”.2115
In the King II Report, it was highlighted that “what constitutes the business judgment rule is
controversial”.2116 The recommendations in the King II Report contain the same principles of good
faith, an informed decision, absence of self-interest and rationality just as is contained in its
predecessor.2117 The King III Report addresses the BJR in the “Introduction and Background”
(Published Masters’ thesis, University of Cape Town, 2014) 29, Bainbridge 2004 Vand. L. Rev 101; Schoeman
2013 Without Prejudice 12.
2112
Section 76(4)(a) provides as follows “in respect of any particular matter arising in the exercise of the powers or
the performance of the functions of director, a particular director of a company- (a) will have satisfied the
obligations of subsection (3)(b) and (c) if:
(i) the director has taken reasonably diligent steps to become informed about the matter;
(ii) either-
(aa) the director had no material personal financial interest in the subject matter of the decision, and had no
reasonable basis to know that any related person had a personal financial interest in the matter; or
(bb) the director complied with the requirements of section 75 with respect to any interest contemplated in
subparagraph (aa); and
(iii) the director made a decision, or supported the decision of a committee or the board, with regard to that
matter, and the director had a rational basis for believing, and did believe, that the decision was in the best
interests of the company”.
2113
71 of 2008.
2114
King Report on Corporate Governance for South Africa 1994 9.
2115
Steinberg 1981 Notre Dame Law Review 905. See also Bouwman 2009 SA Merc LJ 526-527. For a critique of
these reasons see the same article at 527-528.
2116
King Report on Corporate Governance for South Africa 2002 70.
2117
See chapter 9 note 1 of the King Report on Corporate Governance for South Africa 2002 70.
268
section.2118 The report does not go so far as to provide any guidelines on the application of the
rule.2119 Also, it has to be noted that all three reports do not mention any grounds or instances such
as fraud or illegality whereby a court can intervene in directors’ decisions.
Clause 91 of the Companies Bill of 2007 was the first attempt to include the BJR in South African
legislation.2120 The result was section 76(4) of the Companies Act.2121 This is the section that
eventually introduced the rule into South Africa.2122 The authors of Henochsberg have correctly
observed that the rule is incorporated into South African law as part of both the directors’ fiduciary
duty to act in the best interests of the company and the duty of care and skill. 2123 However,
Muswaka recognises only the nexus between the rule and the fiduciary duty.2124 Cassim FHI et al
contend that section 76(4) creates a presumption2125 which necessarily means that the plaintiff
bears the burden of proof. This statutory provision is similar to the rule’s formulation in the King
I and II Reports except that the King I Report does not include the requirement of good faith.
Although Schoeman concedes that the adjudication and application of the rule have not been tested
2118
“A new statutory defence has been introduced for the benefit of directors who have allegedly breached their duty
of care. This defence will be availed of by a director who asserts that he had no financial conflict, was reasonably
informed, and made a rational business decision in the circumstances”. King Report on Governance for South
Africa 2009. Unlike its two predecessors, King III does not contain anything about good faith as a requirement
for a director to rely on the BJR.
2119
2120
Bouwman 2009 SA Merc LJ 528. Clause 91(2) of the 2007 Bill provided that “[a] director's judgement that an
action or decision is in the best interest of, or for the benefit of, the company is reasonable if ... the director ...
has taken reasonably diligent steps to become informed about the subject matter of the judgement … does not
have a personal financial interest in the subject matter of the judgement; and ... it is a judgement that a reasonable
individual in a similar position could hold in comparable circumstances”.
2121
71 of 2008. This section provides that “in respect of any particular matter arising in the exercise of the powers
or the performance of the functions of director, a particular director of a company will have satisfied the
obligations of subsection (3)(b) and (c) if the director has taken reasonably diligent steps to become informed
about the matter; either the director had no material personal financial interest in the subject matter of the
decision, and had no reasonable basis to know that any related person had a personal financial interest in the
matter; or the director complied with the requirements of section 75 with respect to any interest … and the
director made a decision, or supported the decision of a committee or the board, with regard to that matter, and
the director had a rational basis for believing, and did believe, that the decision was in the best interests of the
company”. See also Loubser et al Company secretarial practice Revision service 2 2018 8-26 and Cassim MF
2013 South African Mercantile Law Journal 172.
2122
Mupangavanhu 2019 Journal of African Law 1; Loubser et al Company secretarial practice Revision service 2
2018 8-26; Henochsberg on the Companies Act 71 of 2008 297; Klauberg “General case on directors’ duties”
in Siems and Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018) 62; Davies et al
Companies and other business structures in South Africa 3 ed (2013) 124; Bouwman 2009 SA Merc LJ 528;
Muswaka 2013 International Journal of Humanities and Social Science 89; Van Tonder 2016 Obiter 562 563.
2123
Henochsberg on the Companies Act 71 of 2008 298. See also Bouwman 2009 SA Merc LJ 528.
2124
Muswaka 2013 International Journal of Humanities and Social Science 90.
2125
269
by South African courts,2126 the authors of Henochsberg opine that the test whether a director’s
decision is covered by the BJR is partly subjective and objective.2127
The rule remains mostly uncodified with the exception of Australia and South Africa.2128 The way
the rule is fashioned in section 76(4) of the Companies Act of 2008 has been criticised on the basis
that it blurs the distinction between the directors’ fiduciary duty to act in the best interests of the
company and the common law duty of care and skill.2129 This can be attributed to the fact that in
the USA where the rule originates, there is no such distinction. The two are regarded as fiduciary
duties.
Put differently, the Act lays down the elements of the South African BJR which are the decision,
informed basis, disinterestedness, rationality and the best interests of the company. 2130 A
comparison with Australia, which was the first jurisdiction to codify the rule is valuable. It is
argued that the South African version of the BJR is very wide in scope and therefore open to abuse
as it applies “[i]n respect of any particular matter arising in the exercise of the powers or the
performance of the functions of director…”.2131 The vulnerability of section 76(4) to abuse is
amplified if one reads the said provision with section 66(1) of the 2008 Companies Act which
unequivocally states that “[t]he business and affairs of a company must be managed by or under
the direction of its board, which has the authority to exercise all of the powers and perform any of
the functions of the company, except to the extent that this Act or the company’s Memorandum of
Incorporation provides otherwise”.2132 According to Black’s Law Dictionary, the word business
2126
2127
2128
Branson 2002 Valparaiso University Law Review 633; Lombard 2005 THRHR 618. It is a paradox that the rule
is not codified in Delaware which frequently deals with corporate law issues relating to it but has been codified
in South Africa where the rule has barely been tested by the courts. For more on the advantages and disadvantages
of codification and non-codification see Bouwman 2009 SA Merc LJ 521-523.
2129
See Cassim FHI et al Contemporary company law 2 ed (2012) 564.
2130
Henochsberg on the Companies Act 71 of 2008 298; Davies et al Companies and other business structures in
South Africa 3 ed (2013) 124. See also Muswaka 2013 International Journal of Humanities and Social Science
89 and Pillay and Natesan “The Business Judgment Rule”
2019) argue that unless the above mentioned requirements are complied with, the rule will not be successfully
invoked. See also Muswaka 2013 International Journal of Humanities and Social Science 89.
2131
2132
Section 66(1) of the Companies Act 71 of 2008. See also Cassim R “The Power to Remove Company Directors
from Office: Historical and Philosophical Roots” 2019 Fundamina 37 62; Klauberg “General case on directors’
duties” in Siems and Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018) 59;
Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 247-248.
270
refers to both commercial2133 and non-commercial transactions.2134 It is also clear from section
66(1) of the 2008 Companies Act that directors have all the powers and perform any functions of
the company.2135 Ultimately, all directors’ decisions may end up qualifying for treatment as
business judgments. Against the above background, it can be submitted that South Africa’s overly
elastic version of the BJR may potentially offer arbitrary immunity to mischievous directors. Pillay
and Natesan submit that the South African version of the rule is broader than that adopted by its
counterparts.2136
There has been no judicial pronouncement on the correct application of section 76(4). However, it
may also be contended that the provision encompasses innate limitations against abuse in the form
of section 76(3)(b)2137 and (c).2138 Under this line of reasoning, a director who does not act in the
company’s best interests and violates her/his duty of care obligations may be disqualified from the
protections of the BJR. Although the duty to act in the best interests of the company and with the
degree of care, skill and diligence are not elements of the BJR in terms of section 76(4), 2139 it is
highly unlikely that a director who violates them will enjoy the protections of the BJR. Section
76(4)(a)(iii) links the rationality enquiry to an analysis of the best interests of a company. The link
between section 76(4)(a)(iii) and 76(3)(b) was confirmed in Visser Sitrus (Pty) Ltd v Goede Hoop
Sitrus Ltd2140 when the court held that “section 76(4) makes clear that the duty imposed by s
2133
Keay and Loughrey 2018 Legal Studies 22 submit that the traditional meaning of the word “commercial
judgment” as per the United Kingdom courts strictly refers to transactional dealings of buying and selling
between the company and third parties.
2134
Garner et al Black’s law dictionary 8 ed (2004) 211. See also Keay and Loughrey 2018 Legal Studies 22.
2135
Fundamina 37 62.
2136
2019). See also Cassim FHI et al Contemporary company law 2 ed (2012) 566.
2137
Section 76(3)(b) provides that “[s]ubject to subsections (4) and (5), a director of a company, when acting in that
capacity, must exercise the powers and perform the functions of director in the best interests of the company”.
2138
Section 76(3)(c) stipulates that “[s]ubject to subsections (4) and (5), a director of a company, when acting in that
capacity, must exercise the powers and perform the functions of director with the degree of care, skill and
diligence that may reasonably be expected of a person carrying out the same functions in relation to the company
as those carried out by that director; and having the general knowledge, skill and experience of that director”.
2139
Under the BJR as provided for in section 76(4)(a) there is a presumption that a director acted in the company’s
best interests with the necessary degree of care, skill and diligence if the elements of the rule are satisfied. See
Cassim FHI et al Contemporary Company Law 2 ed (2012) 565.
2140
2014 (5) SA 179 (WCC).
271
76(3)(b) to act in the best interests of the company is not an objective one”.2141 The existence of
that nexus has also been asserted by Klauberg.2142
Unlike South Africa, Australian legislation, which has influenced most common law jurisdictions
in this regard, specifically delimits the exact scope of application of the BJR.2143 Besides section
76(4) of the South African Companies Act, as Cassim MF has argued, a statutory BJR is envisaged
in section 165(7)(c) of the same Act.2144 The Australian statutory version of the rule strictly applies
to section 180 of the Corporations Act2145 and its equivalent common law and equity
obligations.2146 The same section provides for directors’ duties of care and diligence. Therefore,
the Australian BJR is only applicable in the context of directors’ statutory duty of care and
diligence and the equivalent obligations at common law and equity. It has been submitted that the
Australian version of the BJR is more inclined to the ALI formulation and hence a standard of
liability doctrine than it is to the Delaware construction.2147 Section 180(2) of the Australian
Corporations Act seemingly requires directors to bear the burden of proof.2148
Another notable difference between the two pieces of legislation is that South Africa’s 2008 Act
deliberately does not require directors to act in good faith and for a proper purpose for their
decisions to enjoy the protection of the BJR.2149 However, the authors of Henochsberg argue that
2141
Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus Ltd 2014 (5) SA 179 (WCC) para 74. Klauberg “General case on
directors’ duties” in Siems and Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018)
62.
2142
Klauberg “General case on directors’ duties” in Siems and Cabrelli (eds) Comparative company law: A case-
based approach 2 ed (2018) 62.
2143
A note to section 180(2) of the Australian Corporations Act (Cth) No. 50 2001 which accommodates the rule
provides that “[t]his subsection only operates in relation to duties under this section and their equivalent duties
at common law or in equity (including the duty of care that arises under the common law principles governing
liability for negligence)—it does not operate in relation to duties under any other provision of this Act or under
any other laws”.
2144
Cassim MF 2013 South African Mercantile Law Journal 170; Cassim MF 2013 South African Mercantile Law
Journal 301.
2145
2001.
2146
In this regard, the Australian Corporations Act (Cth) No. 50 2001 can be regarded as progressive because of its
clarity and contextual reference on the application of the rule. As Ponta 2015 Juridical Tribune 27 has argued,
“the business judgment rule permeates all aspects of corporate law, from the analysis of possible negligent
business decisions, to self-dealing operations or transactions or even the adoption of long-term business
policies”. Therefore, a bare mention of the rule must not automatically lead to assume that it will be in the context
of derivative actions or mergers and takeovers, although the doctrine is usually applied in these two proceedings.
2147
Yaru 2016 SAcLJ 445 and 447; Branson 2011 SAcLJ 709.
2148
2149
Cassim FHI et al Contemporary Company Law 2 ed (2012) 564. Section 76(4) of the 2008 Act seems to
deliberately subject its application only to section 76(3)(b) and (c) and omit (a) which provides for the
272
if a duty is not specifically excluded by the Act, the common law should continue to apply. 2150
Conversely, the Australian Corporations Act2151 explicitly provides that “[a] director or other
officer of a corporation who makes a business judgment is taken to meet the requirements of
subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment
if they make the judgment in good faith for a proper purpose”. 2152 Apart from the requirements
mentioned in section 76(4) of the South African Companies Act, it has also been submitted that
the BJR must conform to section 76(3)(c).2153
Similarly, both statutes require directors to make informed decisions. 2154 In the process of
diligently making informed decisions, South African directors are allowed to reasonably rely on
the performance and information provided by other professionals. 2155 By application of a literal
interpretation of this provision, directors who rely on blatantly false information will not have
acted reasonably and therefore the immunity of the rule falls away. Reasonable reliance on the
performance of other people implies a reasonable test. According to this test, a director who does
not behave in the same way a reasonable director who possesses the ordinary skill and diligence
does not enjoy the protection of the rule. However, Delport et al believe that the test is partly
objective and partly subjective.2156
In Australia, directors are also allowed to rely on information, or professional or expert advice,
given or prepared by an employee of the corporation,2157 a professional adviser or
expert,2158another director or officer2159 or a committee of directors on which the director did not
serve in relation to matters within the committee’s authority.2160 The reliance must be made in
requirement to act in the good faith and for a proper purpose. See also Cassim MF 2013 South African Mercantile
Law Journal 175.
2150
2151
2001.
2152
See section 180(2)(a) of the Australian Corporations Act (Cth) No. 50 2001.
2153
Henochsberg on the Companies Act 71 of 2008 298; Cassim FHI et al Contemporary company law 2 ed (2012)
565. See also the discussion by Klauberg “General case on directors’ duties” in Siems and Cabrelli (eds)
Comparative company law: A case-based approach 2 ed (2018) 62.
2154
See section 76(4)(a)(i) of the Companies Act 71 of 2008 and section 180(2)(c) of the Australian Corporations
Act (Cth) No. 50 2001.
2155
See section 76(4)(b) read together with section 76(5)(a), (b) and (c).
2156
Henochsberg on the Companies Act 71 of 2008 297. See also Howard Smith Ltd v Ampol Petroleum Ltd [1974]
1 All ER 1124.
2157
Section 189(a)(i) of the Corporations Act 2001 (Cth).
2158
Section 189(a)(ii) of the Corporations Act 2001 (Cth).
2159
Section 189(a)(iii) of the Corporations Act 2001 (Cth).
2160
Section 189(a)(iv) of the Corporations Act 2001 (Cth).
273
good faith.2161 Before making a decision relying on the information from the above mentioned
possible sources, a director has a duty to also make their own personal assessment of the advice so
received.2162 If these requirements are fulfilled, then a director’s “reliance on the information or
advice is taken to be reasonable unless the contrary is proved”.2163 From the language of the
legislature, it seems that upon fulfilment of the requirements of the outlined provisions, directors
are presumed to have acted reasonably.2164 Unlike the Australian Corporations Act, the South
African Companies Act does not prescribe how the reliance should be made. It is submitted that,
in this regard, the Australian provision is more plausible.
The Australian Corporations Act mentions two specific sources of data that directors can rely on;
these are information and professional or expert advice. In South Africa, directors can rely on
information, opinions, recommendations, reports or statements, including financial statements and
other financial data. Although the South African legislature listed different types of “information”,
it can be argued that all that can be grouped as either information or advice. Therefore, it is
submitted that the scope of the two provisions is essentially the same.
Interestingly, both statutes require the concerned director to be disinterested 2165 from the
challenged transaction or decision but none obligates directors to be independent.2166 As discussed
in chapter six above,2167 the two concepts are not synonymous. An independent director2168 is “free
from the influence, control or determination of someone or something… [and in order] to be
‘independent,’ a director should be ‘disinterested’”.2169 In Teixon Corp. v Meyerson2170 it was held
that “directors must not only be independent but must act independently”.2171 In Rales v
2161
Section 189(b)(i) of the Corporations Act 2001 (Cth).
2162
Section 189(b)(ii) of the Corporations Act 2001 (Cth).
2163
Section 189(c) of the Corporations Act 2001 (Cth).
2164
The relevant part states that the “director’s reliance on the information or advice is taken to be reasonable unless
the contrary is proved”. This gives the impression that the default approach is, subject to fulfilment of the
mentioned requirements, to believe that the director’s reliance was reasonable.
2165
See section 76(4)(a)(ii) of the Companies Act 71 of 2008 and section 180(2)(b) of the Australian Corporations
Act (Cth) No. 50 2001.
2166
2167
See Chapter 6 above under section 6 5 1 1.
2168
For more on independent directors see Gurrea-Martínez A “Towards a credible system of independent directors
in controlled firms” 2019 Working Paper Series 1/2019 4-32 available at https://ssrn.com/abstract=3380868
(accessed 27-09-2019).
2169
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 60. Cassim MF 2013 South
African Mercantile Law Journal 307 argues that “disinterestedness is narrower than independence”.
2170
802 A.2d 257 264 (Del. 2002).
2171
Telxon Corp. v Meyerson 802 A.2d 257 264 (Del. 2002).
274
Blasband,2172 it was held that an interested director “will receive a personal financial benefit2173
from [the] transaction that is not equally shared by the [other shareholders]”.2174 A disinterested
director must not appear on both sides of a transaction.2175 Also, Black’s Law Dictionary defines
one to be independent when s/he is “not subject to the control or influence of another”. 2176 The
same dictionary states that a disinterested individual is “free from bias, prejudice or partiality” or
does not have a pecuniary interest.2177
Clearly, the South African legislature omitted the requirement of independence on the directors’
part. The same sentiments were echoed by Cassim MF, who, though arguing in the context of
section 165(7)(c) of the Companies Act, lamented that this omission is regrettable as “[t]he
adoption of a more comprehensive notion of independence would serve as a safeguard against
several abuses such as wrongdoing by a director who is dominant or who has close or long-standing
personal relationships with his fellow board members”.2178 It can be argued that the concept of
independence is captured in the requirement to act in the best interests of the company.2179
However, if the legislature wished to include it, it would have done so unequivocally. The South
African Companies Act should therefore be amended to include the requirement that directors act
independently. Besides the fact that the current provision gives the courts very wide discretion, it
is also vague and susceptible to abuse. Legal certainty is one of the vital aspects of the enhanced
accountability perspective of derivative litigation.
77 JAPAN
As indicated in Chapter 4 above, Japan is a civil law jurisdiction and hence statutes are the main
source of law.2180 As a result, unlike the common law jurisdictions which are under examination
in this study, judicial precedents do not play a major role in the development of Japanese company
2172
634 A.2d 927 936 (Del. 1993).
2173
It should be noted that the benefit need not be expressed in financial terms. See Scarlett 2008 Florida L. Rev.
616.
2174
Rales v Blasband 634 A.2d 927 936 (Del. 1993).
2175
In re Riverstone National Inc. Stockholder Litigation Consol. C.A. No. 9796-VCG Del. Ch. July 28 2016.
2176
2177
2178
2179
Cassim MF 2013 South African Mercantile Law Journal 308 arguing that at common law, the duty to act
independently falls under the overarching fiduciary duty to act in good faith.
2180
Shishido “Japanese Corporate Governance: The Hidden Problems of Corporate Law and their Solutions” 2000
Del. J. Corp. L. 195.
275
law.2181 Court opinions are not binding in subsequent cases. In fact, the writings of legal scholars
significantly contribute more to the development of Japanese company law than case law.2182
Japanese judges refer to scholarly writings, especially when explaining “new or alien” concepts2183
of which the BJR is one.2184 However, this does not mean that Japanese case law is not worthy of
examination. It remains important for at least two reasons. Japanese judicial precedents assist in
the interpretation of the codes and the changes that may be introduced by them. 2185 Weng has
advised that the transplantation of the rule “calls for greater specificity within the rule itself to
compensate for the lack of established and binding precedent”.2186
In the said Asian nation, the BJR is known as the keiei handan kisoku.2187 The rule is treated as
part of article 254(3) of the Commercial Code which requires company directors to act with the
care of a mandate.2188 This provision sounds like the equivalent of the duty of care standard in
common law systems. According to the said provision, a director whose negligence and
inexperience causes damage to the company will be liable to the latter.2189 Beyer argues that
according to article 254(3) of the Commercial Code, it stands to reason that directors who make
informed decisions that are “properly approved” by the board do not incur personal liability.2190
However, Beyer’s argument risks blurring the distinction between the BJR and the duty of care.
The two are not the same and should not be treated as such.2191 The duty of care standard prescribes
how a director should conduct himself. The standard spells out the expected behaviour of a
director.2192 On the contrary, the BJR is only invoked ex post facto.2193 In other words, the BJR is
2181
2182
2183
Ibid.
2184
Cassim FHI et al Contemporary company law 2 ed (2012) 563; Schoeman 2013 Without Prejudice 11; and
Bouwman 2009 SA Merc LJ 523 all confirm the fact that the BJR originates from the USA.
2185
2186
2187
2188
Beyer VL 1993 Bond Law Review 214. See also the discussion by Klauberg “General case on directors’ duties”
in Siems and Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018) 65-66.
2189
Ibid.
2190
Ibid.
2191
Yaru 2016 SAcLJ 444; Hill “Evolving Directors’ duties in the common law world” in Paolini (ed) Research
2192
Triem 2007 Alaska Law Review 29. For more on this consult Dan-Cohen “Decision Rules and Conduct Rules:
On Acoustic Separation in Criminal Law” 1984 Harv L.R. 625 and Eisenberg MA “The Divergence of Standards
of Conduct and Standards of Review in Corporate Law” 1993 Fordham L.R 437.
2193
Triem 2007 Alaska Law Review 29.
276
applied to determine whether the relevant standard of care was met. At most, the two are
complementary but not synonymous.
It can be argued that Japan is more inclined to a standard of liability version of the BJR.2194 An
important lesson to take from this jurisdiction is that “it is insufficient to just examine the rule to
determine how it will affect the director’s liability. The amount of protection and discretion that
directors enjoy may rely ultimately on other factors in the corporate governance framework”. 2195
78 ENGLAND
Unlike all the other jurisdictions that have been mentioned above, England does not have a formal
BJR either in terms of statute or under case law. However, the judiciary has maintained the policy
of “minimum intervention in business decisions”.2196 Adoption of a statutory BJR was once
considered by the UK Law Commission.2197 A formal BJR was rejected on the basis that its
introduction would not improve directors’ standard of conduct.2198 Secondly, it was claimed that a
formal BJR would be synonymous to inviting judicial interference with the management decision-
making process when the courts determine whether the decision was rational.2199
Also, it was argued that for directors to satisfy the requirements2200 of the BJR they would need to
spend a lot of time making decisions so that their decisions would appear to be informed.2201 This
concern cannot be better expressed than in the words of Elson who argued that “staged like a good
play, such proceedings may evoke a recitation of the required emotions on the part of the actors
that, in the final analysis, when the stage lights dim, have only been an illusion. Nothing is gained
by such a charade. Entertaining, maybe; shareholder value-embracing, absolutely not”.2202
Branson has also contended that the insistence on formal decisions does not in any way improve
2194
2195
Ibid.
2196
2197
2198
Ibid. Velasco 2018 Notre Dame Law School Legal Studies Research Paper No. 1933 5 differentiates between a
standard of conduct and a standard of review. The scholar contends that the former informs the actor on how to
behave, while the latter directs the reviewing court on how to determine whether one should be held liable.
2199
2200
It has been emphasised that the BJR is only applicable upon satisfaction of certain requirements which slightly
vary from jurisdiction to jurisdiction. See Gurrea-Martinez 2018 Journal of Corporate Law Studies 418; Morales
2018 Indon. J. Int'l & Comp. L. 148.
2201
2202
277
the quality of directors’ decisions but rather “places a premium on play acting and on paper
trails”.2203
The case of Howard Smith Ltd v Ampol Petroleum Ltd2204 will be used here to illustrate the judicial
attitude towards the BJR in the United Kingdom. The litigation arose in a hostile takeover scenario.
In that case, Ampol Petroleum Ltd (hereinafter, referred to as the respondent) and Bulkships Ltd
(these companies will be loosely referred to as “the two companies”) owned almost 55% of the
issued shares of R W Miller (Holdings) Ltd (Millers). The respondent made an offer to buy all the
issued shares of Millers. The directors of Millers met to consider the offer and unanimously
rejected it saying that it was too low. Barely three weeks afterwards, Howard Smith Ltd (the
appellant) applied to Millers for the allotment of 4 500 000 ordinary shares. The application was
considered and approved on the same day by the majority of the Millers’ board of directors. It is
this conduct which forms the basis of the litigation in casu. The effect of the allotment of the said
shares to the appellant would effectively shift majority voting rights from the two companies to
the appellant, the new majority shareholder. The trial court had set aside the directors’ decision to
allot shares to the appellant. The current case was an appeal against the decision of the court a
quo.
At issue was the validity of the directors’ decision to allot shares to the appellant. More
specifically, the question was whether the primary purpose of the majority of directors was to
satisfy Millers' need for capital or whether their primary purpose was to terminate the majority
holding of Ampol and Bulkships.2205 The directors were empowered by clause 8 of the company’s
articles of association to allot or dispose of Millers’ unissued shares, subject to certain
qualifications.2206 It was argued on behalf of the appellant that for the directors’ decision to be
valid, it was enough that they acted bona fide in the best interests of the company; that “once it is
found that the directors were not motivated by self-interest, [that is] by a desire to retain their
control of the company or their positions on the board, the matter is concluded in their favour and
that the court will not inquire into the validity of their reasons for making the issue”.2207 In
response, the respondents contended that the purpose for which the power to issue shares is
2203
2204
[1974] 1 All ER 1126.
2205
Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 All ER 1126.
2206
2207
278
conferred is to enable directors to raise capital for the company and that once it is found that the
issue was not made for that purpose, invalidity should follow.2208
The appellate court held that none of these arguments should be upheld. On its view of the matter,
self-interest is the most common instance of improper motive but not the only one. 2209 Although
directors in the majority of decided cases where such power has been invalidated were found to
have acted out of self-interest, the absence of such should not automatically mean that their
decisions were valid. The court also held that the view that the power to issue shares was to be
exercised only for the directors to raise capital for the company was too narrow.2210 Shares can
validly be issued for reasons other than raising capital.2211
Of significance to this study is the court’s willingness to abandon the celebrated “best interests of
the company” standard. It held that in instances where directors are:
“acting sectionally, or partially [that is] improperly favouring one section of the shareholders against
another, the question which arises is sometimes not a question of the interests of the company at all,
but a question of what is fair as between different classes of shareholders. Where such a case arises
some other test than that of the ‘interests of the company’ must be applied”.2212
Furthermore, while the court accepted that the judiciary should not assume some supervisory
responsibilities over the decisions of corporate management which are arrived at honestly, it also
acknowledged that this conventional stance can be justifiably departed from in some instances.2213
It was held that:
“when a dispute arises, whether directors of a company made a particular decision for one purpose or
for another, or whether, there being more than one purpose, one or another purpose was the substantial
or primary purpose, the court, in their Lordships' opinion, is entitled to look at the situation objectively
in order to estimate how critical or pressing, or substantial or, per contra, insubstantial an alleged
requirement may have been. If it finds that a particular requirement, though real, was not urgent, or
critical, at the relevant time, it may have reason to doubt, or discount, the assertions of individuals that
2208
Ibid.
2209
Ibid.
2210
Ibid.
2211
See Punt v Symons & Co [1903] 2 Ch 506; Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co
No Liability (1968) 121 CLR 483.
2212
2213
279
they acted solely in order to deal with it, particularly when the action they took was unusual or even
extreme”.2214
The court outlined two conditions which must be satisfied in order to determine whether it will
“exercise deference” to a management’s decision. First, the court opined that the nature of the
power in question should be considered.2215 Second, the limits within which such power may be
exercised need to be defined. It is only after the court examines the “substantial purpose”2216 for
which the power was exercised that it is able “to reach a conclusion whether that purpose was
proper or not. In doing so it will necessarily give credit to the [bona fide] opinion of the directors,
if such is found to exist, and will respect their judgment as to matters of management; having done
this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case
falls”.2217 A determination of the wrong motive requires both a subjective and objective
standard.2218 Therefore, according to this decision, before a court “exercises respect” towards
management’s decisions the above two preconditions must be satisfied.
It is submitted that the UK’s informal or “soft” BJR contains an inherent inescapable review
mechanism that allows for partial judicial interference with directors’ decision making prerogative.
With respect to the second precondition, it is contended that by making an enquiry into or defining
the limits of a director’s exercise of power, one is bound to at least partly review the merits of the
decisions. In order to outline the parameters of such power it is necessary to contextualise every
scenario. Whilst it is appreciated that the court did not vitiate the directors’ exercise of power to
issue Miller’s shares, it in fact attached a different purpose other than that which the directors
claimed.
The judiciary’s willingness to reject the “interests of the company” standard and “substitute” its
own purpose for the directors’ further prove the need for the exercise of flexibility towards the
BJR presumption while considering “modern conditions”.2219 This case also emphasises the need
2214
Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 All ER 1131-1132.
2215
In this case, it was the power to issue shares.
2216
The court’s decision made reference to numerous vague expressions such as “dominant purpose”, “primary
purpose”, “ultimate purpose” and “immediate purpose” which it did not attempt to define. However, the court
could just have used these phrases to show that there could be more than one purposes underlying a single
decision.
2217
2218
Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 All ER 1133 where it was indicated that one has to consider
the actor’s state of mind and intention which can be deduced from considering the surrounding circumstances.
2219
280
for the BJR to be applied in respect of a power exercised for a proper purpose, a requirement which
was disappointingly omitted by the South African legislature in its statutory formulation of the
rule. It is submitted that this case also demonstrates that the proper purpose requirement is not
always accommodated in the “best interests” standard.
79 THE APPLICABILITY OF THE BJR TO DERIVATIVE ACTIONS

One of the crucial questions that need to be addressed is whether the BJR is needful. It can be
argued that market forces are not to take care of management misconduct in the sense that if
directors “make careless decisions”, the market will respond by means of a drop in the share
price.2220 Taken a step further, this can lead to the directors being voted out by the shareholders.2221
Scarlett describes the BJR as a basic defence in derivative actions.2222 This section presents a more
focussed examination of the application and/or interpretation of the rule in derivative actions.
7 9 1 Is the board’s decision not to litigate a commercial decision?

One of the reasons why courts of law exercise deference to directors’ decisions is that the latter
are better placed to make commercial decisions on behalf of the company.2223 A potentially game-
changing question that has not been adequately answered is: What exactly is a commercial
decision? In the context of this chapter, a corollary of this will be whether the board’s decision not
to litigate is a commercial one.
Cooksey and Hutchins argue that company directors’ scope of business judgment includes the
decision to terminate derivative litigation.2224 Similarly, Cassim MF one of the prominent voices
in South African company law, has argued that the decision to litigate may be considered as a
commercial decision.2225 This scholar contends that the decision to litigate does not only affect the
2220
2221
Ibid.
2222
Scarlett 2008 Florida L. Rev 599.
2223
Beyer D 1982 Vand. L. Rev. 241; Scarlett 2008 Florida L. Rev. 600.
2224
Cooksey and Hutchins 1981 Texas Tech L. Rev. 639 and 648.
2225
281
legal sustainability of the claim but also the commercial feasibility2226 thereof since litigation can
potentially “interfere with the conduct of the company’s business”.2227
However, the South African Companies Act differentiates ordinary commercial decisions and the
directors’ decision not to litigate.2228 On the other hand, it can be argued that the derivative action
does not require the same business acumen that would be required to assess “more strictly
commercial decisions”.2229 “Courts and not litigants should decide the merits of litigation”.2230
7 9 2 When should courts disregard the BJR?

