A Critical Assessment of Pertinent Locus Standi Features of the Derivative Remedy under Zimbabwe's New Companies and Other Business Entities Act

Abstract

The importance and contribution of derivative litigation to the effectiveness and credibility of a jurisdiction's corporate governance system is indisputable. There is a positive correlation between good corporate governance practices, which include shareholders’ rights, and investors’ return on their investments. On the one hand, an overly pro-shareholder derivative scheme is vulnerable to abuse and results in unnecessary interference with company management. This may, in turn, discourage directors from entrepreneurial risk-taking and undermine enterprise efficiency. On the other hand, a complex and ineffective system of derivative litigation protects errant directors and decreases investor confidence. This article is a critical assessment of Zimbabwe's recently adopted statutory derivative remedy. The analysis focuses on five locus standi-related aspects of the new statutory derivative regime. The article highlights some major weaknesses within Zimbabwe's statutory remedy and proposes pertinent legislative amendments.

INTRODUCTION

One of the innovative features of Zimbabwe's new Companies and other Business Entities Act¹ (the New Act) is the introduction of a statutory derivative remedy. The derivative action is one of the common and effective shareholder remedies and minority protection mechanisms worldwide,² especially among common law Anglo-American jurisdictions.³ A derivative action is a claim brought before a court by a complainant seeking redress on behalf of a company, usually when the directors are unable or unwilling to do so.⁴ The action is christened “derivative” because the complainant (usually a minority shareholder) steps into the shoes of the company to seek redress on its behalf.⁵ The “shareholder ‘derives’ his or her right of action from that of the company”.⁶ In other words, the complainant is not the direct beneficiary of the court order that is being sought through the proceedings. In essence, the derivative action is a clear departure from the well-known “proper plaintiff” rule⁷ of Anglo-American company law, which is capable of creating the potential for abuse of power where “the wrongdoers who commit a wrong against the company are the directors themselves”.⁸

Good corporate governance practices boost investor confidence.⁹ Accordingly, a strong system of corporate governance is attractive for both domestic and foreign investment. There is growing appreciation that derivative actions are “a valuable tool of corporate governance”.¹⁰ The primary function of derivative proceedings in contemporary company law is to ensure and promote directorial accountability.¹¹ This is largely against the backdrop of the fact that separation of ownership and control¹² presents shareholders with the problem of potentially encouraging directorial misappropriation of company resources for personal benefit.¹³ In the words of Griggs, derivative litigation acts as a form of “corporate watchdog, to pursue an action against a wrongdoer, when the board refuses to act”.¹⁴ Derivative actions can also be viewed as a practical and tangible expression of the checks and balances invoked by shareholders to monitor directors’ conduct.¹⁵ Further, derivative litigation plays a critical role in securing compensation for corporate losses or injuries.¹⁶ The remedy protects the interests of the company for the benefit of all shareholders.¹⁷ It is submitted that Zimbabwe's newly adopted statutory derivative regime should advance these underlying policy objectives. Accordingly, this assessment of that regime will be undertaken with those objectives in view.

The article is in three broad parts. Following this introduction is an examination of Zimbabwe's derivative remedy under the New Act. That analysis focuses on five locus standi-related aspects of the new statutory derivative regime. A fairly comparative approach is adopted to contrast this sub-Saharan state's codified remedy with some selected regional and international counterparts.¹⁸ The statutory derivative litigation scheme's fitness for purpose is then assessed, before the concluding remarks.

