Bond University

ePublications@bond
Corporate Governance eJournal

Faculty of Law

1-1-2005

The Statutory Derivative Action in Australia: An

Empirical Review of its Use and Effectiveness in
Australia in Comparison to the United States,
Canada and Singapore
Melissa Hofmann
mhofmann@bigpond.com

Follow this and additional works at: http://epublications.bond.edu.au/cgej

Part of the Business Organizations Law Commons
Recommended Citation
Melissa Hofmann. (2005) "The Statutory Derivative Action in Australia: An Empirical Review of its
Use and Effectiveness in Australia in Comparison to the United States, Canada and Singapore" ,, .
http://epublications.bond.edu.au/cgej/13
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The Statutory Derivative Action in Australia: An Empirical Review of its

Use and Effectiveness in Australia in Comparison to the United States,
Canada and Singapore
Abstract

This article reviews the use of the statutory derivative action (SDA) in Australia and assesses its success in
Australia compared to its impact in the United States, Canada, Japan, Germany, France, New Zealand,
Malaysia, India and Singapore. Each jurisdictions standing, leave and notice requirements, together with the
costs issue are covered. The article also addresses criticisms by commentators that the statutory derivative
remedy has little practical use and that there are other remedies already available to address corporate wrongs.
Keywords

statutory derivative action, (SDA)

Disciplines

Business Organizations Law

This journal article is available at ePublications@bond: http://epublications.bond.edu.au/cgej/13

THESTATUTORYDERIVATIVEACTIONINAUSTRALIA:
ANEMPIRICALREVIEWOFITSUSEANDEFFECTIVENESS
INAUSTRALIAINCOMPARISONTOTHEUNITEDSTATES,
CANADAANDSINGAPORE.

MelissaHofmann

Dateofpublication:May2004

Thisarticlereviewstheuseofthestatutoryderivativeaction(SDA)inAustralia
andassessesitssuccessinAustraliacomparedtoitsimpactintheUnitedStates,
Canada,Japan,Germany,France,NewZealand,Malaysia,IndiaandSingapore.
Each jurisdictions standing, leave and notice requirements, together with the
costs issue are covered. The article also addresses criticisms by commentators
that the statutory derivative remedy has little practical use and that there are
otherremediesalreadyavailabletoaddresscorporatewrongs.

INTRODUCTION
Onceacompanyisincorporated,itacquiresaseparatelegalidentity,withthe
abilitytosueandtobesued.However,acompanycannotactonitsownand
relies on its representatives in order to function as a legal personality.
Accordingly,themanagementisbestowedwithexorbitantpowersofcontrol,
subject to duties and responsibilities. Shareholders, who are the owners of
the company, are left with residual powers of oversight and control, which
includesthepowertosueforpersonalandcorporatewrongdoingscommitted
bythemanagement.
The StatutoryDerivative Action(SDA),alsoreferredtoas the representative
action,1 was enacted by various legislatures around the world to unveil

LLB,LLM(Bond),Solicitor(Qld),Tutorincorporateandcommerciallaw.
AlthoughthephrasestatutoryderivativeactioniswidelyusedinAustraliatorefertothe
actionavailabletoshareholdersinPart2F.1AoftheCorporationsAct2001theActdoes
notrefertotheactionasbeingastatutoryderivativeaction(thoughthetermwasused
byHeenanJinWestgoldResourcesNLvPreciousMetalsAustraliaLtd[2002]WASC221.The
phrasehasbeencontrastedwithstatutoryrepresentativeactionbyacademics,withthe
suggestionthatuseofthewordderivativeisacolloquialmisnomer.BruceWellingat
page544ofCorporateLawinCanadatheGoverningPrinciples(2nded,ScribblersPublishing
1991)said,Thetermderivativeaction,initsmoderncorporateuse,seemstobe
Americaninorigin.ItisusedinAmericatodescribeacommonlaw(notstatutory)action
brought,usuallybyashareholder,onbehalfofacorporationtoredressawrongdoneto
thecorporation.WhilstthetermisproperlyusedintheAmericancommonlawaction

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

corporatemismanagementandtoalleviatetheimbalanceofpowercreatedby
the separation of ownership and control. It empowers shareholders by
enablingthemtobringanactiononbehalfofthecompanyagainstcompany
insiders for wrongs suffered by the company in circumstances where the
companyiseitherunableorunwillingtobringtheaction.WhilsttheSDAwas
only introduced into Australian company law less than five years ago, this
form of action is relatively well established in countries including Canada,2
the United States,3 France,4 Israel,5 Japan,6 Singapore,7 New Zealand8 and
SouthAfrica.9
ThisarticlereviewstheuseoftheSDAinAustraliasinceitsintroductionand
analysesthesuccessandeffectivenessoftheSDAinAustraliacomparedtoits
use in the United States, Canada, Japan, Germany, France, New Zealand,
Malaysia, India and Singapore. This article looks at each jurisdictions
standing,leaveandnoticerequirements,togetherwiththecostsissuebefore
concludingastothepopularityandsuccess(orlack)ofthederivativesuitin
that particular jurisdiction. Neither the personal action nor the statutory
oppression remedy will be addressed in detail. The article concludes by
addressing criticisms by various commentators that the statutory derivative

