The shareholders of a company entrust the daily management of the company to a group of experts, namely directors. But as the owners of a company, shareholders maintain certain means of influence over the management of the company in order to protect the value of their shares and their right to receive dividends. Normally their influence is exercised through the expression of opinions and the casting of votes at shareholders’ general meetings. However, there are other means of influence and one of them is the derivative action. It is ‘derivative’ as the party bringing the action does not have the right to sue, but such a right is ‘derived’ from that of the company. It is an action against directors brought by a shareholder on behalf of the company. Where a company has incurred damage due to a breach of duty by a director, the company is entitled to take an action against the director, but is usually reluctant to do so. The derivative action enables shareholders to enforce directors’ liability on behalf of the company.
Derivative action’ is defined as a(corporate) action by which someone enforces a right that belongs to a company for and on behalf of the company. To provide further clarity to this broad definition, we can identify six features that are normally present in derivative actions:
(1) harm is done to the company;
(2) the harm is normally inflicted by someone who owes a duty to the company;
(3) the organ of the company that is legally empowered to rectify the harm by filing an action for relief in the name of the company has failed to fulfil its pertinent duties, most often because the person with effective control of the organ is the same person who caused the harm;
(4) an exceptional delegation of the company’s power to enforce its legal rights is given to another legal person (the ‘derivative plaintiff’) for the purpose of enforcing the company’s right through a derivative action;
(5) the cost of the derivative action is prima facie borne by the derivative plaintiff; and
(6) relief from a successful derivative action flows directly to the company(not to the derivative plaintiff).
A derivative action is not a qui tam pro corporatus quam pro se ipso. The shareholder is not demanding a right in his or her name as well as the corporation’s; but rather a right solely in the corporation’s name.
Download – Comparative Analysis of Instituting Derivative Actions by Ijeoma Ucheibe
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