It must be noted that the BJR does not completely absolve company directors from personal
liability.2231 In the USA state of Delaware, proof of fraud, breach of fiduciary duty, collusion,
illegal2232 or dishonest conduct may lead to directors being held personally liable for their business
judgments.2233 The other factor is self-interest.2234 The plaintiff does not need to prove that all of
these factors were present in a specific given case. However, it logically follows that proof of the
presence of more than one factor in any given case may increase the chances of a successful
derivative suit.
Fraud has been the main bone of contention in the application of the rule. Fraudulent behaviour
falls outside the scope of business judgment.2235 Pinguelo et al argue that it is difficult to prove
2226
Some of the commercial aspects that may be attached to corporate litigation include the likely costs of the
litigation, the potential amount to be recovered by the company, the company’s financial position, the likelihood
of disrupting the company’s operations including “the diversion of managerial time and resources, and the
potential harm to the company’s image and its relationships with customers, suppliers, financiers and others”.
Scarlett 2008 Florida L. Rev 626 states that there is empirical evidence which shows that commencing a
derivative action results in a sharp decrease in the value of the subject company’s shares. See also Cassim MF
2013 South African Mercantile Law Journal 173.
2227
2228
2229
2230
Zapata Corp. v Maldonado 430 A.2d 789.
2231
Beyer D 1982 Vand. L. Rev. 241.
2232
As Monroe-Sheridan 2015 Washington International Law Journal Association 320 331 put it “[a] knowing
violation of law does not fall within the scope of business decisions protected by the business judgment rule”.
See also Morales 2018 Indon. J. Int'l & Comp. L. 148; Harner “Navigating financial turbulence: Directors’ duties
in the face of insolvency” in Paolini (ed) Research handbook on directors’ duties: Research handbooks in
corporate law and governance (2016) 275.
2233
In re Walt Disney Co. Derivative Litigation 906 A. 2d 27 - Del: Supreme Court (2006); In re Caremark Intern.
Inc. Deriv. Lit. 698 A. 2d 959 - Del: Court of Chancery (1996).
2234
Brehm v. Eisner 746 A. 2d 244 - Del: Supreme Court (2000) 257. With respect to South Africa, a director’s
decision that is tainted by self-interest disqualifies her/him from enjoying the immunity offered by the BJR. See
section 76(4)(a)(ii) of the Companies Act 71 of 2008. However, it is thought that the requirements thereof have
been sufficiently discussed above under 4 4 1 4.
2235
Triem 2007 Alaska Law Review 27; Morales 2018 Indon. J. Int'l & Comp. L. 148.
282
fraud for a number of reasons.2236 First, the actual meaning of fraud is not easy to delineate. For
example, in the case of Gimbel v The Signal Companies Inc.2237 the court confused terms such as
“constructive fraud”, “badge of fraud”, “intentional fraud”, “inferred fraud” and “actual fraud”.2238
It has been said that that the meaning of fraud in the context of derivative actions is “replete with
uncertainty”.2239 Second, in the USA, the application of the BJR requires the plaintiff to prove the
fraudulent conduct on the defendant’s part.2240 However, this is not easy due to informational
asymmetries that exist between the management and shareholders or any other stakeholder with
the required legal standing. An important element of fraud is misrepresentation by the alleged
offender. Ordinarily, such misrepresentation may be manifest in company books and records
which are not easily available to the plaintiff. An injustice would be done if, by application of the
rule minority shareholders’ actions are restricted to fraud which is difficult to prove.2241 There
should be no reason why cases of fraud should be treated differently from cases where there is no
fraud but directors’ negligence has conferred some benefit upon the directors themselves and the
majority shareholders at the expense of the company.2242 It is submitted that the rule that the
plaintiffs should prove directorial fraud is too onerous and can effectively bar meritorious suits,
especially given the current limited discovery rules which do not provide enough shareholder
access to relevant company books and records.
7 10 THE FUTURE OF THE RELATIONSHIP BETWEEN THE BJR AND

DERIVATIVE ACTIONS
Recently, there have been some interesting developments in the USA and Australia which may
affect the future application of the BJR not only in the said jurisdictions but also in the others that
have adopted it. The influence of USA company law cannot be denied.2243 The first case worthy
of examination here is Kahn v M & F Worldwide Corp.2244 The appeal arose from an acquisition
2236
Pinguelo et al “Even as Data Breaches Continue to Increase, Obstacles Remain for Litigants Seeking to Pursue
Securities Fraud and Derivative Suits” 2018 The Computer & Internet Lawyer 19.
2237
316 A.2d 599 (1974).
2238
Gimbel v The Signal Companies Inc 316 A.2d 599 (1974) para 77.
2239
Sullivan “Restating the Scope of the Derivative Action” 1985 The Cambridge Law Journal 238. Nwafor 2010
Macquarie J. Bus. L. 214 227 says that the meaning of the word “fraud” is controversial.
2240
Brehm v. Eisner 746 A. 2d 244 - Del: Supreme Court (2000) 261.
2241
2242
Ibid.
2243
Gurrea-Martinez 2018 Journal of Corporate Law Studies 418; Cassim FHI et al Contemporary company law 2
ed (2012) 563; Bouwman 2009 SA Merc LJ 523.
2244
88 A. 3d 635 (2014).
283
by MacAndrews & Forbes Holdings, Inc., which owned a 43% stake in M & F Worldwide Corp.
(“MFW”), of the remaining common shares of MFW. M&F proposed to acquire the remaining
shares of MFW in order to take the latter private. M&F's proposal to take MFW private was
subjected to two shareholder-protective procedural conditions. One of these conditions which is
more important for the purposes of this study is that MFW required that the merger is approved by
a majority of shareholders unaffiliated with M&F. The merger was approved by a vote of 65.4%
of MFW's minority shareholders.2245
Among the defendants sued for breach of fiduciary duty were MFW's directors which included the
members of the Special Committee.2246 The main question was whether the BJR is the appropriate
standard of review for a merger between a controlling shareholder and its subsidiary where the
merger “is conditioned ab initio upon the approval of both an independent, adequately-empowered
Special Committee that fulfils its duty of care, and the uncoerced, informed vote of a majority of
the minority [share]holders?”2247
The court found in the affirmative. It held that:
“in controller buyouts, the business judgment standard of review will be applied if and only if: (i) the
controller conditions the procession of the transaction on the approval of both a Special Committee
and a majority of the minority [share]holders; (ii) the Special Committee is independent; (iii) the
Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the
Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is
informed; and (vi) there is no coercion of the minority”.2248
Consequently, the claims against the defendants were dismissed. Therefore, in Delaware if the
above six conditions are satisfied, the BJR will be the applicable standard of review for similar
cases. The case set a precedent as the question in casu had never been directly brought before the
court.2249 Also, unlike the entire fairness standard of review, this so-called qualified application of
the rule in interested transactions shifts the burden of persuasion from the defendants to the
plaintiff once the defendants meet either of the two procedural requirements.2250 The defendant
2245
Kahn v M & F Worldwide Corp 88 A. 3d 635 (2014) 638.
2246
2247
2248
2249
2250
Ibid.
284
should either show that the transaction was approved by a well-functioning committee of
independent directors or that the approval by a majority of the minority shareholders constituted
an informed vote.2251
In In re Cornerstone Therapeutics Inc. Shareholder Litigation2252 and Leal v Meeks2253

(hereinafter, referred to as the In re Cornerstone Therapeutics Inc. Shareholder Litigation case),
the two appeals were heard on the same day because they turned on the same legal question.2254
The plaintiff sued the directors derivatively for corporate damages suffered due to the alleged
breach of fiduciary duty by approving transactions which were unfair to the minority shareholders.
However, in both cases, the defendant directors were protected from liability for monetary
damages by an exculpatory charter provision adopted in accordance with section 102(b)(7) of Title
8 of the Delaware General Corporation Law.2255 The question was whether the plaintiffs’ claims
should be dismissed on the ground that they had not pled any non-exculpatory claims against the
independent directors. The court held that the “plaintiffs must plead a non-exculpated claim for
breach of fiduciary duty against an independent director protected by an exculpatory charter
provision, or that director will be entitled to be dismissed from the suit”.2256
Although this case had more to do with the entire fairness standard2257 rather than the BJR, the
judicial attitude concerning the disinterestedness of the parties is valuable to the present discussion.
The court took the view that the rule can still be validly invoked even in the case of “interested
transactions” subject to fulfilling the six requirements established in Kahn v M & F Worldwide
Corp.2258 Ordinarily, the BJR’s protections are not available in cases of “interested transactions”.
2251
Ibid.
2252
C.A. No. 564 2014 Del. May 2015.
2253
Ibid.
2254
In re Cornerstone Therapeutics Inc. Shareholder Litigation C.A. No. 564 2014 Del. 2015 1.
2255
This section provides that the certificate of incorporation may contain “[a] provision eliminating or limiting the
personal liability of a director to the corporation or its [share]holders for monetary damages for breach of
fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i)
For any breach of the director's duty of loyalty to the corporation or its [share]holders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) [under section] 174
of this title; or (iv) for any transaction from which the director derived an improper personal benefit. No such
provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date
when such provision becomes effective”.
2256
2257
For more on the entire fairness standard see Casarino and Greene “Back to Basics: Board & Special Litigation
Committee Investigations” 2019 The Corporate Governance Advisor 17; Melbinger and Moore 2017 Benefits
Law Journal 8.
2258
285
However, the court’s willingness to refer to the Kahn v M & F Worldwide Corp standard may
signal the dawn of a new era in derivative actions and merger transactions. To qualify for the
immunity of the BJR, an interested party can avoid personal liability by proving that the impugned
transaction was approved by an independent, adequately empowered Special Committee that
fulfilled its duty of care and that the majority of the minority’s vote was informed and
uncoerced.2259 This could gradually build into becoming the norm rather than the exception. It is
feared that invoking the current pro-director BJR, which is already too onerous, in “interested
transactions” could erode the little protection that is left for minority shareholders in form of
derivative actions.
Also, in the case of Ryan v Armstrong,2260 the shareholder commenced derivative litigation for the
directors to pay the company the equivalent of losses suffered by the company as a result of the
directors’ conduct during failed merger negotiations.2261 The plaintiff maintained that the director
defendants breached their fiduciary duty to the company. Also, it has to be noted that the
independent directors were protected by an exculpatory clause according to which director
negligence was not enough to warrant an award of damages.2262
Of concern was the fact that the plaintiff failed to serve a demand on the board. It is trite that the
right to recover for any fiduciary breach is an asset belonging to the company, and like any
corporate asset, the directors control its disposition.2263 In the absence of a demand on the board,
Court of Chancery Rule 23.1 requires the plaintiff to show that the demand is excused by pleading
specific facts that, if true, raise a reasonable doubt that a majority of the directors are capable of
validly exercising their business judgment with respect to the matter.2264 It was held that the
plaintiff had failed to aver particularised facts as required by the Chancery Court Rule 23.1.
Consequently, the case was dismissed.
2259
See Kahn v M & F Worldwide Corp 88 A. 3d 635 (2014).
2260
C.A. No. 12717-VCG (Del. Ch. May 15 2017).
2261
Ryan v Armstrong C.A. No. 12717-VCG (Del. Ch 2017) 1.
2262
2263
2264
Court of Chancery Rule 23.1.
286
The court rightly noted that the directors’ exercise of judgment on behalf of the company is covered
by the BJR which “provides deference” to their decisions.2265 However, the court also conceded
that:
“[c]ertain recurring circumstances have arisen, however, where the [c]ourt has recognised the need to
take a more direct role in overseeing the actions of the board, before application of the business
judgment rule. These include, notably, the case of directors taking measures to fend off a potential
acquisition of the company, which actions raise entrenchment concerns”.2266
This statement establishes the fact that due to some unique developments in today’s business
world, there is need for an increased judicial oversight of the boardroom. Such heightened scrutiny
is not limited to cases of directors taking measures to fend off a potential acquisition of their
company. This is just one of such cases because the court in Ryan v Armstrong used the words
“[t]hese include...” which implies there are other such instances. Similar sentiments were echoed
in Omnicare Inc. v NCS Healthcare Inc.2267 where it was indicated that “[t]here are certain
circumstances, however, which mandate that a court take a more direct and active role in
overseeing the decisions made and actions taken by directors. In these situations, a court subjects
the directors' conduct to enhanced scrutiny to ensure that it is reasonable, before the protections of
the business judgment rule may be conferred”.2268
Shockingly, Ryan v Armstrong and Omnicare Inc. v NCS Healthcare Inc. depart from the
traditional Delaware formulation of the BJR which is usually couched as a presumption. However,
it is not clear how far such enhanced scrutiny of director conduct goes. Had it not been for the
plaintiff’s failure to plead non-exculpatory claims and service of the demand on the board the court
would have proceeded to address the scope of such enhanced judicial scrutiny. It is submitted that
although Ryan v Armstrong and Omnicare Inc. v NCS Healthcare Inc. have paved the way for
more judicial enquiry into directors’ exercise of discretion and judgment, more guidance is still
required lest the corporate world loses the benefits of the rule through unlimited judicial
interference.
2265
Ryan v Armstrong C.A. No. 12717-VCG (Del. Ch 2017) 20. See also Millstein et al 2018 Journal of Applied
Corporate Finance 17.
2266
2267
818 A. 2d 914 928 (Del. 2003).
2268
Omnicare Inc. v NCS Healthcare Inc. 818 A.2d 914 928 (Del. 2003).
287
The last case regarding the developments in the USA and Australia which may affect the future
application of the BJR is Australian Securities and Investment Commission v Rich.2269 In that case,
the ASIC commenced litigation against two directors of the affected company. It was alleged that
the officers had breached their duty of care and due diligence under section 180(1) of
the Corporations Act2270 by failing to disclose the company’s true financial position to the board.
The defendants argued that their decision had a rational basis, was taken in the best interests of the
company and as such qualified for protection by the rule. The court found against ASIC.
It has to be noted that this was the first comprehensive judicial opinion on the codified Australian
version of the BJR. Therefore, the case offers valuable guidance regarding the interpretation and
application of the rule. In arriving at its final conclusion, the court adopted a four-stage
approach.2271 First, the court seized with the matter has to determine whether the impugned
conduct is more than a mere error of judgment.2272 Second, the court has to establish whether the
challenged transaction involves a business judgment.2273 Decisions of this nature include planning,
budgeting and forecasting2274 but exclude directors’ supervisory and oversight responsibilities.2275
Next, the court will be required to consider whether all the elements of the BJR have been satisfied.
Notably, the court also considered the issue of the bearer of the burden of proof. Initially, the court
found the language of section 180(2) of the Corporations Act to be vague.2276 After a thorough
examination of the provision, the court concluded that the defendant director bears the onus of
proving the above mentioned four elements in order for the BJR to apply.2277 The imposition of
the burden of proof on directors is in line with the thinking that “the business judgment defence
should not have the effect of adding to the elements of contravention to be proven, ie for the
2269
2009 NSWC 1229.
2270
2001 (Cth).
2271
Lumsden “The business judgment defence - Insights from ASIC v Rich” 4 available at
2272
ASIC v Rich 2009 NSWSC 1229 para 7239.
2273
ASIC v Rich 2009 NSWSC 1229. See also Hill “Evolving directors’ duties in the common law world” in Paolini
(ed) Research handbook on directors’ duties: Research handbooks in corporate law and governance (2016) 23.
2274
ASIC v Rich 2009 NSWSC 1229 paras 7273- 7276. See also Hill “Evolving directors’ duties in the common law
world” in Paolini (ed) Research handbook on directors’ duties: Research handbooks in corporate law and
governance (2016) 24.
2275
ASIC v Rich 2009 NSWSC 1229 para 7202.
2276
2277
See also the discussion by Hill “Evolving directors’ duties in the common law world” in Paolini (ed) Research
288
applicant to have to establish that each of the preconditions was not satisfied”.2278 This is supported
by the fact that all the preconditions to be proven are issues that are within the knowledge of the
management.2279 This decision in Australian Securities and Investment Commission v Rich would
be welcome to the South African corporate governance system considering the information
asymmetry challenges faced by derivative suitors. Such a development would relieve any potential
derivative claimant of the evidentiary burden imposed by the BJR presumption.
It is submitted that South Africa would benefit from the legal positions espoused in the Ryan
v Armstrong and Omnicare Inc. v NCS Healthcare Inc. judgments. As has been mentioned above,
South Africa’s version of the BJR is very wide in scope2280 especially as it relates to “any particular
matter arising in the exercise of the powers or the performance of the functions of a particular
director of a company”.2281 Limited and responsible judicial oversight of directorial exercise of
discretion is desirable in South Africa as it will assist in defining the parameters of the BJR’s
application. This will further provide legal certainty in the South African corporate governance
terrain unlike the current state of affairs where any decision can support invocation of the rule.
Also, increased judicial scrutiny is required in order to reduce the corporate scandals2282 which are
almost becoming commonplace.
However, the dictum set out in Kahn v M & F Worldwide Corp2283 and its progeny seems
unfavourable and therefore unsuitable for adoption in the South African corporate governance
landscape. First, the judgment is more onerous for the already overburdened shareholders or any
other stakeholder with standing as they have to first overcome the BJR’s presumption hurdle.
Second, the mechanics of the Khan judgment seem to be inapplicable to South African law. The
legality of the establishment of the Special Committee as contemplated in USA law is different
2278
Lumsden “The business judgment defence - insights from ASIC v Rich” 4 available at
http://ssrn.com/abstract=1584652 (accessed 02-04-2019) further explained that managers can, without much
pain, satisfy this requirement by keeping records to support the fact that all the relevant procedure were properly
followed in arriving at the challenged decision.
2279
ASIC v Rich 2009 NSWSC 1229.
2280
See part 7 6 above.
2281
2282
Recently in South Africa, the VBS Mutual Bank scandal made headlines. See
https://www.businesslive.co.za/fm/features/cover-story/2018-12-21-scandal-of-the-year-vbs-a-most-
unsophisticated-bank-heist/ (accessed 16-06-2019) and https://www.businessinsider.co.za/vbs-mutual-bank-
report-terry-motau-the-great-heist-greatest-hits-2018-10 (accessed 30-12-2019).
2283
88 A. 3d 635 (2014).
289
from the one envisaged by section 165(4)(a) of the South African Companies Act. 2284 The latter
refers to a committee to investigate a demand and report to the board whether it appears to be in
the best interests of the company to pursue any such cause of action or continue any such
proceedings.2285 On the other hand, the USA Special Committee must be fully empowered and is
not formed to merely investigate a demand.
7 11 PRELIMINARY CONCLUSIONS
This chapter presented an examination of the BJR in the context of derivative actions. A historical
account of the rule was provided where it was revealed that the BJR is an American judge-made
legal export which has been transplanted to most of the common law jurisdictions.2286 It was shown
that among the very few jurisdictions that have codified the rule are South Africa and Australia.
In the USA and Japan, the rule remains rooted in the common law. England rejected a formal BJR
and adopted what one company law commentator has referred to as “a soft business judgment
rule”.2287
It was also shown from the first court decision that formulated the BJR, that the fallibility of man
was the compelling rationale behind the rule’s adoption. The court’s formulation of the rule was
also marred by vague terminology such as “ordinary knowledge”, “gross…”, and “ordinary
attention”. Coupled with this was the inconsistency of the courts in their application of the rule.
Therefore, it can be submitted that these two factors could have significantly contributed to the
misunderstandings surrounding this time-hallowed rule.
The focus was then turned onto the significance of the BJR. After an examination of all the
purported justifications for the rule, it is contended that the sole rationale behind the formulation
and adoption of the rule is the infallibility of man as highlighted by the American court in the first
BJR decision.2288 Elements of the rule were then analysed in an effort to establish the true nature
of the rule. It was unanimously found that the threshold requirements for the rule to be invoked in
South Africa, Japan and the USA, are that disinterested company directors should have made an
2284
71 of 2008.
2285
Section 165(4)(a)(iii) of the Companies Act 71 of 2008.
2286
Gurrea-Martinez 2018 Journal of Corporate Law Studies 418; Cassim FHI et al Contemporary company law 2
ed (2012) 563; Schoeman 2013 Without Prejudice 11; Bouwman 2009 SA Merc LJ 523.
2287
2288
290
informed decision which includes a decision not to make a decision in the best interests of the
company.
The three manifestations of the rule were also interrogated. It was discovered that although the
abstention doctrine respects directors’ decision making prerogative, it is more onerous for
shareholders due to the innate presumption. Also, the doctrine terminates the litigation proceedings
before any review of the merits of the related board of directors’ decision. 2289 This can deprive a
well-meaning plaintiff of access to justice.2290 It was highlighted that the standard of liability
principle contradicts the abstention doctrine’s hands-off approach and calls for a review of
directors’ decisions. Although this may threaten directorial decision-making power, it encourages
company managements to make responsible risk-taking decisions. The immunity doctrine lies
somewhere between the two manifestations.
Thereafter, the study focussed on the jurisdictional framework for the rule in the USA, South
Africa, Japan and England. In the USA, there are two dominant formulations of the rule which are
the Delaware and the ALI formulations. It is contended that the Delaware formulation is more
inclined to the abstention doctrine whilst the ALI formulation is disposed towards the standard of
liability policy. This formulation was commended for shifting the burden of proof from plaintiffs
to defendant directors.2291 Suggestions that the MBCA provides for the third formulation of the
BJR in the USA were quashed. The differences between the BJR and the directors’ standard of
care principle were also clarified.
The South African BJR is provided for in section 76(4) of the Companies Act. 2292 It was
demonstrated that this codified version of the BJR is wider in scope when compared to its
counterparts.2293 Under the current regime, directors are allowed to rely on information or advice
from other professional persons. However, Unlike the Australian Corporations Act which clearly
stipulates that such reliance should be reasonable, the South African Companies Act does not
include such a prescription. Furthermore, in sharp contrast to the USA’s SLC and Australian
directors, the South African statute does not specifically require director independence. Also, the
2289
2290
2291
Yaru 2016 SAcLJ 441 and 451.
2292
71 of 2008.
2293
See also Cassim FHI et al Contemporary company law 2 ed (2012) 566.
291
South African legislative framework is vague as it is not clear about how the proper purpose rule
relates to the BJR.2294
Lastly, the Japanese BJR framework is common law based. It was shown above that this South
East Asian state has adopted the standard of liability version of the BJR. On its part, England does
not have any formal BJR either under statute or the common law. It has instead adopted what has
been described as a “soft” BJR standard. Recommendations in relation to the above issues will be
made in the last chapter.
2294
292
CHAPTER EIGHT
The exercise of judicial discretion in derivative litigation

81 INTRODUCTION
One of the most important aspects of derivative proceedings is the role played by the courts to
allow or deny the commencement or continuation of litigation. Commenting on the current English
company law regime, Davies and Worthington assert that one of the innovative features of the
Companies Act2295 is that the “gatekeeping decision”2296 whether or not to continue with derivative
litigation has been placed in the hands of an outsider2297 which happens to be the court. By
introducing a statutory derivative action in South Africa,2298 the legislature effectively ensured that
no derivative proceedings may be discontinued, compromised or settled without the court’s
permission.2299 It is trite that a shareholder or any suitable stakeholder may initiate derivative
litigation. However, after the initiation of the suit, the court will usually exercise its discretion
whether to refuse or grant permission for the suit to continue.2300
This chapter, which happens to be the last discursive one of this study, is dedicated to an
examination of the judiciary’s exercise of its discretion in derivative suits. While it is accepted that
the requirement of leave of the court plays a very significant role in filtering out vexatious and
frivolous derivative suits,2301 it must be noted that the same requirement may also be a potentially
insurmountable hurdle for honest derivative litigants. The purpose of this chapter is to consider
whether the requirement of judicial discretion in derivative suits is an indispensable procedural
prerequisite or is a needless barrier to well-meaning litigants. If it is concluded that judicial
discretion is central to the proper regulation of derivative litigation, then it will also need to be
determined, by a comparative analysis, whether South Africa’s current approach is vulnerable to
abuse.
2295
2006.
2296
SALJ 496 496; Cassim FHI et al Contemporary company law 2 ed (2012) 777.
2297
2298
2299
2300
Section 165(5) of the Companies Act 71 of 2008; section 263(3) of the UK Companies Act 2006; Davies and
Worthington Gower’s principles of modern company law 10 ed (2016) 598; Cassim MF “The Statutory
Derivative Action under the Companies Act of 2008: The Role of Good Faith” 2013 SALJ 497.
2301
293
It will be interesting to explore the role played by the courts in the United States of America (USA)
considering that jurisdiction’s novelty in making use of Special Litigation Committees (SLCs). Of
further curiosity is the extent, if any, to which Japanese courts influence the commencement or
continuation of derivative litigation taking into account the fact that it is a civil law jurisdiction
meaning the principle of judicial precedent is not so hallowed.2302
Several corporate law scholars have written voluminous accounts regarding the requirement of the
court’s leave in derivative actions.2303 Among those that have written about judicial discretion in
derivative litigation, some have inadvertently limited their scholarly inquiry to the leave of the
court. However, this study seeks to, inter alia, distinguish between judicial discretion and leave of
the court in the context of derivative litigation. As will be evident as the discussion unfolds, the
latter is contained in the former. Judicial or legal discretion refers to “the exercise of judgment by
a judge or court based on what is fair under the circumstances” following certain rules and
principles of law.2304 On the other hand, leave of the court refers to the permission obtained from
a court to take some action without which such action would not be acceptable.2305 Alternatively,
it can simply be defined as an authorisation to follow a non-routine procedure.2306 Therefore, leave
of the court, in its strictest sense refers to the court’s permission to allow or refuse to allow
derivative proceedings to commence or continue. Unlike the court’s leave, judicial discretion is
wider in scope and involves the court exercising its judgment over various issues which may or
may not necessarily affect the commencement or continuation of derivative litigation.
2302
Beyer VL “Judicial Development of a Business Judgment Rule in Japan” 1993 Bond Law Review 211; Weng
Assessing the Applicability of the Business Judgment Rule and the “Defensive” Business Judgment Rule in the
Chinese Judiciary: A Perspective on Takeover Dispute Adjudication” 2010 Fordham International Law Journal
123.
2303
SALJ 496; Cassim MF “Judicial Discretion in Derivative Actions under the Companies Act of 2008” 2013 SALJ
778; Baum and Puchniak “The derivative action: An economic, historical and practice-oriented approach” in
Puchniak et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 52;
Hamadziripi “Judicial Construction of the Requirement of Good Faith in Section 165(5)(b) of the Companies
Act 71 of 2008” 2018 Journal of Corporate and Commercial Law & Practice 74; Scarlett “Confusion and
Unpredictability in Shareholder Derivative Litigation: The Delaware Courts' Response to Recent Corporate
Scandals” 2008 Florida L. Rev. 589 598.
2304
Garner et al Black’s law dictionary 8 ed (2004) 499. See also
https://www.law.cornell.edu/wex/judicial_discretion (accessed 01-06-2019) for a similar definition expressed as
“[a] judge's power to make decisions based on fairness or a weighing of the facts and circumstances, particularly
in cases where a party requesting relief or a benefit has no automatic or clear-cut legal right to it”.
2305
https://thelawdictionary.org/leave-of-court/ (accessed 01-06-2019).
2306
294
This chapter will also expose the sharp differences and a few tangential similarities between the
jurisdictions under study as far as the exercise of judicial discretion in derivative proceedings is
concerned. Immediately following this introductory note is an exploration of the rationales for the
judiciary’s gatekeeping role at issue. After that, a discussion of the legal framework under which
courts exercise their discretion in derivative litigation in the selected jurisdictions will be
presented. Thereafter, an examination of those aspects of judicial discretion common to at least
two of the jurisdictions under study will be undertaken. This comparative analysis will then
proceed to focus on jurisdiction-exclusive elements of the court’s role in derivative litigation. A
discussion of a few miscellaneous but important issues regarding judicial discretion will precede
the preliminary conclusions of this chapter. Throughout this study, any lessons that may improve
South Africa’s corporate governance system through derivative actions will be highlighted.
82 PURPOSE OF THE REQUIREMENT OF LEAVE OF COURT

The primary purpose for the requirement of leave of the court is to provide a filter against
unmeritorious actions.2307 Cassim regards judicial discretion as “the chief safeguard against the
exploitation of section 165”2308 of the South African Companies Act.2309 It is hoped that such
discretion is exercised in a “more accessible” manner that promotes the use of the derivative
remedy rather than “a narrow and restrictive approach that stultifies the use of the derivative
action”.2310
Other secondary purposes or by-products of judicial discretion include limiting strike suits2311 and
greenmail. In a USA case of Cohen v Beneficial Industrial Loans Corporation,2312 it was explained
that derivative claims were sometimes brought “not to redress real wrongs, but to [realise] upon
2307
48.
2308
Act 71 of 2008 (Part 1)” 2014 SA Merc LJ 7. Although the Speculum Juris Referencing Style allows for an
abbreviated version of a journal article for subsequent uses, but due to the fact that there are a couple of authors
who share the surname “Cassim” and that some of their articles are published in similar journals, to avoid
confusion, their works will be referenced in full throughout this chapter.
2309
71 of 2008.
2310
Cassim FHI et al Contemporary company law 2 ed (2012) 777. See also Cassim MF “The Statutory Derivative
Action under the Companies Act of 2008: The Role of Good Faith” 2013 SALJ 503; Cassim MF “Judicial
Discretion in Derivative Actions under the Companies Act of 2008” 2013 SALJ 778 779.
2311
Act 71 of 2008 (Part 1)” 2014 SA Merc LJ 6.
2312
337 US 541 548 (1949).
295
their nuisance value. They were bought off by secret settlements in which wrongs to [ordinary
shareholders] were compounded by the suing [shareholder], who was mollified by payments from
corporate assets”.2313 These proceedings came to be known in professional slang as “strike suits”.
Greenmail refers to a scenario where an investor intentionally buys enough of a company's shares
to be able to threaten a hostile takeover which forces the company’s management to buy the shares
back at a price above market value.2314 Clearly, strike suits and greenmail involve improper
exploitation of a company’s resources. To that end, it is necessary to have an effective tool that
protects corporate assets from such detrimental conduct. As will be revealed below, requiring
derivative applicants to bring their claims in good faith in the best interests of the company limits
the risk of both strike suits and greenmailing.
Also, it is argued that the requirement of judicial discretion prevents shareholders or any other
person who may have legal standing as envisaged in section 165(2) of the South African
Companies Act from unnecessarily interfering with the internal management of the company and
usurping such responsibilities as are vested in the board of directors.2315 Therefore, it can be
submitted that the leave of court requirement is instrumental in fulfilling one of the core purposes
of South African contemporary company law, namely; “[to] balance the rights and obligations of
shareholders and directors within companies”.2316 Lastly, the requirement of judicial discretion
also discourages the opening of floodgates to a multiplicity of actions.2317
83 THE LEGAL FRAMEWORK OF JUDICIAL DISCRETION

In South Africa, judicial discretion in derivative proceedings can be exercised in terms of various
provisions including section 165(2)(d), section 165(4)(b), section 165(5)(a) and section 165(5)(b)
2313
Cohen v Beneficial Industrial Loans Corporation 337 US 541 548 (1949).
2314
Merriam-Webster Dictionary https://www.merriam-webster.com/dictionary/greenmail (accessed 21-06-2019).
2315
SALJ 501.
2316
Section 7(i) of the South African Companies Act 71 of 2008. This contrasts with the opinion of Cassim MF “The
Statutory Derivative Action under the Companies Act of 2008: The Role of Good Faith” 2013 SALJ 506 who is
of the view that the requirement of judicial discretion creates a tension between the benefit of a right of redress
and the threat of frivolous actions. See also Cassim MF “Judicial Discretion in Derivative Actions under the
Companies Act of 2008” 2013 SALJ 779.
2317
SALJ 501.
296
read together with sections 165 (9) and (10)2318 of the Companies Act.2319 First, a South African
court may exercise its discretion in terms of section 165(2)(d) which provides that:
“[a] person may serve a demand upon a company to commence or continue legal proceedings, or take
related steps, to protect the legal interests of the company if the person has been granted leave of the
court to do so, which may be granted only if the court is satisfied that it is necessary or expedient to
do so to protect a legal right of that other person”.
The above-quoted provision relates to plaintiffs that can be awarded standing by the exercise of
judicial discretion.
In South Africa, a court may also exercise its discretion to extend the sixty-day period2320 within
which a company that has been served with a demand2321 has to either initiate or continue the
derivative proceedings or serve a notice of refusal to the person who made the demand. 2322 This
provision has not been of much contention as evidenced by South African case law on derivative
litigation thus far. However, a few important aspects thereof deserve attention. First, it must be
noted that the defendant company must bring an application before the court requesting an
extension of the stipulated sixty days. Second, the Companies Act does not outline any factors that
the court should consider in determining whether or not to extend the specified time frame.
2318
For the sake of convenience, the contents of section 165(5)(a) and (b) are quoted below since these contain the
most contentious provisions on judicial discretion in the context of derivative actions.
2319
71 of 2008.
2320
By comparing with section 237(2)(a) of the Australian Corporations Act (Cth) No. 50 2001, which does not
specify any time frame, but simply states that it must be “probable” that the company will not itself bring the
proceedings, Cassim MF “The Statutory Derivative Action under the Companies Act of 2008: The Role of Good
Faith” 2013 SALJ 502 is of the opinion that the South African position is “stricter… unnecessarily rigorous, and
could foreseeably lead to practical difficulties”. However, it is submitted that the South African legislature’s
choice to specify the timeframe and at the same time leave room for extension thereof in exceptional
circumstances in plausible. The specified sixty days provides a guideline which might be taken as a general rule
subject to being extended at the court’s discretion. This ensures legal certainty as envisaged by section 7(l) of
the 2008 Companies Act which provides that one of the purposes of the Act is to “provide a predictable and
effective environment for the efficient regulation of companies”. It is further submitted that the problem with the
use of terms like “probable”, as is the case with the Australian provision, is that judicial determination becomes
uncertain because the term itself is vague. Interpretation of the meaning of such terms might be stretched by the
courts which may lead to bad precedents.
2321
This refers to a demand served on the board of directors to institute derivative actions as provided in section
165(2) of the South African Companies Act 71 of 2008.
2322
297
Also, in South Africa, a person who has made a demand2323 may apply to a court for leave to bring
or continue proceedings in the name and on behalf of the company.2324 Such leave may only be
granted upon satisfaction of two broad criteria. These requirements are captured in section
165(5)(a) and (b) of the Companies Act.2325 First, leave will be granted only if;
“the company- (i) has failed to take any particular step required by subsection (4); (ii) appointed an
investigator or committee who was not independent and impartial; (iii) accepted a report that was
inadequate in its preparation, or was irrational or unreasonable in its conclusions or recommendations;
(iv) acted in a manner that was inconsistent with the reasonable report of an independent, impartial
investigator or committee; or (v) has served a notice refusing to comply with the demand, as
contemplated in subsection (4)(b)(ii).”2326
As evident from the above quoted statutory provision, the first set of requirements relates to a
company’s conduct. The above criteria have not attracted much judicial activity also. Secondly,
leave will be granted if the court is satisfied that “the applicant is acting in good faith; the proposed
or continuing proceedings involve the trial of a serious question of material consequence to the
company, and it is in the best interests of the company that the applicant be granted leave to
commence the proposed proceedings or continue the proceedings, …”.2327 It is this set of
requirements that contains more contentious issues.
Elsewhere, the role of the judiciary in derivative litigation in the USA sharply contrasts with that
of South Africa and England. This is mainly attributable to the USA’s use of Special Litigation
2323
It has to be noted that according to section 165(6) of the Companies Act 71 of 2008, a person can bring an
application to commence proceedings without having to first make a demand. This exception only applies to
“bringing” proceedings and not “continuing” proceedings. Such an application may only be successful if the
court is satisfied that “the delay required for the procedures contemplated in subsections (3) to (5) to be completed
may result in irreparable harm to the company; or substantial prejudice to the interests of the applicant or another
person; or there is a reasonable probability that the company may not act to prevent that harm or prejudice, or
act to protect the company’s interests that the applicant seeks to protect; and that the requirements of subsection
(5)(b) are satisfied”. See also Cassim FHI et al Contemporary company law 2 ed (2012) 784 and Henochsberg
on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 586(2).
2324
Section 165(5) of the Companies Act 71 of 2008. See also Henochsberg on the Companies Act 71 of 2008 Vol
1 Service Issue 2 2012 586(2).
2325
71 of 2008.
2326
See section 165(5)(a) of the Companies Act 71 of 2008.
2327
See section 165(5)(b) of the Companies Act 71 of 2008. In Australia, the court must grant leave if it is satisfied
that “… the applicant is acting in good faith; and it is in the best interests of the company that the applicant be
granted leave; and if the applicant is applying for leave to bring proceedings— there is a serious question to be
tried”. See section 237(2)(b)-(d) of the Australian Corporations Act (Cth) No. 50 2001.
298
Committees (SLCs).2328 Nonetheless, in the interests of convenience, it is noteworthy here that
when a board receives a demand, it may either review it as a whole or it may opt to constitute a
committee to investigate the facts underlying the plaintiff’s allegations.2329 Such a committee is
known as an SLC. It has become common practice for boards in the USA to appoint SLCs. A USA
court has held that members of an SLC should be “vested with full and unconditional authority to
act on behalf of the board to investigate the allegations and to determine if litigation is in the
company’s best interest”.2330 An SLC is required to prepare a report of its findings of fact and
conclusions of law and present its recommendations to a competent court. And, it is required that
members of an SLC should be independent and disinterested,2331 act in good faith and have
reasonable bases for their recommendations.2332 Consequently, in the USA, a court only exercises
its discretion to determine whether members of an SLC in question acted independently, were
disinterested, acted in good faith and that their recommendations to the court were reasonable.2333
In England, the previous common law regime required shareholders to prove the presence of fraud
on the minority and wrongdoer control.2334 Derivative actions had to be brought in terms of the
rule in Foss v Harbottle.2335 The current statutory test that replaced the rule in Foss v Harbottle2336
requires shareholders to show on a prima facie basis that granting leave to pursue derivative
litigation would result in the action being instituted in good faith and in the best interests of the
company.2337 Section 263(2) of the UK Companies Act,2338 provides grounds for mandatory
refusal of the court’s permission.2339 Furthermore, in considering whether to grant leave, the court
2328
An extensive discussion regarding SLCs was undertaken in chapter six above under part 6 5 1.
2329
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 52. See also Cassim MF “When
Companies are Harmed by Their own Directors: The Defects in the Statutory Derivative Action and the Cures
(Part 2)” 2013 South African Mercantile Law Journal 301 313.
2330
Melton v Blau 2004 WL 2095317 (Conn. Super. Ct. Aug. 26 2004) 6.
2331
Melton v Blau 2004 WL 2095317 (Conn. Super. Ct. Aug. 26 2004) 6. See also Scarlett “Confusion and
Unpredictability in Shareholder Derivative Litigation: The Delaware Courts' Response to Recent Corporate
Scandals” 2008 Florida L. Rev. 598.
2332
In re Oracle Corp. Derivative Litig. 824 A.2d 917 (Del. Ch. 2003).
2333
Ibid.
2334
2335
1843 67 ER 189.
2336
Ibid.
2337
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 52; Mayson et al
Company law 33 ed (2016) 564.
2338
2006.
2339
Stainer v Lee [2010] EWHC 1539 (Ch); Cabrelli “Shareholders’ rights and Litigation” in Siems and Cabrelli
(eds) Comparative company law: A case-based approach 2 ed (2018) 362; Davies and Worthington Gower’s
299
must take into account the factors outlined in section 263(3)2340 and (4) of the Companies Act.2341
Additionally, directors are also obliged to act in ways they consider to be “in good faith, to promote
the success of the company for the benefit of its members as a whole”.2342
Unlike the USA and South African approaches, the English statutory derivative proceedings
framework involves the court at an earlier stage. This allows the judiciary to effectively dismiss
“unmeritorious claims [without] wasting corporate assets to defend frivolous claims”.2343 Early
judicial involvement affords the court, as an independent party, the opportunity to separate
wasteful claims from valid ones.2344 In this regard, it can be submitted that the English framework
is efficient in this regard.
In distinct contrast to the legal frameworks of the other jurisdictions forming the subjects of this
comparative study, in Japan, it is auditors or kansayaku who generally represent Japanese
principles of modern company law 10 ed (2016) 601; Tang 2012 UCL Journal of Law and Jurisprudence 181;
Alan and Lowry Company law: Core texts and series 8 ed (2014) 203; Lowry and Reisburg Pettet’s company
law: Company law and corporate governance 4 ed (2012) 264-265; Wild and Weinstein Smith and Keenan’s
company law 16 ed (2013) 315; Girvin et al Charlesworth’s company law 18 ed (2010) 521-522; Kershaw
Company law in context: Text and materials 2 ed (2012) 612.
2340
The section provides that in considering whether to grant permission (or leave) the court must take into account,
in particular “whether the member is acting in good faith in seeking to continue the claim, the importance that a
person acting in accordance with section 172 (duty to promote the success of the company) would attach to
continuing it, where the cause of action results from an act or omission that is yet to occur, whether the act or
omission could be, and in the circumstances would be likely to be - (i) authorised by the company before it
occurs, or (ii) ratified by the company after it occurs, where the cause of action arises from an act or omission
that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be,
ratified by the company, whether the company has decided not to pursue the claim, whether the act or omission
in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own
right rather than on behalf of the company”. When considering the importance that a person acting in accordance
with section 172 would attach to continuing the derivation suit, the court in Kleanthous v Paphitis [2011] EWHC
2287 (Ch) para 71 held that some of the factors include “the amount at stake, the apparent strength of the case,
the prospects of securing a satisfactory outcome without litigation, the prospects of successful execution of any
judgment, the likely cost of the proceedings, the disruption caused to the company’s business, and potential risks
to reputation and business relationships”. See also Cabrelli “Shareholders’ rights and Litigation” in Siems and
Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018) 382; MacIntyre Business law 4
ed (2008) 598-599.
2341
This section states that: “in considering whether to give permission (or leave) the court shall have particular
regard to any evidence before it as to the views of members of the company who have no personal interest, direct
or indirect, in the matter”.
2342
Section 172(1) of the UK Companies Act 2006. See also Cabrelli “Shareholders’ rights and Litigation” in Siems
and Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018) 381; Bourne Bourne on
company law 6 ed (2013) 173; Riches and Allen Keenan and Riches’ business law 10 ed (2011) 192; Kershaw
Company law in context: Text and materials 2 ed (2012) 620.
2343
2344
300
companies in derivative suits.2345 These auditors are elected at a shareholders’ meeting. Unlike the
USA and South Africa, Japan’s system is commendable in that courts do not exercise much
deference to auditors’ decisions, regardless of the amount of time taken in conducting their
investigations.2346 It is submitted that this is vital in creating an effective corporate governance
culture founded on accountability. Of further interest is the fact that Japanese courts do not enjoy
much discretion in derivative proceedings.2347 This should not come as a surprise since Japan is a
civil law jurisdiction2348 which impliedly means that courts have a less influential role in
comparison to the common law systems.2349 As a civil law jurisdiction, Japan’s primary source of
law is legislation.2350 The role of the judiciary is usually to interpret legislation and determine how
the statutory provisions ought to be applied in given circumstances.2351 However, such judicial
interpretations do not constitute legally binding precedents.2352
84 SIMILARITIES BETWEEN TWO OR MORE JURISDICTIONS