9
7
8

contextitmaybebeingmisusedinAustralia,Canada,UnitedKingdomandother
commonlawjurisdictions.Wellingaddsthat,Thereisadangerthatcolloquialtermsin
thecourtroommaybringwiththemthetechnicallimitationsinherentinthosetermsin
otherjurisdictions.(546).
CanadaBusinessCorporationsAct1975.Thestatutoryderivativeactionwasintroducedinto
Canadiancompanylawinthe1970sfollowingreformasearlyas1967:LangThai,How
PopularareStatutoryDerivativeActionsinAustralia?ComparisonswithUnitedStates,
CanadaandNewZealand(2002)30AustralianBusinessLawReview118,124.
Thederivativeactioncanbetracedbacktothe1855decisioninDodgevWoolsey59US331,
341(1855).ProvisionforstatutoryderivativeactionisatbothFederal(Rule23.1ofthe
FederalRulesofCivilProcedure,andstatelevel(individualstatecompanylegislation):
StephenBottomley,TheRelativeImportanceoftheStatutoryDerivativeActionin
Australia(2002)2InternationalCorporateLawAnnual141,142.
CommercialCode(LegislativePart)Book2TitleIIArticleL225252toL225257(LawNo
2001420of15May2001,Article107(8)OfficialGazetteof16May2001)
<http://www.legifrance.gouv.fr/html/codes_traduits/commercetextA.htm#Section%208:%2
0Civil%20liability>
AradReisberg,Promotingtheuseofderivativeactions(2003)24(8)TheCompanyLawyer
250withreferencetos1194AoftheCompaniesAct1999at250.Reisbergalsocommented
thatpriortotheintroductionofthestatutoryderivativeactionthatIsraeliCourts,unlike
Englishcourtshaveshownaninclinationtoeffectivelybrushasidetheprocedural
barriersofFossvHarbottlewheretheystandinthewayofjusticebeingserved.
CommercialCodeofJapan,Articles267268:StephenBottomley,TheRelativeImportanceof
theStatutoryDerivativeActioninAustralia(2002)2InternationalCorporateLawAnnual
141,142.
IntroducedintotheCompaniesActCap50(Singapore)in1993.
Aboven5,142;CompaniesAct1993(NewZealand)ss1658.
Aboven5,142;CompaniesAct1973(SouthAfrica)ss2668.

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

remedy has little practical use and that there are other remedies already
available under the Act to address corporate wrongs, thereby rendering the
SDAineffectiveandunnecessary.
ThesecondpartwillthenempiricallyreviewAustralianreportedcasesonthe
SDAinAustraliabetween28June2000and30March200510inanattemptto
understand:
which courts and jurisdictions give more favourable treatment to the
SDA;
thenumberofSDAsdismissedandthereasonswhy,and
thenumberofSDAstowhichleaveisgranted.
thetypeofcompanieswhicharethesubjectoftheaction
thegroundsofcomplainttosupporttheSDA.
Part1
TheUnitedStates
1

Introduction

The derivative action has been available in the US since 1855.11 The present
day SDA is based on the common law derivative action, which was
establishedinHawesvCityofOakland12andreproducedtodayinRule23.1of
the Federal Rules of Civil Procedure13 and the Model Business Corporations Act.
Most states have civil procedure and corporations laws that mirror these
federallaws.14
WhilstthereappearstobeconflictingopinionsastothepopularityoftheSDA,15the
AmericanSDAisregardedasoneoftheprimarymechanismsforholdingcorporate

Thesearchwasconductedonthewww.austlii.edu.auwebsiteon1November2003.
DodgevWoolsey59US331,341(1855),asreferredtoinMichaelAColloraandDavidM
Osbourne,ClassActionReformsSpurDerivativeClaims:Shareholdersaretakingafresh
look at derivative suits to pursue investor fraud cases (15 February 1999) National Law
Journalat2http://dwyercollora.com/articles/mc_class.asp(accessed4November2003).
12 104US450(1882)(USSupremeCourt).
13 LyndenGriggs,TheStatutoryDerivativeAction:LessonsThatMayBeLearntFromThe
Past!(2002)6UWSLR63,81
<http://80
search.informit.com.au.ezproxy.bond.edu.au:8080/fullText;res=AGISPT;dn=20032652>
14 Forexample,theDelawareCorporationsCode.
15 Such litigation is relatively rare in the case of public companies: Ian M Ramsay,
Enforcement of Corporate Rights and Duties by Shareholders and the Australian
Securities Commission: Evidence and Analysis (1995) 23 Australian Business Law Review
174,179.
15 Aboven5,162:Shareholderlitigationisaninfrequentexperience.
10
11

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

fiduciaries accountable16 and is based on a managerial system of corporate

governance. Regardless of outcome, the American SDA is used with far greater
frequency than the SDA available in Canada, Australia, New Zealand and
Singapore.17

1.1

CivilProcedure

TheAmericanSDA(bothatFederalandstatelevel)differsquitedramatically
tothecommonlawSDAsexaminedhereinthat:
1. There is no leave requirement (unlike Australia, New Zealand,
CanadaandSingapore).18
2. The notice of demand requirement is very strict: the plaintiff is
requiredtopleadeverycauseofactioninthewrittennotice.
3. The standing requirement is more restrictive than the Australian,
Canadian andNewZealandstandingrequirementinthatin order
tobringaSDAtheplaintiffmustbeacurrentmemberorhavebeen
ashareholderormemberofthecorporationortheassociationatthe
timeofthetransactionofwhichcomplaintismadeorthattheshare
ormembership,ifacquiredthereafter,devoidbyoperationoflaw.19
4. The costs associated with running a SDA can be funded on a
contingencybasisuntilsettlementoftheaction.
5. Aspeciallitigationcommitteemaybeappointedbythecompanys
boardofdirectorstodeterminewhetheritisinthebestinterestsof
the company (the business judgment rule) for the SDA to be
pursued.
6. Pursuant to s 23.1 of the Federal Court Rules of Civil Procedure,
once a SDA is commenced the action cannot be settled,
discontinued or compromised without the courts approval
(collusion).20
Noticeofdemandrequirements

