Derivative Action
A number of management-level difficulties develop in company law as a result of wrongdoings and unaccountable behaviour, which compromises the company’s reputation and financial stability and causes harm and loss. When a corporation experiences problems as a result of the negligent and improper activities of its directors, derivative action procedure is a possible recourse. A shareholder may ask for permission to commence a derivative action in the name and on behalf of the company against the wrongdoer (the director of the similar company) under Sections 216 and 216a of the Companies Act.
However, it is important to understand that a derivative action can only be provided if the court intervenes and allows one under its discretion.
Under Singaporean law, there are two different types of derivative actions: one is based on statutory provisions, specifically Sections 216 and 216a of the Companies Act, and is referred to as Statutory Derivative Action; the other is based on precedents established by prior decisions and is known as Common Law Derivative Action.
Common Law Derivative Action
The statutory derivative action is expressly inaccessible to members of listed corporations in Singapore, which is why the common law derivative action is still relevant. Sections 216 and 216A of the Singapore Companies Act include the statutory derivative action. According to Section 216A(1) of the same act, “company” refers to any firm other than one that is listed on the Singapore Stock Exchange for the purposes of those provisions. Due to this, members and shareholders of publicly traded firms do not have access to statutory derivative actions and must instead rely on common law derivative actions to address mismanagement or malfeasance committed by the company’s director.
The case of MCH International Pte Ltd v YG Group Pte Ltd Suit No. 107 of 2017 (Summons No. 1668 of 2017) set out procedural and substantive requirements for a common law derivative action.
Procedural requirements:-
i) A minority shareholder of the company should bring the action on behalf of himself and the other shareholders, excluding the majority wrongdoers. (this action is not necessarily taken on behalf of ‘all’ the shareholders).
ii) The wrongdoers must be named as defendants, even though they are part of the same company.
iii) The statement of claim must disclose that it is a derivative action.
Substantive Requirements:-
i) The company has a solid case against the defendant (the company’s directors and wrongdoers). A plaintiff must show that the claim at least appears to be valid. However, this is just to screen out actions by minority shareholders for purely arbitrary reasons; it is not necessary that the claim will or is most likely to succeed.
ii) The minority shareholder who filed the lawsuit has locus standi to do so. A plaintiff is required to demonstrate locus standi—the legal right to bring a derivative action—under this criterion. Since the majority of a company’s members can attest to any disputed transaction, a minority shareholder who can demonstrate the following may commence a derivative action:
i) There has been fraud committed against the minority.
i) The court recognized that the meaning of ‘fraud’ here is the subject of much academic debate but declined to adopt any one view.
ii) The orthodox view is that fraud refers to wrongs so egregious that they cannot be ratified. However, there is no clear demarcation of what constitutes ratifiable or unratifiable wrongs.
iii) The court also raised an alternative view, which is that fraud refers to a composite of the breach of director’s duties and the attempt to stifle action by the company by means of manipulation within the company.
ii) The alleged wrongdoers are themselves in control of the company.
i) The court here adopted a ‘substance over form’ approach when assessing whether control existed.
ii) Control can obviously exist when the wrongdoer is a majority shareholder.
iii) However, it can also exist where the wrongdoer is able to prevent an action from being brought against him, such as through a monopoly of information or the use of managerial vetoes over litigation.
Statutory Derivative Action
The statutory derivative action is only applicable in cases where the claimant/plaintiff wishes to sue on behalf of a company that is incorporated in Singapore. The basic requirements that are necessary to obtain leave from Court to commence a statutory derivative action are:
i) The applicant/plaintiff must be a member of the company, or in some cases of investigation under fraud, the Minister of Finance is also allowed to commence derivative action.
ii) If the business’s directors do not start or continue the lawsuit or arbitration sought, the plaintiff must have given the directors of the company 14 days’ notice of his intention to ask the court for permission to pursue the statutory derivative action.
iii) The plaintiff must prove he is acting in good faith, which requires proof that he honestly or reasonably believes that good grounds for a legal action exists.
Section 216A also clearly sets forth certain pre-requisites that have to be satisfied before a statutory derivative action may be commenced, which were elaborated in Petroships Investment Pte Ltd V Wealthplus Pte Ltd (2017) SGHC 122, Originating Summons No 594 of 2016
i) A complainant must first apply to the High Court for Leave/permission to bring a derivative action (Section 216A (2) of the Act.
ii) 14 days’ notice to the directors of the company of his/her intention to commence a derivative action.
iii) Acting in good faith, which must be satisfied by the court.
iv) As per 216A(3)(c) of the Companies Act, the Court must be satisfied that the complainant’s application is prima facie in the interests of the company, which also resonates with the pre-requisite of acting in good faith.
Both types of derivative actions must satisfy the same basic criteria, including having a reasonable case against the defendant and acting in good faith, saving the company from future management-level difficulties as a result of wrongdoings and unaccountable behaviour. The statutory derivative action framework’s absence from the members of listed companies has drawn criticism, and led to the relevancy of Common law derivative action. The goal of a derivative action lawsuit is to give a minority shareholder the opportunity to seek compensation for harm done to the corporation, done by the directors. Consequently, it is recommended that statutory derivative actions be given precedence over common law derivative actions. Singapore should abolish common law derivative actions, just like the UK, Canada, Australia, and New Zealand have done. This would simplify the complicated legal framework surrounding derivative actions, especially revolving around Common Law Derivative Action, since there is no set definition related to the same. The development of derivative action in Singapore would then be solely focused on the statutory route.
References
- Section 216 of the Companies Act.
- Section 216A of the Companies Act.
- Section 216A (2) of the Companies Act.
- Section 216A (3) of the Companies Act.
- Section 216A(3)(c) of the Companies Act.
- Case of MCH International Pte Ltd v YG Group Pte Ltd Suit No. 107 of 2017 (Summons No. 1668 of 2017)
- Case of Petroships Investment Pte Ltd V Wealthplus Pte Ltd (2017) SGHC 122, Originating Summons No 594 of 2016
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