8 4 1 The requirement of good faith
The following discussion presents a comparative examination of the requirement of good faith in
derivative litigation between South Africa and England.2353 Due to Japan’s uniqueness, limited
references will be made to it in this regard. Good faith is an abstract conception whose definite
meaning is difficult to ascertain.2354 However, there has been some useful attempts to define this
elusive concept. According to Garner et al, good faith means “[a] state of mind consisting in
honesty in belief or purpose, faithfulness to one's duty or obligation, observance of reasonable
commercial standards of fair dealing in a given trade or business, or absence of intent to defraud
2345
Kawashima and Sakurai “Shareholder Derivative Litigation in Japan: Law, Practice, and Suggested Reforms”
1997 Stanford J. Int'l L. 48.
2346
2347
This is manifest in Japanese court decisions which are generally short and apart from Supreme Court cases, they
also do not refer to judicial precedents. See Aronson BE “Reconsidering the Importance of Law in Japanese
Corporate Governance: Evidence from the Daiwa Bank Shareholder Derivative Case” 2003 Cornell
International Law Journal 40.
2348
Mollett “Derivative Lawsuits Outside of Their Cultural Context: The Divergent Examples of Italy and Japan”
2009 University of San Fransisco L. Rev. 659.
2349
2350
Ibid.
2351
Ibid.
2352
Ibid.
2353
According to section 8.30(a) of the MBCA 1984 (Revised 2016), directors should act “in good faith and in a
manner the director reasonably believes to be in the best interests of the corporation”.
2354
SALJ 508.
301
or to seek unconscionable advantage”.2355 In the words of Wang, the term “good faith” features “a
high degree of flexibility and uncertainty [and therefore] requires clarification and interpretation
in a given context”.2356 It has been argued that this uncertainty is problematic as directors are
deprived of the opportunity to know how exactly they should behave in certain circumstances.2357
In South African derivative litigation, the plaintiff bears the onus to prove on a balance of
probabilities2358 that s/he is pursuing the purported derivative action in good faith,2359 that it is in
the best interests of the company to do so and that the proposed or continuing proceedings involve
the trial of a serious question of material consequence to the company. 2360 It has been held that
such evidentiary burden is “an important safeguard and judicial oversight to prevent the abuse of
the section to unduly harass a company’s management for a collateral purpose”.2361 The onus also
ensures that accountability and good corporate governance can readily be enforced. 2362 It should
be noted that good faith cannot be presumed.2363 And, there is no evidentiary burden or onus on
the respondent to disprove the applicant’s good faith.2364
In South Africa, the common law, though abolished2365 can provide guidance as far as the meaning
of good faith is concerned.2366 In the case of Mouritzen v Greystones Enterprises (Pty) Ltd2367 the
applicant, Kenneth Hansen Mouritzen, and the second respondent, Digby Hall Mouritzen, were
brothers and the only directors of the first respondent, Greystones Enterprises (Pty) Limited (the
company).2368 The applicant and the second respondent were co-directors whose personal credit
2355
2356
Wang Company Law in China: Regulation of Business Organisations in a Socialist Market Economy (2014)
199. Garner et al Black’s law dictionary 8 ed (2004) 713 also noted that good faith is an elusive idea whose
meaning somewhat varies with the context.
2357
Nowicki “Not in Good Faith” 2007 Southern Methodist University L. Rev. 441 453.
2358
for by the applicant’s counsel in Mbethe 2016 para 153.
2359
A bald assertion of good faith is insufficient, the plaintiff has to demonstrate her/his good faith.
2360
2361
Mbethe 2016 para 91. In paragraph 168 of the same case it was further explained that “[to] require an applicant
wishing to institute a derivative action to demonstrate his good faith would not serve to deprive persons seeking
to protect the interests of the company against bad corporate governance or discourage accountability but rather
serve to protect the section against abuse”.
2362
2363
2364
2365
See section 165(1) of the Companies Act 71 of 2008.
2366
SALJ 508.
2367
2012 5 SA 74 (KZD).
2368
302
cards were linked to the company’s First National Bank (FNB) account to the effect that all credit
card transactions were automatically debited to, and paid by the company. 2369 The applicant
alleged that the second respondent abused his personal credit card to the detriment of the company
and its shareholders.2370 The applicant then served a demand2371 on the company to institute legal
action in order to recover the funds. The second respondent, in his capacity as a director, refused
to comply with the demand.2372
It was common cause that prior to the applicant instituting the current application, there had been
a serious and long-standing personal feud between him and the second respondent.2373 It is this
personal animosity between the parties which the second respondent sought to point to as the
motive behind the applicant’s decision to launch this application.2374 The court had to determine
whether in seeking to have proceedings commenced against the second respondent the applicant
was acting in good faith, and whether it was in the best interests of the company that the applicant
be granted leave to commence such proceedings in the name of the company.2375
The court held that although personal animosity between two opposed parties “is an important
factor which the Court will always take into account together with other relevant evidentiary
material”, it was not, by itself, sufficient proof that any person referred to in sections 165(2) or
165(5) of the Act is not acting in good faith.2376 The court further elaborated that the law does not
require the directors of a company “to be friends or even to be in talking terms. What is of utmost
fundamental importance, amongst others, is the fiduciary duty which they individually owe to the
company of which they are the directors”.2377 Consequently, the court held that the applicant had
2369
2370
Ibid.
2371
In terms of section 165(2) of the Companies Act 71 of 2008.
2372
Mouritzen v Greystones Enterprises (Pty) Ltd 2012 5 SA 74 (KZD) para 34. It should be noted that the second
respondent and his wife owned a total of 98 shares of the issued 198. The applicant and the second respondent’s
two sisters each held a share and the remainder was owned by the Mouritzen Trust of which the applicant was a
trustee.
2373
2374
Ibid.
2375
2376
2377
Mouritzen v Greystones Enterprises (Pty) Ltd 2012 5 SA 74 (KZD) para 60. See also Cassim R “An Analysis of
Directors’ Duties in the Removal of a Director from office” 2019 Stellenbosch Law Review 212 215; Abugu
“The Monster Theory: Setting the Boundary for Corporate Financial Malpractice” An Inaugural Lecture
delivered at the University of Lagos 2015 20; However, while quoting, Lewis Group Limited v Woollam 2017
(2) SA 547 (WCC) para 49 Cassim R “The Launching of Delinquency Proceedings under the Companies Act 71
of 2008 by means of the Derivative Action: Lewis Group Limited v Woollam 2017 (2) SA 547 (WCC)” 2017
303
successfully demonstrated on a preponderance of probabilities that he was acting in good faith.2378
Good faith is associated with one’s state of mind and depends mostly but not entirely upon the
subject’s honesty.2379 The question of whether one was acting in the best interests of the company
rests upon the motive of the applicant.2380
The English case of Barrett v Duckett2381 is a good example of how English courts deal with
questions of a derivative plaintiff’s ulterior motive.2382 The litigation was initiated amidst a bitter
matrimonial dispute between the plaintiff’s daughter, Carol, and Christopher Duckett (the
defendant). Mrs Barrett (the plaintiff) was the widow of Mr Barrett and Carol’s mother. Carol was
married to the defendant but later divorced. Upon the breakdown of the marriage, Carol ceased
cooperating with the defendant on several issues relating to their company. On one occasion, she
refused to sign the company’s accounts. As a result, the accounts could not be filed. The plaintiff
was a shareholder and the defendant was a director in the company. The defendant tried to have
another director appointed but this was opposed by the plaintiff. The plaintiff subsequently brought
an action “to right grievous wrongs done to [the company] of which she is a shareholder”.2383
The court held that for a shareholder to be allowed to sue on behalf of the company, he or she must
bring the action bona fide for the benefit of the company and for damage to the company for which
no other remedy exists.2384 Therefore, if the action is brought for an ulterior purpose or if another
adequate remedy is available, the court will not allow the derivative action to proceed. 2385 The
plaintiff’s action was, in this case, dismissed because of the personal vendetta that she was
pursuing against the first defendant which was not in the best interests of the company. Therefore,
under the common law, derivative action used to be based, the presence of an ulterior motive was
proof of an application brought mala fides.
Obiter 678 asserted that the directors’ duty “to act honestly and in accordance with their fiduciary duties to the
company ‘is owed not only to the company but also to the shareholders personally’”.
2378
2379
SALJ 508.
2380
SALJ 509.
2381
[1995] 1 BCLC 243.
2382
Ibid.
2383
Barrett v Duckett [1995] 1 BCLC 243.
2384
Ibid.
2385
Barrett v Duckett [1995] 1 BCLC 243. This is also the position under the Companies Act of 2006. See Parry v
Bartlett [2011] EWHC 3146 (Ch).
304
It has to be noted that in South Africa, the good faith requirement is intimately tied up with the
other substantive requirements in section 165(5)(b) of the Companies Act.2386 Conversely, in
England, the good faith prerequisite is coupled with the best interests of the company
requirement.2387 South African law treats the two as separate stand-alone requirements.2388 This
effectively means that even if the plaintiff has successfully established that commencing or
continuing the derivative proceedings is in the best interests of the company, the court will not
grant leave unless it has also been shown that the application is brought in good faith. 2389 The
requirements of good faith in section 165(5) of the Companies Act are a corollary of the
requirements of bad faith in section 163(3) where not only must it be shown that the demand is
frivolous and vexatious, but also that it is without merit.2390
It is submitted that the South African statutory derivative actions framework system is
commendable for separating the requirements of “good faith” and “the best interests of the
company”. The English approach risks shrouding the two concepts which may result in proof of
one aspect being mistaken for proof of both requirements. This will result in an ineffective filtering
requirement which could in turn contribute to a weak corporate governance system. It is possible
for one to initiate litigation in the best interests of the company but not in good faith.2391 It is further
submitted that good faith deals with the relationship between the applicant and the application
whilst the best interests of the company have more to do with the relationship between the
application and the company.
For example, an MTN (Pty) Ltd shareholder may commence derivative litigation in good faith,
that is, without an ulterior motive. However, the reputational damage that may result from such
action may be significantly more than the possible amount to be recovered. Another good example
was provided in the Mouritzen case in this form: Where a person does not act in good faith but is
2386
71 of 2008. See Mbethe 2016 para 156 where it was opined that, for example “[w]here it is not shown that the
proposed action has merit (in the sense that a legally [cognisable] cause of action exists), it would be harder for
the applicant to satisfy the Court that the application is brought in good faith as no reasonable person would in
such circumstances want to pursue such an action. Conversely, where the derivative action appears to have merit
and is in the interests of the company, it would more readily be accepted that the applicant is acting in good faith
unless there are objective circumstances to establish otherwise”. See also the discussion by Cassim MF The new
derivative action under the Companies Act: Guidelines for judicial discretion (2016) 51-55.
2387
Section 172(1) of the UK Companies Act 2006. See also Mbethe 2016 para 152.
2388
Ibid.
2389
Ibid.
2390
2391
305
driven by an ulterior motive, such as a personal dispute, s/he will generally not be acting in the
best interests of the company.2392 Under such circumstances, it is possible that the suit may be held
not to be in the best interests of the company. Also, integrating good faith and the interests of the
company into one requirement assumes that both concepts are subject to the same standard which
may not be true in some circumstances.
In another South African case, Lewis Group Limited v Woollam,2393 the applicant company brought
an application in terms of section 165(3) of the 2008 Companies Act for an order setting aside a
demand in terms of section 165(2) served on it by the first respondent, Mr David Woollam.2394 It
was contended on behalf of the applicant that the first respondent had acquired shares in the Lewis
Group in circumstances in which he expected the price to fall.2395 It was further averred that the
bad publicity suffered by the applicant company as a result of Woollam’s initiation of derivative
proceedings adversely affected the former’s share price and that the first respondent’s conduct
“was directed at engineering movements in the share price to benefit his short-selling2396
activities”.2397 The first respondent admitted to having held short positions2398 on the applicant’s
securities at various times but opted not to disclose his trading activities in this regard. He
maintained that there was nothing unusual about his short-selling of shares in the Lewis Group as
they are allegedly one of the most widely short-traded shares on the market.2399
2392
2393
(ZAWCHC) October 2016 para 84. This case has been referenced as such in order to differentiate in from Lewis
Group Limited v Woollam (ZAWCHC) 15 November 2016 and Lewis Group Limited v Woollam (ZAWCHC)
2017.
2394
Lewis Group Limited para 1.
2395
2396
An Introduction to Short Selling: White Paper by Managed Funds Association 2018 available at;
http://hedgefundamentals.org/wp-content/uploads/2018/05/An-Introduction-to-Short-Selling_White-Paper.pdf
4 (accessed 23-06-2019) describes short selling as a process whereby an investor “borrows a security and sells
it, then later buys back the security and returns it”. Ideally, for the investor to make a profit, the selling price
must be higher than the buying price. Consequently, an investor normally borrows securities in anticipation of a
drop in their value. See also Lewis Group Limited para 85 for the definition of short selling.
2397
2398
Lewis Group Limited para 85 defined the phrase “taking a short position” in securities to mean “an investment
strategy whereby the investor ‘borrows’ shares from a holder thereof, normally at an agreed fee, and sells them
into the market at a time when he expects the price to drop. The investor then purchases an equivalent number
of shares at the lower price to which they have fallen to be able to return them to the ‘lender’ (usually a brokerage
firm). His profit is the difference between the price at which he sold the shares and that at which he purchased
replacements to return to the ‘lender’, less, of course, the costs of the transactions”.
2399
306
The applicant alleged that Woollam’s resort to section 165 of the Companies Act was motivated
by a collateral purpose and was not brought in good faith.2400 Further, it was argued that Woollam
had no genuine interest in the protection of the company’s legal interests.2401 Woollam bore the
onus to satisfy the court that his application was brought in good faith for the court to grant him
leave to proceed derivatively.2402 The court found for the applicant and set aside the first
respondent’s demand served on the company in terms of section 165(2) of the Act. 2403 The court
held that the first respondent’s failure to disclose pertinent facts that were the subject matter of the
demand was tantamount to acting for an ulterior motive.2404
Another important South African judicial decision comes from the Supreme Court of Appeal
(SCA) case of Mbethe v United Manganese of Kalahari (Pty) Limited.2405 The applicant/appellant
was Mr Lazarus Mbethe. He was the chairperson and a director of the respondent company, United
Manganese of Kalahari (Pty) Ltd. The company is an open cast miner of manganese ore that is
crushed and screened at a fixed crushing and screening plant. In 2012, the company was faced
with a fairly high global demand for its product.2406 To capitalise on this demand, it identified a
need for the services of mobile crushing and screening contractors to supplement its own
production capacity.2407 This effectively meant that the contractors’ services would only be
required for as long as the demand for manganese ore remained high such that the company could
not meet it. The appellant introduced the company’s board of directors to Zastrospace (Pty) Ltd
(hereinafter “Zastrospace” or “the contractor”), a mobile crushing and screening contractor.2408
Zastrospace was subsequently appointed to provide the said services to the company. The appellant
justified Zastrospace’s appointment by stating that hiring the latter would substantially benefit the
local community through employment creation and that the company would also obtain the
required services at a competitive cost.2409 Later on, in order to confirm the appellant’s claims, the
2400
2401
2402
Lewis Group Limited para 88. See also Cassim MF “The Statutory Derivative Action under the Companies Act
of 2008: The Role of Good Faith” 2013 SALJ 521.
2403
2404
2405
2017 (6) SA 409 (SCA). This case will be referred to as “Mbethe SCA” to differentiate it from the one from the
court a quo.
2406
Mbethe v United Manganese of Kalahari (Pty) Limited 2017 (6) SA 409 (SCA) para 2.
2407
Mbethe 2017 para 2.
2408
Mbethe 2017 para 4.
2409
Mbethe 2017 para 2.
307
company made enquiries concerning the affairs of Zastrospace. It emerged that at the height of its
operations, Zastrospace employed only twelve to thirteen employees from the local community on
an ad hoc basis.2410
Due to a rapid deterioration in the market for the company’s product in 2014, its board resolved to
terminate Zastrospace’s contract in November of that same year. Aggrieved by the board’s
decision and other alleged managerial flaws, the appellant launched an application in the court a
quo seeking an order granting leave to institute and prosecute to finality legal proceedings in the
name and on behalf of the company, in terms of s 165(5) of the Act.2411
Relying on the Australian case of Swansson v Pratt,2412 the court a quo dismissed the application
with costs based on the view that the appellant had failed to comply with the pertinent requirements
of the Act.2413 In the court a quo, first, it had to be established that the applicant honestly believed
that a good cause of action existed.2414 Secondly, it had to be ascertained “whether the applicant
sought to bring a derivative action for a collateral purpose”.2415 The court a quo held:
“The legislature has quite clearly placed a substantive onus on an applicant seeking to bring a
derivative action to show that he is acting in good faith, which requires his establishing both elements
of the requirement of good faith set out in Swansson. This is a substantive self-standing requirement
for relief”.2416
With leave of the court, the appellant launched an appeal to the SCA where the main issue centered
on what had to be proved by the appellant in order to establish good faith. An important aspect of
the requirement of good faith is a determination of whether the plaintiff had a collateral or ulterior
motive. In this case of Mbethe,2417 the parties also disagreed about the elevation of the absence of
a collateral or ulterior purpose to the status of an element or criterion of the good faith requirement,
which the appellant had to prove as part of the substantive onus. The appellant contended that the
2410
2411
Mbethe 2017 para 5.
2412
[2002] NSWSC 583 where it was held that the good faith condition entailed two interrelated requirements.
Previously, this case was also referred to with approval in the first South African derivative action case on
derivative actions under the 2008 Companies Act, namely: Mouritzen v Greystones Enterprises (Pty) Ltd 2012
(5) SA 74 (KZD).
2413
71 of 2008.
2414
Mbethe 2016 para 154 while referring to Mouritzen v Greystones Enterprises (Pty) Ltd 2012 (5) SA 74 (KZD).
2415
Swansson v Pratt [2002] NSWSC 583.
2416
2417
Mbethe 2017.
308
absence of an ulterior purpose ought not to be treated as a separate element to be proved by him.
On the contrary, by drawing an analogy based on how the proper purpose rule functions, the
company challenged the appellant’s view and insisted that the latter was indeed required to prove
the absence of any collateral purpose.2418 According to that reasoning, it is a fact that proof of any
ulterior or collateral motive was required to determine whether the appellant was acting in the best
interests of the company or consistently with the proper purpose rule.
In responding to the question whether the presence of an ulterior motive is a separate element of
the good faith requirement, the SCA compared South Africa’s section 165(5) of the Act and
Australia’s section 237(2) of the Corporations Act. It was pertinent for the appellate court to draw
a comparison between provisions of the two pieces of legislation since the court a quo relied on
Australian authority as the ratio for its decision. Cassim FHI et al are of the view that these
statutory provisions are similar.2419 However, the SCA held that the two sections are not the
same.2420
The court took the view that in South Africa, the presence of an ulterior motive is dealt with under
the requirement that the question to be resolved must be of serious consequence to the company.
Conversely, under section 237 of the Australian Corporations Act, it is, according to the SCA,
justified that an applicant is required to show the absence of an ulterior motive when proving good
faith. By choosing not to follow the traditional two-tier approach to determine good faith as held
in the Australian case of Swansson,2421 it is submitted that the SCA decision in Mbethe presents a
new approach to determining the presence or absence of good faith. This is one of the aspects that
makes the Mbethe case groundbreaking. Given that this is a decision of the SCA, it effectively
means that the South African derivative action remedy has entered a new phase whereby unless a
constitutional issue arises, the appellant is no longer required to show the absence of an ulterior
purpose in order to prove the presence of good faith in terms of s 165(5)(b) of the 2008 Companies
Act. Additionally, the SCA’s choice not to follow the Swansson pronouncement is proof that South
African courts are allowed to consider foreign law but are not bound by the said laws. Also, even
2418
2419
2420
2421
See also English cases such as Whitwam v Watkin (1898) 78 LT 188 and Nurcombe v Nurcombe [1985] 1 WLR
370 and approved by the KwaZulu-Natal High Court, Durban, in Mouritzen v Greystones Enterprises (Pty) Ltd
2012 (5) SA 74 (KZD).
309
though South African company law is similar in several respects to its counterparts in other
Commonwealth jurisdictions, it has some aspects that are unique to itself.
In England, an argument has been advanced that the duty to promote the success of the company
has replaced the duty to act in good faith.2422 In Stainer v Lee,2423 Mr Stainer (“the applicant”),
brought an application in terms of section 261 of the Companies Act2424 for permission to continue
a derivative claim seeking relief on behalf of Kerrington Ltd (“the company”) against its two
respondent directors, Mr Lee and Mr Elliott, and Eldington Holdings Ltd (“Eldington”). 2425 The
applicant owned about 0.08 per cent of the company’s issued share capital. Eldington was a
company incorporated by Mr Lee to acquire the shares in the company not already owned by
him.2426 The applicant claimed that the two directors breached their fiduciary duty under section
172 of the Companies Act by allowing the company to extend an interest-free loan to Eldington
and by permitting additional lending to the same.2427
Of interest to this study is the respondents’ contention that the applicant was not acting in good
faith. It was alleged that the applicant was motivated by self-interest when he sought to sell his
shares by which he would also personally benefit. Consequently, it was further argued that the
applicant had a personal vendetta against Mr Lee because the latter had failed to offer a better price
for the former’s shares.2428 In rejecting the respondents’ argument, the court considered the fact
that before the applicant commenced the proceedings, he secured the written support plus a
financial contribution from 35 other small shareholders. The court regarded the applicant’s conduct
in seeking and obtaining that support as “strong evidence that he was acting in good faith”.2429
The case of Stainer v Lee highlights some important jurisprudential developments regarding the
requirement of good faith in England. First, the court’s determination that the applicant was acting
in good faith simply because he had secured the support of other minority shareholders seems to
depart from the traditional subjective standards for determining good faith. Whilst it is true that
one’s state of mind (subjective) can be manifest from objective facts, it is submitted that the court
2422
2423
[2010] EWHC 1539 (Ch).
2424
2006.
2425
Stainer v Lee [2010] EWHC 1539 (Ch).
2426
Mr Lee and Eldington’s shareholding amounted to 87 per cent of the issued shares of the company.
2427
Stainer v Lee [2010] EWHC 1539 (Ch) para 30.
2428
2429
Ibid.
310
should have arrived at its decision after a consideration of more than one factor. As such, the
court’s decision risks setting an unintended precedent that securing other shareholders’ support
automatically vitiates self-interest, which is not the case. Securing the support of other
shareholders may be one of the factors to be considered but not the only one.
It has been argued that the first part of the test of good faith is not purely subjective,2430 but has an
objective element that is tied up with the requirement that the demands have merit and are in the
interests of the company.2431 In England, it has been held that the test whether one acted in the
best interests of the company is subjective.2432 In the USA, in the landmark case of In re Caremark
International Inc. Derivative Litigation2433 it is noteworthy that the directors were held to what
they personally believed to be good corporate governance2434 rather than what a reasonable director
would have believed.2435 This suggests that the test of good faith is subjective because it relates to
one’s mind.2436 However, if the test is left open without any controls, the good faith standard would
be vulnerable to abuse by ill-behaved directors.2437 Accordingly, there should be limits to the
subjectivity of the good faith standard. A good example would be the English case of
Charterbridge Corporation Ltd v Lloyds Bank Ltd2438 where it was held that the test is whether an
intelligent and honest person in the position of the director could, in the given circumstances, have
2430
Cassim R “An Analysis of Directors’ Duties in the Removal of a Director from office” 2019 Stellenbosch Law
Review 212 215.
2431
Mbethe 2016 para 155 borrowing from the Australian case of Swansson v RA Pratt Properties Pty Ltd (2002) 42
ACSR para 36 where it was held that “the applicant may be disbelieved if no reasonable person in the
circumstances could hold that belief”. In Australia, this requirement has been couched in a way that requires a
determination whether the applicant honestly believes that a good cause of action exists and that there is a
reasonable prospect of its success. However, such applicant’s belief may be rendered moot or even nullified if
no reasonable person in the circumstances could hold that belief. Secondly, it must also be considered whether
the applicant intends to bring the derivative action for a collateral purpose so as to constitute an abuse of process.
See Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 586(1) while also referring to
Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACR ACSR 313.
2432
Lista “Directors’ duties in the common law legal system: Directors in the UK” in Paolini (ed) Research handbook
on directors’ duties: Research handbooks in corporate law and governance (2016) 82.
2433
698 A.2d 959 (Del Ch 1996).
2434
So held the court as it exercised deference to directors’ decisions. It was further urged that the court should not
second guess directors’ decisions.
2435
In re Caremark International Inc. Derivative Litigation 698 A.2d 959 (Del Ch 1996). See also Wood “Director
Duties and Creditor Protections in the Zone of Insolvency: A Comparison of the United States, Germany, and
Japan” 2007 Penn St. Int'l L. Rev. 139 145.
2436
SALJ 508.
2437
Although Davies and Worthington Gower’s principles of modern company law 10 ed (2016) 601 concede that
the requirement is broad, the scholars point out that application of the standard is regulated.
2438
[1970] Ch 62.
311
reasonably believed that s/he was acting in the interests of the company.2439 It should be noted that
the good faith test in Charterbridge was formulated in the context of director liability. However,
there is no doubt that these principles can be appropriately adjusted to apply to derivative
applicants and plaintiffs.2440 To that end, Cassim MF has appropriately concluded that the South
African good faith enquiry in section 165 of the 2008 Companies Act is “a subjective criterion,
qualified by an objective criterion”.2441
In Japan, when a shareholder makes an application commencing derivative litigation,2442 a

defendant may make a counter application to show that the application was filed in bad faith. 2443
If the defendant applicant proves the existence of a prima facie case that shows that the derivative
litigation was instituted in bad faith, the court may exercise its discretion and order such
shareholder to provide reasonable security.2444 Two issues are worthy of note here. The first one
is - what does reasonable security mean? Also, what must the defendant allege in order to convince
the court that the plaintiff’s application was brought in bad faith? However, before the bases for
ordering the plaintiff to provide security are discussed, an understanding of the order itself and its
purpose is important.
Unlike the other jurisdictions forming the basis of this comparative study, Japan arguably has the
least screening mechanisms for derivative actions. In fact, Oda argues that the court’s order for a
shareholder to provide security is the only filtering apparatus in the Asian state.2445 The deposit or
security for costs is meant to pay for the potential damages due to the defendant in cases where the
plaintiff acted in bad faith or was grossly negligent towards the defendant.2446 The problem with
an order for security of costs is that its consideration may ultimately determine the outcome of the
2439
Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62 74.
2440
SALJ 508.
2441
Ibid.
2442
It should be remembered that in Japan, a derivative action is known as an action for pursuing liability. See article
847 of the Japanese Companies Act 86 of July 26 2005.
2443
2444
Ibid. See also Oda “Shareholder's Derivative Action in Japan” 2011 ECFR 334 343.
2445
Oda “Shareholder's Derivative Action in Japan” 2011 ECFR 343.
2446
Ibid.
312
case because in some instances plaintiffs fail to pay the required security. 2447 Such failure
effectively leads to the dismissal of a case.2448
The Japanese word for bad faith is akui.2449 Some of the circumstances where the court ordered
the provision of security in derivative litigation include: where the plaintiff knows or negligently
fails to know that the claim lacks legal or factual grounds and where the plaintiff brings an action
for an inappropriate purpose.2450
From the above discussion, it is clear that South African and English courts generally struggle to
define the parameters of good faith. The USA has not been immune to this difficulty of defining
“good faith” as evident from the jurisprudence of the Delaware Chancery Court.2451
8 4 2 The best interests of the company and SLC disinterestedness

