Understanding derivative actions under section 61 of the Companies and Other Business Entities Act
KELVIN SABAO
Introduction
Section 61 of the Companies and Other Business Entities Act (the COBE Act) empowers members or shareholders to take legal action on behalf of a company or private business corporation against managers, officers, or directors who violate their duties to the entity.
This legal mechanism, known as a derivative action, serves as a crucial tool for protecting the interests of the company and its stakeholders.
In this article, we will delve into the key provisions of Section 61, exploring its requirements, procedures, and implications.
Requirements governing derivative actions
Section 61 delineates several requirements that must be met for a member or shareholder to bring a derivative action on behalf of the entity.
These requirements are carefully crafted to ensure the judicious use of this legal remedy in the best interest of the company. Below are the requirements:
- Damage or Breach of Duty
The foundational requirement for initiating a derivative action is the presence of damage or a breach of duty to the company.
This requirement underscores the necessity for the plaintiff to demonstrate tangible harm to the entity resulting from the alleged misconduct.
- Membership Status
Another critical requirement stipulates that the plaintiff must have been a member or shareholder at the time of the acts in question or acquired such status through a transfer from someone who held that status at that time.
This ensures that those bringing the action have a genuine connection to the entity during the alleged wrongdoing.
- Minimum Voting Power
To further safeguard against frivolous or self-serving legal actions, the provision mandates that the plaintiff must hold at least ten per cent of the private business corporation or company’s voting power.
In cases involving multiple plaintiffs, the collective holdings of all parties must meet this threshold.
- Prior Written Request
Before initiating legal proceedings, the plaintiff must have made a written request to the manager, controlling members, or board of the company to rectify the alleged acts.
If this request is refused or not responded to within thirty days, the plaintiff can proceed with the derivative action.
However, the court retains the discretion to dispense with this requirement under certain circumstances.
Procedures and Oversight
- Inclusion of Request in Complaint
The complaint filed under Section 61 is required to include a copy of the written request mentioned in the previous requirement.
Additionally, it should provide details of any other efforts made to prompt the company itself to bring the complaint or offer reasons why such attempts would not be successful. This requirement ensures transparency in the legal process.
- Court Approval for Discontinuance or Settlement
A derivative action initiated under Section 61 cannot be discontinued or settled without the court’s approval.
This ensures that any resolution reached is fair and in the best interest of the company. Full disclosure of the details of the proposed discontinuance or settlement is a prerequisite for court approval.
- Distribution of Damages
All damages obtained in a successful derivative case become the property of the company or corporation.
However, the prevailing plaintiffs are entitled to receive their reasonable expenses, including legal fees, from the funds recovered from the defendants.
The court must approve the amount of these expenses, ensuring fairness in the distribution of recovered assets.
Conclusion
In conclusion, section 61 of the COBE Act serves as a crucial instrument for members or shareholders to act as stewards of corporate governance, providing a legal avenue to address alleged misconduct by managers, officers, or directors.
The carefully crafted procedural requirements underscore the importance of balancing the protection of the entity’s interests with the prevention of the misuse of derivative actions.
Stakeholders must grasp the nuances of these provisions to effectively uphold corporate accountability and governance in the evolving landscape of business entities.
Disclaimer:
The information and opinions expressed above are for general information only. They are not intended to constitute legal or other professional advice.
Kelvin Sabao is a duly registered Legal Practitioner practising law at Titan Law. He writes in his personal capacity. He is a co-author of a book titled ‘The Directors’ Handbook in Zimbabwe’.
This publication underscores his expertise and dedication to advancing the knowledge and understanding of corporate law and corporate governance in the Zimbabwean context. For more information, you can contact Kelvin via email at: sabaokelvin@gmail.com
