Derivative action (in the context of litigation)

A derivative action occurs where an action is brought by a minority of a company’s members or shareholders in their own names on behalf of the company. It is the primary exception to the rule that a company itself is the proper plaintiff in respect of a wrong suffered by it. A derivative action applies in situations of ‘wrongdoer control’, and may be brought against the company itself or to pursue rights against third parties where directors are unwilling or conflicted. The rule and the exceptions were outlined in the landmark English corporate law case of Foss v Harbottle, which formed the foundation of minority shareholder remedies in Australian statute law today.

The allowance for derivative actions is codified in the Corporations Act 2001 (Cth) in Part 2F.1A. The relevant sections dictate that the Court should allow a derivative action where it is satisfied by those bringing the action that the relevant grounds required for an application have been established. Some of the more difficult grounds to satisfy include that shareholders are acting in good faith, that the action is in the best interest of the company, and that it is unlikely the company would bring the action itself or take responsibility over the matter.

Courts are gradually becoming more amenable to derivative actions and intervening against inappropriate or potentially unlawful administrative conduct. There has also been a shift away from the view that relief should be solely controlled by ASIC and other regulators, towards the idea that shareholders are adequately placed to pursue remedies of their own accord.