As has been shown above, in England, good faith and best interests of the company are integrated
to constitute one requirement. It has also been shown that Japan’s approach to judicial discretion
is very unique relative to the rest of the selected jurisdictions. Consequently, the consideration
below relates to South African and USA law. In order to facilitate a healthy comparative analysis,
the requirement that the applicant act in the best interest of the company has been equated with the
SLC’s obligation to be disinterested. In South Africa’s first reported case on derivative actions2452
since the coming into effect of the 2008 Companies Act, the court had to determine whether the
proposed legal action was in the best interests of the company as envisaged in section 165(5)(b)(iii)
of the Act. The court acknowledged that in most but not all cases, this requirement overlaps with
the good faith obligation.2453 For example, where a person does not act in good faith but is driven
2447
2448
Ibid.
2449
Takahashi “Shareholder derivative action: safeguards against abuse” available at: https://sas-
space.sas.ac.uk/3609/1/1587-1963-1-SM.pdf (accessed 21-06-2019).
2450
Ibid; See also Oda “Shareholder's Derivative Action in Japan” 2011 ECFR 344.
2451
See In re Walt Disney Co Derivative Litig 731 A.2d 342 (Del Ch 1998); In re Walt Disney Co Derivative Litig
825 A.2d 275 (Del Ch 2003); In re Walt Disney Co Derivative Litig 907 A.2d 693 (Del Ch 2005); Brehm v
Eisner 906 A.2d 27 (Del 2006). However, it must be noted that these listed cases referred to the “good faith”
requirement in the context of directors’ standards of liability and not in respect of derivative plaintiffs.
2452
Mouritzen v Greystones Enterprises (Pty) Ltd 2012 5 SA 74 (KZD). The facts of this case have already been
presented earlier in this chapter in part 8 4 1. See also Cassim MF The new derivative action under the Companies
Act: Guidelines for judicial discretion (2016) 75.
2453
313
by an ulterior motive, such as a personal dispute, s/he will generally not be acting in the best
interests of the company. The court considered that:
[t]he applicant is a trustee of the Mouritzen Family Trust which has the majority shareholding in the
company. Any financial maladministration and mismanagement of a company will naturally adversely
affect the financial condition of that company. Therefore, as a representative of the majority
shareholder, the applicant is entitled to call for a proper investigation of any suspected irregularities
and abuse of the company’s assets. The Mouritzen Family Trust has a direct and substantial interest in
the success and prosperity of the company in that if the allegations against the second respondent are
proven, that would have a direct negative impact on the value of the Mouritzen Family Trust’s
shareholding in the company.2454
It was held that an order in terms of section 165(5) would be the most effective and expeditious
way to resolve this matter in the best interests of the company.2455
According to section 165(7) of the South African Companies Act,2456 the establishment of certain
factors activates the rebuttable presumption that granting leave is not in the best interests of the
company.2457 It is submitted that the similarity between these two provisions2458 is no coincidence.
The South African provision is simply a carbon copy of the Australian version.2459 First, it will be
presumed that granting leave will not be in the best interests of the company if it is proved that the
2454
2455
Mouritzen v Greystones Enterprises (Pty) Ltd 2012 5 SA 74 (KZD) para 66. For a critique of the analysis in this
case see Cassim MF The new derivative action under the Companies Act: Guidelines for judicial discretion
(2016) 77.
2456
71 of 2008. See also section 237(3) of the Australian Corporations Act (Cth) No. 50 2001.
2457
For example see Mbethe 2016 para 86. See also Henochsberg on the Companies Act 71 of 2008 Vol 1 Service
Issue 2 2012 586(2).
2458
The two provisions are section 237(3) of the Australian Corporations Act (Cth) No. 50 2001 and section 165(7)
of the South African Companies Act 71 of 2008.
2459
In Mouritzen v Greystones Enterprises(Pty) Ltd 2012 5 SA 74 (KZD) para 36, Ndlovu J pointed out that section
165 of the South African Companies Act 71 of 2008 is derived from section 237 of the Australian Corporations
Act (Cth) No. 50 2001 which in turn was extracted from section 165 of the New Zealand Companies Act of
1993. The latter was itself a derivative of section 239 of the Canada Business Corporations Act of 1985. In
Mbethe 2016 para 154, the court admitted that the South African statutory derivative action framework has been
substantially influenced by that in Australia, Canada and England.
314
proceedings are by the company against a third party2460 or by a third party against the
company.2461
Second, there will be a rebuttable presumption that granting leave is not in the best interests of the
company “if the company has decided not to bring the proceedings or not to defend the proceedings
or to discontinue, settle or compromise the proceedings”.2462 However, the South African
Companies Act does not prescribe how the subject company must communicate its intention to
discontinue the purported derivative action. Apart from the implied meaning of section 165(3)2463
read together with section 165(4) of the Act, there is no statutory provision that expressly
prescribes how the company must communicate its intention to continue or discontinue the
litigation. Also, the use of the word “may” in section 165(3) is another cause for concern. It has
been held that the word is not peremptory but discretionary.2464
2460
Section 237(4) of the Australian Corporations Act (Cth) No. 50 2001 provides that “[f]or the purposes of
subsection (3): a person is a third party if the company is a public company and the person is not a related party
of the company; or the company is not a public company and the person would not be a related party of the
company if the company were a public company; and proceedings by or against the company include any appeal
from a decision made in proceedings by or against the company”. Section 50 of the Australian Corporations Act
(Cth) No. 50 2001 provides that two or more bodies corporate are related when one “is a holding company of
another body corporate or a subsidiary of another body corporate; or a subsidiary of a holding company of another
body corporate; the first-mentioned body and the other body are related to each other”.
2461
Therefore, as stated obiter in Mbethe 2016 para 87, in terms of section 165(8)(a) of the Companies Act 71 of
2008, the presumption must not be applied to persons other than those upon whom locus standi is conferred by
subsection (2)(a) (b) or (c) to whom leave is granted under subsection (2)(d). These persons include a
shareholder, a directors or a trade union of the company. In the unreported case of Larrett v Coega Development
Corporation (Pty) Ltd ECD 2639/2013 decided on 13 March 2015, Stretch J held that the provision was designed
to be invoked in those situations only where the wrongs are committed by third parties or outsiders and not the
management of the company or its directors against whom other directors of the company decline to act because
they are related parties or have some or other association with the outsider. See also section 237(3)(a) of the
Australian Corporations Act (Cth) No. 50 2001; and section 165(7)(a) of the South African Companies Act 71
of 2008.
2462
Section 237(3)(b) of the Australian Corporations Act (Cth) No. 50 2001 and section 165(7)(b) of the South
African Companies Act 71 of 2008.
2463
The section reads “[a] company that has been served with a demand in terms of subsection (2) may apply within
15 business days to a court to set aside the demand only on the grounds that it is frivolous, vexatious or without
merit”.
2464
Cassim. However, Wentzel AJ in Mbethe 2016 para 190 stated obiter that “the word ‘may’ is used in the sense
of permitting the Court to grant relief only if the requirements are met and not otherwise. The use of the word in
this context does not confer discretion but rather authority to the Court to only grant relief if the requirements of
the subsection are satisfied. Where they are satisfied, there is no residual discretion conferred upon the court not
to grant relief”. In this regard, inspiration can be drawn from section 165(5) of the New Zealand Companies Act
1993 which unambiguously provides that “[t]he company or related company may appear and be heard; and
must inform the court, whether or not it intends to bring, continue, defend, or discontinue the proceedings, as the
case may be”.
315
However, it is submitted that the defect in the South African statute highlighted in the previous
paragraph is cured by the legislature’s provision of timeframes within which a company is required
to act. A company served with a demand may apply within 15 days to a court to set aside the
demand.2465 If the company does not wish to apply for the demand to be set aside, then, within 60
business days or longer as may be determined by the court, it must either initiate or continue legal
proceedings, or take related legal steps to protect the legal interests of the company, as
contemplated in the demand, or serve a notice on the person who made the demand, refusing to
comply with it.2466
Thirdly, a South African court will presume that granting leave is not in the best interests of the
company if it is shown that:
“all of the directors who participated in that decision acted in good faith for a proper purpose and did
not have a material personal interest in the decision and informed themselves about the subject matter
of the decision to the extent they reasonably believed to be appropriate; and rationally believed that
the decision was in the best interests of the company.”2467
In the South African case of Mbethe 2016, it was held that the requirements set out in section
165(7) for invoking the presumption2468 are conjunctive and not disjunctive.2469 That means all the
prerequisites in the subsection must be satisfied before the presumption becomes operative. It has
been argued that this is a strong indication that the legislature did not wish to place too onerous a
burden on an applicant seeking to employ the section to enforce good corporate governance.2470
However, it remains debatable why the company’s refusal to initiate or continue with derivative
proceedings forms part of the presumption of mala fides. It is submitted that, in the meantime, this
must be left to the court to decide along the lines in which the English statute is couched. But, the
2465
Section 165(3) of the Companies Act 71 of 2008. See also Cassim R “The Launching of Delinquency
Proceedings under the Companies Act 71 of 2008 by means of the Derivative Action: Lewis Group Limited v
Woollam 2017 (2) SA 547 (WCC)” 2017 Obiter 673 676.
2466
Section 165(4) of the Companies Act 71 of 2008; Henochsberg on the Companies Act 71 of 2008 Vol 1 Service
Issue 2 2012 586.
2467
Section 237(3)(c) of the Australian Corporations Act (Cth) No. 50 2001; and section 165(7)(c) of the South
African Companies Act 71 of 2008.
2468
Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 586(2).
2469
2470
316
South African Companies Act2471 should ultimately be amended in this regard. The copy and paste
from the Australian Corporations Act2472 was not plausible.
With respect to the USA, it is noteworthy that, unlike derivative plaintiffs in South Africa,
members of the SLCs are required to be both independent and disinterested. Since there is no
statutory definition of the terms “independence” and “disinterestedness”, judicial opinion will be
relied upon here. To be “‘independent’ means that one is free from the influence, control or
determination of someone or something…to be ‘independent’, a director should be
‘disinterested’”.2473 In Teixon Corp. v Meyerson2474 it was held that “directors must not only be
independent, but must act independently”.2475 In Rales v Blasband,2476 it was held that an interested
director “will receive a personal financial benefit2477 from [the] transaction that is not equally
shared by the [other shareholders]”.2478 It follows that a disinterested director must not appear on
both sides of a transaction.2479
On the other hand, lack of independence can be proved by showing that a director is controlled2480
or influenced by interested directors such that the independent director’s discretion is
compromised.2481 Also, a plaintiff must allege facts that would support the inference that “because
of the nature of a relationship or additional circumstances other than the interested director's
[share] ownership or voting power, the non-interested director would be more willing to risk his
or her reputation than risk the relationship with the interested director”.2482
2471
71 of 2008.
2472
2001.
2473
2474
802 A.2d 257 264 (Del. 2002).
2475
2476
634 A.2d 927 936 (Del. 1993).
2477
It has to be noted that the benefit must not necessarily be expressed in financial terms. See Scarlett 2008 Florida
L. Rev. 589 616.
2478
2479
In re Riverstone National Inc. Stockholder Litigation Consol. C.A. No. 9796-VCG Del. Ch. July 28 2016.
2480
Scarlett 2008 Florida L. Rev. 618 argued that a director is controlled when the controlling power can unilaterally
either directly or indirectly exercise power to “decide whether the director continues to receive a benefit upon
which the director is so dependent or is of such subjective material importance that its threatened loss might
create a reason to question whether the director is able to consider the corporate merits of the challenged
transaction objectively”. Wilder “The Demand Requirement and the Business Judgment Rule: Synergistic
Procedural Obstacles to Shareholder Derivative Suits” 1985 Pace L. Rev. 633 644 opined that the question
whether one is being controlled by another is a factual enquiry.
2481
Scarlett 2008 Florida L. Rev. 617 while referring to Telxon Corp. v Meyerson 802 A.2d 257 264 (Del. 2002).
2482
317
It is evident that most definitions that define director interestedness focus on familial or close
personal relationships.2483 But, non-familial relationships alone are not enough to prove directors’
lack of independence.2484 Therefore, allegations of mere personal friendship or an ordinary outside
business relationship alone are insufficient to raise a reasonable doubt about a director's
independence.2485 “It is the care, attention and sense of individual responsibility to the performance
of one's duties, not the method of election that generally touches on independence”.2486 Moreover,
structural bias alone is not compelling enough to negate the independence of a director.2487
Regardless of whether an SLC is made up of outside or incumbent directors, the primary
requirement is that they act in a detached and disinterested manner.2488
In the USA case of Klein v FPL Group Inc.2489 directors who were involved in or approved the
challenged transactions had been selected by the defendant CEO. They were also approved by the
board without any inquiry into their independence. The court held that they lacked the capacity to
objectively investigate a demand.2490 The independence of an SLC may also be compromised when
its members have a strong friendship with a key defendant, when the board fails to delegate
sufficient authority to the committee and when its key member “prematurely issued statements
exculpating the [main] defendant before the committee finished its investigation”.2491
Furthermore, in the USA, a court can broaden the independence analysis by application of a
contextual approach which “takes into account all relevant facts and circumstances that may affect
an SLC member’s impartiality, focused on ‘bias-creating’ factors beyond the usual economic
factors”.2492 For example, in the case of In re Oracle Corp. Derivative Litigation,2493 the court held
2483
2484
2485
Scarlett 2008 Florida L. Rev. 618 while referring to Beam v Stewart 845 A.2d 1040 (Del. 2004) 1050.
2486
Aronson v Lewis 473 A.2d 805 815 (1984).
2487
Scarlett 2008 Florida L. Rev. 618. The author defined structural bias as “the predilection of directors to favor
those of the same social or economic class, such as fellow directors or senior managers”.
2488
Kim “The Demand on Directors Requirement and the Business Judgment Rule in the Shareholder Derivative
Suit: An Alternative Framework” 1981 Journal of Corporation Law 512. Apparently, inclusion of outside
directors in an SLC adds to its credibility.
2489
2003 WL 22768424 20-24 (S.D. Fla. Sept. 26 2003).
2490
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 54 making reference to Klein v
FPL Group Inc. 2003 WL 22768424 20-24 (S.D. Fla. Sept. 26 2003).
2491
2492
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 61 making reference to In re
Oracle Corp. Derivative Litig. 824 A.2d 917 (Del. Ch. 2003).
2493
824 A.2d 917 (Del. Ch. 2003).
318
that even though the committee members were not “dominated” or “controlled” by any of the
defendants in the traditional economic sense, “the members were not independent due to other
social and collegial factors, such as the difficulty of accusing a fellow professor, whom one might
see at the faculty club or at academic conferences…”.2494
In another USA case of Zapata v Maldonado,2495 it was also held that:
“[w]hen a derivative plaintiff is allowed to bring suit after a wrongful refusal, the board's authority to
choose whether to pursue the litigation is not challenged although its conclusion reached through the
exercise of that authority is not respected since it is wrongful. Similarly, Rule 23.1, by excusing
demand in certain instances, does not strip the board of its corporate power. It merely saves the plaintiff
the expense and delay of making a futile demand resulting in a probable tainted exercise of that
authority in a refusal by the board or in giving control of litigation to the opposing side. But the board
entity remains empowered under [section] 141(a) to make decisions regarding corporate litigation. The
problem is one of member disqualification, not the absence of power in the board”.2496
In the USA, the question is whether a board that is tainted by the self-interest of a majority of its
members, can legally delegate its authority to a committee of two disinterested directors?
According to Delaware corporate law, “the interest taint of the board majority is per se a legal bar
to the delegation of the board's power to an independent committee composed of disinterested
board members”.2497 However, disinterested directors are allowed to act for the board.2498
Therefore, the SLC can legally move to dismiss derivative claims which it believes to be against
the interests of the company.
The court’s decision in Zapata deserves a warm reception as it allows for judicial scrutiny of the
SLC’s independence and good faith in instances where demand has been excused but the
committee recommended termination of the plaintiff’s litigation.2499 Furthermore, even where the
court acknowledged the independence and good faith of the SLC, Zapata empowers the court to
2494
In re Oracle Corp. Derivative Litig. 824 A.2d 917 (Del. Ch. 2003).
2495
430 A.2d 779 (Del. 1981). See also a discussion of this case by Cassim MF The new derivative action under the
Companies Act: Guidelines for judicial discretion (2016) 125-126.
2496
Zapata Corp. v Maldonado 430 A.2d 779 (1981) 786.
2497
Ibid.
2498
Section 141 of the DGCL. Zapata Corp. v Maldonado 430 A.2d 779 (1981) 786.
2499
L. Rev. 493. See also Cassim MF 2013 South African Mercantile Law Journal 316.
319
further exercise its discretion in considering whether it should grant the committee’s motion to
dismiss.2500
The USA should be applauded for requiring members of the SLC to be both disinterested and
independent. South African law does not explicitly require a derivative applicant to be
independent.2501 Also, South Africa has one of the broadest statutory derivative actions framework
in the sense that anyone can acquire the requisite legal standing through exercise of the court’s
discretion. It is therefore important to ensure that such possible derivative litigants are independent
and act free of anyone’s influence and control. The requirement of a derivative plaintiff to be
independent will make South Africa’s current derivative remedy scheme an even more effective
filter of vexatious and frivolous actions.
8 4 3 Ratification and approval/authorisation of the impugned conduct

The consideration hereunder consists of a comparison of South African and English law regarding
shareholder ratification and approval of the challenged conduct. In determining whether leave can
be granted, courts in England differentiate between causes of action that arise from conduct2502
that has already occurred2503 and that which has not yet happened.2504 England retained the
ratifiability principle under its current derivative litigation model.2505 Accordingly, an English
court is obliged to consider whether or not conduct is ratifiable or was approved before determining
whether or not to grant leave.2506 If the conduct complained of has been appropriately ratified in
accordance with the relevant rules, this forms one of the instances of mandatory judicial refusal of
2500
Zapata Corp. v Maldonado 430 A.2d 779 789 (Del. 1981).
2501
2502
The UK Companies Act makes reference to both acts and omissions.
2503
Section 263(3)(d) provides that “[i]n considering whether to give permission (or leave) the court must take into
account [whether] the cause of action arises from an act or omission that has already occurred, whether the act
or omission could be, and in the circumstances would be likely to be, ratified by the company”. See also Cabrelli
“Shareholders’ rights and Litigation” in Siems and Cabrelli (eds) Comparative company law: A case-based
approach 2 ed (2018) 383.
2504
Section 263(3)(c) provides that “[i]n considering whether to give permission (or leave) the court must take into
account [whether] the cause of action results from an act or omission that is yet to occur, whether the act or
omission could be, and in the circumstances would be likely to be authorised by the company before it occurs,
or ratified by the company after it occurs”. See also Mayson et al Company law 33 ed (2016) 562-563; Kershaw
Company law in context: Text and materials 2 ed (2012) 612-613.
2505
Cassim MF The new derivative action under the Companies Act: Guidelines for judicial discretion (2016) 135
argues that the ratifiability principle “has not been entirely neutralised”.
2506
In section 263(3), the legislature used peremptory language this way: “In considering whether to give permission
(or leave) the court must…”.
320
permission to proceed with a derivative claim.2507 Ratification of acts of directors that lead to
liability must be done in accordance with section 239 of the Companies Act.2508
The scope of ratifiable conduct is also worrisome. It ranges from negligence and default to breach
of trust in relation to the company.2509 Any decision to ratify directors’ conduct must be taken by
shareholders of the company without depending on the votes in favour by the director or any
connected2510 person.2511 It is noteworthy that England’s current legislative provisions do not affect
the validity of a decision taken by unanimous consent of the members of the company, 2512 or any
power of the directors to agree not to sue, or to settle or release a claim made by them on behalf
of the company.2513
Unlike England, section 165(14) of the South African Companies Act,2514 makes it clear that
ratification is not a bar to derivative litigation.2515 Furthermore, a South African court is not obliged
to take such ratification or approval into account.2516 The abolition of the requirement of
shareholder ratification or approval is a welcome development as it makes the derivative remedy
more flexible and more accessible to complainants. A look at the Foss v Harbottle era shows that
2507
Davies and Worthington Gower’s principles of modern company law 10 ed (2016) 601. In Iesini v Westrip
Holdings Ltd [2009] EWHC 2526 (Ch) para 85 it was held that this mandatory bar will only apply where the
court “is satisfied that no director acting in accordance with s.172 would seek to continue the claim. If some
directors would and others would not seek to continue the claim the case is one for the application of section
263(3)(b)”.
2508
2006. See also Cabrelli “Shareholders’ rights and Litigation” in Siems and Cabrelli (eds) Comparative company
law: A case-based approach 2 ed (2018) 382.
2509
Section 239(1) of the Companies Act 2006.
2510
For the definition of connected persons, see section 252 of the Companies Act 2006.
2511
Section 239(2) of the Companies Act 2006.
2512
2513
Section 239(6)(b) of the Companies Act 2006.
2514
71 of 2008.
2515
The relevant section provides that “[i]f the shareholders of a company have ratified or approved any particular
conduct of the company the ratification or approval does not prevent a person from making a demand, applying
for leave, or bringing or intervening in proceedings with leave under this section; and does not prejudice the
outcome of any application for leave, or proceedings brought or intervened in with leave under this section”. See
also Cassim FHI et al Contemporary company law 2 ed (2012) 777; Cassim MF “The Statutory Derivative
Action under the Companies Act of 2008: The Role of Good Faith” 2013 SALJ 502; Cassim MF The new
derivative action under the Companies Act: Guidelines for judicial discretion (2016) 23; Cassim MF “Judicial
Discretion in Derivative Actions under the Companies Act of 2008” 2013 SALJ 779; and Henochsberg on the
2516
Section 165(14)(b) provides that “the court may take that ratification or approval into account in making any
judgement or order”. It is important to note that the legislature employed the word “may” which is generally
taken to imply the conferment of discretionary power upon a decision maker. See also Cassim MF The new
derivative action under the Companies Act: Guidelines for judicial discretion (2016) 132-134 and Hendrikse
and Hefer Corporate governance handbook: Principles and practice 3 ed (2019) 372.
321
the derivative remedy was only available in instances where there was a possibility of ratifying the
impugned conduct.2517 The major problem with this approach was that courts always had a difficult
time differentiating between ratifiable and non-ratifiable actions.2518 With its abolition from being
one of the factors considered by the courts before granting leave, all the confusion that may
emanate from an attempt to distinguish between ratifiable and non-ratifiable actions is effectively
history. Also, the development saves both the judiciary and parties’ time. The requirement of
shareholder ratification was unnecessarily burdensome on derivative litigants in that the plaintiff
faced a difficult feat to persuade the court that the conduct complained of would not have been
ratified by the shareholders. It is submitted that, in this regard, the current South African statutory
derivative litigation framework is more advanced than its English counterpart.2519
85 JURISDICTION-EXCLUSIVE ISSUES
8 5 1 The USA
8 5 1 1 Determining demand futility
The demand futility doctrine is prevalent in the USA, hence the discussion hereunder mainly
relates to the jurisdiction. The essence of the demand futility doctrine is that there are certain
circumstances in which the demand requirement can be waived because serving it would be futile,
unavailing or useless.2520 As part of exercising their discretion, Delaware courts apply a two-
pronged test to determine whether demand futility has been sufficiently pleaded. 2521 In the USA
case of Zapata Corp. v Maldonado,2522 Maldonado, who was a shareholder of Zapata Corp (the
company), commenced derivative litigation against directors and officers of the company on
allegations of breach of fiduciary duty.2523 However, Maldonado did not first serve a demand on
the board stating that doing so would have been futile because all the directors were named as
defendants and were allegedly involved in the impugned actions. Four years later, while the
litigation was still ongoing, four of the defendant-directors had ceased to be part of the board. The
2517
2518
Ibid.
2519
Cassim FHI et al Contemporary company law 2 ed (2012) 795 submit that other common law jurisdictions such
as Canada and Australia employ the same approach. See section 242(1) of the Canada Business Corporations
Act 1985 and section 239 of the Australian Corporations Act (Cth) No. 50 2001.
2520
Melbinger and Moore 2017 Benefits Law Journal 7; Seitz Jr. and Sirkin 2018 The Business Lawyer 306; Erickson
2017 Oklahoma Law Review 264; Stickells 1953 Boston University L. Rev. 437; Wilder 1985 Pace L. Rev. 636.
2521
2522
430 A.2d 779 (1981).
2523
Zapata Corp. v Maldonado 430 A.2d 779 (1981).
322
remaining directors then named two new directors who, at that juncture, constituted an
Independent Investigation Committee (the committee). These two were tasked to investigate
Maldonado’s actions and to determine whether the company should continue any or all of the
litigation. It was held that the committee’s report would be “final,… not ... subject to review by
the Board of Directors and ... in all respects ... binding upon the Corporation”.2524 The committee
conducted the investigation and concluded that the derivative suit should be terminated because it
was not in the best interests of the company.2525 The question was whether the committee had the
power to terminate derivative litigation instituted for the benefit of the company.
The Delaware Supreme Court held that the decision of the court a quo that “a [shareholder], once
a demand is made and refused, possesses an independent, individual right to continue a derivative
suit for breaches of fiduciary duty over objection by the corporation, as an absolute rule”,2526 was
erroneous.2527 The court also held that “a board decision to cause a derivative suit to be dismissed
as detrimental to the company after demand has been made and refused, will be respected unless
it was wrongful”.2528
Under USA law, a shareholder can institute derivative litigation in equity without prior demand
on the board when “it is apparent that a demand would be futile, that the officers are under an
influence that sterilises discretion and could not be proper persons to conduct the litigation”.2529
However, it has to be noted that not all cases of demand excusal are automatically aligned with the
best interests of a company. Therefore, it is necessary to examine whether section 141 2530 of the
Delaware General Corporation Law (DGCL) allows directors to terminate litigation where a
demand is rightly excused but it is not in the best interests of the company to pursue it. In the
absence of such a procedure the destiny of the whole company may lie in the hands of an individual
2524
2525
Ibid.
2526
2527
The court explained that the USA case of Sohland v Baker Del. Supr. 141 A 277 1927 which was used as
authority for the court a quo’s proposition merely supported the shareholder's right to initiate the lawsuit. It did
not support an absolute right to continue to control it.
2528
2529
Ibid.
2530
This section empowers directors to choose whether or not to institute litigation.
323
shareholder.2531 On the other hand, the court in the Zapata case warned against the committee’s
potential to abuse the system.2532
In Zapata, the court suggested that after an objective and thorough investigation of a derivative
suit, the committee may cause the company to file a pre-trial motion to dismiss, based on the
interests of the company. In determining the validity of the motion, the court would adopt a two-
step test. First, the company should have the burden of proving independence, good faith and a
reasonable investigation, rather than presuming independence, good faith and reasonableness of
the committee and its investigation.2533 If any of these are not sufficiently proved or if the court is
not satisfied with any process related issue, the court may deny the company’s motion.2534 The
second enquiry would see the court applying its business judgment rule (BJR) to determine
whether the motion should be allowed.2535 It was also indicated that when appropriate, a court
should give special regard to matters of law and public policy in addition to the corporation's best
interests.2536 The court may grant the motion upon satisfaction with the independence of the
underlying business judgment.2537
However, the Zapata decision overlooked a very crucial issue in that the court failed to address
the critical question: When is a shareholder's demand upon a board of directors, to redress an
alleged wrong to the company, excused as futile prior to the filing of a derivative suit? 2538 This
issue was resolved in Aronson v Lewis2539 where the court came up with a two-stage test to be
2531
In Lewis v Anderson 9th Cir. 615 F.2d 778 783 (1979) the court expressed the point in the following words; “to
allow one shareholder to incapacitate an entire board of directors merely by leveling charges against them gives
too much leverage to dissident shareholders”.
2532
2533
2534
2535
Zapata Corp. v Maldonado 430 A.2d 779 (1981) 789 where it was also held that the second step is intended to
thwart instances where corporate actions meet the criteria of step one, but the result does not appear to satisfy its
spirit, or where corporate actions would simply prematurely terminate a shareholder grievance deserving of
further consideration in the corporation's interest.
2536
2537
Ibid.
2538
Wilder 1985 Pace L. Rev. 645-646.
2539
473 A.2d 805 (1984). DeMott 1986 University of California L. Rev. 490 has argued that before this case there
were significant inconsistencies among the courts with respect to the test for demand futility. Some courts were
more readily willing to excuse a demand on grounds such as when the plaintiff named a majority of the directors
as defendants in the suit or when the plaintiff claimed that the alleged wrongdoer controlled a majority. See for
example Brooks v Land Drilling Co. 564 F. Supp. 1518 1522 (D. Colo. 1983). However, in some cases, a
shareholder’s demand would only be excused if directors had personal economic interests in the impugned
transactions.
324
applied in determining demand futility. From the onset, it was noted that the issue of demand
futility depends on the allegations of the complaint.2540 The plaintiff, Harry Lewis, was a
shareholder of Meyers Parking System Inc. (Meyers or the company). The defendants were Meyers
and its ten directors, some of whom were also company officers. The suit challenged certain
transactions between Meyers and one of its directors Leo Fink (Fink) who owned 47% of the
company’s outstanding shares.2541 The plaintiff alleged that the transactions served “no valid
business purpose”, and were a “waste of corporate assets” because the amounts to be paid were
“grossly excessive”, that Fink performed “no or little services”, and because of his “advanced age”
would not be “expected to perform any such services”.2542 The plaintiff sought to cancel the
Meyers-Fink employment contract and to hold the directors, Fink included, to account for all the
damage sustained by Meyers as well as the return of all the profits duly derived.
The plaintiff did not serve a demand on the Meyers’ board of directors alleging that such an attempt
would be futile since all of the directors were named as defendants in the suit which rendered them
hostile to the plaintiff’s case. Their participation and express approval and/or acquiescence in the
wrongs complained of also meant that they faced possible liability, so argued the plaintiff. It was
also alleged that Fink controlled and dominated the Meyers’ board. Further, it was argued that the
institution of this action by present directors would require the defendant-directors to sue
themselves, thereby placing the conduct of this litigation in hostile2543 hands and preventing its
effective prosecution.2544
However, the defendants moved to dismiss the plaintiff's claim for failure to make a demand on
the Meyers board prior to the suit and plaintiff’s failure to allege with factual particularity why
demand is excused under the circumstances.2545 They had two arguments to support their motion.
First, the defendants contended that corporate management is the board’s prerogative and that this
policy required “the strict construction and enforcement of [Delaware Court] Chancery Rule
2540
2541
Ibid.
2542
Ibid.
2543
Wilder 1985 Pace L. Rev. 645 expressed concern that although there is judicial authority to support the view that
board hostility can affect its independence, the challenge is - how does the court measure hostility?
2544
2545
Ibid.
325
23.1”.2546 Second, the defendants argued that the plaintiffs’ claims lacked the factual particularity
necessary to allege demand futility.2547
In laying the legal framework within which the issues were to be determined, the court reiterated
that directors, rather than shareholders have the responsibility to manage the affairs of a
company.2548 The court further explained that the entire question of demand futility was
inextricably hinged on “issues of business judgment and the standards of that doctrine's
applicability”.2549 The court formulated a two-step approach to determine demand futility. It held
that a court must exercise its discretion to decide “whether, under the particularised facts2550
alleged, a reasonable doubt is created that: [a] the directors are disinterested 2551 and
independent2552 and [b] the challenged transaction was otherwise the product of a valid exercise of
business judgment”.2553 With respect to the first enquiry, a court must review the factual
allegations to decide whether they raise a reasonable doubt that the protections of the BJR should
fall away.2554 If it is an interested director transaction as in the case of self-dealing2555 or if the
board’s discretion was sterilised, then the BJR will not apply even if the transaction was approved
by a majority.2556 Demand futility would have been established and the inquiry ceases. The second
inquiry requires a court not to assume that the impugned transaction is a corporate wrong that
2546
Aronson v Lewis 473 A.2d 805 810 (1984). See also “Discovery in Federal Demand-Refused Derivative
Litigation” 1992 Harv. L. Rev. 1025.
2547
2548
See also Delaware General Corporations Law, section 141(a).
2549
2550
One of the hurdles that may stand in a complainant’s way to allege particularised facts is information asymmetry.
It has been argued that shareholders already have the relevant tools to access company records. See Scarlett 2008
Florida L. Rev. 597 making reference to Grimes v Donald 673 A.2d 1207 1216 (Del. 1996).
2551
Scarlett 2008 Florida L. Rev. 596. See also Bainbridge “Redirecting State Takeover Laws at Proxy Contests”
1992 Wisconsin L. Rev. 1071 1131.
2552
Aronson v Lewis 473 A.2d 805 816 (1984) defined independence as “a director's decision [that] is based on the
corporate merits of the subject before the board rather than extraneous considerations or influences”.
2553
Aronson v Lewis 473 A.2d 805 814 (1984)
2554
Aronson v Lewis 473 A.2d 805 814 (1984). For example, Branson “A Business Judgment Rule for Incorporating
Jurisdictions in Asia” 2011 SAcLJ 687 703 asserts that a director who intentionally hides material information
from other board members in order to mislead shareholders lacks good faith. See also Scarlett 2008 Florida L.
Rev. 596-597; Branson “The American Law Institute Principles of Corporate Governance and the Derivative
Action: A View from the other Side” 1986 Wash. & Lee L. Rev. 403.
2555
Marshall L. Rev. 571 588. Wilder 1985 Pace L. Rev. 641 argued that mere naming of directors as defendants
does not suffice.
2556
326
needs to be corrected by the board.2557 Rather, the challenged transaction must be substantively
reviewed against the factual background alleged in the complaint.2558
In that same USA case of Aronson v Lewis, it was further held that: “…in the exercise of its
discretion, [a] court must be satisfied that a plaintiff has alleged facts with particularity which,
taken as true, support a reasonable doubt that the challenged transaction was the product of a valid
exercise of business judgment. Only in that context is demand excused”.2559
In its application of the law to the facts, the court held that:
“[share] ownership alone, at least when it amounts to less than a majority, is not sufficient proof of
domination or control. Moreover, in the demand context, even proof of majority ownership of a
company does not strip the directors of the presumptions of independence, and that their acts have
been taken in good faith and in the best interests of the corporation. They must be coupled with the
allegation of such facts as would demonstrate that through personal or other relationships the directors
are beholden to the controlling person”.2560
The court concluded that it was not enough to claim that a shareholder dominated the board
because the former appointed the members thereof for that is the usual way a person becomes a
company director. The court took the view that in the demand-futile context, “a plaintiff charging
domination and control of one or more directors must allege particularised facts manifesting ‘a
direction of corporate conduct in such a way as to comport with the wishes or interests of the
corporation (or persons) doing the controlling’”.2561
2557
Ibid.
2558
Ibid.
2559
Ibid.
2560
Aronson v Lewis 473 A.2d 805 815 (1984). See also Branson 1986 Wash. & Lee L. Rev. 403.
2561
Aronson v Lewis 473 A.2d 805 816 (1984). Regarding allegations that ownership of a majority of shares by the
alleged wrongdoer automatically affects a director’s independence, in Kaster v Modification Sys. Inc. 731 F.2d
1014 1020 (2d Cir. 1984) it was held that; “such an argument does not always reflect the realities of corporate
life once the directors are seated. A director may have superior interests that would result in a vote contrary to
the interests of the majority shareholder. A director usually owns some [shares] of the corporation and may vote
to protect that interest if a contrary vote would result in a looting of the corporate treasury. A director may be
motivated to protect the interests of the corporation because of the risk of personal liability for breach of fiduciary
duty or for a securities laws violation. In less cynical times, the subjective sense of duty to the corporation that
accompanies the acceptance of a directorship would be viewed as a strong incentive to vote to protect the
corporation against any excesses. We are thus unwilling to say that ownership of a majority of shares by the
alleged wrongdoer automatically makes a demand on the directors futile”.
327
The court in Aronson v Lewis further held that the plaintiff’s claim of demand futility could not be
sustained because he failed, inter alia, to allege sufficient facts to support a claim of control. It
was also held that the plaintiff failed to specify the causal link between Fink's control and board
approval2562 of the employment agreement. The Aronson judgment shows the court’s inclination
to preserve directors’ managerial prerogatives and its reluctance to extend judicial intervention
into the province of corporate governance.2563 The court’s decision is welcome in that it limits
judicial participation in business transactions whilst upholding a fundamental company law
principle which states that corporate management powers are vested in the directors of a company.
Recently, in the USA, the Delaware Court of Chancery had to decide another demand futility case
in Wilkin v Narachi.2564 In this case, the plaintiff, Ben Wilkin (Wilkin) was a shareholder in the
nominal defendant Orexigen Therapeutics Inc., a biopharmaceutical company, at the time the
wrongdoing complained of took place. The plaintiff alleged that some of the decisions made by
the board during certain clinical drug trials violated positive law thereby breaching the directors’
fiduciary duties to the company. It was further claimed that the board’s decisions amounted to a
waste of corporate assets. The plaintiff contended that the demand would be excused under either
Aronson or Rales because a majority of the board faced a substantial likelihood of liability for
breaching the duty of loyalty by knowingly and intentionally causing the company to violate
certain regulations and confidentiality obligations relating to clinical drug trials.2565 It was further
argued that demand would be excused as the defendants’ decisions were not a result of a valid
exercise of business judgment. The defendants on their part moved to dismiss the complaint for
failure to adequately plead demand futility under Delaware Court of Chancery Rule 23.12566
In its judgment, the court in Wilkin v Narachi,2567 noted that in order for a derivative suit to
proceed, “the complaint must allege with particularity that the board was presented with a demand
and refused it wrongfully or that the board could not properly consider a demand, thereby excusing
2562
Emerson 1986 John Marshall L. Rev. 589 argued that mere directorial approval may not be sufficient to cause
doubt that the director’s independence might have been impaired. See also Wilder 1985 Pace L. Rev. 642 who
opined that there has to be evidence that the directors personally benefited from the challenged transactions.
2563
2564
C.A. No. 12412-VCMR (Del. Ch. Feb. 28 2018).
2565
Wilkin v Narachi C.A. No. 12412-VCMR (Del. Ch. Feb. 28 2018) 28.
2566
2567
328
the effort to make demand as futile”.2568 In the court’s view, conclusory statements, mere notice
pleadings, speculation and opinion are not enough to satisfy Delaware Chancery Court Rule
23.1.2569 In determining whether demand is excused, the court must “accept as true the well-
pleaded factual allegations in the complaint, as well as all reasonable inferences that logically flow
from [those] facts”.2570
Sadly, the plaintiff’s complaint was punctuated with fatal deficiencies. First, the plaintiff failed to
provide a reason to doubt that the board of directors could have properly exercised its independent
and disinterested business judgment in responding to a demand.2571 A determination whether a
majority of the board faces potential personal liability is conducted on a case by case basis. The
conduct complained of must “be so egregious on its face” that the board could not have exercised
its business judgment in responding to a shareholder’s demand to pursue those claims.2572
The plaintiff in Wilkin v Narachi2573 argued that demand was futile due to the director defendants’
substantial likelihood of liability for, inter alia, allowing the dissemination of confidential interim
data2574 in violation of the Food and Drug Administration regulations.2575 However, the complaint
did not specify the exact statute that was violated by the company. The court held that “merely
discussing statutes in vague, broad terms does not support an inference that director defendants’
decisions somehow violated these statutes”.2576 In the court’s view, pleading violations of non-
binding recommendations do not constitute pleading a violation of positive law such that the board
faces a substantial likelihood of liability and therefore cannot consider a demand.2577
The court further held that the demand should not be excused as futile on the facts of Wilkin
v Narachi because the plaintiff failed to prove any violation of the law but instead painted a picture
of the directors’ failure to follow best practices which do not create a “substantial likelihood of
2568
2569
Wilkin v Narachi C.A. No. 12412-VCMR (Del. Ch. Feb. 28 2018) 25. See also Brehm v Eisner 746 A.2d 244,
254 (Del. 2000) and In re Walt Disney Co. Deriv. Litig. 825 A.2d 275 285 (Del. Ch. 2003).
2570
2571
2572
Wilkin v Narachi C.A. No. 12412-VCMR (Del. Ch. Feb. 28 2018) 29 while quoting Melbourne Municipality
Firefighters’ Pension Tr. Fund ex rel. of Qualcomm Inc. v Jacobs 2016 WL 4076369 6.
2573
2574
2575
2576
2577
329
liability”.2578 However, New York courts have been more inclined to plaintiff woes in satisfying
the rather onerous requirements of Delaware law. Instead, under New York law, proof of fraud,
self-dealing or personal profit are not prerequisites to demand futility claims.2579
In light of the shortcomings of the demand futility doctrine outlined above, the American Law
Institute (ALI) proposed some reforms aimed at balancing directors’ need to retain corporate
control and enhancing shareholders’ interest in corporate accountability.2580 The ALI proposed
that the demand issue should be eliminated from the standard of scrutiny to be applied to a
corporate board's motion to dismiss a derivative suit. It also urged American courts to adopt a strict
standard for excusing demand and that even when demand is made and refused in all cases alleging
wrongdoing by a corporate fiduciary or self-dealing by a controlling shareholder, the company
requesting dismissal should bear the burden of justifying its request.2581
It can be argued that the statutory derivative actions framework in South Africa already provides
for a subtle demand futility principle in its current legislative framework. Section 165(6)(b) of the
Companies Act provides that in exceptional circumstances the court may grant leave only if it is
satisfied that “there is a reasonable probability that the company may not act to prevent that harm
or prejudice, or act to protect the company’s interests that the applicant seeks to protect”.2582 The
legislature’s use of the conjunctive “and” between 165(6)(b) and 165(6)(c) shows that the two
paragraphs ought to be read together.2583 The latter requires the applicant to comply with the
requirements of 165(5)(b). Considering that the applicant bears the burden to prove the
requirements of section 165(5)(b),2584 it can be submitted that the same bears the onus to prove the
requirements of 165(6)(b) read together with 165(6)(c) since both provisions refer to the same test.
8 5 1 2 Other Rule 23.1 discretionary aspects