Thenoticeofdemandrequirementsarestrict.Thecontentofthenoticemust
be adequate for its purpose identify the wrongdoers; plead every cause of
action;outlinethenatureoftheinjurysufferedbythecompany;andstatethe

When Should Courts Allow the Settlement of DutyofLoyalty Derivative Suits? (1996)
109HarvardLawReview1084,1085.
17 LangThai,HowPopularareStatutoryDerivativeActionsinAustralia?Comparisons
withUnitedStates,CanadaandNewZealand(2002)30AustralianBusinessLawReview
118,124.
18 Ibid,119.
19 Ibid,withreferencetoRule23.1oftheFederalCourtRulesofCivilProcedure.
20 Ibid,122.
16

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

remedyrequested.21Butthecompanysdirectorsmustalsobegivenatleast90
daystorespondtothecontentofthenotice,unlesstheplaintiffcanshowthat
a shorter timeframe is required as the company would otherwise suffer
irreparableinjury.22
The notice of demand requirement can only be excused at the Chancery
Courtsdiscretionindecidingwhether,onapplicationofthetestinAronsons
case:
underthe[alleged]facts,areasonabledoubtiscreatedthat:(1)thedirectors
are disinterested and independent; and (2) the challenged transaction was
otherwisetheproductofavalidexerciseofbusinessjudgment.23
TheLitigationCommittee

The Litigation Committee (the Committee) is a unique concept to the

American SDA. It is a function instigated by the directors of the allegedly
injuredcompanyatthetimetheplaintiffcommencestheSDA,asitstaysthe
proceedingsuntilsuchtimeastheCommitteedetermineswhetheritisinthe
bestinterests of the company to litigatethe SDA.TheCommitteeisperhaps
the main obstacle that needs to be overcome by the potential plaintiff in
bringing a SDA. The Committee is purportedly made up of company
directorsindependentoftheallegedlyinjuredcompany.Inreality,however,
bias surely exists as the directors of the allegedly injured company appoint
theCommittee.
1.2

Litigationcosts

ReasonsfortheSDAbeingpopularinAmericainclude:
1. LawyersarebeingencouragedbythecourtstotakeonSDAsoneither
a contingency or lodestar basis because they use several methods of
calculating solicitors fees in a SDA depending on the success of the
action.24 Using the common fund method, the solicitors fee
percentage is calculated based on the amount awarded by the court
beforeanydistributionsaremade.Thesolicitorsfees(ofbetween20%
and 30%) are to be paid first using the percentage rule:25 Trustees v
Greenough26andCentralRR&BankingCovPettus.27

23
24
25
26
27
21
22

Ibid,120,withreferencetorule23.1oftheFederalCourtRulesofCivilProcedure.
Ibid.
Ibid,120withreferencetoAronsonvLewis473A2d805,814(Del1984).
Ibid,123.
Ibid.
105US527(1881).
113US116(1885).

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

2. Becausepotentialcomplainantscantakeadvantageofcontingencyfee
arrangementswithlawyers,therebyavoidingtheprohibitivecostissue
sufferedbycomplainantsinAustralia,Canada,andSingaporeandtoa
lesserextent,NewZealand.
1.3

Howpopularisthederivativesuit?

Between1995and2003thereappeartohavebeen144reportedSDAcasesin
Delaware alone.28 Of this figure, the majority of the cases have occurred
within the last four years. This figure suggests that the SDA is used quite
regularly,despitesuggestionsthatuseoftheSDAinAmericaisquiterare.
IncontrasttoAustralia,theAmericanSDAisalsousedbypotentialplaintiffs
inclassactionsandsecuritiesfraudcases.Infact,duetolitigiousshareholders
andtheapparentabuseoftheSDAtolitigatesecuritiesfraud,investorfraud
and misappropriation of corporate opportunities (by way of example), US
Congress enacted the Private Securities Litigation Reform Act 1995 in an
attempt to, amongst other things, end the routine filing of lawsuits against
issuers of securities and others whenever there is a significant negative
changeinvalueinthevalueoftheissuersstockandtoendtheabuseofthe
discovery process toimpose costs so burdensome that it is often economical
forthevictimisedpartytosettle.29
However, due to dysfunctions in the Private Securities Litigation Reform Act
1995,CongressenactedtheSecuritiesLitigationUniformStandardsActof1998to
addresstheseproblems.ThisActspecificallyexcludesSDAs.30Suchmovesby
CongresstolimittheuseoftheSDAsuggeststhatthebroaduseoftheSDA
mayactuallybemorecommonthatotherwisethought.
Canada
2.1

Introduction

The Canadian SDA was introduced in the 1970s following the recommendationsof
theDickersonCommitteein1971oncompanylawreformwithrespecttotherightsof
shareholders. In contrast to the American SDA, which is based on more general

ThisfigureisbasedonasearchontheLexisonewebsiteon3November2003,submitting
thephrasederivativeaction:
<www.lexisone.com/caselaw/freecaselaw?action=FCLSearchCaseByTerm&pageLimit=10&
format=CITE&sourceID=325&pageNumber=1&sourceType=State&sourceCandidate=325&
sourceCandidate=se;ectSource&searchTerm=derivative+action&dateType=relative&relativ
eDate=5Y&fromDate>
29 Michael A Collora and David M Osbourne, ClassAction Reforms Spur Derivative
Claims: Shareholders are taking a fresh look at derivative suits to pursue investor fraud
cases(15February1999)NationalLawJournal1.
30 Ibid.
28

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

standards of fiduciary duties as defined by case law, the Canadian SDA is heavily
regulatedbyregulatoryagenciessuchastheOntarioSecuritiesCommission.31
The Canadian SDA, considered by many jurisdictions as the ideal model of SDAs,
has been borrowed and adapted to a great degree by New Zealand, Australia and
Singapore.
TheCanadianSDAisreferredtothroughout othersectionsofthisarticle.Toavoid
duplication,thissectionbrieflyoverviewstheCanadianSDA.

