Abstract
A statutory derivative action is a corporate action brought on behalf of and in the name of the company against a director or an officer of the company for allegedly committing a wrong to the company. A shareholder or former shareholder or an officer or former officer of the company is entitled to apply to the court for leave to commence a derivative action. This chapter explores the underlying reasons which led to the limited use of the statutory derivative action in Australia. It examines areas of defect in the legislative provisions and notes the system’s dynamism in getting around them, and then makes some suggestions for law reform to reflect the modern needs for a more effective derivative action.
BSc, LLB (Monash), GradDipEd (Melb), LLM (Monash), Lecturer in the Law School, Deakin University, Australia; Barrister and Solicitor of the Supreme Court of Victoria and High Court of Australia.
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Notes
- 1.
Corporations Act 2001 (C’th) is the main statute that applies to corporate law in Australia.
- 2.
Foss v. Harbottle (1843) 2 Hare 461; (1843) ER 189.
- 3.
Cope v. Butcher (1996) 20 ACSR 37.
- 4.
Prudential Assurance Co Ltd v. Newman Industries Ltd (No.2) [1981] Ch 257 at 323; Daniels v. Daniels [1978] Ch 406 at 414.
- 5.
Ian M Ramsay, “An Empirical Study of the Use of the Oppression Remedy” (1999) 27 Australian Business Law Review 23–37. Unlike a derivative action which is an action belonging to the company and any award of remedies would go back to the company, a successful plaintiff in an oppression action would expect to pocket all of the remedies awarded by the court.
- 6.
See Explanatory Memorandum to the CLERP Bill 1998 at [6.36] and [6.37].
- 7.
See Ontario Business Corporations Act 1982, s.245.
- 8.
Bruce Welling, Corporate Law in Canada (2nd ed, Butterworths, 1991) at 528.
- 9.
Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313.
- 10.
Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313, at [36].
- 11.
Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313, at [35], emphasis added. This approach has been followed in a number of subsequent first instance decisions, for example, Carpenter v Pioneer Park Pty Ltd [2004] NSWSC 1007, Charlton v Baber (2003) 47ACSR 31 and Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732.
- 12.
The NSW Court of Appeal in Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661 (per Tobias JA, with whom Beazley and Bell JJA agreed, at para 69–84) has unanimously supported Palmer J’s reasoning.
- 13.
Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763.
- 14.
Vinciguerra v. MG Corrosion Consultants Pty Ltd [2010] FCA 763, [para 75, 128, 152, and 153].
- 15.
Vinciguerra v. MG Corrosion Consultants Pty Ltd [2010] FCA 763, [para 30, 47, 70, 76, and 98].
- 16.
Gilmour J’s approach was perhaps consistent with the approach in Chahwan v. Euphoric Pty Ltd (2008) 65 ACSR 661where the NSW Court of Appeal [at para 83 per Tobias JA] noted that the onus was on “the applicant to satisfy the court that … he or she is acting in good faith”.
- 17.
Vinciguerra v. MG Corrosion Consultants Pty Ltd [2010] FCA 763, [para 54, 56].
- 18.
Vinciguerra v. MG Corrosion Consultants Pty Ltd [2010] FCA 763, [para 64].
- 19.
Vicad Pty Ltd – Pottie v. Dunkley & Ors [2011] NSWSC 166.
- 20.
Vicad Pty Ltd – Pottie v. Dunkley & Ors [2011] NSWSC 166, at para 43.
- 21.
The mother who was the other shareholder and director of the corporation was shown to have suffered from dementia and there was no evidence that she attended the board meeting to approve certain matters arranged by the defendants. However, the court found no difficulty in allowing the shareholder applicant to bring a derivative action, as the other shareholder had agreed to such action.
- 22.
Vicad Pty Ltd – Pottie v. Dunkley & Ors [2011] NSWSC 166, at para 58.
- 23.
Percival v. Wright [1902] 2 Ch 421.