In Delaware, to satisfy the demand requirement, the plaintiff must “state with particularity any
effort by the plaintiff to obtain the desired action from the directors or comparable authority and,
2578
Wilkin v Narachi C.A. No. 12412-VCMR (Del. Ch. Feb. 28 2018) 28-29.
2579
See Wilder 1985 Pace L. Rev. 647 who made reference to the leading USA case of Barr v Wackman 36 N.Y.S.2d
497 (1975).
2580
2581
2582
2583
The same reasoning was applied in Nova Property Group Holdings v Cobbett 2016 3 All SA 32 (SCA).
2584
The South African Companies Act 71 of 2008.
330
if necessary,2585 from the shareholders or members; and the reasons for not obtaining the action or
not making the effort”.2586 This provision sets out two other aspects on which the Chancery Court
can exercise its discretion before deciding whether or not to grant the plaintiff leave. The first is
the requirement of particularity. And the second one relates to the definition of comparable
authority as far as the recipients of the demand are concerned. It should be noted that both of these
aspects were discussed in detail in chapter six under part 6 4 1.
However, it has to be reiterated that although the term “comparable authority” is also not defined
in the Model Business Corporation Act (MBCA) rules, the official comment on section 7.42
thereof states that a demand can be served on the board of directors, chief executive officer or
secretary at the corporation’s principal office.2587 The use of the disjunctive “or” shows that the
above mentioned are competent alternative recipients of a demand.2588 If the MBCA’s approach is
adopted, then it can be argued that Delaware Chancery Court Rule 23.1’s “comparable authority”
may mean chief executive officer or secretary based at the company’s principal office. This
interpretation makes sense since there may be cases, such as a decision to sue a third party for an
injury to the company, in which the taking of or refusal to take action would fall within the
authority of company officers.2589
8 5 2 Japan
Unlike the other jurisdictions that are subjects of this comparative study where derivative claims
are determined on a case by case basis, Japan’s system can be described as “formalistic and
categorical”.2590 In Japan, the plaintiff may not commence or continue derivative litigation to seek
2585
phrase “if necessary” literally.
2586
Delaware Chancery Court Rule 23.1. See also Emerson 1986 John Marshall L. Rev. 575. Similar wording is also
found in the statutes of other USA states. Section 800(b)(2) of the California Corporations Code 1982 provides
that the plaintiff must “allege in the complaint with particularity plaintiff’s efforts to secure from the board such
action as plaintiff desires, or the reasons for not making such effort”. Section 626(c) of the New York Business
Corporation Law 1963 provides that “the complaint shall set forth with particularity the efforts of the plaintiff to
secure the initiation of such action by the board or the reasons for not making such effort”.
2587
2588
See Nova Property Group Holdings v Cobbett 2016 3 All SA 32 (SCA) para 30 where South Africa’s Supreme
Court of Appeal provided a historical analysis of section 26 of the Companies Act 71 of 2008, and held that the
word “and” is a conjunctive whilst the word “or” is a disjunctive.
2589
2590
Goto “Legally Strong Shareholders of Japan” 2014 Michigan Journal of Private Equity & Venture Capital Law
138.
331
unlawful personal gains or to recover damages on behalf of a company.2591 Such plaintiff must
own at least one share in the preceding six or more months before initiating the suit.2592 The ambit
of Japanese derivative proceedings is limited to those that are prescribed by legislation.2593
Usually, these are claims which the law regards to be at the risk of being under-utilised by those
controlling the company.2594
Paradoxically, even under such restrictive circumstances, Japanese shareholders are more
empowered in relation to the pursuit of derivative claims than those in common law jurisdictions
such as South Africa, England and even the USA.2595 It must be remembered that Japanese
derivative plaintiffs do not need to prove wrongful refusal by the board neither do they need to
show demand futility.2596 Such concepts are alien to Japanese company law whereas they
constitute the backbone of derivative suits in the USA, especially in Delaware State. Furthermore,
the requirement of a fair and adequate representation is non-existent in the Japanese derivative
claims legal framework.2597 Also, a court cannot dismiss a derivative suit by referring to the
decision or outcome of deliberation by a company’s SLC.2598 Likewise, the contemporaneous
ownership rule is absent in the Japanese model for regulating derivative litigation. 2599 Therefore,
Goto was correct in concluding that Japanese derivative remedies are “easy to commence but
difficult to dismiss”.2600
A result of the absence of the above-mentioned requirements is that the courts play a more relaxed
role in Japanese derivative litigation. Clearly, plaintiff shareholders are less restricted in
commencing derivative claims in Japan. On the face of it, one might be tempted to think that the
relaxation of “strict” shareholder prerequisites promotes the interests of minority shareholders
whose voice is generally not loud enough in other jurisdictions. However, it must be noted that
each national model has its own advantages and disadvantages. First, in Japan, the interests of the
2591
2592
Ibid.
2593
Goto 2014 Michigan Journal of Private Equity & Venture Capital Law 138. See article 847(1) of the Japanese
Companies Act 86 of July 26 2005.
2594
2595
Ibid.
2596
Ibid.
2597
2598
Ibid. Japan’s corporate governance model has no room for American-style SLCs.
2599
2600
Ibid.
332
plaintiffs might deviate from the interests of the shareholders in general or from those of the
company.2601 Consequently, in the absence of an independent judiciary exercising its discretion to
determine whether the plaintiff is acting in good faith in the interests of the company, the
shareholders’ right to sue might be abused for personal gain.2602
Second, lack of restraining requirements upon Japanese derivative claimants may also result in
them interfering with decisions of company management.2603 Japan’s model risks crossing the
boundary between corporate ownership and control. Directors are entrusted with the responsibility
to manage the affairs of their companies.2604 Centralised decision-making is key to a sound system
of corporate governance.2605 Accordingly, there is always a need to prevent shareholders from
becoming managers of their company.2606 However, if shareholders’ legal actions are not
effectively checked, they may interfere with the discharge of managerial responsibilities.
A corollary of the above point is that the Japanese model may discourage directors from taking
innovative risks and engaging in “venturesome business activity”2607 as any of their decisions may
become subject to shareholder scrutiny. It has been argued that “in the normal course of events no
businessmen can avoid taking risks”.2608 Businesses thrive on innovation which in turn is directly
linked to risk-taking. A rule, practice or tradition that discourages innovation is counterproductive
not only to the concerned company but to the economy at large.
2601
2602
Ibid.
2603
Ibid.
2604
Sharfman “The Importance of the Business Judgment Rule” 2017 New York University J.L. & Bus. 55. Section
66(1) of the Companies Act 71 of 2008 reads: “[t]he business and affairs of a company must be managed by or
under the direction of its board, which has the authority to exercise all of the powers and perform any of the
functions of the company, except to the extent that this Act or the company’s Memorandum of Incorporation
provides otherwise”. See also section 141(a) of the Delaware General Corporations Law; article 348(1) of the
Japanese Companies Act 86 of July 26 2005; and Cassim R “The Power to Remove Company Directors from
Office: Historical and Philosophical Roots” 2019 Fundamina 37 62; Klauberg “General case on directors’
duties” in Siems and Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018) 59.
2605
Ponta “The Business Judgement Rule - Approach and Application” 2015 Juridical Tribune 29.
2606
Bouwman “An Appraisal of the Modification of the Director's Duty of Care and Skill” 2009 SA Merc LJ 524.
2607
Morales “Modernizing Colombian Corporate Law: The Judicial Transplant of the Business Judgement Rule”
2018 Indon. J. Int'l & Comp. L. 176; Bainbridge “The Business Judgment Rule as Abstention Doctrine” 2004
Vand. L. Rev 112; Branson “The Rule That Isn't a Rule- The Business Judgment Rule” 2002 Valparaiso
University Law Review 637; Bouwman 2009 SA Merc LJ 524.
2608
Weng 2010 Fordham International Law Journal 130 argues that the rule encourages risk-taking by diligent
businessmen. See also Rosenberg “Supplying the Adverb: The Future of Corporate Risk-Taking and the Business
Judgment Rule” 2009 Berkeley Bus. L.J. 217.
333
Also, it must be noted that shareholder derivative suits result in a company incurring financial
costs. Pursuing derivative suits employs a company’s financial and human resources which may
reduce shareholder value. Directors and other officers may be distracted from their daily activities
as they focus on responding to the claim.2609 No doubt, the performance of a company will be
adversely affected since litigation imposes additional responsibilities on the same resources. In the
long run, the negative effects of unrestrained shareholder litigation will also be felt even by the
plaintiffs themselves.
Uncontrolled shareholder derivative litigation in Japan may also pose a possible risk of opening
the floodgates to a multiplicity of litigation which may result in reputational damage.2610 A
company that is always being dragged before the courts may be viewed by investors as a high-risk
and undesirable investment. With the passage of time, the company’s value will drop as reflected
by a decrease in its share price. There are also higher chances of destroying relationships with
creditors and suppliers.2611
Another negative aspect that strengthens the position of Japan’s over-empowered shareholders is
the nature of its BJR.2612 Although Japan boasts a formal BJR,2613 which is not the case with
England, it is submitted that the Asian state’s version of the BJR is weak. In chapter seven above,
it was argued that Japan is more inclined to a standard of liability version of the BJR.2614 According
to this preference, the BJR will not apply if the decision-maker violated her/his duty of care.2615
Such a standard of liability dictates how one should conduct himself or how one is expected to
play an assigned role.2616 As was argued in the previous chapter, the standard of liability approach
is tantamount to putting the cart before the horse in the sense that the courts first seek evidence of
misconduct and if they fail to find such they then proceed to adopt a “hands-off policy”.2617 This
2609
2610
Ibid; Cooksey and Hutchins “Offensive Application of the Business Judgment Rule to Terminate Non frivolous
Derivative Actions: Should the Courts Guard the Guards” 1981 Texas Tech L. Rev. 654; Eccles et al “Reputation
and Its Risks” https://hbr.org/2007/02/reputation-and-its-risks (accessed 12-09-2018).
2611
2612
A detailed discussion of the nuances of the BJR was presented in chapter seven above.
2613
See article 254(3) of the Commercial Code Act No. 48 of March 9 1899.
2614
Yaru “The Business of Judging Directors’ Business Judgments in Singapore Courts” 2016 SAcLJ 450.
2615
2616
2617
Bainbridge 2004 Vand. L. Rev 94; McMillan “The Business Judgment Rule as an Immunity Doctrine” 2012
William & Mary Business Law Review 534.
334
approach would inevitably result in the courts becoming more and more involved in reviewing
directors’ decisions.
All in all, the financial effects of the above negative aspects of uncontrolled shareholder derivative
litigation outweighs the possible value to be derived from a successful suit.2618 It is from this line
of reasoning that the directors’ decision not to sue is sometimes “justified”. 2619 For this same
reason, courts in most common law systems tend to defer to directors’ decisions.2620 However, it
is submitted that this does not mean that restrictions to the use of the derivative remedy should be
completely done away with. The mere presence and/or availability of the remedy is an
indispensable deterrent to would-be miscreant directors.2621
However, it can be argued that the above mentioned negative aspects of Japan’s remote judicial
influence on derivative claims prosecution could be made good by an effective abuse of rights
doctrine. The abuse of rights doctrine is common in most civil law jurisdictions2622 although some
common law systems have also adopted it.2623 The doctrine’s roots can be traced back to ancient
Rome.2624 The nuances of the doctrine differ from place to place.2625 It has been utilised mostly in
international law,2626 intellectual property law, labour law and the law of contracts.2627 The
principle of abuse of right found its way into Japanese law from France towards the end of the
nineteenth century.2628
2618
Goto 2014 Michigan Journal of Private Equity & Venture Capital Law 161. See also West “Pricing of
Shareholder Derivative Actions in Japan and the United States” 1994 NW. U. L. Rev. 1436 1457-1458.
2619
2620
Ibid.
2621
Ibid.
2622
West 1994 NW. U. L. Rev 1468. See also Triggs “Japanese Scientific Whaling: An Abuse of Right or Optimum
Utilisation” 2000 Asia Pac. J. Envt’l. L. 33 37.
2623
Byers “Abuse of Rights: An Old Principle, A New Age” 2002 McGill Law Journal 389 393-395. Apart from
Japan, other civil law jurisdictions that employ the abuse of rights doctrine include Switzerland, France, Spain
and Netherlands. Some of the common law jurisdictions where the doctrine has been favourably received and
given wide application include the USA, Australia and England.
2624
Byers 2002 McGill Law Journal 391; West 1994 NW. U. L. Rev 1468.
2625
Byers 2002 McGill Law Journal 393-394 highlighting that jurisdictions differ on whether or not intention is part
of the doctrine.
2626
See United States — Import Prohibition of Certain Shrimp and Shrimp Products Complaint by the USA 1998
Appellate Body Report; available on https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds58_e.htm
(accessed 03-07-2019). See also Article 38(1) of the Statute of the International Court of Justice (ICJ).
2627
Byers 2002 McGill Law Journal 392.
2628
335
According to the Black’s Law Dictionary, the abuse of rights doctrine is a principle to the effect
that:
“a person may be liable for harm caused by doing something the person has a right to do if the right is
exercised for the purpose or primary motive of causing harm, without a serious and legitimate interest
that is deserving of judicial protection, against moral values, good faith or elementary fairness or for
the purpose other than its intended legal purpose”.2629
It is submitted that if the abuse of rights doctrine was applied in Japan as defined above, then the
principle could have been an effective counterbalance to the seemingly uncontrolled nature of
shareholder derivative suits in that jurisdiction. The definition of the abuse of rights doctrine
contains most of the “missing” aspects from the Japanese derivative litigation regulatory
framework. An application of the principle as defined above would have required the shareholder
plaintiff to act in good faith.2630 In fact, it has actually been argued that the doctrine of abuse of
rights is the common law equivalent of the requirement of good faith.2631 The requirement of a
serious and legitimate interest would also have helped curb strike suits. Also, plaintiffs’ motives
would not have gone unchecked as the doctrine’s definition requires one not to exercise her/his
rights for the primary motive of causing harm. Shareholders would also have been required to
prove that the derivative suit is brought in the interests of the company because the abuse of rights
doctrine only upholds the promotion of rights that are enforced fairly and solely for the intended
legal purpose. This is capable of operating as an important bar to self-interested shareholders.
In essence, the Japanese version of the abuse of rights doctrine states that proprietary rights are not
absolute and that the exercise of such rights should be governed by reason.2632 The term ‘abuse of
rights’ denotes some restriction on the exercise of one’s right. 2633 Rights are limited not only in
2629
Garner et al Black’s law dictionary 8 ed (2004) 11. Iluyomade “Scope and Content of a Complaint of Abuse of
Right in International Law” 1975 Harv. Int'l. L. J. 47 48 provides a definition which essentially contains the
same elements.
2630
Byers 2002 McGill Law Journal 406 asserts that conduct done in good faith is unlikely to result in abuse of
rights. The same author, while writing in the context of international law quoted Mann The Legal Aspects of
Money 5 ed (1992) 476 who opined that “[i]t is the lack of fair and equitable treatment, or of good faith, that is
the real and fundamental and, at the same time, the most comprehensive cause of action”. Although this statement
was made in the context of state actors, it is submitted that the underlying principle can, mutatis mutandis be
adjusted to be applied derivative proceedings instituted by private citizens.
2631
Triggs 2000 Asia Pac. J. Envt’l. L. 37.
2632
2633
Iluyomade 1975 Harv. Int'l. L. J. 48.
336
their scope but also in their exercise, which is permissible only for specific intents.2634 Simply put,
the abuse of rights doctrine refers to “the use of power in an unjustifiable or arbitrary manner”.2635
With this understanding, it can be argued that the shareholders’ right to institute derivative
litigation is not absolute. Rather, the right should be exercised subject to the dictates of
reasonableness.
However, Japan’s abuse of rights doctrine also has its downside. Firstly, the judiciary has been
inconsistent in interpreting the doctrine. Case law on the doctrine is often contradictory. 2636 The
principle has evolved into a subjective balancing test which the courts have employed to determine
the costs and benefits involved in the exercise of a certain right.2637 This has been done at the
expense of simply establishing whether an individual has injured another with no benefit accruing
to her/himself.2638 Consequently, the court’s decision will be based on equity. 2639 The subjective
nature of the balancing test allows the court to exercise its discretion to decide issues on a case by
case basis.2640
Furthermore, the abuse of rights doctrine can be financially demanding on the plaintiff
shareholders. The principle significantly hikes the price of Japanese derivative litigation.2641
Consequently, the doctrine can be employed to the exclusion of those shareholders who cannot
afford the required fees. A corollary of this is that some grievances that have merit will go without
redress. Also, the doctrine can be invoked as a defence by the board. If the defence is unsuccessful,
the plaintiff and the defendant will remain in their original positions.2642 However, if the defence
is successful then the directors would have won and the plaintiff will potentially be liable both to
the company and the board.2643
2634
Ibid.
2635
Triggs 2000 Asia Pac. J. Envt’l. L. 39.
2636
West 1994 NW. U. L. Rev. 1469.
2637
West 1994 NW. U. L. Rev. 1468.
2638
Ibid.
2639
Ibid.
2640
Ibid.
2641
West 1994 NW. U. L. Rev. 1468.
2642
West 1994 NW. U. L. Rev. 1469.
2643
Ibid.
337
8 5 3 England
Section 263 of the UK Companies Act sets out the criteria which must be taken into account by
the court to determine whether to grant permission for continuation of a derivative claim. 2644 The
Act prescribes several bases upon which the court can exercise its discretion to turn down the
commencement or continuation of derivative proceedings. First, a court must refuse leave to
continue a derivative claim if it is satisfied that a person acting in accordance with the general duty
of directors to promote the success of the company would not seek to continue the claim.2645 A
person acting to promote the success of the company must have regard to:
“the likely consequences of any decision in the long term, the interests of the company’s employees,
the need to foster the company’s business relationships with suppliers, customers and others, the
impact of the company’s operations on the community and the environment, the desirability of the
company maintaining a reputation for high standards of business conduct, and the need to act fairly as
between members of the company”.2646
Second, the court can also refuse permission where the cause of action arises from an act or
omission that is yet to occur or the impugned act or omission has been authorised by the
company.2647 Third, permission to proceed or commence derivative litigation can also be refused
where the cause of action arises from an act or omission that has already occurred, or the act or
omission was authorised by the company before it occurred, or has been ratified by the company
since its occurrence.2648 Section 263(3) of the UK Companies Act stipulates particular factors that
courts ought to take into consideration in deciding whether or not to grant permission. The
provisions in section 263(2)(a)-(d) of the said Act have already been examined above and will
therefore not be revisited here.
2644
Explanatory Notes on the UK Companies Act of 2006 note 498.
2645
Section 263(2) of the UK Companies Act 2006 and the Explanatory Notes on the UK Companies Act of 2006
note 499(a). In the English case of Kleanthous v Paphitis [2011] EWHC 2287 (Ch) para 70, the court took the
view that a claim against a director who does “not appear to have received any profits for which he could be
liable to account” is so weak that a person acting in accordance with section 172 of the UK Companies Act
would not seek to continue the claim. Consequently, the court would refuse permission to institute derivative
proceedings against the alleged wrongdoer.
2646
2647
Section 263(2)(b) of the UK Companies Act 2006.
2648
Section 263(2)(c)(i) and (ii) of the UK Companies 2006.
338
8 5 3 1 Discretion in terms of section 263(3)(e) of the UK Companies Act
In considering whether to grant leave to the plaintiff to continue with a derivative action, the court
must take into account whether the company has decided not to pursue the claim.2649 The board
may seek legal advice on whether or not it should bring or continue the derivative proceedings.2650
In doing so, board members are encouraged to act independently and avoid being influenced by
others.2651 Judicial discretion in this regard may be compromised because of the operation of the
BJR.2652 For example, in the English case of Kleanthous v Paphitis,2653 a minority shareholder in
a company brought an application under section 261 of the Companies Act2654 for permission to
continue a derivative claim on behalf of the company and one of its subsidiaries for alleged breach
of fiduciary duty by several directors of the company.2655 Although the court noted that allegations
of extremely “abusive behaviour should not be defeated by assertions of genuine belief by board
members or shareholders who think that litigation must always be the worst option; either
financially or in terms of corporate reputation”,2656 Newey J, held that the company’s CEO and
finance director were better placed than him to assess where the companies’ commercial interests
lie.2657 It is submitted that the court should have, on the facts of this case, exercised its discretion
due to the gravity of the allegations. Meritorious claims may go without redress because of the
judiciary’s wholesale exercise of deference. It is because of this and other difficulties that it has
been argued that section 263 of the UK Companies is a “bar to a derivative claim proceeding”.2658
The use of the peremptory “must” in section 263(3)(e) of the UK Companies Act shows that the
court is required to consider whether or not the company has decided not to pursue the claim. It is
2649
Section 263(3)(e) of the UK Companies Act 2006. See also Cabrelli “Shareholders’ rights and Litigation” in
Siems and Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018) 383; Lowry and
Reisburg Pettet’s company law: Company law and corporate governance 4 ed (2012) 268-270; Mayson et al
Company law 33 ed (2016) 561.
2650
Kleanthous v Paphitis [2011] EWHC 2287 (Ch) para 75.
2651
Ibid.
2652
The BJR was discussed in detail above in chapter seven.
2653
[2011] EWHC 2287 (Ch).
2654
2006.
2655
Kleanthous v Paphitis [2011] EWHC 2287 (Ch).
2656
Kleanthous v Paphitis [2011] EWHC 2287 (Ch) para 75 while quoting Boyle Minority shareholders’ remedies
(2002) 80.
2657
Kleanthous v Paphitis [2011] EWHC 2287 (Ch) para 75.
2658
Bawah “A Comparison of the Statutory Provisions of the United Kingdom (UK) Companies Act 2006 and
Ghana's Companies Act 1963 (Act 179), to the Rule in Foss v Harbottle” 2019 Beijing Law Review 153 161 who
further argued that “[c]omparing the language of ss. 261-264 with the common law rules it replaces shows that
there is little or no change of emphasizes in terms of formulation”. Restriction of access to the derivative remedy
does not promote responsible management.
339
logical that if a company has conceded to pursuing the claim then it should take over the litigation
from the complainant shareholder since it is the proper plaintiff.2659 However, it has to be noted
that when a company decides to institute derivative proceedings it may practically mean that
disinterested directors sue fellow miscreant directors. This may be difficult due to structural
bias2660 and it is feared that companies may engage in strategic delays to at least allow the
potentially defecting directors to leave the company. 2661 Though not expressly provided for by the
English legislature, it is submitted that in instances where the company elects to take over the
derivative litigation but delays the proceedings, a complainant can have recourse via section
262(1)2662 read together with subsection (2)2663 of the UK Companies Act.2664
There are three grounds upon which a shareholder/member2665 can successfully rely to continue
with a derivative claim in the England.2666 The first one is when “the manner in which the company
commenced or continued the claim amounts to an abuse of the process of the court”. 2667 It is
submitted that it may be difficult if not impossible for a plaintiff to have recourse through this
provision in instances where the company decides to pursue the derivative litigation but engages
in strategic delays. The provision in question relates to the manner in which the company handles
the proceedings of a derivative action that has already commenced. Nevertheless, section 262(2)(a)
can protect the plaintiff in instances where the company engages in strategic delays after the
litigation process has already commenced. However, it is, for a number of reasons, highly unlikely
that a company can afford any delays after commencing the litigation process. Firstly, the financial
2659
TWK Agriculture Ltd v NCT Forestry Co-operative Ltd 2006 6 SA 20 (N) para 9; Idensohn “The Fate of Foss
under the Companies Act 71 of 2008” 2012 SA Merc L.J 356.
2660
An extensive discussion of this concept was provided in chapter six above under 6 7 3.
2661
Under such circumstances, the issue whether or not the disinterested directors are not liable is a beyond the scope
of this study.
2662
Section 262(1) of the UK Companies Act provides that “… where a company has brought a claim, and the cause
of action on which the claim is based could be pursued as a derivative claim under this Chapter”.
2663
Section 262(2) reads: “[a] member of the company may apply to the court for permission to continue the claim
as a derivative claim on the ground that the manner in which the company commenced or continued the claim
amounts to an abuse of the process of the court, the company has failed to prosecute the claim diligently, and it
is appropriate for the member to continue the claim as a derivative claim”.
2664
2006.
2665
In defining “members” section 112(1) and (2) of the UK Companies Act provides that “[t]he subscribers of a
company’s memorandum are deemed to have agreed to become members of the company, and on its registration
become members and must be entered as such in its register of members. Every other person who agrees to
become a member of a company, and whose name is entered in its register of members, is a member of the
company”.
2666
It has to be noted that according to section 263(1), these grounds are subject to section 263 of the UK Companies
Act.
2667
Section 262(2)(a) of the UK Companies Act 2006.
340
implications arising from reputational damage due to prolonged litigation can paralyse any
company. Second, any deliberate delays by the company after it has commenced the litigation
process can be visited with criminal sanctions in the form of contempt of court. Consequently, it
is submitted that a company would rather delay commencing the proceedings than interrupt
ongoing litigation.
Also, to successfully invoke the provisions of section 262(2)(a), the plaintiff has to prove that the
manner in which the company commenced the litigation amounted to an abuse of court process.
This can be quite onerous. Therefore, it is submitted that recourse in terms of section 262(2)(a) in
instances where the company deliberately delays the derivative litigation is highly unlikely for the
plaintiff. The court will have to exercise its discretion to determine whether or not the alleged
delay was reasonable.
The second ground upon which the plaintiff can successfully depend to continue with the
derivative claim is “when the company has failed to prosecute the claim diligently”.2668
Considering that the word prosecute is normally associated with criminal conduct and related
proceedings, it is debatable why the English legislature employed it in a discussion about
derivative actions which are normally civil proceedings. However, if it is to be accepted that the
word was employed as a synonym of “litigate” then this rather catch-all phrase can be invoked
effectively by the derivative plaintiff to overcome strategic delays by companies that are unwilling
to properly pursue derivative proceedings. On the face of it, the plaintiff is simply required to
allege that the company’s delay is tantamount to a failure to diligently litigate the claim. The court
will then have to exercise its discretion to determine whether, in the given circumstances, the
alleged delay amounted to the said failure.
The third ground upon which the plaintiff can successfully depend to continue with the derivative
claim is when it is “appropriate for the member to continue the claim as a derivative claim”. 2669
The question of when it is appropriate is for the court to determine by exercising its discretion.
However, a look at the South African Companies Act2670 may provide some guidance regarding
some of the instances when a court in England may be inclined to grant leave to a plaintiff because
2668
2669
Section 262(2)(c) of the UK Companies Act 2006.
2670
71 of 2008.
341
it is appropriate. First, leave may be granted if the court is satisfied that the delay may result in
irreparable harm to the company.2671 Second, an argument that there is “a reasonable probability
that the company may not act to prevent that harm or prejudice, or act to protect the company’s
interests that the applicant seeks to protect”2672 may convince the court to hold that it is appropriate
for a member to continue the claim as a derivative claim.
Although not expressly provided for in the South African Companies Act, it is argued that,
logically, some of the factors that the court may consider in determining whether there is a
reasonable probability that the company may not act are: the disinterestedness and independence
of the board;2673 whether the company has a unitary or two-tier board structure;2674 and, to some
extent, the board’s behaviour in previous similar circumstances, if any. Of the above three possible
options that a disgruntled plaintiff may choose to employ, it is submitted that section 262(2)(b) of
the UK Companies Act is the most ideal as it is less onerous and flexible, although it may be
vulnerable to judicial abuse since it is overly broad.
In instances where the company refuses to continue the derivative litigation, a member may apply
to continue the litigation.2675 However, in instances of such refusal, it is probable that the court
will scrutinise the application more as it has to be persuaded as to why the shareholder(s) should
institute derivative proceedings against the company’s will as expressed by its directors. 2676 The
applicant must produce before the court evidence that discloses a prima facie case in order for
leave to be granted. Failure to present such evidence may result in the application being
dismissed.2677 If it is not dismissed, the court may exercise its discretion to provide directions as
to the evidence to be provided by the company2678 and may adjourn the proceedings to enable the
evidence to be obtained.2679
2671
See section 165(6)(a)(i) of the South African Companies Act 71 of 2008. See also Cassim MF The new derivative
action under the Companies Act: Guidelines for judicial discretion (2016) 21.
2672
See section 165(6)(b) of the South African Companies Act 71 of 2008.
2673
An in-depth exposition on disinterestedness and independence has already been presented above under part 8 4
2.
2674
An elaborate discussion of the two main types of board structures was undertaken above in chapter four under
part 4 2 6.
2675
2676
2677
2678
2679
342
8 5 3 2 Discretion in terms of section 263(3)(f) of the UK Companies Act
In considering whether to grant permission, the court must consider, in particular, whether the
conduct in respect of which the claim is brought gives rise to a cause of action that the member
could pursue in his own right rather than on behalf of the company.2680 This provision directs
courts to consider the difference between conduct on the basis of which an applicant may institute
legal action in his personal interest and that which can provide basis for bringing an action on
behalf of the company. Besides this, the provision does not clarify how the court should approach
a scenario where the cause of action may give rise to both derivative and personal actions.
English case law is inconsistent about whether or not the availability of an optional remedy in
terms of a section 994 petition could be a bar to derivative litigation.2681 For example, in Franbar
Holdings Ltd v Patel,2682 the plaintiff claimed that the first and second defendants diverted some
business opportunities from the affected company which was the third defendant. It was further
alleged that such conduct amounted to a default and breach of fiduciary duties by the first and
second defendants. Consequently, the plaintiff commenced action under section 261 of the Act
seeking leave to institute derivative litigation to recover losses allegedly suffered by the
company.2683 The court held that the plaintiff should be empowered to achieve sufficient redress
through a section 994 petition and shareholders’ action.2684 Also, in Iesini v Westrip Holdings
Ltd,2685 the respondents argued that the applicants’ standing should be displaced for want of good
faith. It was held that a combination of the potential liability of the company and the availability
of another remedy under section 994 were vital factors which would have led the court to the
conclusion that, had the matter not been adjourned, “it would not have been appropriate to allow
a derivative claim to proceed”.2686
However, on the other hand, in Wishart v Castlecroft Securities Ltd,2687 Lord Reed opined that
unfair prejudice proceedings would “constitute, at best, an indirect means of achieving what could
2680
Section 263(3)(f) of the UK Companies Act 2006; Cabrelli “Shareholders’ rights and Litigation” in Siems and
Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018) 383.
2681
Kleanthous v Paphitis [2011] EWHC 2287 (Ch) paras 76-79.
2682
[2008] EWHC 1534 (Ch) paras 53 and 54.
2683
Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch).
2684
Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch) para 54. See also Cabrelli “Shareholders’ rights and
Litigation” in Siems and Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018) 384.
2685
[2009] EWHC 2526 (Ch) para 126.
2686
Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch).
2687
[2009] CSIH 65.
343
be achieved directly by derivative proceedings”.2688 Similarly, in Stainer v Lee2689 Roth J
considered a derivative action “entirely appropriate [and] the theoretical availability to the
applicant of proceedings by way of an unfair prejudice petition … not a reason to refuse
permission”; especially given that the applicant was “not seeking to be bought out”.2690
If a cause of action can be pursued in the plaintiff-member’s own right then it falls outside the
scope of derivative litigation. Derivative claims provided for in Chapter I2691 of Part II of the UK
Companies Act are brought by a member “in respect of a cause of action vested in the company,
and seeking relief on behalf of the company”.2692 Additionally, derivative actions in England must
be instituted to promote the success of the company.2693 Unlike South Africa, the English
legislation is commendable in this respect in that it is unequivocal about whose interests the
derivative remedy seeks to protect. Section 165(6)(a)(ii) of the South African Companies Act
seems to contain a conceptual error in respect of the derivative remedy as it refers to leave being
granted if the court is satisfied that “delay…may result in substantial prejudice to the interests of
the applicant or another person”.2694 The question of when a cause of action is vested in a company
may be clear cut in some circumstances. However, in some instances, it is not that distinct and the
court will have to exercise its discretion to make the determination.
8 5 4 South Africa
This section presents an examination of the requirement of the trial of a serious question of material
consequence to the company. Together with the good faith and the best interests of the company
requirements, these three form the basis of judicial discretion in derivative remedy leave of court
enquiries.
2688
Wishart v Castlecroft Securities Ltd [2009] CSIH 65 para 46.
2689
[2010] EWHC 1539 (Ch).
2690
2691
Sections 260-264 of the UK Companies Act 2006 which deals with derivative actions in the UK and Wales and
Northern Ireland. Chapter II which encompasses sections 265-269 deals with the same legal proceedings but in
relation to Scotland.
2692
Section 260(1)(a) and (b) of the UK Companies Act 2006.
2693
2694
Section 165(6)(a)(ii) of the South African Companies Act 71 of 2008. See also section 165(2)(d) of the same
Act which provides that: “[a] person may serve a demand upon a company to commence or continue legal
proceedings, or take related steps, to protect the legal interests of the company if the person has been granted
leave of the court to do so, which may be granted only if the court is satisfied that it is necessary or expedient to
do so to protect a legal right of that other person”.
344
8 5 4 1 Trial of a serious question of material consequence to the company
Section 165(5)(b)(ii) of the South African Companies Act provides that court may grant leave only
if it is satisfied that the proposed or continuing proceedings involve the trial of a serious question
of material consequence to the company. The authors of Henochsberg argue that this requirement
does not imply that the applicant is obliged to prove the substantive issue. 2695 They contend that
the requirement is satisfied if the applicant merely demonstrates that “proceedings should be
commenced and can serve as a barrier to frivolous or vexatious claims”.2696 Cassim MF has argued
that the trial of a serious question is “a threshold test” which relates to the evidence that the
complainant must establish to maintain her/his claim.2697 A similar provision in the Australian
legislation has been interpreted to mean that the requirement obligates the plaintiff to “identify the
legal or equitable rights to be determined at trial in respect of which the final relief is sought”.2698
The requirement for a showing of a serious triable question of material consequence to the
company before any court decision is made has been extensively dealt with by Cassim. 2699 This
part of the chapter seeks to provide an examination of this requirement as has been interpreted by
the South African courts thus far. To that end, the case of Mbethe2700 will be considered. The
Supreme Court of Appeal (SCA), in that case, opined that the Australian Corporations Act did not
include a stipulation that the proceedings must involve the trial of a serious question “of material
consequence to the company” as is required by section 165(5)(b)(ii) of the South African Act. The
SCA took the view that in South Africa, the presence of an ulterior motive is addressed under the
requirement that the question to be resolved must be of serious consequence to the company.2701
Conversely, under section 237 of the Australian Corporations Act, it is, according to the SCA,
justified that an applicant is required to show the absence of an ulterior motive when proving good
2695
Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 586(1).
2696
Ibid.
2697
2698
Henochsberg on the Companies Act 71 of 2008 Vol 1 Service Issue 2 2012 586(1) whilst referring to Ragless v
IPA Holdings Pty Ltd (in liq) (2008) 65 ACSR 700.
2699
See Part II of Cassim MF “Judicial Discretion In Derivative Actions Under the Companies Act of 2008” 2013
SALJ 780 -791.
2700
Mbethe 2017.
2701
345
faith. The SCA, therefore, held that it was unnecessary for the court a quo to import such a
requirement2702 from Australia seeing that it was already dealt with, albeit in a different way.2703
86 CRITICISMS OF THE ROLE OF JUDICIAL DISCRETION

