Derivative Suits

Corporate Law/Corporate
Governance

Definition
Alegalactioninwhichashareholderof
a
corporationsuesinthenameoftheco
rporation
toenforceordefendalegalrightbeca
usethe
corporationitselfrefusestosue

Definition
Astockholder'sderivativesuitisatypeoflitigationbrou
ghtbyoneormoreshareholderstoremedyorprevent
awrongtothecorporation.Ina
derivativesuit,theplaintiffshareholdersdonotsueon
aCause
of
Actionbelongingtothemselvesasindividuals.Instea
d,theysueina
representativecapacityonacauseofactionthatbelo
ngstothecorporationbutthatforsomereasontheco
rporationisunwillingtopursue.
Therealpartyininterestisthecorporation,andthesh
areholdersaresuingonitsbehalf.Mostoften,theacti
onsofthecorporation's
executivesareatissue.Forexample,ashareholderco
uldbringa

In context
A company may have 10,000 shareholders, of the which
7,000 may be minority shareholders and 3,000 owning
more than 50% of the Company in terms of
shareholding.
The company has a board of directors that manage the
company and are voted in at an Annual General Meeting
Company has provision for Special General Meetings
Who determines how the company is run?
How may dispute in the company be resolved?
Majority v Minority?
Can shareholders owning 0.001% of the Company sue
on behalf of the company?

DADANI Vs- MANJI & 3 OTHERS

[2004]KLR 95
It is a cardinal principle in Company Law that it is for the
Company and not an individual shareholder to enforce rights of
actions vested in the Company and to sue for wrongs done to it.
It is also cardinal that in absence of illegality a shareholder
cannot bring proceedings in respect of irregularities in the
conduct of the Companys internal affairs in circumstances
where the majority are entitled to prevent the bringing of an
action in relation to such matter (see Foss v. Harbottle (1843)2
Hare 461). All this is in deference to the self-regulation the law
allows corporations and thus limits the interference by courts in
the running of such bodies on their own. However, if due to an
illegality a shareholder perceives that the company is put to loss
and damage but cannot bring an action for relief in its own
name, such a shareholder can bring an action by way of a
derivative suit.

Kuldeep Singh Sehra & another v Bullion

Bank Ltd & 2 others[2014] eKLR - Leave
granted for the derivative suit to continue
IN THE MATTER OF CMC HOLDINGS
LIMITED[2012]eKLR - Leave granted for
the derivative suit to continue
Silouanos Samuel Mwangi Gichanga v
Makarios Tillyrides & 5 others [2015]
eKLR leave denied for derivative suit to
continue

Foss v. Harbottle (1843) 2 Hare 461

In any action in which a wrong is
alleged to have been committed and
or done to or against the Company,
the proper claimant or person to
commence proceedings for purposes
of remedying the wrong is the
company itself and therefore the
Company itself is the Proper Plaintiff.

Foss v. Harbottle (1843) 2

Hare 461

Exception:
A minority shareholder can bring a suit on behalf of
the Company as a derivative action.
But:
The minority must show that they had exhausted
any possibility of redress within the internal forum
The court will not intervene where a majority of the
shareholders may lawfully ratify irregular conduct
The courts should be slow to interfere with the
internal management of companies where
management act in accordance with their powers
The company is the proper plaintiff

Foss v. Harbottle (1843) 2

Hare 461
When exception may be applied
Ultravires conduct
Illegality
Actions requiring special majorities
Invasion of individual rights
Fraud on minority

Shareholder Activism
There are investors who believe that
a company's management is doing a
bad job and who attempt to gain
control of the company and replace
management for the good of the
shareholders.
Influencing how corporate operations
influence Environmental, Social and
Governance issues

Derivative Suits
Standing and leave
The Court must grant leave where it is
satisfied that:
(a)it is probable that the company will
not itself bring the proceedings, or
properly take responsibility for
them; and
(b)the applicant is acting in good faith;

Derivative Suits
(c) it is in the best interests of the
company that the applicant be
granted leave;
(d) there is a serious question to be
tried;
(e) and the provision of relevant notice

Derivative Suits
Substantive suit
Costs???