In the realm of South African corporate law, derivative actions represent a crucial legal mechanism, allowing individuals other than the company itself to initiate legal action on its behalf. This concept is particularly relevant when a company, as a separate legal entity, suffers wrongdoing but does not take action independently.

Understanding Derivative Actions

The General Rule in Corporate Litigation

• Company as a Litigant: Typically, if a company is wronged, it must act to address the wrong, given its status as a separate legal entity with its rights and obligations.

The Exception: Derivative Actions

• Enabling Third-Party Action: Derivative actions allow someone other than the company, such as shareholders or directors, to take legal action to protect the company's interests.

Legal Framework Under the Companies Act

Section 165 of the Companies Act

• Abolition of Common Law Doctrine: Section 165 replaces the common law derivative action with a statutory framework.

• Key Requirements for Derivative Action:

  • Submission and service of a Section 165 demand on the company.

  • Company’s refusal or failure to comply with the demand.

  • Acting in good faith.

  • Serious question of material consequence to the company.

  • Action being in the best interests of the company.

The Process and Implications

• Investigation and Decision: Post-demand, the company must decide on appropriate legal action or refuse the demand.

• Court Application for Leave: If the company refuses to act, the individual making the demand can seek court permission to proceed on the company's behalf.

Seeking Legal Advice

Understanding and navigating derivative actions require expert legal guidance. Our law firm offers comprehensive assistance in this area, from advising on the viability of a derivative action to representing clients in court proceedings.

Conclusion

Derivative actions provide an essential avenue for addressing corporate wrongs in cases where a company is reluctant or unable to act. Familiarity with Section 165 of the Companies Act is crucial for anyone considering this legal route. For more information on derivative actions or any related corporate law inquiries, please contact our law firm. Our experienced team is ready to provide expert advice and representation.