2.2

CivilProcedure

Withrespecttostanding,Canadasapproachisquitestrict.PearlieKohMingChoo
notes:
Inpractice,mostoftheapplicationsreviewedinonestudywerebroughtby
current shareholders. But where the applications were made by former
shareholders or former directors, these were denied primarily because the
judges felt that such applicants lacked sufficient interest in the outcome of
thederivativeaction.32

Canadas leave and notice requirements are not dissimilar to Australias.

When determining whether leave should be granted to the complainant, it
should be borne in mind that a derivative action brought by an individual
shareholderonbehalfofacorporationservesadualpurpose.First,itensures
that a shareholder has a right to recover property or enforce rights for the
corporation if the directors refuse to do so. Second, and more important for
ourpresentpurposes,ithelpstoguaranteethatsomedegreeofaccountability
and to ensure that control exists over the board of directors by allowing
shareholders the right to bring an action against directors if they have
breachedtheirdutytothecompany.33
2.3

Howpopularisthederivativesuit?

There havebeenapproximately199reportedSDAsthroughoutthewhole of
Canadafortheperiod29January1987and23October2003.34Authoritative

DeborahDeMott,OppressedButNotBetrayed:AComparativeAssessmentofCanadian
RemediesforMinorityShareholdersandOtherCorporateConstituents(1993)Lawand
ContemporaryProblems181,182<www.law.duke.edu/globalmark/research/oppresse.html>.
32 PearlieKohMingChoo,TheStatutoryDerivativeActioninSingaporeACriticaland
ComparativeExamination(2001)13BondLawReview64,72.
33 RobinsJAinRichardsonGreenshieldsofCanadaLimitedvRussellJKalmacoff,DavidM
Cockfield,JosephOBrien,DaroldHParken,EdwardHWernick,JohnLLee,DinoBotteroand
SecurityHomeMortgageInvestmentsCorporation(19950407)ONCAc19193withreference
toMAMaloney,WhitherTheStatutoryDerivativeAction?(1986)64CanBarRev309
<http://www.canlii.org/on/cas/onca/1995/1995oncal10110.html>.
34 ThisfigureisbasedondoingasearchontheCanliiwebsiteon3November2003,
submittingthephrasederivativeaction:
31

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

viewssuggestthattheSDAisusedinfrequentlyandhasnotmadetheimpact
onCanadiancorporatelawwhichmighthavebeenexpected.35
Singapore
3.1

Introduction

Duetothewelldevelopedoppressionremedy36availableinSingapore,useof
theSDAisveryrare.37SincetheintroductionoftheSDAin1993,therehave
been two reported SDA cases,38 one unreported SDA case,39 and 7 reported
casesinwhichthecompanyhassueditsdirectorsforbreachofduty.40
The Singaporean SDA is not dissimilar to the English, Canadian, Australian
andNewZealandSDAsandismodelledontheCanadianSDAcontainedin
theCanadaBusinessCorporationsAct.TheSingaporeanSDAiscontainedatss
216Aand216BoftheCompaniesActCap50.
However, unlike the Canadian SDA, the Singaporean SDA applies only to
companiesnotlistedontheSingaporeStockExchange41ascompaniesthatare
listed on the stock exchange are already subject to heavy regulation and
disgruntled shareholders have the option of selling their shares on the open
market.42
3.2

Standingandleaverequirements

TobringaSDA,pursuanttos216Athepersonbringingtheaction(the
complainant)mustbeeitheramemberofthecompany;43theMinister(inthe
caseofadeclaredcompanyunderPartIX)44oranyotherpersonwho,inthe
discretionoftheCourt,isaproperpersontomakeanapplicationunderthis
section.45

37
35
36

40
41
38
39

42

45
43
44

<www.canliii.org/sino/srch.pl?method=phrase;query=derivative%20action;bouton.x=7;bou
ton.y=9;context=full;firsthit=1;lang=en;database=en>
Aboven5,162withreferencetoCheffins(n98).
Section216oftheCompaniesActCap50.
Kanaga Dharmananda, Singapore The Oppression Action in the Tropics (2001) 22(6)
TheCompanyLawyer194,194.
Aboven33,64.
Ibid,75.
Ibid,70atn37.
Ibid,81.Atn93theauthorfurtherstatesthat,AlthoughitisrecognisedbytheSelect
Committeemembersthatifthecompanywaslistedonstockexchangesotherthanthe
SingaporeStockExchange,itmayapplyforleavetobringastatutoryderivativeaction
undersection216A.
Ibid,81withreferencetotheReportoftheSelectCommitteeontheCompanies
(Amendment)Bill,para45.
Section216A(1)(a)oftheCompaniesActCap50.
Section216A(1)(b)oftheCompaniesActCap50.
Section216A(1)(c)oftheCompaniesActCap50