DERIVATIVE ACTIONS IN ZIMBABWE BEFORE THE NEW ACT

Before the New Act, aggrieved shareholders could institute derivative litigation under the common law, as the repealed¹⁹ Companies Act²⁰ (the Old Act) made no provision for derivative proceedings. The Old Act was extensively criticized for its chaotic and anomalous provisions.²¹ Under Zimbabwe's common law rules pertaining to derivative litigation, a corporate wrong could be rectified by the majority shareholders.²² The common law recognized derivative actions as an exception to the rule in Foss v Harbottle.²³ The main policy rationale underlying that approach to derivative litigation was that the principle of corporate personality should not be employed “to defeat public convenience, justify wrong, protect fraud and defend crime or other improper conduct”.²⁴ Consequently, derivative claims were permitted and employed as a tool for advancing the interests of justice.²⁵

There were two circumstances in which a director or shareholder could institute derivative litigation.²⁶ First, a director or shareholder would have locus standi to commence derivative litigation where a meeting was called to enable the shareholders to pass a resolution for the company to institute proceedings but the shareholders refused or prevented the meeting from taking place.²⁷ Secondly, derivative claims could also be instituted under Zimbabwe's common law rules where calling a general meeting would be an exercise in futility.²⁸ Under the common law, an applicant willing to commence derivative litigation was required to prove the presence of a direct and substantial interest in the allegedly injured company and that the company was either unwilling or unable to institute the proceedings on its own.²⁹ It was also necessary to prove that the company had been denied legal recourse by the alleged wrongdoers who were in control of the company.³⁰ The best way to prove that fact was by showing that the directors and the general meeting were called upon to commence litigation on behalf of the company but refused and that the refusal was as a result of the alleged wrongdoers’ votes.³¹

DERIVATIVE ACTIONS UNDER THE NEW ACT

Although the New Act does not explicitly abolish common law based derivative proceedings, an examination of the related parliamentary debates³² and bills³³ reveals the legislature's intention to jettison common law proceedings from the corpus of Zimbabwean company law. However, some common law principles relating to derivative proceedings will continue to apply unless they are in conflict with the New Act.³⁴ In the New Act, the Zimbabwe legislature sought to create an “enhanced derivative action [that] will advance good corporate responsibility and will promote stakeholder activism, thereby discouraging malfeasance by directors in relation to their company and providing a remedy through court action / application”.³⁵ This is in line with some of the statute's objectives, namely to encourage good corporate governance and implement additional measures to protect minority shareholders and investors in particular.³⁶ Using virtually identical language, Zimbabwe's deputy chief registrar of companies has reiterated that the New Act seeks, inter alia, to “increase protection of minority shareholders [and] accountability”.³⁷

Who has standing to institute a derivative action under the New Act?

Legal standing, or locus standi, is one of the filtering mechanisms that courts have constructed to restrict participation in derivative litigation to those whose interest in the concerned corporation is recognized and deemed adequate.³⁸ As a matter of US law, the complainant is required to demonstrate her or his standing to sue.³⁹ It has been argued that legal standing is the “sine qua non [essential prerequisite] of the shareholders’ right to sue”.⁴⁰ According to section 61(1) of the New Act, only company shareholders are eligible to launch derivative proceedings in their own names and on behalf of the company. Such proceedings can be initiated against any officer or director to enforce, or recover from them, damages caused to the company by violation of duties they owed to the company.⁴¹

The rationale behind making only shareholders eligible to commence derivative litigation under the New Act is debatable. Under both the March and October 2018 Bills, proof of the existence of “exceptional circumstances” would enable an interested person other than a shareholder to institute proceedings without first demanding action from the company.⁴² Both bills further stipulated that employees would have standing to institute a derivation action.⁴³ Furthermore, during the second reading of the October 2018 Bill before Parliament, some lawmakers argued that corporate governance principles that encourage stakeholder participation should be adopted in line with international best practice.⁴⁴ Evidently, an enhanced derivative remedy scheme that seeks to promote stakeholder activism in the realm of corporate governance cannot limit standing to shareholders alone. It is, therefore, submitted that, in this particular respect, the standing requirements of the New Act represent a glaring and unjustifiable departure from the underlying policy objectives expressed in the memorandum to the October 2018 Bill. Rather, the Zimbabwean legislature should have explicitly extended derivative standing to other stakeholders in its quest to facilitate and thereby ensure directorial accountability.