From the arguments presented above, there is no question whether the requirement of judicial
discretion promotes corporate governance. For example, the requirement allows the shareholder
or any suitable plaintiff to access a decision on the issue of whether or not the derivative suit is in
the interest of the company, at an early stage.2704 Also, it is appreciated that the requirement of
judicial discretion is by far better than the previous rule in Foss. The rule in Foss made it difficult
if not impossible for plaintiffs to pursue derivative actions based on claims of pure negligence.2705
Additionally, the requirement of wrongdoer control was an insurmountable hurdle for plaintiffs
because “evidence of de facto (not actual control through voting rights) based on informal
relationships is notoriously difficult to uncover”.2706 However, the requirement has not escaped
criticism unscathed. Below are some of the criticisms directed towards the court’s exercise of
discretion in derivative proceedings.
To begin with, the requirement for leave of the court “makes the court the primary arbiter of
whether the action can proceed”.2707 In this regard, Baum and Puchniak argue that this statutory
test is substantially similar to the “Rule in Foss”.2708 The said requirement has been condemned
on the basis that it essentially “requires a trial of the action in order to proceed to trial”.2709 Whilst
it is understood that the plaintiff is only required to satisfy the criteria in the leave application on
a prima facie basis, it is argued that, in practice, it is difficult to fulfil such requirements unless
one delves into the detail of the claim.2710 Consequently, the plaintiffs will be left with no choice
but to spend significant time and money just for them to know whether or not they have the right
to bring the derivative action.2711 This is economically unjustifiable considering the fact that in
2702
The requirement of an ulterior motive as a separate prerequisite of good faith.
2703
2704
2705
2706
2707
2708
Ibid.
2709
Ibid.
2710
Ibid.
2711
Ibid.
346
those jurisdictions that provide for shareholder indemnification, in particular, the plaintiff, at the
leave application stage is unsure whether s/he will receive indemnification for her/his costs.2712
The plaintiff’s predicament is further compounded by the fact that s/he faces the prospect of being
liable for the defendant’s litigation costs due to the fancied “loser pays costs” principle.2713
Also, regardless of the advantages offered by the current regime over the previous, it remains
debatable whether the court is in the best position to decide whether the application is brought in
the best interests of the company based on the plaintiff’s prima facie evidence.2714 Baum and
Puchniak do not think it justified that the court and not independent directors who possess an
intimate knowledge of the business of the company should make such a determination.2715 The
shareholders’ general meeting has also been thought to be a competent substitute for the court’s
filtering role. However, shareholder general meetings are “costly administratively and [do] nothing
to confront the wrongdoers who have actual or de facto control of the meeting”.2716
It is evident that under the English current statutory derivative framework, the prospect of the suit
proceeding is largely decided by the court’s interpretation of the factors outlined in section 263(3)
of the UK Companies Act.2717 Of particular interest is the open-ended nature of the section 263(3)
factors “which makes them inherently uncertain”.2718 In this connection, Tang has expressed
concern that there is a high probability that the scope of section 263(3) could be expanded by the
courts.2719
2712
Ibid.
2713
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 52. Garner et al Black’s
law dictionary 8 ed (2004) 570 define the loser pays principle as the requirement that a losing litigant must pay
the winner’s costs and attorney’s fees.
2714
2715
Ibid.
2716
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 54. These shortcomings
could be the reasons why the US vacated shareholder approval as a prerequisite for derivative suits long time
ago.
2717
2718
Ibid.
2719
Ibid. See also Wang Company Law in China: Regulation of Business Organisations in a Socialist Market
Economy (2014) 199 and Garner et al Black’s law dictionary 8 ed (2004) 713. Davies and Worthington Gower’s
principles of modern company law 10 ed (2016) 598 argue that the requirement of leave of court can be
inconvenient as the plaintiff’s enthusiasm for derivative litigation is subject to convincing a judicial officer that
the litigation is in the best interests of the company.
347
The appropriateness of the requirement of good faith has also been questioned on the ground that
the plaintiff’s motive should not matter as long as s/he is bringing the application in the best
interests of the company?2720 Derivative litigation is by nature brought on behalf of the company
in instances where corporate agents are not willing to do so.2721 Should the derivative litigation be
successful, the company is the direct beneficiary of the proceedings whilst the plaintiff’s economic
benefit is remote.2722 It is therefore suggested that the company’s interests ought to take precedence
over the plaintiff’s alleged mala fides.
With respect to the USA, the fact that SLCs have always recommended that derivative
shareholders’ claims are not in the best interests of the company casts doubt on their independence
and disinterestedness. Even if members of an SLC were not appointed by any of the potential
defendant directors, in most cases, an SLC depends on the same directors for information pertinent
to effectively conduct its investigation.2723 If members of an SLC are selected from among the
incumbent board, they will potentially be vulnerable to structural bias.2724 In Wilder’s opinion,
“[i]nside directors, who are also corporate officers, may depend on named defendants to determine
their salaries, fringe benefits, and future promotions”.2725 Davies and Worthington expressed this
point as follows: “the same incentives which operated to cause directors to breach their duties in
the first place may cause them to utilise their board positions to suppress litigation against
them”.2726 As a result, the board may not always be supportive in commencing litigation against a
miscreant director even when it is in the best interests of the company.2727
With further reference to the USA, besides instances of demands accepted, it has to be noted that
SLCs can also be used in demand excusal cases. In the context of demand futility claims, an SLC
may terminate pending litigation, may negotiate a settlement of the derivative action with the
derivative plaintiff and defendants and seek court approval of the settlement, or it may seek to take
2720
2721
Mongalo et al Forms of business enterprise: Theory, structure and operation (2004) 273; TWK Agriculture
Limited v NCT Forestry Co-operative Ltd 2006 6 SA 20 (N); Nwafor “Shareholder Derivative Action - Nigerian
2722
2723
2724
Branson 1986 Wash. & Lee L. Rev. 415.
2725
2726
2727
Ibid.
348
over the litigation from the derivative plaintiff and pursue the corporation’s claims against the
individual defendants.2728 Unlike a committee formed in response to a demand that makes
recommendations to the full board, an SLC created in the demand-excusal cases “must be given
the authority to make a binding determination as to the derivative suit without seeking approval
from the full board”.2729 Absent such delegation, the SLC becomes an “ineffective means of
insulating the corporation’s response to the derivative suit from the taint of interested
directors”.2730
In light of the above challenges, Scarlett has described SLCs as a hurdle that stands in the way of
shareholder-plaintiffs intending to sue derivatively. 2731 On his part, Wilder has opined that the
effectiveness of the demand futility principle2732 has been undermined by the use of SLCs2733
largely because defendant directors appear to be able to obviate liability by appointing an SLC.2734
Also, the decision handed down in the celebrated USA case of Aronson v Lewis2735 has been
criticised for at least three shortcomings. First, the futility test created in the case requires the
plaintiff to allege facts with particularity. The test does not take into consideration the fact that at
the time the action is filed, the plaintiff will not have access to “detailed information concerning a
board's deliberations and directors' procedures in approving a challenged transaction”.2736 As a
result, the plaintiff will most likely not be able to allege particularised facts to create a doubt that
the directors’ decision is not worthy of immunity in terms of the BJR.2737
Second, the test denies directors an opportunity to rectify errors that they would have made when
they participated in or approved the impugned transactions.2738 By assuming that a plaintiff does
not need to serve a demand in certain circumstances, the Aronson test presupposes that directors
2728
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 56-57.
2729
2730
Ibid.
2731
2732
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 23; Stickells 1953 Boston
University L. Rev. 437 and Wilder 1985 Pace L. Rev. 636 concur that the demand futility principle states that in
certain circumstances, the demand requirement can be waived because serving it would be futile, unavailing or
useless. This principle was discussed in greater detail above in 6 6 1.
2733
Wilder 1985 Pace L. Rev. 636-637.
2734
2735
473 A.2d 805 (1984).
2736
2737
Ibid.
2738
349
continue to act against the interests of the company and that they do not “repent”. Furthermore,
the decision has been criticised for requiring a plaintiff to serve a demand even in circumstances
where doing so will be tantamount to a mere “formalistic and meaningless act”.2739 For example,
since the test requires the plaintiff to prove directorial interest in the impugned transaction(s), lack
of independence and that the conduct does deserve business judgment immunity, one will still be
required to serve a demand even when the board has revealed utter hostility to the institution of
the derivative action.
Also, linking the demand requirement to the BJR has been another cause for concern. The contours
of the BJR are not cast in stone. They evolve in response to the dynamic and competitive business
environment in which companies operate. “Subjecting the demand requirement to fluctuations in
the BJR could result in demand being deemed futile where it could serve a useful purpose”. 2740
Additionally, the high degree of self-interest required by the BJR test leads to very few, if any,
shareholder suits proceeding past the pleading stage.2741 Based on these deficiencies, it can be
argued that the Aronson test is very narrowly interpreted, too onerous and practically difficult to
satisfy. Regardless of such severe criticisms, the Aronson test was approved and applied in later
Delaware cases such as Pogostin v Rice2742 and In re The Walt Disney Co. Derivative Litigation.2743
This chapter sought to undertake an examination of the requirement of judicial discretion in the
context of derivative actions in South Africa, England, USA and Japan. The critical issue was
whether judicial discretion is an important corporate governance tool or an unnecessary burden on
derivative litigants’ shoulders. The first part of the chapter outlined the purposes of the requirement
of judicial discretion. A number of rationales were proposed but it was made clear that the primary
policy rationale for this prerequisite is to provide a filter against unmeritorious actions.2744 After
that, an exploration of the legal frameworks under which courts in the selected jurisdictions
exercise their discretion was presented. It was noted that the English model is more efficient and
2739
2740
2741
2742
480 A.2d 619 627 (Del. 1984).
2743
825 A.2d 275 (Del. Ch. 2003).
2744
48.
350
advanced than its counterparts in that the judiciary is involved at an earlier stage which affords the
court the opportunity to separate wasteful claims from valid ones.2745 It was also revealed that
Japan’s system is unique in that auditors or kansayaku generally represent Japanese companies in
derivative suits.2746 The Asian jurisdiction’s system is also enviable in that courts do not exercise
much deference to auditors’ decisions, regardless of the amount of time taken in conducting their
investigations.2747
The chapter then proceeded to present an examination of judicial discretion facets that are common
to at least two of the jurisdictions under study. First to be examined was the requirement of good
faith. A comparative study between South Africa and England was proffered. It was noted that in
England, the requirement of good faith is subsumed with the applicant’s requirement to act in the
best interests of the company. The South African model was commended for its separation of the
two concepts. Furthermore, failure to disclose facts that were the subject matter of the demand
may be tantamount to acting for an ulterior motive in South Africa.2748
The discussion subsequently focused on the best interests of the company and the requirement of
disinterestedness of SLCs in the USA. It was conceded that the South African requirement of good
faith overlaps with the requirement to act in the best interests of the company. However, it was
maintained that such overlap does not warrant a merger of the two requirements. The requirement
that USA’s SLC members act independently is enviable from a South African perspective
considering that derivative litigants in the latter jurisdiction have no legal obligation to be
independent.
What followed next was an assessment of the exercise of judicial discretion in view of the
ratification and approval of the disputed conduct. It was noted that shareholder ratification is no
longer an issue in South African derivative claims.2749 The abolition of the requirement of
shareholder ratification or approval is a welcome development as it makes the derivative remedy
more flexible and more accessible to complainants. In contrast, England still upholds and considers
2745
2746
2747
2748
2749
351
the ratifiability principle.2750 In this respect, the South African derivative remedy is considered
progressive.
Attention was then focused on jurisdiction-specific issues. First to be discussed was the USA. The
demand futility doctrine and other discretionary aspects in terms of Rule 23.1 were examined. It
was found that demand futility is inextricably linked with the requirement of particularity. With
respect to the demand futility principle, it was shown that, in its current state, the Delaware State
Chancery Court version is too onerous on derivative plaintiffs. A softer approach like the one
adopted by the New York courts which do not require evidence of fraud, self-dealing or personal
profit to prove demand futility claims2751 is advocated for. Another option in pursuit of the
necessary balance between directors’ need to retain corporate control and enhancing shareholders’
interest in corporate accountability2752 is to require the company requesting dismissal to bear the
burden of justifying its request.2753 One of the issues which arise under Rule 23.1 is the meaning
of “comparable authority”. It was highlighted that there is a need for this term to be defined, maybe
in legislation, as pertinent case law has been inconsistent so far.
Issues pertaining solely to Japan in the context of judicial discretion were then explored. It was
noted that Japanese courts do not exercise much discretion in derivative suits. The Asian nation’s
system was shown to be commendable for its approach in not exercising much deference to
auditors’ decisions. It was also revealed that Japanese shareholders are over-empowered and that
such power can be counter-balanced by an effective abuse of rights doctrine. However, it was
cautioned that the abuse of rights doctrine can also come at a cost especially to minority
shareholders.
With respect to England, the open-ended nature of the section 263(3) factors “which makes them
inherently uncertain”2754 was highlighted as a cause for concern. There is a high probability that
section 263(3) could be expanded by the courts.2755 It was also worrisome to note that regardless
2750
See section 263(3)(c) and (d) of the UK Companies Act 2006.
2751
See Wilder 1985 Pace L. Rev. 647 who made reference to the leading USA case of Barr v Wackman 36 N.Y.S.2d
497 (1975).
2752
2753
2754
2755
Ibid. See also Wang Company Law in China: Regulation of Business Organisations in a Socialist Market
Economy (2014) 199 and Garner et al Black’s law dictionary 8 ed (2004) 713. See also Davies and Worthington
Gower’s principles of modern company law 10 ed (2016) 598.
352
of the fact that England has declined to adopt any formal BJR, at times, courts tend to exercise
wholesale deference to directors’ decisions. Such deference is exercised even in cases of extreme
abusive behaviour as was evident in Kleanthous v Paphitis.2756 It was also noted that English case
law is contradictory on whether or not the availability of an optional remedy in terms of a section
994 petition could be a bar to derivative litigation.2757 Perhaps, it is time for England to codify
some of these principles.
The sole issue that was unique to South Africa was the requirement of a showing of a serious
question of material consequence to the company.2758 It was noted that in a recent SCA decision
the presence of an ulterior motive was dealt with under the requirement that the question to be
resolved must be of serious consequence to the company.2759 Most importantly, it was highlighted
that the SCA decision in Mbethe presents a new approach to determining the presence or absence
of good faith in South Africa. In terms of that decision, the complainant is no longer required to
demonstrate the absence of an ulterior purpose in order to prove the presence of good faith in terms
of s 165(5)(b) of the Act. Recommendations of law reform directed at covering the loopholes
highlighted above are presented in the next and final chapter of this study.
2756
[2011] EWHC 2287 (Ch).
2757
Kleanthous v Paphitis [2011] EWHC 2287 (Ch) paras 76-79.
2758
Section 165(5)(b)(ii) of the South African Companies Act 71 of 2008.
2759
353
CHAPTER NINE
Conclusions and Recommendations

91 INTRODUCTION
The value that an effective derivative remedy can add to a jurisdiction’s corporate governance
model is not debatable. It is vital to understand that any form of investment is a risky adventure.
There are numerous sources of business risk which require different ways of minimising or
avoiding the consequences thereof. An effective system of shareholder remedies and minority
protection is an indispensable aspect of any regime that seeks to minimise credit and investment
risks. Therefore, derivative litigation, as a form of minority protection, becomes an indispensable
feature of any credible jurisdiction, especially those seeking to attract domestic and foreign
investment such as South Africa.
Accordingly, the substantive and procedural requirements of any shareholder remedy ought not to
defeat the main purpose for which most business entities in capitalist states are established, namely
profit maximisation through risk-taking. Consequently, the design of a sensible derivative
litigation model requires striking a balance between accountability and authority. On the one hand,
both the procedural and substantive requirements of derivative claims must not be too onerous and
rigid lest meritorious claims go unaddressed. On the other hand, a weak derivative litigation model
undermines directorial business judgment and may potentially fail to provide the relevant filter
against vexatious and unmeritorious suits. Therefore, while directors’ conduct needs to be
regulated to avoid abuse of power,2760 there is also a need to allow for flexibility in corporate
decision-making processes as rigidity will stifle innovation and responsible risk-taking, two vital
ingredients for success in today’s dynamic world of commerce.
This comparative study sought to examine the requirements of the current derivative remedy
scheme in the United States of America (USA) especially the State of Delaware, England, Japan
and South Africa. The critical question was whether the requirements of derivative litigation are
undesirable obstacles to meritorious proceedings or whether the requirements are indispensable
filters against frivolous and vexatious suits. After this introductory note, the immediately following
section presents a recapitulation of the main arguments and pertinent issues raised in the preceding
2760
Bainbridge “The Business Judgment Rule as Abstention Doctrine” 2004 Vand. L. Rev 85.
354
chapters. After that, recommendations for possible reform of the current South African derivative
remedy and suggestions of solutions to the problems identified are presented.
92 RECAPITULATION
The first chapter introduced the study and provided a general overview of the thesis. It set out the
research problem and questions, objectives, the importance and delimitation of the study and the
relevant research methodology. The study commenced with a demonstration of the distinct
advantages of conducting business through the vehicle of a company. The importance of the legal
personality of a company was also highlighted. On the flip side of the coin, it was indicated that
this important business entity, called a company, is handicapped in the sense that it can only act
through the employ of its agents who are usually directors. With references to some local and
foreign judicial decisions, the derivative remedy was shown to be a vital corporate governance tool
for mitigating the said company handicap. In essence, it was emphasised that derivative litigation
is of significant value in instances where the company, which is the proper plaintiff for wrongs
done to it is either unwilling or unable to commence or proceed with litigation mainly because its
agents are the wrongdoers.
However, after demonstrating the importance of derivative claims, it was disappointing to note
that there is, in practice, a shockingly high failure rate for derivative remedy applications.
Empirical evidence revealed that the failure rate can be directly attributed to the applicants finding
it difficult to prove that their applications were brought bona fide in the best interests of the
company for the purpose of trying a serious question.2761
The second chapter of this thesis was dedicated to a historical examination of derivative
proceedings. More specifically, the chapter focussed on the genesis, development and
transplantation of derivative actions. It was shown that derivative litigation commenced as a form
of representative litigation in English partnership law.2762 Initially, representative litigation took
the form of group litigation which was necessary to avoid multiplicity of suits and the possibility
2761
Ramsay and Saunders “Litigation by Shareholders and Directors: An Empirical Study of the Statutory Derivative
Action” 2006 Journal of Corporate Law Studies 429. Also, Baker and Hacking “Statutory derivative claim
regime: ten years on” http://gowlingwlg.com/en/global/insights-resources/statutory-derivative-claim-regime-
ten-years-on (accessed 06-10-2017) agreed that derivative litigation has not been successful in increasing
shareholder participation because “the bar to bringing derivative claims is set high”.
2762
Slater and Gordon “Group Litigation Explained” https://www.slatergordon.co.uk/commercial-and-group-
litigation/group-litigation/ (accessed 08-11-2017).
355
of inconsistent results. The two important elements of group litigation were “shared identical
interests [among the members] and consent to representation by the named parties”. 2763 With the
passage of time, there was a transition in the English Court of Chancery from group litigation to
class litigation around the 18th century.2764 Class litigation was devised to take care of situations
where the number of individuals who would have suffered the same wrong becomes difficult to
manage. Under group litigation, every affected member had to be joined and become a party to the
case, whereas, under class litigation, a select few would represent the “class”. 2765 The
proper/necessary parties rule and its exceptions were devised during the era of class litigation. It
is common ground that it was the court’s decision in Foss v Harbottle2766 that transformed the
necessary parties rule from a mere old partnership law principle into an engraved company law
principle.2767 By the middle of the 19th century, the necessary parties rule and its exceptions were
firmly embedded into the fibre of litigation involving incorporated bodies under the common law.
Another notable contribution of Foss v Harbottle2768 was the introduction of the ground-breaking
proper plaintiff rule and its exceptions in company law. For some time the exception pertaining to
fraud on the minority stood as the sole exception to the proper plaintiff rule. Shareholders could
litigate on behalf of the company subject to proving the existence of fraud by a controlling
majority. By the 19th century, derivative litigation was common in England.2769 However, due to
the challenges with proving “fraud” and “control” the United Kingdom Law Reform Commission
recommended that this requirement be abolished. The ultimate result was a statutory derivative
remedy enacted in terms of sections 260-264 of the United Kingdom (UK) Companies Act.2770
It was mainly by virtue of the USA being an English colony that the derivative remedy was
transplanted to the USA.2771 However, in 1980, derivative litigation in the USA decreased due to
uncertainties regarding the demand requirement and the increased use of Special Litigation
2763
Scarlett “Shareholder Derivative Litigation’s Historical and Normative Foundations” 2013 Buffalo Law Review
845.
2764
2765
2766
1843 67 ER 191.
2767
2768
1843 67 ER 191.
2769
2770
2006.
2771
Colonies usually adopted the law of their colonial masters. See Meintjies et al Introduction to South African
Law: Fresh Perspectives 4 ed (2013) 17-18.
356
Committees (SLCs). After being influenced by the USA and Germany, albeit not through any
political influence, derivative litigation was transplanted to Japan. Like its English counterpart,
South Africa’s derivative remedy used to be based on the common law. The remedy was partially
incorporated into the old Companies Act.2772 The current Companies Act2773 has abolished
common law derivative suits and now a derivative suit may only be brought in South Africa under
section 165 of the Companies Act.2774
Chapter three was dedicated to a discussion of the enhanced accountability perspective. It was
highlighted that the purpose of the perspective was to develop a novel derivative litigation scheme
whose requirements are neither too onerous lest the remedy becomes an access barrier to justice
nor too flexible lest the remedy be readily prone to abuse. The seven facets of the enhanced
accountability perspective were then discussed in detail. It was from this perspective that all
subsequent arguments were predicated.
Chapter four of this thesis was dedicated to an examination of pertinent corporate governance
concepts, ideas and institutional arrangements which influence the institution of derivative
proceedings in the four subject jurisdictions. From the onset, it was noted that the term “corporate
governance” lacks legislative definition. However, it was shown that all the different definitions
that have been advanced retain identical ideas of performance management, directors’ compliance
with their duties and promotion of accountability towards the attainment of corporate goals.2775
The role played by derivative litigation in advancing a State’s system of corporate governance was
again reiterated. Furthermore, it was noted that corporate governance goes beyond the letter of
pertinent legislation and codes. Consequently, it is hoped that aspects such as morality and ethics
are not divorced from contemporary discussions around corporate governance in general and
derivative proceedings in particular as history has shown that some catastrophic corporate scandals
could have been avoided by simply taking heed of such principles.2776
Some of the company law principles which were examined include the doctrine of separation of
ownership and control. Flowing from that was a discussion of the ownership patterns in South
2772
61 of 1973.
2773
71 of 2008.
2774
Ibid.
2775
2776
357
African, English, USA, and Japanese companies. The key players in derivative litigation and their
respective roles in the specified jurisdictions were also considered. The primary beneficiaries of
directors’ fiduciary duties in the selected jurisdictions were also identified. It was noted that strict
adherence to the shareholder primacy theory was no longer tenable in view of the directorial abuse
of power in the last 15 years. There is a need for a model that addresses contemporary corporate
governance issues while at the same time balancing directorial accountability and authority.
Additionally, it was noted that there is a need to revisit access to information principles in all the
four jurisdictions as the problem of information asymmetry continues to persist though in varying
degrees.
On another note, it was found that unlike the Delaware State and England, South Africa does not
have a special court that is dedicated to company law matters. Although it can be accepted as fact
that South Africa is a less litigious jurisdiction and that there is a relatively low turnover rate of
company law-related cases, it is still submitted that a court that is especially dedicated to company
law matters remains necessary. It is not just about the number of cases heard. Such a focussed and
dedicated court will improve the quality of judicial decisions on company law matters in general
and derivative litigation in particular. This will significantly advance South African company law
as a specialised court will have more time and resources devoted to dealing with the complexities
of a contemporary super dynamic business world. A specialised court also leads to improved
integration and coordination
The fifth chapter was dedicated to an examination of the requirement of legal standing in derivative
actions. The chapter began by differentiating between standing in ordinary civil litigation and
standing in derivative litigation. One of the main issues explored centred around the
contemporaneous ownership rule which is exclusive to the USA. It was submitted that although
the rule has some exceptions, the policy considerations behind its formulation are no longer
applicable in responding to modern-day company law issues.2777 It was noted that the rule has the
effect of letting meritorious applications go unaddressed because of its inherent restrictions. One
of the exceptions to the contemporaneous ownership rule is the doctrine of continuing wrong.
However, this doctrine has also been criticised for being too technical, being based on a fallacy
2777
See chapter 5, part 5 4 4 above.
358
and an untested assumption that all shareholders who purchased shares after the wrong complained
of had knowledge of the wrongdoing2778 and being short of vital definitions.2779
Japan does not subscribe to the contemporaneous ownership rule. Instead, Japanese derivative
complainants are required to have owned their shares for at least six consecutive months.2780 The
rule has the potential to open doors for strike suits or purchased litigation. A strictly literal
interpretation of the rule suggests that even if one became a shareholder after the alleged
wrongdoing had happened, and with knowledge of it,2781 s/he can still commence derivative
litigation by simply waiting until the six months have elapsed. 2782 Consequently, Kawashima and
Sakurai’s argument that Japan should repeal its six months’ ownership requirement, in favour of
the continuous ownership rule,2783 is plausible.
England has developed a substitute for the USA’s contemporaneous ownership rule in the form of
the continuous ownership rule. Baum and Puchniak explain that the continuing ownership rule is
premised on the policy rationale that “only a plaintiff shareholder with an ongoing interest in the
company will properly represent the interests of all shareholders”.2784 As has been submitted
above, this rationale reflects a deep conceptual misunderstanding as derivative litigators do not
commence an action on behalf of the other shareholders, but on behalf of the company.2785
South Africa, just like England and Japan, does not subscribe to the contemporaneous ownership
rule. The 2008 Companies Act is silent on whether the complainant must remain a shareholder
throughout the duration of the derivative litigation. A strictly literal interpretation of section 165
2778
Reform” 1981 Columbia Law Review 313.
2779
Robinson Jr. “A New Interpretation of the Contemporaneous Ownership Requirement in Shareholder Derivative
Suits: In re Bank of New York Derivative Litigation and the Elimination of the Continuing Wrong Doctrine”
2005 Brigham Young University Law Review 235.
2780
Art 847(1) of the Companies Act 86 of July 26 2005. See also Iglesias-Rodriguez “Obligations of directors in
takeovers” in Siems and Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018) 158;
approach 2 ed (2018) 369; Puchniak “The Complexity of derivative actions in Asia” in Puchniak et al (eds) The
2781
2782
Oda 2011 ECFR 341.
2783
2784
2785
law 775; Nwafor “Shareholder Derivative Action- Nigerian Statutory Innovation -Not Yet a Victory for the
Minority Shareholder” 2010 Macquarie J. Bus. L 215; Laster 2008 Delaware Journal of Corporate Law 676.
359
of the Companies Act does not in any way require a shareholder to continue owning shares in the
company throughout the derivative proceedings.2786 However, even though the Act is silent on this
issue, there are convincing arguments for the view that the courts should require a shareholder to
maintain “a continuing interest” throughout the litigation process.2787 As Cassim MF argued, a
shareholder who divests her/his shareholding may possibly act for an improper purpose and lacks
the necessary interest to bring derivative litigation.2788 Accordingly, such a shareholder is unlikely
to pass the good faith muster under section 165(5)(b)(i) of the Companies Act.2789 It was also noted
that South Africa has the broadest standing rules due to its discretionary complainants’ category.
Chapter six focussed on the requirement of demand on directors. It was shown that the demand
rule is a product of the USA Supreme Court as per Hawes v Oakland2790 which rule is currently
codified as Federal Rule of Civil Procedure 23.1. The rule is also a progeny of the rule in Foss v
Harbottle.2791 This chapter presented an examination of both the substantive and procedural
components of the demand requirement in order to ascertain whether the rule is potentially
vulnerable to abuse2792 by vexatious shareholders or whether it constitutes an unnecessary hurdle
in the institution of meritorious derivative claims. There is no prescribed form for a demand in the
USA and Japan. Conversely, the South African legislature has prescribed a specific form for a
valid demand. Among other policy rationales, the demand requirement primarily seeks to enhance
corporate governance by respecting directors’ managerial prerogatives. There are various
jurisdiction-specific conditions that must be met before one can successfully satisfy the demand
requirement. For example, the requirement of demand particularity and the employment of Special
Litigation Committees (SLCs) are very popular in the USA. Another aspect of the USA demand
2786
Cassim MF “The doctrine of contemporaneous share ownership and aspects of locus standi in the new derivative
action” 2018 South African Law Journal 110 arguing that “section 165(2)(a) states that ‘[a] person may serve a
demand upon a company ... if the person is a shareholder’ while s 165(5) states merely that ‘A person who has
made a demand in terms of subsection (2) may apply to a court for leave’”.
2787
2788
Ibid.
2789
Ibid. At page 112, the scholar refers to the case of Jacobs Farm Ltd v Jacobs (1992) OJ No 813 (Ont Gen Div)
where it was held that “it could not have been the intention of the Legislature ... to clothe every former
shareholder ... with the status of a complainant for the purposes of bringing a derivative action”.
2790
104 U.S. 450 (1882).
2791
(1843) 67 Eng. Rep. 189.
2792
Fischel “The Demand and Standing Requirements in Stockholder Derivative Actions” 1976 U. Chi. L. Rev. 168
explains that “the alleged cause of action may be without merit, or the costs of litigation coupled with the adverse
effect on the business relationship between the [company] and the party to be sued may outweigh any recovery
which could be gained. The derivative suit may also be abused by the filing of ‘strike’ or ‘blackmail’ suits. In
these situations a suit will be contrary to the best interests of the corporation”.
360
requirement is that the scope of persons who qualify to receive a demand as “comparable
authority” is not clearly circumscribed. Furthermore, the independence and disinterestedness of
these SLCs, as shown above,2793 have been major causes of concern.
The current English derivative approach does not make use of the demand requirement at all but
instead invokes judicial intervention at an earlier stage. The English system shifts the decision-
making powers of whether to institute2794 or continue2795 derivative litigation from the board of
directors to the judiciary.2796 This regime introduced a two-stage approach for leave to proceed
with derivative litigation.2797 First, the complainant must establish a prima facie case for
permission to continue.2798 The second stage involves the judiciary’s consideration of factors listed
in section 263(2) and (3) of the UK’s 2006 Companies Act. 2799 Among other things, the prima
facie test has been criticised as being too onerous in light of the fact that the shareholder suffers
from information asymmetry.2800 England’s current system that allows judicial participation at an
early stage has been criticised for violating some fundamental corporate governance principles
which recognise that corporate managerial powers vest in the directors.2801 It has also been argued
that England’s system is at odds with the need for complainants to exhaust intra-corporate
remedies.2802
In South Africa, any person with standing in terms of section 165(2) of the Companies Act can
serve a letter of demand on the subject company requesting it to commence or proceed with
derivative litigation or take related steps to protect the interests of the company. 2803 Unlike the
2793
See part 8 4 2 in chapter eight above.
2794
2795
Section 262(2) of the UK Companies Act 2006 states that “a member of the company may apply to the court for
permission to continue the claim as a derivative suit on the ground that the manner in which the company
2796
Goehre “Is The Demand Requirement Obsolete? How the United Kingdom Modernized its Shareholder
2797
Goehre 2010 Wisconsin Int’l L. J. 157-158. See also Stoop “The Derivative Action Provisions in the Companies
Act 71 of 2008” 2012 SALJ 533-534; Tang “Shareholder Remedies: Demise of the Derivative Claim?” 2012
UCL Journal of Law and Jurisprudence 178 180-181. Sykes 2010 Civil Justice Quarterly 205 217.
2798
Section 261(1) and (2) of the Companies Act 2006. Tang 2012 UCL Journal of Law and Jurisprudence 180.
2799
2800
2801
2802
Ibid. Goehre 2010 Wisconsin Int’l L. J. 144 argued that the business judgment rule and the principle that
corporate management is the board’s prerogative “interweave the fabric of [USA] derivative procedure”.
2803
361
USA, South Africa has a prescribed letter of demand format. It was submitted that by virtue of
section 165(2)(d) of the Companies Act, it can be argued that South Africa has the most flexible
demand requirement. However, it was also noted that the South African legislature did not provide
sufficient guidelines in the 2008 Companies Act for application of the demand rule.2804 A more
comprehensive statutory demand requirement would have provided “a predictable and effective
environment for the efficient regulation of companies”.2805
In Japan, a shareholder may serve a demand in writing or by any other method prescribed by the
applicable Ordinance of the Ministry of Justice to commence derivative litigation.2806 It was shown
in Chapter six that this right has an internal limit in that it cannot be exercised to seek unlawful
personal gains.2807 Uniquely, independent auditors or kansayaku generally represent Japanese
companies in derivative suits.2808 In another plausible development, auditor recommendations are
subjected to adequate judicial review in cases where auditors’ independence and objectivity are
compromised.2809 In other words, the courts are not required to exercise deference to auditor’s
reports/recommendations by default. Also, unlike their USA counterparts, Japanese shareholders
are not burdened with the onus to prove wrongful refusal of the demand to pursue the relevant
claim by the company’s directors.
There are some exceptional circumstances the proof of which will excuse one from the requirement
to serve a demand. These include instances of demand futility in the USA and where there is
imminent irreparable harm in the context of South African derivative proceedings. Also, it was
noted that all the four jurisdictions forming the subject of this study do not unequivocally address
the issue of director deadlock with respect to responding to a demand. In the case of Japan, this
would manifest as “auditor deadlock”.
An analysis of the interplay between the business judgment rule (BJR) and derivative actions was
at the core of Chapter seven. The chapter commenced with a discussion of the historical overview
2804
2805
See section 7(l) of the Companies Act 71 of 2008.
2806
2807
Ibid.
2808
2809
Ibid.
362
of the BJR clearly showing that the BJR is an American legal export.2810 It was noted that from
the rule’s infancy, the USA courts were inconsistent on whether to apply the BJR as an abstention
doctrine or as a standard of liability. Thereafter, a demonstration of the significance of the BJR
was presented. The most important section of chapter seven was an analysis of the elements of the
BJR because they determine the extent of judicial interference with the internal management of
the company. It was shown that the best interest component of the BJR depends on whether a
jurisdiction is inclined to the shareholder primacy theory, the enlightened shareholder value theory
(ESV) or the stakeholder or Pluralist theory. It was noted that although England does not have a
formal BJR, the courts exercise deference to directorial decisions.
The three manifestations of the BJR were also examined. It was noted that the presumption
inherent in the abstention doctrine is difficult to rebut. The immunity doctrine was lauded for
justifiably requiring the defendant to bear the onus of proof2811 in that s/he must prove that s/he
qualifies for the immunity. The BJR has also been applied by the courts and described by corporate
law scholars as a standard of liability.2812
The last discursive chapter of this thesis was dedicated to an examination of the leave of the court
in derivative actions. An exploration of the purpose behind the requirement of judicial discretion
was presented. Thereafter, a consideration of the legal framework for the exercise of judicial
discretion was undertaken. The leave of court requirement was broadly discussed in relation to the
standards of good faith, the best interests of the company and ratification of the impugned conduct.
93 FINDINGS AND CONCLUSIONS
This section puts together the pertinent findings from the enhanced accountability perspective and
the substantive and procedural aspects of derivative litigation discussed in the previous chapters.
It was found that there is a need to revisit derivative litigation in view of the GFC which exposed
most of the corporate governance regimes’ weaknesses. It was suggested that one way of
2810
Gurrea-Martinez “Re-examining the law and economics of the business judgment rule: Notes for its
implementation in non-US jurisdictions” 2018 Journal of Corporate Law Studies 418; Morales “Modernizing
Colombian Corporate Law: The Judicial Transplant of the Business Judgement Rule” 2018 Indon. J. Int'l &
Comp. L. 147 148; Cassim FHI et al Contemporary company law 563.
2811
McMillan “The Business Judgment Rule as an Immunity Doctrine” 2012 William & Mary Business Law Review
569; Giraldo “Factors affecting the Application of the Business Judgment Rule: An Empirical Study of the US,
UK, Australia and the EU” 2006 130; Lee 2005 University of Botswana L.J. 52.
2812
McMillan 2012 William & Mary Business Law Review 529; Furlow “Good Faith, Fiduciary Duties, and the
Business Judgment Rule in Delaware” 2009 Utah Law Review 1083.
363
advancing or promoting corporate governance through derivative litigation is by infusing pertinent
aspects such as the ethical and moral dimensions into directors’ decision-making processes. It was
also established that the enhanced accountability perspective contributes immensely to the ongoing
debate of trying to locate the much needed balance between directorial authority and
accountability.
The first substantive aspect of derivative litigation to be considered was the requirement of legal
standing. With respect to the USA’s contemporaneous ownership rule, it was found that the only
true purpose for the rule was to prevent collusive conduct which may be engaged in by derivative
plaintiffs to confer federal jurisdiction that the court would otherwise lack.2813 It was also found
that the contemporaneous ownership rule imposes an unnecessary hurdle upon shareholders
because it makes derivative actions remain too onerous. Further, it was determined that the
continuing wrong doctrine is also cramped with uncertainty as courts are not clear on the definition
of “transaction”. Most importantly, it was also concluded that of the four jurisdictions under study,
South Africa has standing requirements that are more inclined to the fabric of the enhanced
accountability perspective in terms of the scope of potential plaintiffs. The sub-Saharan nation not
only affords registered shareholders standing, but it also includes those that are not yet registered.
Directors and company officers, trade unions and employee representatives can also pursue
derivative litigation in South Africa.2814 In addition, other stakeholders such as creditors, who are
not specifically mentioned may invoke the discretionary provision in section 165(2)(d) of the 2008
Companies Act to institute derivative litigation. However, the UK must be commended for
expanding the potential causes of action to include negligence.
With respect to the demand requirement, it was found that the current Delaware demand rule is
out of step with the enhanced accountability perspective because it is too onerous and restrictive.
It was further concluded that the employment of SLCs in the USA is another hurdle which
shareholders have to deal with as courts are usually reluctant to find against a board’s motion to
dismiss a plaintiff’s claim especially if it is based on the recommendations of an SLC. It was
further established that SLCs can be employed to quell meritorious claims since most of the
members thereof are selected from among an incumbent board which makes them susceptible to a
2813
2814
Section 165(2)(b) and (c) of the Companies Act 71 of 2008.
364
high risk of structural bias. Their independence is questionable as well. Also, the lack of a
predetermined “waiting period” for the board to respond in Delaware makes the demand rule
vulnerable to abuse by unscrupulous directors. This is against the spirit of the enhanced
accountability perspective. With respect to South Africa, it was found that its demand rule lacks
sufficient guidelines for both plaintiffs and defendants as both the Act and its Regulations do not
provide any guidance as to the meaning of “an independent and impartial person or committee”.
The effect of the BJR on derivative actions revealed some interesting conclusions. First, it was
found that very few jurisdictions, including South Africa, have codified the BJR. The rule remains
rooted in the common law in the USA and Japan. The UK does not have a formal BJR but instead
employs what has been described as a soft business judgment rule”.2815 After an examination of
the three manifestations of the BJR, it was discovered that although the abstention doctrine respects
directors’ decision making prerogative, it is more onerous for shareholders due to the innate
presumption. Also, the doctrine terminates the litigation proceedings before any review of the
merits of the related board of directors’ decision.2816 Thus, the abstention doctrine is contrary to
the tenets of the enhanced accountability perspective as it may potentially deprive a well-meaning
plaintiff of access to justice.2817 It was highlighted that the standard of liability principle contradicts
the abstention doctrine’s hands-off approach and calls for a review of directors’ decisions.
Although this may threaten directorial decision-making power, it encourages company
managements to make responsible risk-taking decisions. The immunity doctrine, which is more
inclined to the enhanced accountability perspective, lies somewhere between the two
manifestations.
The last discursive chapter exposed more divergent findings regarding the four comparative
jurisdictions concerning the role of the judiciary in derivative litigation. It was found that in the
UK, the requirement of good faith is subsumed with the applicant’s requirement to act in the best
interests of the company. However, it was also conceded that the South African requirement of
good faith overlaps with the requirement to act in the best interests of the company. The
requirement that USA’s SLC members act independently is enviable from a South African
2815
2816
2817
365
perspective considering that derivative litigants in the latter jurisdiction have no legal obligation
to be independent.
It was further found that South Africa has abolished the requirement of shareholder ratification or
approval from its derivative remedy regime.2818 This abolition is a welcome development as it
makes the derivative remedy more flexible and more accessible to complainants thus aligning more
with the spirit of the enhanced accountability perspective. Conversely, England still upholds the
ratifiability principle.2819 It was further found that the Delaware State’s demand futility principle
which is inextricably linked with the requirement of particularity is too onerous on derivative
plaintiffs. Again this is contrary to the spirit of the enhanced accountability perspective.
94 RECOMMENDATIONS FOR THE ENHANCED ACCOUNTABILITY