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

Neither former shareholders nor directors are expressed as potential

complainantsasisthecaseinAustralia.Yetthescopeofpotentialclaimantsis
broaderthantheAustralianprovision.Providedonecansatisfythecourtthat
thereisaproperpersontomaketheSDA,leavewillbegrantedatthecourts
discretion.
On satisfying standing requirements, the complainant will only be granted
leaveifhehassatisfiedthecourtthattheSDAisnotbroughtwithoutmeritas:
1. 14 days notice has been given to the companys directors of the
proposed SDA if the companys directors fail to bring, diligently
prosecuteordefendordiscontinuetheaction;46
2. Thecomplainantisactingingoodfaith;47
3. Theactionisprimafacieinthecompanysinterest.48
Unlike Australia, there is no obligation bestowed upon the court to grant
leave as it is in the best interests49 of the company to do so, and there is a
seriousquestiontobetried.50
However,thereisnorequirementinAustraliathattheSDAbe,primafacie,in
thecompanysinterest.IntheCompanies&SecuritiesAdvisoryCommittees
Report on a Statutory Derivative Action, the view of the Committee that the
serious question to be tried test was more favourable to the prima facie test
was accepted.51 It appears that a problem with the requirement that the
complainantestablishaprimafaciecaseatthetimeofapplyingforleavefrom
the court to bring a SDA may lead to a trial of the issues as opposed to
demonstratingthathehasanarguable,orareasonable,case.52
Notice

WithrespecttotheSingaporeannoticerequirements,whilstitiscompulsory
to give notice, the legislation is silent as to whether the notice is to be in
writingandifso,thecontentofthenotice.Thisisidenticaltothepositionin
Canada53 but unlike the position in Australia, which has written notice
requirements.54

48
49
50
51

Section216A(3)(a)oftheCompaniesActCap50.
Section216A(3)(b)oftheCompaniesActCap50.
Section216A(3)(c)oftheCompaniesActCap50.
Section237(2)(c)oftheCorporationsAct2001(Cth).
Section237(2)(d)oftheCorporationsAct2001(Cth).
Companies&SecuritiesAdvisoryCommittee,ReportonaStatutoryDerivativeAction,July
1993page17.
52 Ibidat17withreferencetoJCorkery,DirectorsPowersandDuties(1987)at170171.
53 Section239(2)(a)oftheCanadaBusinessCorporationsAct
54 Section237(2)(e)(i)oftheCorporationsAct2001(Cth)
46
47

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

Not unlike the position in Australia, Canada, New Zealand and the United
States, the mandatory notice requirements can be dispensed with provided
thecomplainantcanestablishtothecourtssatisfactionthatitisnotexpedient
to give such notice. In such circumstances the court can make any such
interimorderasitseesfit.55
Goodfaithandintheinterestsofthecompany

Similar to the United States, the business judgment rule plays a significant
role for the judge in determining whether the SDA (if it is brought with the
purposeofinstitutinglitigationonbehalfofthecompany)isintheinterestsof
thecompany.Thecourtisrequiredtotakeaccountofthedirectorsviewson
commercial matters when considering whether the SDA is in the interest of
the company56 and whether the decisions made by the companys directors
leadinguptotheSDAweremadeingoodfaith.UnlikeAustralia,thereisno
rebuttablepresumption.57
Singapores approach to the SDAs good faith requirement is based on the
viewthatiftheSDAisintheinterestsofthecompany,iswithmerit58andthe
facts surrounding the bringing of the SDA do not constitute bad faith,59 that
that application for the SDA is one brought in good faith. Provided these
requirementsaresatisfied,thecourtdoesnotappeartobeoverlyconcernedif
theactionisbroughtwithanelementofselfinterest.
3.3

Litigationcosts

SingaporespositionwithrespecttolegalcostsissimilartoAustralias:unless
otherwise ordered by the court;60 the complainant is responsible for costs of
bringingtheSDA.Furthermore,ifthecomplainantisunsuccessful,heisalso
responsible for the respondents legal costs. Pursuant to section 216A(5)(c),
the court may make an order that the company pay the reasonable fees and
disbursementsincurredbythecomplainantinbringtheSDA.

57
58

Section216A(4)oftheCompaniesActCap50
N33at78.
Section237(3)oftheCorporationsAct2001(Cth).
TheunreportedSDAcaseofPohKimChweevLimSweeLong(OSNo376of1997)andthe
reportedSDAcaseofSeowTiongSiewvKwok,Fung&WinpacPaperProductsPteLtd[2000]
4SLR768,asreferredtobyPearlieKohMingChoo,TheStatutoryDerivativeActionin
SingaporeACriticalandComparativeExamination(2001)13BondLawReview64at
page75aretheonlyothertwoSDAcases.Theyweredismissedastheywerenotinthe
interestsoftherespectivecompaniesandcompletelylackedmerit.
59 N33at74:TeoGekLuangvNgAiTong[1999]1SLR434istheonlysuccessfulSDA.
60 Section216A(5)(c)oftheCompaniesActCap50:anorderrequiringthecompanytopay
reasonablelegalfeesanddisbursementsincurredbythecomplainantinconnectionwith
theaction.
55
56

10

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

3.4

Conclusion

As already stated, the SDA is rarely used in Singapore and is viewed as a

deterrenttopotentialcorporatewrongdoingratherthanasamereremedy.It
is viewed as a necessary mechanism available to shareholders in order to
protect their interests in the company and in exercising good corporate
governance.WhilsttheSingaporeanSDAismodelledontheCanadianSDA,
the former has borrowed views on correlation of the SDA withthe Business
JudgmentRulefromtheEnglishLawCommissionandtheUnitedStates,both
of which require the court to take into consideration the views of the
companysdirectorsindeterminingwhetherthepotentialSDAisinthebest
interests of the company.61 Not unlike Australia and Canada, the
responsibility for costs of the SDA is a major obstacle to a potential
complainantinbringingaSDA.Furthermore,thereisnopersonalrewardfor
bringing a SDA in Singapore: the damages (if any) are awarded to the
company and in any event, the complainant may also be responsible for the
legalcostsregardlessofoutcome.
Australia
4.1