It has been argued that shareholders are poor monitors of corporate affairs, in the sense that they are usually not aware of some of the things happening in the company.⁴⁵ Broadening the scope of derivative standing to other stakeholders such as employees and creditors, who might be aware of wrongdoing, would almost certainly increase the chances of protecting a company's interests effectively.⁴⁶ Fears of a multiplicity of suits are allayed by reference to South Africa's experience, where the courts have not been overwhelmed by derivative claims even though access to the remedy has, for almost a decade now, been extended to employees⁴⁷ and nearly all stakeholders.⁴⁸

The restriction of eligibility to institute derivative shareholder litigation to shareholders reflects continuing adherence to an archaic shareholder primacy perspective, according to which companies were managed for the sole purpose of value or profit maximization.⁴⁹ However, keeping in mind the factual details of some unprecedented corporate debacles of the past two decades, it is submitted that treating directorial oversight responsibility as a shareholders’ prerogative is implausible.⁵⁰ This is also consistent with global trends towards a more stakeholder-centric approach to corporate governance.⁵¹ Further, although shareholders provide companies with much-needed equity capital, they are not the only victims of corporate mismanagement.⁵² Unsecured providers of debt capital acting in the best interests of the company also require access to justice.⁵³ It is also worth noting that, after the catastrophic collapse of British Home Stores that led to the loss of over 11,000 jobs, the UK government embarked on corporate governance reforms aimed at amplifying employees’ voices. It has been argued that “without providing a derivative claim right for employees, these measures will likely have little impact in practice”.⁵⁴ Therefore, it is submitted that the weight of rationality overwhelmingly supports the extension of standing in respect of commencing derivative litigation to other stakeholders acting to protect company interests.

In the USA, for the plaintiff to have standing s/he must “allege that [s/he] was a shareholder or member at the time of the transaction complained of”.⁵⁵ Put simply, only contemporaneous shareholders can institute derivative litigation in the USA. Generally, US corporate law does not permit holders of convertible debentures to institute derivative litigation on behalf of the debtor company.⁵⁶ A literal reading of section 7.41 of the US Model Business Corporation Act (MBCA)⁵⁷ reveals that non-shareholder complainants, such as creditors and holders of options, warrants or conversion rights, are not allowed to commence derivative proceedings.⁵⁸ This makes the USA a jurisdiction that has one of the most restrictive derivative standing rules. For its part, English company law does not make provision for creditor derivative litigation.⁵⁹ Furthermore, unlike South Africa where creditors have access to alternative company law based relief, English law does not provide access to such relief.⁶⁰ To facilitate whistle-blowing by management, South Africa's 2008 Companies Act (SA Companies Act)⁶¹ specifically provides that directors and prescribed officers also have derivative standing,⁶² as do trade unions and employee representatives.⁶³ Prospective derivative complainants in South Africa also include a category of persons who may be allowed standing at the discretion of the court.⁶⁴ Leave of the court in such instances can be granted “only if the court is satisfied that it is necessary or expedient to do so to protect a legal right of that other person”.⁶⁵ Against this backdrop, it is plausible to submit that South Africa has the most flexible derivative standing rules, as virtually any stakeholder may have standing under section 165(2)(d) of the SA Companies Act. It is further submitted that the Zimbabwean legislature borrowed liberally from the US restrictive contemporaneous ownership rule which, as shown above, is not part of the derivative litigation regime in the UK or South Africa.

