The statutory derivative action under the Companies Act of 2008: guidelines for the exercise of the judicial discretion

Abstract

Includes bibliographical referencesSection 165 of the Companies Act 71 of 2008 introduces the new statutory derivative action. The section confers a pivotal function on the courts as gatekeepers to the derivative action, with an important filtering or screening function to weed out applications for derivative actions that are frivolous, vexatious or without merit. The vital judicial discretion to grant leave to an applicant to bring a derivative action entails a tension between two equally important policy objectives. A proper balance between these two underpinning policy objectives depends on the appropriate judicial interpretation and application of the three vague, general and open-textured criteria or gateways for the grant of leave to institute a derivative action. The courts have been entrusted by s 165 to flesh out the details, the contours, the ambit and the scope of these criteria. This crucially gives the courts a dominant and a decisive role in shaping the effectiveness of the new statutory derivative action. This thesis makes an original contribution to knowledge in three main respects. First, this thesis focuses on the three guiding criteria for leave, and their many nuances, interpretations and applications in certain foreign jurisdictions that have exerted an influence on the provisions of s 165. Based on experience garnered from Australian, Canadian and New Zealand law, as well as the United Kingdom and the USA, guidelines are suggested for the approach that the South African courts should adopt to the three preconditions for a derivative action. Secondly, it is submitted that the real weakness in s 165 lies in the rebuttable presumption in s 165(7) and (8), which contains a fatal flaw that renders the remedy defective and calls for legislative amendment. Pending such amendment, proposals are suggested for the proper judicial approach in the meantime to the troublesome presumption. These proposals are supported by both reasoned argument and original research on experience in certain foreign jurisdictions, particularly the USA. Thirdly, and equally importantly, a framework is suggested in this thesis for the proper exercise of the judicial discretion to make orders of costs, which is known to have plagued minority shareholders wishing to bring derivative proceedings against miscreant directors who have wronged the company