- 24.
See, for example, the reports from: Parliamentary Joint Committee on Corporations and Financial Services, Report on Corporate Social Responsibility: Managing Risk and Creating Value (June 2006, Canberra); and Corporations and Market Advisory Committee (CAMAC), Report on the Social Responsibility of Corporations (December 2006, Canberra).
- 25.
Talisman Technologies Inc v. Old Electronic Switching Pty Ltd [2001] QSC 324 at para 31, where Mullins J refers to the term “best interests” as requiring an objective test.
- 26.
Swansson v. R A Pratt Properties Pty Ltd (2002) 42 ACSR 313, para 57.
- 27.
Swansson v. R A Pratt Properties Pty Ltd (2002) 42 ACSR 313, para 59.
- 28.
Swansson v. R A Pratt Properties Pty Ltd (2002) 42 ACSR 313, para 60.
- 29.
Vicad Pty Ltd – Pottie v. Dunkley & Ors [2011] NSWSC 166, at para 59.
- 30.
Lang Thai, “How popular are statutory derivative actions in Australia? Comparisons with USA, Canada, and New Zealand”, (2002) 30 Australian Business Law Review 118–137, at 136 and 137.
- 31.
Ian Ramsay and Benjamin Saunders, “Litigation by Shareholders and Directors: An Empirical Study of the Australian Statutory Derivative Action” (2006) 6 Journal of Corporate Law Studies 397–446.
- 32.
Ian Ramsay, “An empirical study of the use of the oppression remedy” (1999) 27 Australian Business Law Review 23–37. The term “oppression remedy” or “oppression action” is explained in Sect. 12.4 of this chapter.
- 33.
Roach v. Winnote Pty Ltd [2006] NSWSC 231; (2006) 57 ACSR 138.
- 34.
Roach v. Winnote Pty Ltd [2006] NSWSC 231; (2006) 57 ACSR 138, [at para 29].
- 35.
Sub Rosa Holding Pty Ltd v. Salsa Sudada Production Pty Ltd [2006] NSWSC 916.
- 36.
Sub Rosa Holding Pty Ltd v. Salsa Sudada Production Pty Ltd [2006] NSWSC 916 [at para 49].
- 37.
Woods v. Links Golf Tasmania Pty Ltd [2010] FCA 570.
- 38.
Woods v. Links Golf Tasmania Pty Ltd [2010] FCA 570, [at para 8].
- 39.
Woods v. Links Golf Tasmania Pty Ltd [2010] FCA 570, [at paras 9–12].
- 40.
Wallersteiner v. Moir (No.2) [1975] QB 373.
- 41.
Farrow v. Registrar of Building Societies [1991] 2 VR 589, 595.
- 42.
Arad Reisberg, Derivative Actins and Corporate Governance: Theory and Operation (Oxford University Press, 2007), Chapter 3, pp. 85–86.
- 43.
See, for example, Majestic Resources NL v Caveat Pty Ltd [2004] WASCA 201, and London City Equities Ltd v Penrice Soda Holdings Ltd [2011] FCA 674.
- 44.
See, for example, Hanks v Admiralty Resources NL (No.2) [2011] FCA 1464 at [24].
- 45.
See, Smartec Capital Pty Ltd v Centro Properties Ltd [2011] NSWSC 495 at [66]-[67].
- 46.
See, for example, in Keenfern Pty Ltd v Thorlock International Ltd (2002) 20 ACLC 1,322 at 1,323, the court refused to allow inspection of documents because it found that the information to be acquired was for the applicant to decide whether to file for winding up of the company and this was noted by the court as an improper purpose. For further reading on s.247A, see: C Mantziaris, “The member’s right to inspect the company books: Corporations Act, s.247A” (2009) 83 Australian Law Journal 621–640.
- 47.
In particular, in relation to the requirement of proof of “good faith” under s.237(2)(b) and the requirement of proof of “in the best interests of the company” under s.237(2)(c).