Introduction

On13March2000theSDAcommencedoperationfollowingintroductioninto
theCorporationsLaw(asitwasthenknown)bytheCorporateLawEconomic
ReformProgramAct1999.ThisformofSDAisbasedontheOntarioBusiness
CorporationsAct,1982.62
4.2

CivilProcedure

BeforetheCourtwillgrantleavetotheapplicanttoproceedwithastatutory
derivativeaction,theapplicantmustsatisfythecourtthat:
1. It is unlikely that the company will commence the necessary
proceedings,orproperlytakeresponsibilityfortheproceedingsorfor
thestepsintheproceedings:s237(2)(a);
2. Theapplicantisactingingoodfaith:s237(2)(b);63
3. Itisinthebestinterestsofthecompanythattheapplicantbegranted
leave:s237(2)(c);64
4. Itisapplyingforleavetobringproceedingsbecausethereisaserious
issuetobetried:s237(2)(d);and

61 N 33 at 7879.
Companies&SecuritiesAdvisoryCommittee,ReportonaStatutoryDerivativeAction,July
1993page13.
63 SwanssonvPratt[2002]NSWSC583.
64 Id.
62

11

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

5. Theapplicantgavewrittennoticetothecompanyatleastfourteendays
priortomakingtheapplicationnotifyingthecompanyofitsintention
toapplyforleaveandthereasonsforsame(unlessthecourtfindsthat
itisappropriatetograntleaveeventhoughnoticewasnotgiventothe
company).65
Each of these criteria must be satisfied for the court to grant leave to the
applicanttoproceedwiththederivativeaction.66ComparedtoNewZealands
requirementthattheapplicantestablishforthecourtthateither:
1. The company does not intend to bring, diligently continue or defend,
ordiscontinue;67or
2. Itisintheinterestofthecompanythattheconductoftheproceedings
should not be left to the directors or to the determination of the
shareholdersasawhole.68
needbesatisfiedbeforethecourtwillgrantleavetotheapplicanttoproceed
withtheSDA,69Australiasleaverequirementsarequiterestrictive.
4.3

LitigationCosts

Similar toothercommonlaw jurisdictions, andunlike America, contingency

feearrangementsareprohibitedinAustralia,70yetthecostofbringingaSDA
is prohibitive and regarded by many71 as the reason why the SDA is
infrequentlyused.
ThecostsissueappearstobeamajorhurdleinbringinganSDA.Bywayof
example, Mitchell in Has the Tyranny of the Majority Become Further
Entrenched?referstotheexorbitantcostsincurredinPrudentialAssuranceCo
LtdvNewmanIndustries(No2)72,whereafullhearingof70dayswasheld,and
$1.5 million in costs run up, in order to decide the question of standing to
bringacase.73

67
68
69
70
71

CorporationsActs237(2)(i)(ii).
GoozeevGraphicWorldGroupHoldingsPtyLtd(2002)42ACSRat541.
N18at127:S165(3)(a)oftheCompaniesAct1993(NewZealand).
S165(3)(b)CompaniesAct1993(NewZealand).
Section165(3)oftheCompaniesAct1993(NewZealand).
N5at161.
For example: Ian M Ramsay, Enforcement of Corporate Rights and Duties by
ShareholdersandtheAustralianSecuritiesCommission:EvidenceandAnalysis(1995)23
Australian Business Law Review 174 at 178; Pearlie Koh Ming Choo, The Statutory
DerivativeActioninSingaporeACriticalandComparativeExamination(2001)13Bond
Law Review 64 at pages 8990; Stephen Bottomley, The Relative Importance of the
StatutoryDerivativeActioninAustralia(2002)2InternationalCorporateLawAnnual141at
162.
72 [1982]Ch204.
73 VanessaMitchell,HastheTyrannyoftheMajorityBecomeFurtherEntrenched?(2002)20
CompanyandSecuritiesLawJournal75atpage81.
65
66

12

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

MrsBrightwell,thethirdandfourthdefendantinBrightwellvRFBHoldings,74
raisedtheprohibitivenatureofcostsindefendingaSDA.
Onthefactsofthiscase,MrsBrightwellwasthewidowofadirectoroffamily
companyRFBHoldingswhodiedin1995leavingpersonaldebtsowingtothe
company (which through the alleged fraudulent accounting practices of the
companys accountant been forgiven: the liquidators report indicates that
the Deceased received a dividend and capital repayment of $416,720 in
respect of his single share, whereas the other shareholders each received $2
pershare).75
The majority of the shares in RFB Holdings were held by the deceaseds
children and exwife, with Mrs Brightwell holding 10 shares and the
deceaseds estate holding 1 share. Proceedings were commenced by the
plaintiffsin1998.
With respect to legal costs, which would amount to approximately
$125,000.00 by the time the SDA was heard, Austin J was quite sympathetic
over Mrs Brightwells expenses burden. Even though the plaintiffs were
successfulintheirapplicationforleavetobringtheSDAaction,theplaintiffs
wereorderedtopaythecostsofMrsBrightwelluptoleavebeinggrantedto
proceed with the SDA, because the earlier costs incurred by Mrs Brightwell
arose out of failure on the plaintiffs side to make proper and appropriate
claims in the original statement of claim.76 Austin J took a similarly flexible
approach on costs in Shum Yip Properties v Chatswood Investment &
Development,77 awarding costs and interest (in addition to damages) to the
plaintiff.
IncomparisontoAustralia,NewZealandhastakenamoreflexibleapproach
on costs arising from the SDA. Once the court has granted leave to the
complainant to bring the SDA, unless the court finds that it is unjust or
inequitableforthecompany,thecourtisrequiredto makeanorderthatthe
companyberesponsibleforthereasonablecostsincurredbythecomplainant
in bringing the action.78 Whilst this may be the case, there have only been
approximately10SDAssince1994,79whichsuggeststhatthecostsassociated
withbringingaSDAmaynotactuallybeamajordeterrent.

