The Statutory Derivative Action Under the Companies Act of 2008: The Role of Good Faith

Abstract

The new statutory derivative action under the South African Companies Act 71 of 2008 is a paramount protective measure or weapon for minority shareholders, which will be very useful in good corporate governance and in policing boards of directors. The court is entrusted in terms of s 165 with a pivotal role as the gatekeeper, and has a crucial screening function in the exercise of its discretion to grant leave to a minority shareholder (or other applicant) to institute derivative litigation to seek redress for the company, when those in control of it improperly fail or refuse to do so. The approach that the courts adopt to the application of the three guiding criteria in s 165(5)(b) for the exercise of their discretion — particularly the open-textured criterion of ‘good faith’ — is a matter of supreme importance that will have a major impact on the effectiveness (or lack thereof) of the new statutory derivative action. The focus of this article is this particularly elusive criterion of good faith, and its many nuances, interpretations and applications in relevant foreign jurisdictions. A framework for good faith in South African law is proposed, and further fundamental facets of good faith are explored, with reference both to existing principles in our common law and valuable lessons gleaned from other comparable jurisdictions such as Canada, Australia, New Zealand and the United Kingdom.

Keywords: derivative action, statutory derivative action, good faith