The Derivative Action as a Means to Promote the Objectives of Section 7(j) of the Companies Act 71 of 2008

Abstract

The Companies Act 71 of 2008 seeks to enhance corporate governance in South Africa by promoting transparency, accountability, and efficiency in the management of companies. Section 7(j) of the Companies Act underpins these principles, aiming to ensure responsible management of companies and the protection of stakeholder interests. One of the mechanisms designed to achieve these objectives is the derivative action under s165 of the Companies Act, 71 of 2008. It is one of the provisions of the Companies Act that facilitates the efficient and responsible management of a company by holding directors accountable to the company and its stakeholders. This is achieved through making the derivative process more accessible, with fewer impediments placed on the applicant and importantly, by the expansion of the legal standing of potential applicants to include not only the shareholders but also the directors, employees’ representatives. Further, the Companies Act confers discretion on the courts to authorise any other person to bring the litigation on behalf of the company where the legal interests of such company suffer. This research considers whether these mechanisms of the derivative action as prescribed by s165 of the Companies Act,71 of 2008 do sufficiently bolster and promote the objectives of s7(j) of the Companies Act, 71 of 2008. It is argued that the courts have the overarching responsibility that this remedy is used to further the legal interest of the company and not further ulterior motives. The paper concludes that whilst there are some deficiencies in s165 of the Companies Act, including, the issue of costs such as the provision relating to security for costs, access to information and an overly complex mechanism that may hamper the effectiveness of the remedy, overall, s165 of the Act promotes the objectives of s7(j) of the Act.