76
77
78
79
74
75

[2003]NSWSC7.
[2003]NSWSC7At8.
[2003]NSWSC7,70.
[2002]NSWSC13.
Aboven18,128withreferencetos166oftheCompaniesAct1993(NewZealand).
Ibid.

13

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

Parttwo:
HowpopularisthederivativesuitinAustralia?
Comparedtothestatutoryoppressionremedy,theSDAisnotfrequentlyused
in most jurisdictions. This is considered an advantage by some authorities,
becausetheSDAworksbestwhenusedinfrequently80andisnecessaryinthe
overallschemeforgoodcorporategovernance.
ShareholderlitigationinAustraliahasareputationofbeingrare.Whilethere
were900decisionsreportedintheAustralianCorporationsandSecuritiesReports
betweenSeptember1989andMarch1994,oftheseonly93decisionsinvolved
shareholderlitigation.81
Resultsofsearch
Based on a search conducted on Austlii of cases containing the phrase
statutory derivative action, there have been 21 reported statutory derivative
action cases between 28 June 2000 and 27 August 2003.82 The result of this
searchiscontainedinTable1below.
Put into perspective, prior to the introduction of the SDA, the only way an
applicantcouldbringacommonlawderivativeactionwasunderoneofthe
exceptionstotheruleinFossvHarbottle.83Consequently,therewereveryfew
commonlawderivativeactionspriortotheintroductionoftheSDA.
Compared with Ramsays84 empirical study into the use of the oppression
remedywhichrevealedthatonly88oppressioncasesoccurredoveraspan
of13years85thefactthatthereappeartohavebeen21applicationsinvolving
SDAs within the last 3 years suggests that this type of remedy may prove
morepopularinAustralia(especiallygiventhefactthatthecourtsappearto
be less restrictive in interpreting the leave requirements under s 237) than it
has in Singapore (of which there have been two reported cases) and New
Zealand(ofwhichtherehavebeenapproximately10SDAsince1994).86

Aboven5,143.
Ian M Ramsay, Enforcement of Corporate Rights and Duties by Shareholders and the
Australian Securities Commission: Evidence and Analysis (1995) 23 Australian Business
LawReview174,175.
82 Thesearchwasconductedonthewww.austlii.edu.auwebsiteon1November2003.
83 (1843)2Hare461.
84 Ian M Ramsay, An Empirical Study of the Use of the Oppression Remedy (1999) 27
AustralianBusinessLawReview23,256.
85 Ian M Ramsay, An Empirical Study of the Use of the Oppression Remedy (1999) 27
Australian Business Law Review 23, 26. The study is based on reported and unreported
decisionshandeddownbyHighCourt,FederalCourtandStateSupremeCourtsbetween
January1984andDecember1997.
86 Aboven18,128.
80
81

14

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

Based on this search, it appears that the majority of these cases were
commencedintheSupremeCourtofNewSouthWales,followedbyVictoria,
QueenslandandWesternAustralia.Therewerenoreportedderivativeactions
in Australias remaining State or Territories and there has only been 1
reportedFederalCourtcase.
Of these, 12 of the applications to bring a SDA were successful,87 with the
remaining 8 cases dismissed.88 Of these 8 cases, two cases were dismissed
becausethecomplainantdidnothavestanding,89and6casesweredismissed
because they did not satisfy s 237(2)s leave requirements.90 3 of the cases
involved a SDA made on behalf of a company in liquidation, 3 of the
applications were made for discovery purposes or access to the company
register,onecasewaswithrespecttothewindingupacompanythesubject
ofadeceasedestateandonecasewaswithrespecttothewindingupofajoint
venture. Several of the cases were with respect to damages suffered by the
company.
Perhaps a reason for the lack of use of the statutory derivative action is the
factthatthereisscantjudicialconsiderationinAustraliaoftherequirements
whichmustbesatisfiedbeforeleaveisgrantedtobringaderivativeactionin
the name of the company.91 In Swansson v Pratt, Palmer J commented that

