Company law revision question and answer

The rule in Foss v Harbottle establishes the principle that where a wrong is done to the company, the proper plaintiff is the company itself. However, where the wrong is done by the company directors, it may be impossible for the company to sue. In such a case, a derivate action may be the only option.

a) Explain what is meant by “derivative action”. (10 marks)

b) Describe the conditions that must be satisfied before a derivative suit can be instituted


• This is a suit brought by a person in the name of and on behalf of the company to remedy a wrong done to the company. It is available only for the enforcement of duties owed to the company and is unavailable to enforce the right of an individual shareholders e.g. actions against directors or officers for breach of their duties to the corporation for an injunction to preclude a threatened injury to the company.
• This action is representative in character.

b) Conditions necessary for a derivative action to be instituted include:

• The wrong complained of must involve fraud on the minority, for example:
o Expropriation of corporate assets.

o Breach of duty by directors.
o Unfair use of voting power.
• The wrong doers must be in control of the company. Their control may be legal or factual.
• The company must be made a defendant in the action so as to benefit from any court order arising.
• The plaintiff shareholder should sue in a representative capacity on behalf of himself and all other members other than the real defendants.
• The right to bring a derivative action is conferred upon individual members of the company as a matter of grace.
• The plaintiff remains dominus litis until judgement. However, he can discontinue or settle it out of court at his pleasure.

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