PERSPECTIVE OF DERIVATIVE ACTIONS
Considering the loopholes and ambiguities in some statutory provisions and inconsistencies or
uncertainties regarding some judicial decisions pertaining to the procedural and substantive
requirements for derivative proceedings examined above, a new derivative actions model, namely
the enhanced accountability perspective is hereby recommended. As discussed in chapter three
above, the underlying theory posits that if derivative actions are a vital tool in ensuring good
corporate governance then its policy objectives must be sensitive to the interests of all company
stakeholders. There are two main underlying themes at the core of this enhanced accountability
model. First, the procedural and substantive requirements for invoking the remedy must not be so
onerous as to render the remedy ineffective. At the same time, the said requirements must not be
so easy to comply with that the remedy becomes susceptible to being abused by mischievous
applicants seeking to bring frivolous, vexatious and strike suits. Secondly, directorial misconduct
does not only affect minority shareholders, but the company as a business entity and, as such, the
remedy must be available to all stakeholders acting in the best interests of the company.
2818
2819
See section 263(3)(c) and (d) of the UK Companies Act 2006.
366
9 4 1 Enhanced accountability derivative action demand requirement
9 4 1 1 Form and service of the demand
It is recommended that there should not be any prescribed form for a demand on management to
institute legal action on behalf of their company as long as its contents clearly communicate the
message. The contents of a demand convey the message with sufficient clarity if it “fairly and
adequately apprise[s] the directors of the potential cause of action so that they, in the first instance,
can discharge their duty of authorising actions that in their considered opinion . . . [are] in the best
interests of the corporation”.2820 Furthermore, the demand must typically “identify the alleged
wrongdoers, describe the factual basis for the allegations, describe the harm caused to the
corporation and describe the request for relief”.2821
In South African law, although deviation from the design or content of the prescribed form does
not invalidate the action taken by the person preparing or completing a demand,2822 the action may
be set aside if the deviation negatively and materially affects the substance of the document or is
such that it would reasonably mislead a person reading it. 2823 To that end, it is recommended that
the South African legislature relaxes its position regarding the form of a demand. In this respect
Regulation 36(1) of the Companies Regulations2824 should be amended to read: “a person who
holds any securities of a company may give notice to the company for any purpose contemplated
in section … 165 (2) by delivering an effective demand to the company, except to the extent that
the requirements of a central securities depository provide otherwise”.
For ease of reference, a demand should be in writing. Also, for the sake of convenience, an
electronic demand may also be served on the board of a company. Oral demands should be
prohibited because it is difficult to record, prone to high risk of distortion and inaccuracy and may
create misunderstandings as one can easily deny receiving such communication if unfavourable to
them. Trying to prove the contents of an orally conveyed demand might lead to mini-trials which
might be costly both financially and in terms of time. An orally served demand may also mean that
the board can also respond orally.
2820
Khanna v McMinn 2006 WL 1388744(Del. Ch. May 9 2006) 13. See also Stoop 2012 SALJ 537-538.
2821
2822
2823
Ibid.
2824
2011.
367
Furthermore, it is recommended that it should not be mandatory that a demand be served at the
subject company’s registered office or its principal place of business. A demand is simply intended
“to notify the person intended to be served of the nature, contents and exigency of the process of
court and to return to the court proof of such service in the manner prescribed by the law”.2825 This
should be the core of the demand which encourages flexible access to justice for all stakeholders
and minimises the opportunity for undue delays by unscrupulous directors. In turn, this enhances
“the efficient and responsible management of companies”.2826 This approach ensures that credible
derivative applications are not dismissed at the first instance or delayed further for mere want of
compliance with immaterial technicalities. This approach has internal limitations against abuse as
the applicant is required to “identify the alleged wrongdoers, describe the factual basis for the
allegations, describe the harm caused to the corporation and describe the request for relief”.2827 A
frivolous or vexatious demand will most probably fail to satisfactorily describe the factual basis
for the allegations. Additionally, the approach respects the entrenched company law principle of
separation of ownership and control. By serving a demand on the company, the complainant
affords the board, which is mandated to determine where the interests of a company lie,2828 an
opportunity to assess whether or not to pursue litigation. As discussed above,2829 a decision to
litigate is a commercial decision.2830
South Africa should not follow England’s approach of completely doing away with the demand
requirement. Although the English system allows the courts, who are thought to be impartial
gatekeepers,2831 to be involved at an earlier stage in derivative proceedings, that approach violates
the fabric of responsible company management envisaged by the enhanced accountability
perspective proposed in this thesis. The current English system shifts the decision-making powers
2825
Mouritzen v Greystones Enterprises (Pty) Ltd 2012 5 SA 74 (KZD) para 28. The court also referred to S v Watson
1969 (3) SA 405 (A) where it was held that the term “‘served’ … has the ordinary connotation of ‘legally
delivered’, i.e. delivered in accordance with the law so as to notify the person on whom it is served of its
contents”.
2826
Section 7(j) of the Companies Act 71 of 2008.
2827
2828
See for example, section 66(1) of the Companies Act 71 of 2008.
2829
See part 7 9 1 in chapter seven above.
2830
2831
368
of whether to institute2832 or continue2833 derivative litigation from the board of directors to the
judiciary.2834 The courts determine the validity of a derivative claim by application of specific
factors that incorporate several common-law principles.2835 The purpose of responsible corporate
affairs management is not to usurp directorial duties by the courts. Serving a demand on the board
first is vital due to the consequences it generates.2836 For example, if the board chooses to take over
and pursue the litigation, it may require the company to cooperate in resolving the dispute without
litigation2837 or it may authorise the company to invest its resources in the dispute.2838
Enhanced accountability is about balancing the rights and responsibilities of directors and other
stakeholders including minority shareholders. Directors should be afforded an opportunity to
express their opinion regarding the demand before bypassing them. If they engage in delaying
tactics, current legislation already caters for that possibility as the board is required to respond to
a demand within certain prescribed timeframes. Directors may only be by-passed in limited
instances namely where demand futility applies and where there is reasonable risk of imminent
irreparable harm to the company. Above all, if there is reasonable danger of imminent harm, a
person contemplated under section 165(2) of the 2008 Act may apply to a court for leave to bring
proceedings in the name and on behalf of the company without making a demand or without
affording the company time to respond to the demand in exceptional circumstances. 2839 Again,
leave of the court is only granted subject to compliance with certain prerequisites.2840
2832
2833
Section 262(2) of the UK Companies Act 2006 states that: “a member of the company may apply to the court
for permission to continue the claim as a derivative suit on the ground that the manner in which the company
2834
2835
Ibid.
2836
L. Rev. 461 462.
2837
DeMott 1986 University of California L. Rev. 462; Wilder “The Demand Requirement and the Business
Judgment Rule: Synergistic Procedural Obstacles to Shareholder Derivative Suits” 1985 Pace L. Rev. 633 640;
Tang SS “The anatomy of Singapore’s statutory derivative action: why do shareholders sue – or not?” 2019
Journal of Corporate Law Studies 1 13.
2838
Wilder 1985 Pace L. Rev. 640 explains that once a company accepts the complainant’s request, it must be
prepared to place a company’s assets behind the suit”.
2839
2840
Mbethe v United Manganese of Kalahari (Pty) Ltd 2016 (5) SA 414 (GJ) para 89.
369
9 4 1 2 Satisfying a demand
It is recommended that South Africa should not adopt the Delaware-style requirement that the
plaintiff must “state with particularity any effort by the plaintiff to obtain the desired action from
the directors or comparable authority”.2841 This has already proved to be too onerous a prerequisite
as most plaintiffs in Delaware struggle to satisfy it. Delaware Chancery Court Rule 23.1 allows
the demand to be served on persons who are of comparable authority.2842 Likewise, it is
recommended that South Africa should not follow this approach. It is too technical and
inappropriate for a jurisdiction like South Africa.2843 There is no certainty regarding the meaning
of “comparable authority”. In most instances, one is required to serve the demand on persons
vested with the board’s full powers. It is not easy to determine beforehand who these persons are.
The only guideline is that persons occupying positions of comparable authority do not necessarily
need to be directors. Legal certainty is essential for implementation of this enhanced accountability
model. Both directors and stakeholders must be aware of their rights and obligations. The
requirement of service of a demand on comparable authority exceeds the limits of flexible norms
and leaves stakeholders uncertain or rather confused.
The South African approach is advanced in this regard. Section 165(2) of the 2008 Companies Act
merely shows that a demand is required to be served on the company. A literal reading of section
66(1) of the 2008 Companies Act suggests that unless a company’s Memorandum of Incorporation
or the Act2844 provides otherwise, a demand shall be served on a director or board of directors
only.2845 The demand must at least identify the alleged wrongdoers and set out the factual basis for
2841
phrase “if necessary” literally. See also Casarino and Greene “Back to Basics: Board & Special Litigation
Committee Investigations” 2019 The Corporate Governance Advisor 16-18.
2842
The rule stipulates that: “[the] complaint shall also allege with particularity the efforts, if any, made by the
plaintiff to obtain the action the plaintiff desires from the directors or comparable authority…”.
2843
The analysis may go as far as considering the timing, circumstances and manner of the alleged demands as was
the case in Kaster v Modification Sys. Inc. 731 F.2d 1014 1017 (2d Cir. 1984).
2844
Companies Act 71 of 2008.
2845
Section 66(1) of the 2008 Companies Act 71 of 2008.
370
the allegations.2846 Also, it must describe the particular harm suffered by the company,2847 the relief
sought by the plaintiff and “cannot rest solely on suspicions and foregone conclusions”.2848
Stoop has argued that in its current form, the South African demand requirement approach “allows
for flexibility2849 and ensures that the process is not more technical than is necessary…. [T]he
provision offer[s] the courts the opportunity to approach the matter on a case-by-case basis and to
apply a substance-over-form approach, using the stated aims of the 2008 Act as a guideline”.2850
This observation is plausible but criticism that the South African demand requirement is not
comprehensive is also valid and should be explored to facilitate law reform to meet the needs2851
of contemporary company law.
The South African legislature would have done better by providing more guidelines for application
of the demand rule in the 2008 Companies Act.2852 For example, the Act as it currently stands is
not clear on who bears the burden to prove that the board’s refusal to pursue derivative litigation
was wrongful. However, this argument does not ignore the provisions of section 165(5) of the
Companies Act.2853 Although the question of who bears such burden has not been decisively dealt
with by a South African court, it is recommended that the practice in Japan is instructive. Unlike
their USA counterparts, Japanese shareholders are not burdened with the onus to prove wrongful
refusal. This encourages auditors2854 to carry out their mandate objectively or else their decisions
would be nullified by the courts.
Directors should bear the burden of proving that their refusal was right. The main reason for this
is the fact and reality of information asymmetry. This is the other reason why South Africa must
2846
2847
It is argued submitted that it is very difficult for a potential plaintiff to describe harm suffered by the company
with particularity. Derivative plaintiffs are victims of pre-suit information asymmetries. This makes it extremely
difficult for them to describe with particularity both the nature of the alleged wrongdoing and the extent to which
the alleged conduct injured the company. It is, therefore, submitted that this requirement it too onerous and does
not consider the plaintiffs’ challenges regarding access to relevant information.
2848
2849
This is consistent with section 7(b)(ii) of the Companies Act 71 of 2008 which provides that the Act seeks to
“promote the development of the South African economy by creating flexibility and simplicity in the formation
and maintenance of companies”.
2850
2851
There is a need to curb directorial misconduct while at the same time not stifling entrepreneurship. Achieving
equilibrium between directorial authority and accountability is one the underlying policies of the enhanced
accountability derivative model.
2852
2853
71 of 2008.
2854
371
refrain from adopting the US-style demand requirement of alleging “facts with particularity”.2855
The complainant’s right of access to company information at a reasonable cost must be balanced
with the defendant’s property and privacy entitlements.2856 Regulatory authorities need to enhance
a derivative complainant’s right of access to accurate information as the deprivation of accurate
information may have serious long term effects on a company and its stakeholders.2857 As
discussed above,2858 South Africa’s Supreme Court of Appeal (SCA) has broadened the plaintiff’s
right of access to company information by scrapping the requirement to prove the litigant’s motive.
Although easy access to corporate information is important2859 for an effective derivative remedy,
it is submitted that a wholesale approach to the issue is counterproductive. Controlled access to
information is in the best interests of a sound corporate governance system. Such control can be
achieved by requiring the applicant to act for a proper purpose or in good faith.2860 The requirement
to prove the sincerity of the applicant’s motive would have been a reasonable filter against
unwarranted malevolent applications. Therefore legislative intervention by way of amendment of
section 26 of the Companies Act is recommended to override the effects of the SCA decision.
9 4 1 3 Responding to a demand
Unlike the Japanese system where it is known that upon receipt of a demand the board of auditors
investigates the merits thereof, in Delaware, directors have to first determine who will respond to
the demand.2861 If there is a disinterested majority on the board, it can respond to the demand. But,
if such a majority is lacking, then there may be need to appoint a Special Litigating Committee
(SLC). In South Africa, once a demand has been served, directors only have two options. The
board may approach a court for the demand to be rejected on the grounds that it is frivolous and
2855
2856
Ibid.
2857
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 44. Cassim MF
“Obstacles and Barriers to the Derivative Action: Costs Orders Under Section 165 of the Companies Act of 2008
(Part 2)” 2014 S. Afr Merc L.J 241.
2858
See part 4 2 3 3 of chapter four above.
2859
Cassim MF 2014 S. Afr Merc L.J 241.
2860
Reference can be made to section 247A(3) of the Australian Corporations Act (Cth) No. 50 2001 which provides
that the Court may make an order authorising the applicant to inspect the company’s books only “if it is satisfied
that the applicant is acting in good faith; and the inspection is to be made for a purpose connected with: applying
for leave under section 237; or bringing or intervening in proceedings with leave under that section”.
2861
372
vexatious.2862 Alternatively, it can opt to investigate the merits of the demand2863 which will
require the board to select an impartial person or committee to investigate the alleged issues.2864
The investigator’s report must be well prepared, “rational and reasonable in its conclusions”.2865
The US-styled SLC is similar to South Africa’s independent and impartial person or a committee
appointed in terms of section 165(4)(a) to investigate the demand and report to the board. The
main difference is that in Delaware, the SLC’s report is presented to the court whilst in South
Africa the report of an independent and impartial person or committee is presented to the board of
directors. The board retains the power whether or not to litigate. In the USA, almost all the SLC’s
recommend that the proposed litigation will not be in the best interests of the company. As argued
above,2866 this casts doubt on the impartiality and integrity of the SLCs’ recommendations. In
principle, a properly constituted SLC has the power to suspend derivative litigation for a
reasonable period of time.2867 However, empirical evidence shows otherwise. Empirical research
in the USA has shown that in almost all cases, the SLC will move for summary judgment to dismiss
the shareholder’s demand on the ground that it is not in the best interests of the company.2868
It has also been argued that the South African approach is vulnerable to structural bias as the person
or committee appointed to investigate the demand technically works under the instruction of the
allegedly miscreant board of directors.2869 Consequently, it is recommended that South Africa
should follow the Japanese approach which uses auditors to investigate the credibility of a demand.
Another aspect of the South African derivative litigation framework which requires attention is
director deadlock possibility. This refers to instances where the board of directors finds itself in a
2862
Section 165(3) of the Companies Act 71 of 2008. Cassim FHI et al Contemporary company law 2 ed (2012) 782
opine that this provision is an important policy consideration which ensures that “suitable checks and balances
[are] built into the derivative action in order to prevent abuse of the right to bring derivative actions”. See also
2863
Section 165(4) of the Companies Act 71 of 2008. See also Stoop 2012 SALJ 538.
2864
Ibid; Cassim FHI et al Contemporary company law 2 ed (2012) 782; Cassim MF “When Companies are Harmed
by Their own Directors: The Defects in the Statutory Derivative Action and the Cures (Part 2)” 2013 South
African Mercantile Law Journal 301 313; Cassim MF 2014 South African Mercantile Law Journal 7.
2865
2866
See part 8 6 of chapter eight above.
2867
Aronson S et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 55 and 56.
2868
to Recent Corporate Scandals” 2008 Florida L. Rev. 589 598; Emerson “Aronson and Its Progeny: Limiting
Derivative Actions through Demand Requirements” 1986 John Marshall L. Rev. 571 572; Wilder 1985 Pace L.
Rev. 637 argued that in all cases, SLCs have recommended that action was not in the best interests of the
company. It is inconceivable that all the suits were really against the best interests of the company.
2869
Cassim MF The New Derivative Action under the Companies Act: Guidelines for Judicial Discretion (2016) 169.
373
stalemate with respect to whether or not it should take over derivative litigation as per the
shareholder’s demand. The comparator jurisdictions that are subjects of this study do not offer any
lessons for South Africa. Although jurisdictions that have codified their derivative proceedings
framework usually specify a certain time period at the lapse of which the shareholder is allowed
to proceed with the suit,2870 this does not address the problem of director impasse. In Perak
Integrated Networks Services Sdn Bhd v Urban Domain Sdn Bhd2871 the Malaysian Court of
Appeal held that corporate deadlock does not preclude a derivative action brought to protect the
interests of the company.2872
There are two recommendations to address this problem. The first one is in consonance with
Cassim MF’s proposal for allowing the court to exercise its discretion and appoint an independent
person or committee to investigate the demand.2873 That independent person or committee must,
subsequent to the investigation, compile a report which should be submitted to the court and not
to the board.2874 This is justifiable under the enhanced accountability perspective in that director
impasse effectively paralyses a board and renders it incapable of making decisions. Evading the
board under such circumstances is justifiable and in the interests of both the company and justice.
Accordingly, director impasse should not be an automatic bar to derivative actions lest meritorious
applications are unfairly dismissed. On the other hand, director deadlock also should not be an
automatic authorisation for derivative litigation lest frivolous and vexatious suits escape the
demand requirement filter.
The second recommendation is that it can be entrenched in a company’s constitution that in

instances of deadlock, the board chairperson shall appoint an independent expert in the field of
company law to make the decision for the company and break the deadlock.
2870
As evident above, both South Africa and Japan prescribe a waiting period of sixty days.
2871
W-02 (NCC) (W)-2442-11/2013.
2872
Perak Integrated Networks Services Sdn Bhd v Urban Domain Sdn Bhd W-02 (NCC) (W)-2442-11/2013.
2873
Cassim MF The New Derivative Action under the Companies Act: Guidelines for Judicial Discretion (2016) 169.
2874
Ibid.
374
9 4 1 4 Demand futility
In Delaware State and under South African law,2875 there are certain circumstances in which the
demand requirement can be waived because serving it would be futile, unavailing or useless.2876
Demand futility is a result of the American judiciary’s effort in trying to discourage directors and
controlling shareholders2877 from blocking derivative litigation that implicates them in
wrongdoing.2878 Although the term “demand futility” is not found anywhere in South Africa’s
Companies Act,2879 the exception found in section 165(6) of the Act especially paragraph (b)2880
basically functions as a demand futility rule or principle. There are some concerns with the wording
of section 165(6)(b).
First, part of the provision states that “the court may grant leave only if the court is satisfied that
the delay required for the procedures contemplated in subsections (3) to (5) to be completed may
result in … substantial prejudice to the interests of the applicant or another person”. 2881 The
provision makes reference to “the interests of the applicant or another person”. It is submitted that
this was a serious mistake on the part of the South African legislature. By nature, derivative
litigation seeks to protect the interests of the company and no one else. It is not a personal remedy
like the oppression remedy that seeks to protect personal interests. Accordingly, as pointed out by
Cassim MF, reference to the interests of the applicant or any other person is a contradiction of the
underlying policy goals and a misconception of the nature of the derivative remedy.2882 In its
current state, section 165(6)(a)(ii) of the South African Companies Act is not good law as it
violates some fundamental principles of corporate governance.2883 Company resources2884 could
2875
See Melbinger and Moore 2017 Benefits Law Journal 7; Seitz Jr. and Sirkin 2018 The Business Lawyer 306;
Erickson 2017 Oklahoma Law Review 264 and Section 165(6)(a) of the South African Companies Act 71 of
2008.
2876
Melbinger and Moore “Lawsuits against Directors over Their Own Compensation” 2017 Benefits Law Journal
7; Seitz Jr. and Sirkin “The Demand Review Committee: How It Works, and How It Could Work Better” 2018
The Business Lawyer 306; Erickson “The Gatekeepers of Shareholder Litigation” 2017 Oklahoma Law Review
264; Stickells “Derivative Suits: The Requirement of Demand upon the Stockholders” 1953 Boston University
L. Rev. 435 437; Wilder 1985 Pace L. Rev. 636.
2877
See Black B et al “Legal Liability of Directors and Company Officials Part 1: Substantive Grounds for Liability
(Report to the Russian Securities Agency)” 2007 Columbia Business Law Review 614 798.
2878
2879
71 of 2008.
2880
Ibid.
2881
Section 165(6)(a)(ii) of the Companies Act 71 of 2008.
2882
2883
Notably, the proper plaintiff rule and the juristic nature of companies.
2884
According to Daily Income Fund Inc v Fox 464 U.S. 523 533 (1984), these resources include company
information, personnel, funds and counsel behind the law suit.
375
end up being channeled in the wrong direction as the company attempts to protect itself from
unmeritorious suits. Consistent with the scholarly case for reform made by Cassim MF, section
165(6)(a)(ii) should be repealed.2885
The second problematic issue relates to the onerous nature of section 165(6). Section 165(6)(c)
stipulates that “the court may grant leave only if the court is satisfied that … the requirements of
subsection (5)(b) are satisfied”.2886 That is the story of section 165(6). Section 165(6)(c) is too
onerous whilst section 165(6)(a)(ii) is too wide. Two wrongs do not make a right. Instead, they
simply make two wrongs. Both extremes are not legally plausible in the enhanced accountability
perspective of derivative proceedings. One extreme exposes the directors to unmeritorious
litigation whilst the other is overly restrictive.
2885
2886
Section 165(5)(b) provides that “[a] person who has made a demand in terms of subsection (2) may apply to a
court for leave to bring or continue proceedings in the name and on behalf of the company, and the court may
grant leave only if the court is satisfied that—
(i) the applicant is acting in good faith;
(ii) the proposed or continuing proceedings involve the trial of a serious question of material consequence to the
company; and
(iii) it is in the best interests of the company that the applicant be granted leave to commence the proposed proceedings
or continue the proceedings, as the case may be”.
376
Figure 5: Demand Requirement in the Enhanced Accountability Perspective
9 4 2 Derivative standing requirements under the enhanced accountability perspective

The requirement of standing is of utmost importance to an effective enhanced accountability
perspective of derivative proceedings. It is one prerequisite that directly filters out unmeritorious
or vexatious suits.
9 4 2 1 Contemporaneous ownership rule

The gist of the contemporaneous ownership rule is that a prospective plaintiff may only legally
institute or proceed with derivative litigation after successfully proving that s/he was a shareholder
377
at the time of the impugned transaction.2887 It has to be remembered that originally, this rule was
introduced as a requirement additional to the exceptions to the proper plaintiff rule. As reiterated
above, of the four jurisdictions forming part of this study, the contemporaneous ownership rule is
only followed in the USA. In essence, a prospective plaintiff who attempts to commence or
proceed derivative litigation may not do so if s/he acquired her/his shares in the subject company
after the impugned conduct had already taken place. This is not consistent with the spirit of the
policy rationales underlying the enhanced accountability perspective of derivative litigation
advanced in this thesis. First, it is common ground that one of the inherent weaknesses of derivative
litigation is free riding. Prospective complainants are discouraged from instituting or proceeding
with derivative litigation because, in most jurisdictions, the one pays for her/his costs of suit whilst
the benefits realised from a successful claim will accrue to the company and not to the plaintiff.
Restricting the entitlement or capacity to pursue a derivative action to contemporaneous

shareholders may leave the company (a fictitious being) without any legal recourse. Miscreant
directors cannot sue on behalf of the subject company as that will essentially mean that they are
suing themselves. By its very nature, the contemporaneous ownership rule bars any other non-
shareholder stakeholders from commencing or proceeding with derivative litigation. This position
can no longer be sustained in contemporary company law. Other stakeholders, such as employees,
might be aware of some wrongdoing which damaged the company, but due to the operation of this
rule, the interests of the company might have no one to vindicate them.
Whilst it is understandable that when the contemporaneous ownership rule was formulated, the
main concern was strike suits or the threat of purchased grievances,2888 this position cannot be
maintained in modern-day corporate governance models given the shocking corporate governance
debacles2889 virtually all of which resulted from directorial abuse of power. Also, as Wells argued,
when the USA Congress codified the contemporaneous ownership rule, they “did not match the
strict ownership requirements with equally strict guidelines for adequate shareholder
2887
Wells “Maintaining Standing in a Shareholder Derivative Action” 2004 U.C. Davis L. Rev. 345; and Aronson S
et al “Shareholder Derivative Actions: From Cradle to Grave” 2009 11 who argue that this is usually governed
by state law. These commentators also pointed out that the contemporaneous ownership rule has been invoked
in cases of inconsistent state law.
2888
In re: Bank of New York Derivative litigation 320 F.3d 291 2003 para 23. See also Wells 2004 U.C. Davis L.
Rev. 347; Robinson Jr. 2005 Brigham Young University Law Review 234; and Kawashima and Sakurai 1997
Stanford J. Int'l L. 31.
2889
See parts 1 1 and 4 2 of chapters 1 and 4 respectively.
378
representation”.2890 Moreover, the rule is unnecessarily technical.2891 Whilst it is understandable
that the policy rationales for the contemporaneous ownership rule were without malicious intent,
it is submitted that a wholesale application of the rule in a dynamic legal and business environment
may result in the rule imposing undesirable barriers on shareholders’ access to justice.
Consequently, it is submitted that the contemporaneous ownership requirement is undesirable and
inappropriate in contemporary company law.
As already shown,2892 Japan does not require derivative complainants to have been
contemporaneous shareholders. However, one must have been a shareholder for at least six
consecutive months for s/he to commence derivative litigation.2893 By its nature, this rule also
restricts derivative litigation to shareholders only. Not surprisingly, calls have been made for Japan
to repeal the six months ownership requirement in favour of the continuous ownership rule.2894
There is no contemporaneous ownership requirement in England. Instead, a plaintiff is required to

prove the existence of a prima facie case before commencing or proceeding with derivative
litigation. Case law shows that this requirement can be waived.2895 As was argued above, the prima
facie test is too onerous as the shareholder suffers from information asymmetry.2896 It is submitted
that contrary to the Law Reform Commission’s envisaged purpose to create “a modern, flexible
and accessible criteria”,2897 the prima facie test presents an unnecessary impediment to applicants.
In practice, the test has turned out to be a hurdle that deters potential honest applicants.2898
2890
2891
Definitions of “transaction” and “conduct” that constitute the contemporaneous ownership rule.
2892
See part 5 4 of chapter five above.
2893
Art 847(1) of the Companies Act 86 of July 26 2005. See also Iglesias-Rodriguez “Obligations of directors in
takeovers” in Siems and Cabrelli (eds) Comparative company law: A case-based approach 2 ed (2018) 158;
Puchniak “The Complexity of derivative actions in Asia” in Puchniak et al (eds) The derivative action in Asia:
A comparative and functional approach (2012) 101 and Oda 2011 ECFR 334 341; Ono “Directors Liabilities”
11 available at https://www.jurists.co.jp/sites/default/files/tractate_pdf/ja/200901_ono.pdf (accessed 28-05-
2018); Siems “Private Enforcement of Directors’ Duties: Derivative Actions as a Global Phenomenon” 2012 7
available at: http://ssrn.com/abstract=1699353 (accessed 28-06-2018).
2894
2895
Cinematic Finance Ltd v Ryder [2012] B.C.C. 797 para 2; Stimpson v Southern Private Landlords Association
[2010] B.C.C. 387 para 3.
2896
2897
2898
Baker and Hacking “Statutory Derivative Claim Regime: Ten Years On” https://gowlingwlg.com/en/insights-
resources/articles/2017/statutory-derivative-claim-regime-ten-years
on/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original (accessed 01-09-2018).
379
Consequently, it is recommended that the English prima facie rule be abolished. The rule does not
add any necessary or valuable element to the derivative litigation regime. The fact that English
courts have allowed derivative proceedings to proceed even in circumstances where the applicant
had not requested a waiver simply means that after all the rule is not so necessary. There is more
to derivative litigation than requiring applicants to make out a prima facie case, and that is what
the courts should pursue under the envisaged enhanced accountability perspective of derivative
litigation. A rule whose presence adds nothing to the proceedings is unnecessary. In actual fact it
is a potential barrier to meritorious claims.2899
South Africa is deserving of commendation for not adopting the restrictive US-style
contemporaneous ownership rule. Unlike Japan, South Africa also does not require shareholders
to have owned shares in the subject company for at least six months. This is premised on the
understanding that the rights at issue do not belong to the plaintiff, but to the company. There is a
possibility that any stakeholder can commence or institute derivative litigation under section
165(2)(d) of the Companies Act.2900 It is therefore submitted that South Africa’s standing
requirements are more advanced and suitable to the requirements of modern company law
challenges considering the widespread corporate governance debacles. Also, South Africa’s
standing requirements are better conformed to the gradual shift from shareholder primacy to the
enlightened shareholder value approach. Traces of the stakeholder approach are also beginning to
appear in this jurisdiction.
9 4 2 2 Continuing wrong doctrine

According to this equitable2901 doctrine, plaintiffs are awarded legal standing if they are able to
demonstrate that the alleged conduct and its effects though it might have happened before the
plaintiff became a shareholder in the company concerned, “continued even after the acquisition of
[shares]”.2902 The doctrine has been criticised for being overly technical. The rule resulting from
the doctrine requires a proper definition of a wrongful transaction which American courts have
been struggling to provide.2903 Also, there have been challenges with defining the exact scope of a
2899
Ibid.
2900
71 of 2008.
2901
In In re: Bank of New York Derivative litigation 320 F.3d 291 2003 para 25 “the continuing wrong doctrine is
frequently considered to be an equitable exception to the contemporaneous ownership rule”.
2902
Wells 2004 U.C. Davis L. Rev. 346. Robinson Jr. 2005 Brigham Young University Law Review 245.
2903
See part 5 2 2 above.
380
continuing wrong. All these inherent shortcomings of the continuing wrong doctrine simply
indicate that the doctrine fails to advance legal certainty. This is undesirable given that the principle
of legal certainty is so vital to the promotion of responsible management of corporate affairs.
9 4 2 3 Continuous ownership rule

