Derivative actions in contemporary company law: A comparative assessment from an enhanced accountability perspective

The company is one of the most popular organisational vehicles for conducting business. The very nature of the company as a juristic person is attractive. The principle of legal personality entitles a company to act as a legal entity separate from its members. The principle was laid down in the landmark decision of Salomon v Salomon 1897 AC 22 (HL). This decision shows that a company is a full player in the legal arena. It has standing before the courts of law and is the proper plaintiff for wrongs done to it, not any of the stakeholders who may also be affected by the wrongdoing. However, it has to be noted that a company is just an artificial person. It is a fictitious being, a juristic person and a creature of statute. Therefore, even though a company has the capacity to acquire rights which can be enforced in a court of law and obligations which another legal subject can enforce against it, a company cannot in all respects be equated with a human person, for it has no physical substance. Inevitably, a director must act as its hands, brain, legs, mouth and eyes. Regardless of how financially strong a company can be, its juristic nature places all its resources and wealth at the mercy of its directors and officers. A company can neither protect itself against wrongdoing, vindicate nor enforce its rights without its representative directors and officers. If the wrongdoing faction in a company comprises of directors who are required to act in the best interests of the company, then who will enforce the company’s rights? The juristic nature of a company makes it vulnerable to abuse, especially by directors. It is important to note that internal stakeholders such as directors innocent of wrongdoing, employees and shareholders are not the only ones who stand to lose from the failure of corporate governance. External stakeholders’ interests too are vulnerable to abuse as a result of a company being abused by its leaders. There is, therefore, a need for a mechanism that controls abuse of power especially by agents of a company. Such a mechanism is critical to accountability as it protects the company from director malfeasance while promoting adherence to corporate governance principles in general. Also, successful derivative claims play a significant role in securing compensation for the company. Seeing that a company can be injured by both internal and external stakeholders, it is imperative that there be an effective and efficient mechanism that protects both the company and its owners without deterring entrepreneurship and stakeholder participation. Proceeding from an iii accountability enhancement perspective, this study undertakes a comparative assessment of the derivative action as a mechanism that created to deal effectively with the mischief revealed in the above paragraphs. For a complainant to be able to invoke the derivative action for relief, he or she must comply with certain requirements. Those requirements will be examined in greater detail with respect to the American, South African, English and Japanese laws. Empirical research has concluded that directors’ exposure to derivative claims remains largely theoretical. The critical question is whether the requirements for commencing or continuing a derivative action are too onerous. Although the remedy is available in theory, its shortcomings appear to make derivative actions almost impossible to invoke in practice. It has been argued that the greatest impediment to a derivative action by minority shareholders arises from the practical barriers to the commencement of derivative proceedings. With respect to the USA, it has further been demonstrated that there is a positive correlation between the significant decline in the importance of derivative litigation and the creation of additional legal hurdles in breach of directors’ duties cases. This study seeks to examine the various shortcomings of the remedy and suggest ways to make it less onerous as well as increase its availability to more stakeholder