A derivative action is an action which can be brought on behalf of another. A derivative action is a remedy which is effective and which is unfortunately sometimes overlooked. The derivative action was only available to shareholders in terms of the 1973 Act. The ambit of interested parties has been extended in the Companies Act No. 71 of 2008 (“Act“) to directors, officers, and trade unions. Even employees can bring a derivative action against a company.

Section 165 of the Act allows an interested party to apply to court for leave to bring or continue legal proceedings on behalf of the company where the company has failed to take the necessary steps in terms of a demand served upon it.

In exceptional circumstances it is allowed that an interested company can apply to court to institute proceedings without demanding action form the company first.

The enhanced derivative action remedy will advance good corporate responsibility and will promote stakeholder activism.

In comparison with the United States and the United Kingdom, the provisions of the South African derivative action are wide on face value and it will be interesting to see how the court would interpret these terms.

29 November 2011