This rule, which is considered to be a better substitute to the USA’s contemporaneous ownership
requirement, has been adopted in England. The continuing ownership rule requires the initiator of
derivative litigation2904 to own shares in the company at the time of filing the action.2905 In some
extreme instances, the plaintiff shareholder might be required to own shares at the time judgment
is entered. The South African Companies Act is quiet on whether the complainant must remain a
shareholder throughout the duration of the derivative proceedings. However, although the Act is
silent on this issue, there are compelling arguments for the view that the courts should require a
shareholder to maintain “a continuing interest” throughout the litigation process. 2906 Cassim MF
argues that a shareholder who divests her/his shareholding is likely to act for an improper purpose
and lacks sufficient interest to bring derivative litigation.2907 According to this scholar, such a
shareholder is unlikely to pass the good faith muster under section 165(5)(b)(i) of the Companies
Act.2908
With respect to those shareholders who divest their shareholding after they have obtained the leave
of the court, Cassim MF argues that such shareholders should be barred from continuing with
derivative proceedings but at the same time the court should allow the action to proceed by
permitting another eligible applicant to pursue it since it is in the best interests of the company
“whose legal rights are being enforced”.2909 It is submitted that this scholar’s arguments are
laudable. Allowing divesting shareholders to continue with derivative proceedings may introduce
2904
In this context, “member” includes “a person who is not a member but to whom shares in the company have
been transferred or transmitted by operation of law”. See section 260(5)(c) of the 2006 UK Companies Act.
2905
et al (eds) The derivative action in Asia: A comparative and functional approach (2012) 56. The same is true for
South Africa. See Cassim MF 2018 South African Law Journal 120.
2906
2907
Ibid.
2908
Ibid.
2909
Cassim MF 2018 South African Law Journal 110. However, it is not clear how the other shareholders are to be
informed of the pending derivative suit.
381
strike suits into the South African derivative actions landscape because those shareholders are
more tempted to act for their personal benefit than those who still own shares in the company.
On the other hand, shareholders must be free to pull out of unprofitable business ventures at any
time. In a free-market economy, a sound system of corporate governance must promote flexibility
of ownership transfer. Denying derivative standing to shareholders for the sole reason that they
should maintain their share ownership throughout the suit will result in fewer shareholders being
willing to commence derivative litigation. This will exacerbate the problem of free riders. With
time, the threat of directors’ personal liability that accompanies derivative litigation will gradually
vanish. When that happens, directors will have one less restraint curbing their misconduct.
Accordingly, it is submitted that the contemporaneous ownership rule does not promote the
interests of justice and is inconsistent with an enhanced accountability perspective of derivative
actions.
9 4 2 4 Extension of legal standing to non-shareholder complainants

In general, of the four jurisdictions forming part of this study, it is only South Africa that
effectively extends derivative standing to non-shareholder stakeholders. As a result of the
contemporaneous ownership rule, the USA restricts derivative standing to shareholders only.2910
The continuing wrong doctrine and the other exceptions are not much helpful in this regard.
Similarly, Japan’s requirement of the complainant having to own shares for at least six consecutive
months means non-shareholder stakeholders are barred from instituting derivative litigation.2911
Likewise, the English statutory derivative actions regime only allows company members to
institute derivative litigation.
It is submitted that shareholders should not be the only recognised category of derivative
complainants. It is acknowledged that the agency and shareholder primacy theories were
influential corporate governance considerations when the derivative remedy was developed.
However, while these two concepts remain important, contemporary derivative litigation should
no longer be seen through the lenses of these two concepts only. As has been argued above,2912 in
general shareholders suffer from information asymmetry and other stakeholders such as employees
2910
It has already been recommended above that this restrictive rule should be abolished.
2911
approach 2 ed (2018) 369. However, as has been recommended above, Japan should also abolish this rule.
2912
See part 4 2 6 of chapter four above.
382
might actually be better placed to institute derivative litigation. Also, in modern-day company law,
there is a gradual but definite shift in the definition of the interests of the company to at least
consider other non-shareholder interests.2913 These shortcomings of the traditional derivative
remedy scheme are addressed by the enhanced accountability perspective of derivative
proceedings. The perspective extends derivative standing to other stakeholders as long as they are
acting for the interests of the company. South Africa is to be commended for the “judicial
discretion” category of derivative litigants in section 165(2)(d) subject to the recommendation
made above to the effect that the same provision should be amended to avoid any implied
suggestion that derivative actions are instituted to protect any personal interests.
However, the inclusion of section 165(2)(b) which awards legal standing to directors for the
commencement or continuation of derivative litigation has been queried.2914 It is common ground
that directors, as agents who owe fiduciary duties to act in good faith in the best interests of the
company, are responsible for overseeing the daily management of companies.2915 The company,
an artificial person, being the proper plaintiff for wrongs done to it, can only institute action
through its directors. Therefore, it is contended that an application brought by directors to
commence action on behalf of a company does not qualify for description or treatment as a
derivative remedy. Derivative actions are by nature proceedings commenced when company
directors are either unable or unwilling to protect the interests of the company. It is difficult to
imagine any scenario where company litigation through its agents qualifies as derivative action. In
its current state, section 165(2)(b)2916 of the Companies Act is confusing and amounts to a
regrettable misconception of the nature of derivative actions. Consequently, it is recommended
that section 165(2)(b) of the South African Companies Act be amended.
2913
See section 172 of the UK Companies Act 2006.
2914
2915
See section 66(1) of the Companies Act 71 of 2008; Cassim R “The Power to Remove Company Directors from
Office: Historical and Philosophical Roots” 2019 Fundamina 37 62; Abugu “The Monster Theory: Setting the
Boundary for Corporate Financial Malpractice” An Inaugural Lecture delivered at the University of Lagos 2015
20.
2916
However Cassim MF The New Derivative Action under the Companies Act: Guidelines for Judicial Discretion
(2016) 15 is of the view that the extension to allow directors to bring derivative claims is a welcome development
as they possess in-depth knowledge of their company’s affairs.
383
Figure 6: Standing Requirements in the Enhanced Accountability Perspective
9 4 3 Adaptation of the business judgment rule for operation of the enhanced

accountability perspective of derivative actions
In South Africa, the proper purpose rule does not form part of an enquiry into the rationality of a
board decision unless it is treated as a principle which falls within the broad fiduciary duty to act
in the best interests of the company.2917 It has also been established that, in practice, the business
judgment rule (BJR) manifests either as an abstention doctrine, as an immunity doctrine or as a
standard of liability. As an abstention doctrine, the BJR operates to preclude the judiciary from
interfering with the outcomes of a company decision-making process.2918 As an immunity rule, the
BJR functions to shield the directors from liability subject to them discharging the required onus
of proof.2919 As a standard of liability, the BJR will not apply if the decision-maker violated her/his
2917
2918
(2003) 159; Mongalo et al Forms of business enterprise: Theory, structure and operation (2004) 217; Rukmono
“Some Problems in the Application of the Business Judgment Rule Principles to the Directors of State-Owned
Enterprises in Indonesia” 2019 Advances in Social Science, Education and Humanities Research 233.
2919
McMillan 2012 William & Mary Business Law Review 569; Giraldo “Factors affecting the Application of the
Business Judgment Rule: An Empirical Study of the US, UK, Australia and the EU” 2006 130; Lee 2005
University of Botswana L.J. 52.
384
duty of care.2920 To avoid possible confusion between the immunity and standard of liability
doctrines, it is recommended that the latter be referred to as the standard of conduct doctrine.2921
The abstention doctrine is laudable for its compliance with some entrenched principles of company
law such as the separation of ownership and control and the proper plaintiff rule. However,
considering contemporary company law problems that have seen directors abuse the power vested
in them, there is a need to regulate corporate decision-making, if it is in the best interests of the
company. Further, the abstention doctrine comes with a presumption that is too onerous for
derivative plaintiffs to rebut.2922 This violates the underlying policy rationales2923 behind the
enhanced accountability model. An onerous requirement discourages prospective plaintiffs from
instituting action against miscreant directors. It is, therefore, recommended that the courts do not
apply the abstention doctrine as it can potentially restrict access to justice by limiting meritorious
derivative claims.
It is further recommended that South African courts adopt the standard of conduct version of the
BJR. This is the model that is in line with the spirit of the enhanced accountability perspective of
derivative actions advocated for in this study. First, the standard of conduct doctrine allows the
director to know what is expected of him/her beforehand. Knowledge of what is expected of one
is a key feature of responsible management. It also creates certainty regarding the scope of one’s
rights and duties. Additionally, in cases of abuse of power, the standard of conduct approach allows
the judiciary to review directorial decisions. It has to be noted that in so doing, the judges do not
essentially usurp directorial decision-making power. Rather, the courts will restrict themselves to
the procedural aspects of decision-making. If it is found that proper procedures were not followed,
then the directors will be requested to reconsider their decision.
As has been argued earlier, the South African version of the BJR is very wide in scope and
therefore vulnerable to abuse as it applies “[i]n respect of any particular matter arising in the
exercise of the powers or the performance of the functions of director…”.2924 Pillay and Natesan
have argued that the South African version of the BJR is broader than that adopted by its
2920
Yaru “The Business of Judging Directors’ Business Judgments in Singapore Courts” 2016 SAcLJ 431.
2921
Rule under South Africa’s Companies Act 71 of 2008” 2019 Journal of African Law 1.
2922
2923
See Figure 2 above.
2924
385
counterparts.2925 Ultimately, all directors’ decisions may end up qualifying for treatment as
business judgments. It is therefore submitted that South Africa’s overly elastic version of the BJR
may potentially offer arbitrary immunity to mischievous directors. There are two options that may
potentially remedy this defect. First, the courts may interpret “the powers or the performance of
the functions of director” to refer to specific directorial decisions in the context of the BJR.
Secondly, section 76(4) of the Companies Act may be amended by the legislature to specifically
outline decisions or conduct that is covered by the rule.2926
The Companies Act is slowly approaching 10 years since its coming into force. Considering the
fact that South African courts have not had the opportunity to interact with the BJR provision, that
is, section 76(4) of the Companies Act, the important question is: Does South Africa really need a
formal BJR? England does not have a formal BJR. Should South Africa follow England in not
having a formal BJR? The lack of a formal BJR in the current English corporate governance
framework must not be viewed in isolation; “it is insufficient to just examine the business judgment
rule to determine how it will affect the director’s liability. The amount of protection and discretion
that directors enjoy may rely ultimately on other factors in the corporate governance
framework”.2927 One has to consider the whole corporate governance model because, in a system,
a weakness in one component might be compensated for by a strength in another component.
Moreover, a jurisdiction’s legal system might be influenced by other extra-legal factors such as
the political landscape and the socio-economic factors. In Arab jurisdictions for example, religion
plays a pivotal role in shaping a state’s legal terrain.
In the case of England, although there is no formal BJR, it is no question that courts have exercised
deference to directorial decisions. England’s informal or “soft” BJR contains an inherent
inescapable review mechanism that allows for partial judicial interference with directors’ decision
making prerogative. The practice of courts exercising deference towards directorial decisions but
officially rejecting a formal BJR might be a case of hiding behind a finger.
2925
2019). See also Cassim FHI et al Contemporary company law 2 ed (2012) 566.
2926
In this regard, South Africa could follow the example of Australia.
2927
386
Figure 7: The Business Judgment Rule under the Enhanced Accountability Perspective
9 4 4 Exercise of judicial discretion under the enhanced accountability perspective of

derivative litigation
As alluded to in chapter eight above, the leave of court requirement is instrumental in fulfilling
one of the core purposes of South African contemporary company law, namely; “[to] balance the
rights and obligations of shareholders and directors within companies”.2928 Davies and
Worthington assert that one of the innovative features of the UK Companies Act2929 is that the
“gatekeeping decision”2930 whether or not to continue with derivative litigation has been placed in
the hands of an outsider2931 which happens to be the court. The court, as an independent body, has
a very crucial role to play in the enhanced accountability perspective of derivative litigation. In
exercising its discretion whether or not to grant leave to continue with derivative litigation on
2928
Section 7(i) of the South African Companies Act 71 of 2008. This contrasts with the opinion of Cassim MF “The
Statutory Derivative Action under the Companies Act of 2008: The Role of Good Faith” 2013 SALJ 496 506
who is of the view that the requirement of judicial discretion creates a tension between the benefit of a right of
redress and the threat of frivolous actions. See also Cassim MF “Judicial Discretion in Derivative Actions under
the Companies Act of 2008” 2013 SALJ 779.
2929
2006.
2930
Cassim MF 2013 SALJ 496; Cassim FHI et al Contemporary company law 2 ed (2012) 777.
2931
Davies and Worthington Principles of modern company law 598.
387
behalf of the company, the court must, on the one hand, be careful that it does not unnecessarily
interfere with the internal management of a company. On the other hand, the court must also ensure
that the interests of the company are protected against abuse by its agents which protection could
be undermined by wholesale judicial deference to directorial decisions. Throughout the process of
judicial exercise of discretion, it must be born in mind that the primary purpose for the requirement
of leave of court is to provide a filter against unmeritorious actions.2932
A South African court can in terms of section 165(2)(d) of the Companies Act exercise its
discretion to extend derivative legal standing to any person if the court is satisfied that it is
necessary or expedient to do so to protect a legal right of that other person. As already submitted
above, the reference to protection of a legal right belonging to that person is a regrettable legislative
error. It is further submitted that, as it currently stands, section 165(2)(d) of the South African
Companies Act is susceptible to another criticism, namely, that it may convey an unintended
message that directors owe some duties directly to various company stakeholders. However,
directors owe direct fiduciary duties to the company only.2933 Therefore, any person acting in terms
of section 165(2)(d) must seek to further the interests of the company only.
However, ignoring that error, it is submitted that the parliamentary intent to extend legal standing
to any person acting in the best interests of the company is a very welcome and arguably the most
innovative feature of the 2008 Companies Act.2934 This provision significantly advances the
underlying policy objectives of the enhanced accountability perspective of derivative litigation
advocated for in this study. First, the provision opens the door to other non-shareholder
stakeholders to institute derivative litigation on behalf of the company. Consequently, creditors,
employees, trade unions and other stakeholders can institute derivative litigation on behalf of the
company. It is submitted that this provision resembles a clear departure from the shareholder
primacy theory to the stakeholder or pluralist theory which is one of the tenets of the enhanced
accountability model. Secondly, such an extension of legal standing is a recognition that directorial
2932
Lewis Group Limited v Woollam 2016 ZAWCHC para 47. Baum and Puchniak “The derivative action: An
economic, historical and practice-oriented approach” in Puchniak et al (eds) The derivative action in Asia: A
comparative and functional approach (2012) 48.
2933
Cassim R “An Analysis of Directors’ Duties in the Removal of a Director from office” 2019 Stellenbosch Law
Review 212 216.
2934
71 of 2008.
388
misconduct does not violate shareholder interests alone. Both internal and external stakeholders’
interests are damaged by directorial misconduct.
In exercising its discretion in terms of section 165(2)(d), the court must be careful not to
unreasonably interfere with the internal affairs of a company. Gratefully, the South African
legislature decorated the provision in question with an internal filter against unmeritorious and
baseless suits. There has not been much judicial guidance provided with respect to the provision
in question. However, a few points are noteworthy. The first part of section 165(2) reads: “[a]
person may serve a demand upon a company to … protect the legal interests of the company”.2935
The purpose of the litigation must therefore be to protect the legal interests of the company.
Impliedly, this means that the complainant must be acting in the best interests of the subject
company. Consequently, the application for leave of court will be subjected to “the best interests
of the company” test. It is submitted that in this instance, it is justifiable for the applicant to bear
the onus of proving that s/he is acting in the best interests of the company.
However, section 165(2)(d) must not be read in isolation. As innovative and flexible as it seems,
section 165(2)(d) requires a holistically supportive legislative framework for it to have teeth and
deliver the intended policy outcomes. For example, one of the factors that may undermine the
effectiveness of section 165(2)(d) is information asymmetry. Although non-shareholder
stakeholders may access company records in terms of section 26(2) of the Companies Act2936 and
the Promotion of Access Information Act,2937 information asymmetry remains a problem in South
African derivative litigation.
In South Africa, a court may also exercise its discretion to extend the sixty-day period2938 within
which a company that has been served with a demand2939 must either initiate or continue the
derivative proceedings or serve a notice of refusal on the person who made the demand. 2940 The
legislature did not provide any guidance regarding the factors that the court should consider in
determining whether or not to extend the specified time frame. It is submitted that some of the
2935
Section 165(2)(d) of the Companies Act 71 of 2008.
2936
71 of 2008.
2937
2 of 2000.
2938
See section 165(4)(b) of the Companies Act 71 of 2008.
2939
This refers to a demand served on the board of directors to institute legal proceedings as provided in section
165(2) of the South African Companies Act 71 of 2008.
2940
389
possible decisive considerations include the complexity and multiplicity of the issues raised in the
demand, the availability of key role players associated with the issues raised in the demand,2941 the
independence of the board,2942 the possibility of imminent and irreparable harm to the company
and to some extent the threat of structural bias. These factors may not need to be listed in the Act
but may be recognised and developed by the courts to allow for flexibility on a case-by-case basis.
Although Cassim MF2943 has expressed a different opinion on whether the legislature should have
prescribed sixty days for the company to respond to a demand, it is submitted that the South
African legislature’s choice to specify the timeframe and at the same time leave room for extension
thereof in exceptional circumstances is plausible. The specified sixty days provides a guideline
which could be treated as a general rule subject to being overridden at the court’s discretion. This
ensures legal certainty as envisaged by section 7(l) of the 2008 Companies Act which provides
that one of the purposes of the Act is to “provide a predictable and effective environment for the
efficient regulation of companies”.
9 4 4 1 The requirement of good faith

In South African derivative litigation, the plaintiff bears the onus to prove on a balance of
probabilities2944 that s/he is pursuing the purported derivative action in good faith,2945 that it is in
the best interests of the company to do so and that the proposed or continuing proceedings involve
the trial of a serious question of material consequence to the company. 2946 Mbethe v United
Manganese of Kalahari (Pty) Ltd2947 it was held that such evidentiary burden is “an important
safeguard and judicial oversight to prevent the abuse of the section to unduly harass a company’s
2941
Some of the issues raised in the demand might require some investigation before a company can decide whether
to litigate or reject the demand. If some key role players are unavailable for this investigation, the process can
take longer than the stipulated sixty days.
2942
Board deadlock paralyses its decision-making powers including the ability to determine whether or not to
commence or continue derivative litigation.
2943
By comparing with section 237(2)(a) of the Australian Corporations Act (Cth) No. 50 2001, which does not
specify any time frame, but simply states that it must be “probable” that the company will not itself bring the
proceedings, Cassim MF “The Statutory Derivative Action under the Companies Act of 2008: The Role of Good
Faith” 2013 SALJ 502 argues that the South African position is “stricter… unnecessarily rigorous, and could
foreseeably lead to practical difficulties”.
2944
for by the applicant’s counsel in Mbethe v United Manganese of Kalahari (Pty) Ltd 2016 (5) SA 414 (GJ) para
153.
2945
A bald assertion of good faith is insufficient; the plaintiff has to demonstrate her/his good faith.
2946
2947
2016 (5) SA 414 (GJ) para 91.
390
management for a collateral purpose”.2948 The onus also ensures that accountability and good
corporate governance can readily be enforced.2949
In Japan, when a shareholder makes an application commencing derivative litigation,2950 a

defendant may make a counter application to show that the application was instituted in bad
faith.2951 If the defendant applicant proves the existence of a prima facie case that shows that the
derivative litigation was instituted in bad faith, the court may exercise its discretion and order such
shareholder to provide reasonable security.2952 Unlike the other jurisdictions forming part of this
comparative study, Japan arguably has the weakest screening mechanisms for derivative actions.
In fact, Oda argues that the court’s order for a shareholder to provide security is the only filtering
apparatus in the South East Asian state.2953 The problem with an order of security for costs is that
its consideration may ultimately determine the outcome of the case because in some instances
plaintiffs are unable to provide the required security.2954 Failure to do so effectively leads to the
dismissal of a prospective derivative action.2955 This approach violates the spirit of the enhanced
accountability perspective of derivative litigation in that meritorious claims may go unaddressed
due to the inability of some prospective litigants to meet the requirement of security for costs. A
requirement that restricts meritorious claims from being heard by a court of law is not consistent
with the goal of promoting responsible management.
9 4 4 2 The best interests of the company and SLC disinterestedness

With respect to the USA, it is noteworthy that, unlike derivative plaintiffs in South Africa,
members of the SLCs are required to be both independent and disinterested.2956 In this respect, the
USA legal framework should be applauded for requiring members of the SLC to be both
disinterested and independent. South African law does not explicitly require a derivative applicant
2948
Mbethe v United Manganese of Kalahari (Pty) Ltd 2016 (5) SA 414 (GJ) para 91. In paragraph 168 of the same
case it was further explained that “[to] require an applicant wishing to institute a derivative action to demonstrate
his good faith would not serve to deprive persons seeking to protect the interests of the company against bad
corporate governance or discourage accountability but rather serve to protect the section against abuse”.
2949
2950
It should be remembered that in Japan, a derivative action is known as an action for pursuing liability. See article
847 of the Japanese Companies Act 86 of July 26 2005.
2951
2952
Article 847(7) and (8) of the Japanese Companies Act 86 of July 26 2005. See also Oda “Shareholder's Derivative
Action in Japan” 2011 ECFR 334 343.
2953
2954
2955
Ibid.
2956
Melton v Blau 2004 WL 2095317 (Conn. Super. Ct. Aug. 26 2004) 6. See also Scarlett 2008 Florida L. Rev. 598.
391
to be independent. Considering that South Africa has one of the most inclusive statutory derivative
actions framework in the sense that anyone can acquire the requisite legal standing through the
exercise of the court’s discretion, it is recommended that such derivative litigants ought to be
required to be independent and to act free of anyone’s influence and control. The requirement that
a derivative plaintiff be independent will make South Africa’s current derivative remedy scheme
even more effective in filtering out vexatious and frivolous actions. The requirement of
independence should not only apply to derivative litigants. The South African Companies Act
should also be amended to require directors to act independently.
9 4 4 3 Ratification and approval/authorisation of the impugned conduct

The discussion of ratification or authorisation of conduct or transaction sought to be challenged in
a derivative action only arose in the context of English and South African frameworks for
regulating such legal proceedings. While England retained the ratifiability principle under its
current derivative litigation model,2957 section 165(14) of the South African Companies Act,2958
makes it clear that ratification is not a bar to derivative litigation.2959 Furthermore, a South African
court is not obliged to take such ratification or approval into account. 2960 The South African
legislature should be commended for abolishing the requirement of shareholder ratification from
its contemporary derivative proceedings regulatory framework. As argued above, during the
common law derivative action era, English courts always had a difficult time differentiating
between ratifiable and non-ratifiable actions.2961 Section 239 of the 2006 UK Companies Act2962
might have codified this problem. It is recommended that other jurisdictions follow South Africa
in this regard. The requirement of shareholder ratification is unnecessarily burdensome on
derivative litigants in that the plaintiff faces a difficult feat to persuade the court that the conduct
complained of would not have been ratified by the shareholders. The requirement therefore has the
potential to discourage the institution of derivative claims. More so, not many prospective
2957
Section 139 of the UK Companies Act 2006.
2958
71 of 2008.
2959
See also Cassim FHI et al Contemporary company law 2 ed (2012) 777; Cassim MF “The Statutory Derivative
Action under the Companies Act of 2008: The Role of Good Faith” 2013 SALJ 502; Cassim MF “Judicial
Discretion in Derivative Actions under the Companies Act of 2008” 2013 SALJ 779; and Henochsberg on the
2960
Section 165(14)(b) provides that: “the court may take that ratification or approval into account in making any
judgement or order”. It is important to note that the legislature employed the word “may” which is generally
taken to imply the conferment of discretionary power upon a decision maker.
2961
2962
2006.
392
derivative claims will pass the ratification muster. As a result, this requirement is incompatible
with the enhanced accountability perspective of derivative litigation by virtue of placing an
unjustifiable burden of proof on prospective applicants.
Figure 8: Exercise of Judicial Discretion under the Enhanced Accountability

Perspective
95 FINAL CONCLUSION
The study presented in this thesis was focussed on four derivative remedy requirements namely-
the demand requirement, legal standing, the business judgment rule and the leave of court criteria.
The relevance and contribution of derivative litigation to the efficiency of a corporate governance
system is not debatable. Good corporate governance practices boost investor confidence.
393
Therefore, a strong system of corporate governance is a pull factor for both domestic and foreign
investment. It was also shown that the consequences of a weak corporate governance system do
not only affect the internal stakeholders of a company, but external stakeholders can also be
adversely impacted. To the extent that derivative litigation directly strengthens any system of
corporate governance, the remedy plays an important role in ensuring the economic well-being of
a nation.
The study has argued in favour of extending derivative litigation to non-shareholder stakeholders.
This has led to its development and articulation of the enhanced accountability perspective of
derivative litigation according to which the procedural and substantive requirements for
commencing or continuing derivative litigation should neither be too restrictive nor too relaxed.
Neither of these extremes is consistent with the promotion of good corporate governance. The
enhanced accountability perspective of the derivative action remedy is all about establishing
common ground between the two above-mentioned extremes. The perspective advocates viewing
and treating the derivative remedy as an indispensable corporate governance tool that enhances
responsible management of corporate affairs. A historical account of derivative proceedings in
chapter two of this thesis revealed that the main policy objective behind the remedy was to limit
strike suits. Thus, it was primarily intended to serve as an effective filter. This underlying policy
goal was a result of the circumstances prevailing at that time where strike suits were widespread.
Consequently, the substantive and procedural requirements of the remedy were justifiably onerous.
On the other hand, an exploration of the major corporate governance debacles one over the last
twenty years, in chapter one, showed that directorial misconduct was the general root cause. Such
directorial wrongdoing did not affect shareholders only. Rather, the interests of all the company
stakeholders were injured, albeit, in varying degrees. Therefore, it is submitted that, in the same
way that derivative litigation was centred on limiting strike suits more than a century ago,
contemporary company law problems justify and call for a shift in formulating the rules pertaining
to the application of the remedy as a vital tool for ensuring responsible management through the
enhanced accountability model.
However, although the study advocates for an enhanced accountability model, it cannot also be
denied that the soundness and efficacy of a jurisdiction’s corporate governance system is not
necessarily determined by a specific remedy, in this case, the derivative action. This is evident
394
when one considers the case of England. As shown above, the English derivative scheme is unique
in that it does not make use of the conventional demand requirement and lacks a formal business
judgment rule. In addition, England also employs a unique two-stage approach which commences
with the popular prima facie requirement. Although the negative consequences of all these rules
have been shown, it does not necessarily translate to the English corporate governance system
being the weakest of the four jurisdictions covered in this study. However, any significant
improvement in one aspect of the corporate governance system directly advances the effectiveness
and credibility of the whole system. This was the core of the study presented in this thesis.
395
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DISSERTATIONS
Esser Recognition of Various Stakeholder Interests in Company Management (Unpublished LLD

thesis, University of South Africa, 2008).
Havenga Fiduciary Duties of Company Directors with Specific Regard to Corporate Opportunities
(Unpublished LLD thesis, University of South Africa, 1995).
Leach The Correct Understanding of the Business Judgment Rule in Section 76(4) of the
Companies Act 71 of 2008: Avoiding the American Mistakes (Published Masters’ thesis, University
of Cape Town, 2014).
Lombard Directors’ Duties to Creditors (Unpublished LLD thesis, University of Pretoria, 2006).
Smit The Application of the Business Judgment Rule in Fundamental Transactions and Insolvent
Trading In South Africa: Foreign Precedents and Local Choices (LLM-thesis, UWC, 2016).
INAUGURAL LECTURES
Abugu JOE “The Monster Theory: Setting the Boundary for Corporate Financial Malpractice” An
Inaugural Lecture delivered at the University of Lagos Main Auditorium on Wednesday, 8th April
2015.
LEGISLATION AND REGULATIONS
Australia
Australian Corporations Act (Cth) No. 50 2001.
Canada
Canada Business Corporations Act RSC 1985.
China
China Company Law 2013.
German
German Commercial Code 1897
German Stock Corporation Act (Aktiengesetz) 1965.

425
Japan
Japanese Commercial Code Act No. 48 of 1899
The Companies Act 86 of July 26 2005.
Japanese Constitution 1946.
The Japanese Corporate Governance Code 2015.
The Law Concerning Civil Litigation Costs and other Matters No. 40 of 1971 as amended by Law
No. 82 of 1982.
New Zealand
New Zealand Companies Act of 1993.
South Africa
The Banks Act 124 of 1993.
The Broad-Based Black Economic Empowerment Act 53 of 2003.
The Companies Bill B40-2010.
The Companies Act 61 of 1973.
The Companies Act 71 of 2008.
The Companies Regulations 2011.
The Competition Act 89 of 1998.
The Constitution of the Republic of South Africa 1996.
The Consumer Protection Act 68 of 2008.
The Financial Markets Act 19 of 2012.
The Income Tax Act 58 of 1962.
The National Environmental Management Act 107 of 1998.
426
The Promotion of Access to Information Act 2 of 2000.
The Public Finance Management Act 1 of 1999.
United Kingdom
The Amended Civil Procedure Rules 2007.
The Companies Act 2006.
The Covent Garden Act 1828.
The Insolvency Act 1986.
The United Kingdom Corporate Governance Code 2016.
United States of America
The California General Corporation Law 1982.
Sarbanes Oxley Act of 2002.
The Delaware General Corporation Law.
The New York Business Corporation Law 1963.
The Pennsylvania Business Corporation Law 1988.
Model Business Corporations Act 1984 (2016 Revision).
COURT RULES, PRINCIPLES AND LISTING REQUIREMENTS
The American Law Institute’s (ALI) Principles of Corporate Governance 1994.
The Federal Rules of Civil Procedure.
The Johannesburg Stock Exchange (JSE) Listing Requirements
CASE LAW
Australia
ASIC v Rich 2009 NSWSC 1229.
427
Hurley v BGH Nominees Pty Ltd [1982] 1 ChD.
In Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler [1994] FCA 332; 51 FCR 425; 122
ALR 531.
Kinsela v Russell Kinsela (Pty) Ltd 1986 4 NSWLR.
Ragless v IPA Holdings Pty Ltd (in liq) 2008 65 ACSR 700.
Swansson v RA Pratt Properties Pty Ltd 2002 42 ACSR 313.
Sycotex Pty Ltd v Baseler 1994 122 ALR 531.
Walker v Wimborne 1976 137 CLR.
Canada
BCE Inc v 1976 Debenture holders 2008 69 (SCC).
Cook v Deeks 1916 1 AC 554.
Pente Investment Management Ltd v Schneider Corp. (1998) 42 O.R (3d) 177.
China
Hantang Co. v Chen Shihwa 2006.
Japan
Azai v Iwasaki (Nikko Securities) 121 Shiryoban Shouji Houmu 149 1994.
Mizuno v Ariyoshi (Mitsui Mining) 1194 Hanrei Jiho 33 1986.
Malaysia
Perak Integrated Networks Services Sdn Bhd v Urban Domain Sdn Bhd W-02 (NCC) (W)-2442-
11/2013.
New Zealand
Nicholson v Permakrafi (NZ) Ltd (in liq) 1985 3 ACLC 453.
428
Singapore
Teo Gek Luang v Ng Ai Tiong [1999] 1 SLR 434.
Waddington Ltd v Chan Chun 2008 HKEC 1948.
South Africa
Brümmer v Minister for Social Development 2009 6 SA 323 (CC).
CIR v Richmond Estates (Pty) Ltd 1956 1 SA 602 A.
Clutcho (Pty) Ltd v Davis 2005 3 SA 486 (SCA).
Cooper v Boyes 1994 4 SA (C) 535.
CSARS v Stepney Investments (Pty) Ltd 2015 ZASCA.
Da Silva v CH Chemicals (Pty) Ltd 2008 6 620 (SCA).
Financial Mail (Pty) Ltd (1990) v Sage Holdings Ltd 1993 (AD)
Investigating Directorate: Serious Economic Offences v Hyundai Motor Distributors (Pty) Ltd: In
re Hyundai Motor Distributors (Pty) Ltd v Smit NO 2001 1 SA 545 (CC).
Larrett v Coega Development Corporation (Pty) Ltd ECD 2639/2013.
Larrett v Coega Development Corporation (Pty) Ltd and others 2019 (3) SA 510 (ECG).
Lewis Group Limited v Woollam 2016 October ZAWCHC.
Lewis Group Limited v Woollam (ZAWCHC) 15 November 2016.
Lewis Group Limited v Woollam (ZAWCHC) 2017.
Mbethe v United Manganese of Kalahari (Pty) Ltd 2016 (5) SA 414 (GJ).
Mbethe v United Manganese of Kalahari (Pty) Limited 2017 (6) SA 409 (SCA).
Midi Television (Pty) Ltd t/a E-TV v DPP (WC) 2007 5 SA 540 (SCA).
Mouritzen v Greystones Enterprises (Pty) Ltd 2012 5 SA 74 (KZD).
429
Nova Property Group Holdings v Cobbett 2016 3 All SA 32 (SCA).
Phillips v Fieldstone Africa (Pty) Ltd 2004 3 SA 465 (SCA)
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Derivative actions in contemporary company law: A comparative assessment from an

enhanced accountability perspective

A Thesis Submitted in Fulfilment of the Requirements for the Degree of

DOCTOR OF LAWS (LL.D)

FRIEDRICH CLEMENCE HAMADZIRIPI

In the Nelson R. Mandela School of Law

Supervisor: Professor Patrick Osode

Date: 31 August 2020

The juristic nature of a company makes it vulnerable to abuse, especially by directors. It is

Derivative actions, enhanced accountability perspective; litigation, historical analysis, legal

My sincere appreciation is extended to my supervisor and promoter Professor Patrick C. Osode

Figure 1: Historical development of derivative actions in England

NAV Net Asset Value

Introduction to the study

It is important to note that internal stakeholders such as directors innocent of wrongdoing,

12 DERIVATIVE REMEDY FEATURES

 Develop and apply an enhanced accountability perspective86 of derivative actions with a

16 SCOPE OF THE STUDY

The general classification is between qualitative and quantitative research methodologies.170

19 STRUCTURE OF THE STUDY

The genesis, development and transplantation of derivative actions

22 REPRESENTATIVE LITIGATION AS THE PRECURSOR

However, notwithstanding the presence of similar circumstances, the court in Moffat v

Regardless of such judicial inconsistency, the interests of justice continued to grow in

23 SHAREHOLDER ACTIVISM AGAINST MANAGEMENT MISCONDUCT

24 THE PROPER PLAINTIFF RULE

25 EXCEPTIONS TO THE PROPER PLAINTIFF RULE

2 5 2 Requirement of special majority vote

2 5 3 Violation of personal or individual rights

2 5 4 Fraudulent conduct affecting the minority

Therefore minority shareholders should be allowed to sue in instances of fraud by a controlling

The court dismissed the defendants’ arguments and held that;

2 6 1 Derivative remedy in England

2 6 3 Derivative claims in Japan

2 6 4 Derivative actions in South Africa

The enhanced accountability perspective

32 THE CONCEPT OF ACCOUNTABILITY

33 THE ENHANCED ACCOUNTABILITY PERSPECTIVE OF DERIVATIVE

Figure 2: Derivative Actions in the Enhanced Accountability Perspective

Information asymmetry579 is a major barrier to stakeholders’ invocation of derivative suits in other

3 4 4 Equilibrium in substantive and procedural requirements

3 4 5 Internal limitations to avoid multiplicity of suits

 any prospective applicant/plaintiff’s standing requirements,

3 4 7 Directors’ fiduciary duty owed only to the company

Corporate governance: Pertinent conceptual ideas and institutional arrangements

Immediately following this introduction is a descriptive analysis of the principle of corporate

4 2 1 Separation of ownership and control

4 2 3 Strategic players and issues

The appeal was with the leave of the court a quo.

4 2 3 6 Derivative litigation defendants

4 2 4 Primary beneficiaries of directors’ fiduciary duties

4 2 8 Double or multiple derivative actions

“where a wrong is perpetrated on Company S, a shareholder in Company S may apply to institute a

43 SUMMARY AND PRELIMINARY CONCLUSION

The requirement of legal standing in derivative actions

A historical account of the development and assimilation of derivative litigation presented in

52 GENERAL REQUIREMENTS FOR LEGAL STANDING

53 LEGAL STANDING IN DERIVATIVE LITIGATION

54 THE CONTEMPORANEOUS OWNERSHIP RULE