Business Enterprises Law - Remedies and Enforcement Notes
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Module
LLB Law (BEL41A0)
Institution
University Of Johannesburg (UJ)
Book
Companies and Other Business Structures
This document covers relevant questions such as
1. Who can make use of the remedy?
2. In what circumstances can they use the remedy, and what steps/requirement need to be complied
with?
3. What are the powers of the court?
Unit 11 (Remedies and enforcement)
Relevant questions
1. Who can make use of the remedy?
2. In what circumstances can they use the remedy, and what steps/requirement need to be complied
with?
3. What are the powers of the court?
Remedies against directors who have abused their position
The remedies against directors who have abused their position include:
1. the right to apply for an order of delinquency or probation
2. giving certain persons the right to institute an action on behalf of the company (Derivative action)
It is interesting to note that in terms of s 165, a variety of stakeholders (not just shareholders) can bring
an action:
1. a director,
2. a representative of employees (a registered trade union), or
3. any other person with leave of the court
Derivative action – common law
Action brought on behalf of the company – the right to proceed is derived from the company
Under the common law, it was accepted that the company itself must act to have a wrong committed
against it redressed.
In Foss v Harbottle, the court held that when a company is wronged by its directors, it is only the
company that has standing to sue – not shareholders of the company. In effect, the court established the
proper plaintiff rule, which states that a wrong done to the company may be vindicated by the company
alone. The company itself must be the plaintiff, and not shareholders of that company.
However, it is clear that a company is unlikely to act where the wrongdoers control the company,
because those in control are unlikely to act against themselves. The common law, therefore, accepted
that in certain circumstances the shareholders of a company could institute court proceedings on behalf
of the company. The action was referred to as a derivative action because the member derived the right
to bring the action from the right of the company. The same facts may also give rise to a personal
remedy to enforce the member’s individual rights against the company or fellow shareholders.
Common law exception
This applies where shareholders could act to protect the company, i.e., bring a derivative action.
It had 3 elements:
1. Where the wrong done to the company is an unratifiable wrong, and
2. the company cannot or will not institute action, and
3. the wrongdoers are in control of the company
This remedy was unsatisfactory because
Difficult for shareholder to access to information held by company
If other shareholders ratify the wrong, then the action cannot proceed
The shareholder could personally incur substantial legal costs while attempting to obtain a remedy for
the company.
The plaintiff shareholder often had to launch the proceedings while the required information was in
the hands of the company and the wrongdoers.
, It was unclear as to precisely what conduct could or could not be ratified by a simple majority, so the
scope of the remedy was unclear.
Reported cases also failed to distinguish clearly between the derivative action and a member
instituting proceedings to enforce the member’s individual rights (as opposed to the company’s
rights).
Derivative action – statutory law (s 165)
In light of these problems, a statutory derivative action as provided for in s 165 is a more certain
alternative to the common-law remedy.
The common law derivative action was abolished by s 165. Now the only option is s 165 derivative
action.
It can be used to protect any legal interest of the company, regardless of who infringed those interests.
Section 165 provides that the persons who may use the statutory derivative action are:
1. Shareholder (or shareholder of a related company)
2. Director/officer (or shareholder of a related company)
3. Registered trade union or employee representative
4. Any person granted leave by the court on the basis that derivative action will simultaneously protect
a legal right of the applicant
5 Steps for Derivative action
The following five steps need to be taken to use the s 165 derivative action:
Step 1: Applicant must serve a demand on the company requiring the company to commence legal
proceedings in the interests of the company
Step 2: Company must appoint an impartial person or committee to make a recommendation to the
board as to whether pursuing legal proceedings is in the best interest of the company
Step 3: Within 60 days of receiving the demand the company must either initiate proceedings or
serve a notice on the person making the demand that the company refuses to comply with the
demand.
Step 4: If the refusal is served the person who made the demand can then approach a court to apply
for leave to bring proceedings
Step 5: To grant such leave the court must be satisfied of four elements:
1. that the company has failed to comply with the statutory steps or accepted an inadequate report or
refused to comply with the demand
2. that the applicant is acting in good faith
3. that the trial will involve a matter that is material to the company
4. it is in the best interests of the company that leave be granted.
Statutory remedies to protect rights
The statutory remedies available to shareholders to protect their own rights include:
1. relief from oppressive or prejudicial conduct in terms of s 163;
2. dissenting shareholders’ appraisal rights in terms of s 164, which are the rights of dissenting
shareholders to require a company to pay fair value in exchange for their shares in certain
circumstances; and
3. additional relief to protect rights of securities holders in terms of s 161 in the form of declaratory
orders or other appropriate relief
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