A comparative analysis of the derivative litigation proceedings under the Companies Act 61 of 1973 and the Companies Act 71 of 2008

• Jurisdiction: South Africa
• Date: 15 August 2019
• Pages: 290-305
• Author: Lindi Coetzee
• Citation: 2010 Acta Juridica 290
• Published date: 15 August 2019

A comparative analysis of the derivative

litigation proceedings under the

Companies Act 61 of 1973 and the

Companies Act 71 of 2008

LINDI COETZEE*

Very little protection was afforded to the protection of minority rights in the

common law of companies. The motivation for the lack of protection was that

a company is a legal person that exists separate from its members. The proper

plaintiff principle as mentioned in Foss v Harbottle provides that the company is

the proper plaintiff that has to institute legal action where a wrong has been

committed against the company. Both the common law and the Companies

Act 61 of 1973 provided exceptions to the proper plaintiff rule. The common

law provided for a common-law derivative action while section 266 of the

Companies Act 61 of 1973 provided for a statutory derivative action. Deriva-

tive actions are provided for in section 165 of the Companies Act 71 of 2008.

This article compares derivative action litigation proceedings under the 1973

Companies Act with the provisions in the new Companies Act 71 of 2008.

The article analyses the unique nature of both the common-law and the

statutory derivative actions. It draws a comparison between the statutory

derivative action contained in section 266 of the Companies Act 61 of 1973

and section 165 of the Companies Act 71 of 2008.

I INTRODUCTION

In the common law of companies very little protection was afforded to

the protection of minority rights. The motivation for the lack of protec-

tion was that a company is a legal person that exists separate from its

members. In Salomon v Salomon & Co Ltd

1

the court held that an

incorporated company must be treated like any other independent

person. It is the bearer of its own rights and liabilities. In Foss v Harbottle

2

the court held that the majority of the members in a company have the

power to bind the minority and that the courts will refuse to interfere in

the running of the company while the majority is acting lawfully.

3

Companies are run according to democratic principles and when a person

* B Juris LLB (UPE) LLM (UNISA), Senior Lecturer, Department of Mercantile Law,

Nelson Mandela Metropolitan University.

1

[1897]AC 22 (HL).

2

(1983) 2 Hare 461; 67 ER 189 203–4.

3

HS Cilliers et al Cilliers & Benade Corporate Law 3 ed (2000) 296.

290

2010 Acta Juridica 290

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becomes a member of the company such a person agrees to be bound by

the decisions of the majority.

4

Another principle which is based on the rules mentioned in Foss v

Harbottle is the proper plaintiff principle. According to this principle the

company is the proper plaintiff that has to institute legal action where a

wrong has been committed against the company.

5

The members of the

company are, as a general rule, not allowed to institute an action to

recover damages on behalf of the company. A problem arises where the

wrongdoers are the persons in control of the company. It is highly

unlikely that they will approve a decision to institute legal action against

themselves to recover the damages that the company has suffered. Both

the common law and the Companies Act 61 of 1973 provided exceptions

to the proper plaintiff rule. The common law provided for a common-

law derivative action while s 266 of the Companies Act 61 of 1973

provided for a statutory derivative action. Derivative actions are provided

for in s 165 of the Companies Act 71 of 2008. This article will compare

derivative action litigation proceedings under the 1973 Companies Act

with the provisions in the new Companies Act 71 of 2008.

II THE RULES IN FOSS v HARBOTTLE

The court in Sammel v President Brand Gold Mining Co Ltd

6

held that when

a person becomes a shareholder in a company, that person undertakes to

be bound by the decisions of the majority, even when these decisions

adversely affect his rights as a shareholder (also referred to as majority

rule). The general principle is that the courts will not interfere in the

internal management of a company.

7

In Foss v Harbottle

8

the court held

that a company and its members are not the same thing for purposes of

instituting an action to recover damages suffered by the company. Where

a wrong has been committed against the company the company must

institute an action in its own name against the wrongdoers.

9

According to

Griggs

10

the rules in Foss v Harbottle promoted the interests of the legal

person to the detriment of the minority shareholder.

4

Hahlo’sSouth African Company Law through the Cases 6 ed by J T Pretorius et al (1999) 380;

Cilliers (n 3).

5

HS Cilliers op cit (n 3) 296–7; Wallersteinerv Moir (No 2); Moir v Wallersteiner and Others (No

2) [1975] 1 All ER 849 (CA) at 857d–f; Pretorius (n 4) 382; LGriggs ‘The Statutory Derivative

Action: Lessons that may be learnt from the Past!’ (2002) 4 University of Western Sydney Law

Review para 1.2.

6

1969 (3) SA629 (A) 678.

7

Carlen v Drury (1812) 1 V 7 B 154; 35 ER 61at 62; Yendev Orlando Coal Distributors (Pty)

Ltd 1961 (3) SA314 (W) 316; Maynard v Off‌ice Appliances (SA) (Pty) Ltd 1927 WLD 290; Levin v

Felt and TweedsLtd 1951 (2) SA 401 (A) 414–15; Pretorius (n 4) 380–1.

8

Foss v Harbottle (n 2) 491; Pretorius (n 4) 383.

9

Cilliers (n 3) 297; Edwards v Halliwell [1950] 2All ER 1064 (CA) 1066; Pretorius (n 4) 382.

10

Griggs (n 5) para 2.1.

291DERIVATIVE LITIGATION PROCEEDINGS

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