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Companies Act, 2008 (Act No. 71 of 2008)

Chapter 7 : Remedies and Enforcement

Part B : Rights to seek specific remedies

165. Derivative actions

 

 

1) 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.

 

2) 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—
a) is a shareholder or a person entitled to be registered as a shareholder, of the company or of a related company;
b) is a director or prescribed officer of the company or of a related company;
c) is a registered trade union that represents employees of the company, or another representative of employees of the company; or
d) 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.

 

3) 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.

 

4) If a company does not make an application contemplated in subsection (3), or the court does not set aside the demand in terms of that subsection, the company must—
a) appoint an independent and impartial person or committee to investigate the demand, and report to the board on—
i) any facts or circumstances—
aa) that may gave rise to a cause of action contemplated in the demand; or
bb) that may relate to any proceedings contemplated in the demand;
ii) the probable costs that would be incurred if the company pursued any such cause of action or continued any such proceedings; and
iii) whether it appears to be in the best interests of the company to pursue any such cause of action or continue any such proceedings; and
b) within 60 business days after being served with the demand, or within a longer time as a court, on application by the company, may allow, either—
i) initiate or continue legal proceedings, or take related legal steps to protect the legal interests of the company, as contemplated in the demand; or
ii) serve a notice on the person who made the demand, refusing to comply with it.

 

5) 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—
a) 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); and
b) 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.

 

6) In exceptional circumstances, a person contemplated in subsection (2) may apply to a court for leave to bring proceedings in the name and on behalf of the company without making a demand as contemplated in that subsection, or without affording the company time to respond to the demand in accordance with subsection (4), and the court may grant leave only if the court is satisfied that—
a) the delay required for the procedures contemplated in subsections (3) to (5) to be completed may result in—
i) irreparable harm to the company; or
ii) substantial prejudice to the interests of the applicant or another person;
b) 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
c) that the requirements of subsection (5)(b) are satisfied.

 

7) A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that—
a) the proposed or continuing proceedings are by—
i) the company against a third party; or
ii) a third party against the company;
b) the company has decided—
i) not to bring the proceedings;
ii) not to defend the proceedings; or
iii) to discontinue, settle or compromise the proceedings; and
c) all of the directors who participated in that decision—
i) acted in good faith for a proper purpose;
ii) did not have a personal financial interest in the decision, and were not related to a person who had a personal financial interest in the decision;
iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and
iv) reasonably believed that the decision was in the best interests of the company.

 

8) For the purposes of subsection (7)—
a) a person is a third party if the company and that person are not related or inter-related; and
b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company.

 

9) If a court grants leave to a person under this section—
a) the court must also make an order stating who is liable for the remuneration and expenses of the person appointed;
b) the court may vary the order at any time;
c) the persons who may be made liable under the order, or the order as varied, are—
i) all or any of the parties to the proceedings or application; and
ii) the company;
d) if the order, or the order as varied, makes two or more persons liable, the order may also determine the nature and extent of the liability of each of those persons; and
e) the person to whom leave has been granted is entitled, on giving reasonable notice to the company, to inspect any books of the company for any purpose connected with the legal proceedings.

 

10) At any time, 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, or in respect of an application for leave under this section:
a) The person who applied for or was granted leave;
b) the company; or
c) any other party to the proceedings or application.

 

11) An order under this section may require security for costs.

 

12) At any time after a court has granted leave in terms of this section, a person contemplated in subsection (2) may apply to a court for an order that they be substituted for the person to whom leave was originally granted, and the court may make the order applied for if it is satisfied that—
a) the applicant is acting in good faith; and
b) it is appropriate to make the order in all the circumstances.

 

13) An order substituting one person for another has the effect that—
a) the grant of leave is taken to have been made in favour of the substituting person; and
b) if the person originally granted leave has already brought the proceedings, the substituting person is taken to have brought those proceedings or to have made that intervention.

 

14) If the shareholders of a company have ratified or approved any particular conduct of the company—
a) the ratification or approval—
i) does not prevent a person from making a demand, applying for leave, or bringing or intervening in proceedings with leave under this section; and
ii) does not prejudice the outcome of any application for leave, or proceedings brought or intervened in with leave under this section; or
b) the court may take that ratification or approval into account in making any judgment or order.

 

15) Proceedings brought or intervened in with leave under this section must not be discontinued, compromised or settled without the leave of the court.

 

16) For greater certainty, the right of a person in terms of this section to serve a demand on a company, or apply to a court for leave, may be exercised by that person directly, or by the Commission or Panel, or another person on behalf of that first person, in the manner permitted by section 157.