Usually, Company Law is driven by the ‘Rule of Majority’ that is when a resolution is passed by the
the requisite majority then it is binding on all the members of the company and the court will not ordinarily intervene to protect the minority interest affected by the resolution. However, in certain circumstances an individual member may bring an action to remedy a wrong done to his company or to compel his company to conduct its affairs in accordance with its constitution and the rules of law governing it, even though no wrong has been done to him personally, and even though the majority of his fellow members do not wish the action to be brought. The form of his action in these exceptional cases is peculiar, because the plaintiff does not sue in his own right alone, but on behalf of himself and all his fellow members other than those, if any, against whom relief is sought. If the member sues for relief against the company, it must, of course, be made a defendant; if he seeks to enforce a corporate claim against other persons, the company must still be joined as a co-defendant so that it
may be bound by the judgment, and so that it may enforce any order giving relief against the substantive defendants.
The individual member’s action in these exceptional cases may be described as representative because it is brought on behalf of himself and persons other than himself who would go along with him to protect their legitimate corporate rights. When relief is sought against third parties for the company’s benefit, the action may also be described as derivative, because the individual member sues to enforce a claim which belongs to the company, and his right to sue is derived from it.
In Spokes v. Grosvenor, etc., Hotel it was held that If the action succeeds, any property or damages recovered go, not to the plaintiff, but to the company. The Court in Bloxham v. Metropolitan Rly held the plaintiff shareholder can complain in a derivative action of wrong committed before he became a member. But a derivative action commenced by a member may not be continued by him if he ceased to be a member. The court may, however, allow it to be continued by some other member who is then substituted as the plaintiff. This was opined in Ffooks v. South Western Rly. Co.
The plaintiff in a representative action is not an agent for the persons on whose behalf he sues. Consequently, he can discontinue the action without their consent; the defendant can raise any defences against him which could be raised if he were suing in his own right alone, including his participation or acquiescence in the defendant’s wrongdoing, and the other persons on whose behalf he sues are not liable for costs if the action is unsuccessful.
The court will only allow a derivative action to proceed if it is brought for the benefit of the company, and so if the plaintiff’s motive is to benefit a rival concern that has encouraged him to sue and has indemnified him against costs, the action will stay. Likewise, if directors have paid dividends out of capital, but the company has since earned sufficient profits to replace the capital expended, it
seems that the court will not permit a member to bring a derivative action to compel the directors to repay the dividend out of their own pockets, because the company could immediately use the money received from the directors to pay a further dividend so that the result would be to benefit not the company, but its members individually.
A common question that arises is whether the plaintiff can claim indemnity of his costs from the company. In Smith v. Croft, Walton, J. held that an indemnity should not be granted if it could not be shown that the proceedings had an even chance of success or if it was opposed by a majority of the independently held shares. In Wallersteiner v. Moir, it was said that the test for whether an indemnity ought to be granted was whether the legal action constituted “a reasonable and prudent course
to take in the interests of the company”.