- 48.
Federal Court of Australia Act 1974 (C’th), s.33C.
- 49.
The first notable case on shareholder class action was in Dorajay Pty Ltd v. Aristocrat Leisure Ltd (2005) 147 FCR 394 and in [2009] FCA 19, where the proceedings commenced in 2003 and the court handed down its decision and reasons, followed by an out of court settlement with the approval of the court in 2009 in the sum of $144.5 million. Analysis of this case and other subsequent cases may be found in Lang Thai, “Is there a need to reform the corporate class action procedure in Australia?” (2011) 8 Macquarie Journal of Business Law 134–160.
- 50.
This is very different from the American o pt in class action, where members generally need to consent to being represented in the class action.
- 51.
For a further discussion of the “opt out” mechanism and the ineffectiveness and the problem in controlling the class size and the whereabouts of the members, see Lang Thai, “Is there a need to reform the corporate class action procedure in Australia?” (2011) 8 Macquarie Journal of Business Law 134–160.
- 52.
Campbells Cash and Carry v. Fostif Pty Ltd (2006) 229 CLR 386.
- 53.
Jeffrey & Katauskas Pty Ltd v. SST Consulting Pty Ltd (2009) 239 CLR 75.
- 54.
The Conflicts Rules applicable to litigation funding arrangements are imposed by the Federal Parliament through the enactment of the Corporations Amendment Regulation 2012 (No.6), which came into force on 12 July 2013 and is now located in Part 7.6 of the Corporations Regulations 2001 (C’th).
- 55.
For further discussion on commercial litigation funding and why government intervention and regulation are necessary, see L. Thai, “Com mercial litigation funding: The need to impose regulations to improve the outcome of the shareholder class actions” (2011) 4 Journal of the Australian Law Teachers Association 1–16.
- 56.
Litigation funders are only willing to provide funding where there is a large pool of shareholders from a large public company; this is how a litigation funder makes profits from individual shareholders in the one class action. A litigation funder is reluctant to fund a case when there is only a handful of shareholders in a small company, the only alternative for these shareholders other than the statutory derivative action is to proceed with an oppression action.
- 57.
See, for example, Kirby v Centro Properties Limited (No 6) [2012] FCA 650 (19 June 2012) which was the latest shareholder class action case with about 6000 shareholders involved where the Fe deral Court of Australia (Middleton J) on 19 June 2012 had approved $200 million out of court settlement, the largest settlement figure in history in shareholder class action; see also Dorajay Pty Ltd v. Aristocrat Leisure Ltd (2005) 147 FCR 394 and in [2009] FCA 19; and Dawson Nominees Pty Ltd v. Multiplex Ltd [2007] FCA 1061.
- 58.
Ian Ramsay, “An empirical study of the use of the oppression remedy” (1999) 27 Australian Business Law Review 23–37; see also Richard Brockett, “The valuation of minority shareholdings in an oppression context – a contemporary review” (2012) 24 Bond Law Review 101–124.
- 59.
Section 233 of the Corporations Act 2001 (C’th).
- 60.
See Woods v. Links Golf Tasmania Pty Ltd [2010] FCA 570, (at para 9–12, per Finkelstein J); Farrow v. Registrar of Building Societies [1991] 2 VR 589, 595; and Wallersteiner v. Moir (No.2) [1975] QB 373.
- 61.
Hanks v Admiralty Resources NL (No.2) [2011] FCA 1464 at [24].
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Thai, L. (2016). Australian Statutory Derivative Action – Defects, Alternative Approaches and Potential For Law Reform. In: Picker, C., Seidman, G. (eds) The Dynamism of Civil Procedure - Global Trends and Developments. Ius Gentium: Comparative Perspectives on Law and Justice, vol 48. Springer, Cham. https://doi.org/10.1007/978-3-319-21981-3_12
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