RoachvWinnoteP/L(inLiq)[2001]NSWSC822;KaramvANZBankingGroupLimited[2000]
NSWSC596;KeyrateP/LvHamarcP/L[2001]NSWSC491;BrightwellvRFBHoldings[2003]
NSWSC7;WestgoldResourcesNLvPreciousMetalsAustraliaLtd[2002]WASC221;Charlton
v Baber [2003] NSWSC 745; Shum Yip Properties v Chatswood Investment & Development
[2002] NSWSC 13 (at 1719); Isak Constructions v Faress [2003] NSWSC 784; BL&GY
InternationalCo.LtdvHypecElectronicsPtyLtd;ColinAnthonyMeadvDavidPatrickWatson
[2001]NSWSC705;CarrevOwnersCorporationSP53020[2003]NSWSC397;MetyorIncv
QldElectronicSwitchingP/L[2002]QCA269.
88 AdventInvestorsPtyLtdvGoldhirsch[2001]VSC59,DeangrovePtyLtd(Rec&MgrsAptd)v
CommonwealthBankofAustralia[2001]FCA173(thismatterwasoriginallystoodoverfor
furtherdirections);TalismanTechnologiesIncvQldElectronicSwitchingP/L[2001]QSC324
(however, this decision was appealed and allowed with costs: see Metyor Inc v Qld
ElectronicSwitchingP/L[2002]QCA269);JeansvDeangroveP/L[2001]NSWSC84;Goozeev
Graphic [2002] NSWSC 640; Chapman v ESports Club Worldwide Limited [2000] VSC 403;
BlakeleyvCook[2001]WASCA208;SwanssonvPratt[2002]NSWSC583.
89 Advent Investors Pty Ltd v Goldhirsch [2001] VSC 59: s 236 (3) of the Law was intended to
apply to events that existed prior to 13 March 2000, that is, to existing common law
derivativeproceedings.BlakeleyvCook[2001]WASCA208:s236.
90 SwanssonvPratt[2002]NSWSC583:leavewasnotgrantedastheplaintifffailedtosatisfy
s237(2)(b)and(c).GoozeevGraphic[2002]NSWSC640:leavewasnotgrantedasthe
Plaintifffailedtosatisfys237(2)(b)(d).JeansvDeangroveP/L[2001]NSWSC84:leavewas
notgrantedastheplaintifffailedtosatisfys237(2)(a).TalismanTechnologiesIncvQld
ElectronicSwitchingP/L[2001]QSC324:leavewasnotgrantedasthePlaintifffailedto
satisfys237(2)(b)and(c).ChapmanvESportsClubWorldwideLimited[2000]VSC403:leave
wasnotgrantedasthePlaintifffailedtosatisfys237(2)(b)(d).
91 PalmerJinSwanssonvPratt[2002]NSWSC583,[20].
87

15

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

while Part 2.F.1A is said to have been inspired by s 165 of the New Zealand
CompaniesAct1993,whichinturnisbasedontheCanadaBusinessCorporations
Act 1985, part 2.F.1A is so different to the Canadian and New Zealand
counterpartsthatthecaselawinthesejurisdictionsisoflittleassistance.92
Conclusion

Compared with the use of the statutory oppression remedy, which has no
leaverequirementsthatneedtobesatisfiedinordertograntedstanding,and
thefactthatacomplainantbringingaSDAdoesntpersonallybenefitagreat
dealfromaSDAandislikelytobeburdenedwiththecostsofrunningaSDA,
theSDAisnotascommonlyusedastheoppressionremedy.
DuetothedeterrentnatureoftheSDA,93itisquestionablewhethertheSDA
canbemeasuredempirically,asobservedbyPearlieKohMingChooinThe
Statutory Derivative Action in Singapore A Critical and Comparative
Examination:
Thedeterrenteffectoftheaction,becauseitdoesnotresultinpositiveactions,
cannotbemeasured.Itisimportanttoacknowledgethisbecausetherehave
been a number of empirical studies in the United States that show that
derivative actions produce little financial benefit, both to the shareholder
litigantinthesensethatthatthereislittlepositiveimpactonshareprices,and
tothecompany.94

SomedisadvantagesofbringingaSDAinclude:
1. Public knowledge via the media
misconduct/mismanagement/negligence;

of

alleged

internal

2. Dropinvalueofshares,iflistedonthestockexchange;
3. Saleofshares;
4. Litigation may ruin the reputation of company especially when the
allegationprovestobeunfounded;
5. Unnecessarywindingupofthecompany;
6. It is very costly to commence a SDA in Australia and other common
lawjurisdictions.
CONCLUSION
Shareholder derivative suits are a vital support to the free enterprise
economy Derivative suits are the major policemen of managerial

Ibid.
Aboven5,162.
94 Aboven18,70.
92
93

16

STATUTORYDERIVATIVEACTIONINAUSTRALIAEMPIRICALSTUDY

integrity.95AddsMatthewBerkahn,theSDAhasthepotentialtoaddcertaintyto
the law, in the sense that it specifies much more clearly and logically the
situations in which an aggrieved shareholder may pursue a remedy for a
wrongdonetothecompany.96
Although Australia does not permit SDA actions to be funded on a
contingencybasis,thefactthattherehavebeen21reportedcasesinlessthan3
yearssuggeststhat,whileinitsearlydays,theSDAismorethanmerely(but
importantly)adeterrent.Itprovidesminorityshareholderswithamechanism
toexercisecontrolonbehalfofthecompanywhenthedirectorscannotorwill
nottakeaction;itservesasacorporatewatchdogandbargainingtoolinthat
shareholders can threaten the use of the SDA. Moreover, because of the
restrictionsonitsuseandtherequirementsthatneedtobesatisfiedbeforethe
complainant is granted leave, it minimises abuse of process and vexatious
litigation.

Companies&SecuritiesAdvisoryCommittee,ReportonaStatutoryDerivativeAction,July
1993page4withreferencetofootnote12:A.F.Conard,quotedinM.A.Maloney,Whither
theStatutoryDerivativeAction?(1986)64CanadianBarReview309at315.
96 Matthew Berkahn, The Derivative Action In Australia And New Zealand: Will The
Statutory Provisions Improve Shareholders Enforcement Rights? (1998) 10 Bond Law
Review74,75.
http://www.liptonherzberg.com.au/secure/pathwayschapter17membersremedies.html

95

17

Jurisdiction

Totalno.of
Reported
cases

No.of
Reported
Supreme
Courtcases

No.of
Reported
caseson
appeal

Yearof
judgment

2000

2001

N.S.W.

QLD

VIC

W.A.

13

13

Federal
1

Other States &

Territories

21
TOTAL

2002

2003

No.of
Cases
whereby
leave
granted
9

No.ofCases
dismissed

1(caseon
Appeal)

1(appeal
dismissed)

19

10

12

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