Scope of the statutory derivative cause of action

Interestingly, derivative actions under the New Act may only be instituted in cases where damage or a breach of duty to the company itself is claimed.⁶⁶ However, clause 60 of the October 2018 Bill also allowed action to be brought against directorial lack of care or negligence. Lack of care or negligence may be wider than a breach of duty.⁶⁷ It is submitted that, on a literal interpretation of section 61(3)(a) of the New Act, directorial negligence and proposed acts and omissions may not warrant derivative litigation. This is in sharp contrast with the approach in other common law jurisdictions. For example, section 165 of the SA Companies Act is targeted at the protection of a company's legal interests.⁶⁸ Hence, the section does not specify the wrongs against which derivative litigation can be instituted.⁶⁹ A company's “legal interests” seem to be wider in ambit than its rights⁷⁰ and may even include potential rights.⁷¹ Consequently, the scope of the South African section 165 extends beyond derivative litigation “based on breach of directors’ duties” to include actions against third parties or instituted by third parties against the company.⁷²

An examination of the practice in the USA⁷³ and the UK⁷⁴ is invaluable here. In the USA, shareholders are empowered to institute a derivative suit in instances where “there is proof that the board of directors has wrongfully refused to pursue a valid cause of action on behalf of the corporation”.⁷⁵ There is no finite definition of the exact instances where shareholders have standing to institute derivative claims.⁷⁶ In the UK, the recognized causes of action are “an actual or proposed act or omission involving negligence,⁷⁷ default, breach of duty or breach of trust by a director of the company”.⁷⁸ The current UK regime has clearly broadened the scope of possible incriminating behaviour.⁷⁹ Under the common law, derivative actions could only be brought in terms of the “fraud on the minority” exception.⁸⁰ Zimbabwe's new statutory derivative remedy scheme evidently represents one of the most restrictive regimes in a contemporary world that seems to be embracing a liberal approach to derivative causes of action. However, it is hoped that the Zimbabwean courts will adopt a flexible approach to interpreting section 61(3)(a) so as to cover cases of directorial negligence, proposed acts or omissions and litigation against third parties.

Introduction of the contemporaneous ownership rule

The contemporaneous ownership rule is a product of the US Supreme Court decision in Hawes v Oakland.⁸¹ Interestingly, the rule does not exist in either the UK or South Africa. According to this rule, the plaintiff has to prove that s/he was a shareholder at the time of the transaction or conduct that is the subject of the complaint.⁸² The contemporaneous ownership rule is also woven into the fabric of the MBCA. Under the MBCA, to commence or maintain derivative litigation, the plaintiff should have been a “shareholder of the corporation at the time of the act or omission complained of or became a shareholder through transfer by operation of law from one who was a shareholder at that time”.⁸³ Also, such a shareholder should fairly and adequately represent the company's interests.⁸⁴

Although the contemporaneous ownership rule has been in existence for decades, there has been increasingly scathing criticism of the rule by contemporary company law commentators and scholars.⁸⁵ Wells argues that, when the US Congress codified the contemporaneous ownership rule, they “did not match the strict ownership requirements with equally strict guidelines for adequate shareholder representation”.⁸⁶ This inconsistency defeats one of the policy rationales behind the contemporaneous ownership rule, which is “ensuring adequate representation and personal interest in continuing zealous litigation”.⁸⁷ Interestingly, the inconsistency between the rule and what it is intended to achieve was also recognized in Delaware corporate law.⁸⁸

Additionally, the contemporaneous ownership rule does not clearly delineate the boundaries of wrongful conduct.⁸⁹ While it is understandable that the policy rationales for the contemporaneous ownership rule were without malicious intent, it is submitted that a wholesale application of the rule in a dynamic legal and business environment may result in the rule imposing undesirable barriers on shareholders’ access to justice.⁹⁰ Also, the findings of an empirical study conducted by Hoffman showed that the contemporaneous ownership rule makes the US standing requirements restrictive.⁹¹ Another empirical study has revealed that the rule is a barrier to potential derivative plaintiffs.⁹² As a result of the shortcomings and unintended consequences of the contemporaneous ownership rule, there have been calls for the rule to be completely disregarded.⁹³ Considering the obviously restrictive nature of the rule, it is submitted that there are no persuasive grounds for infusing it into the fabric of Zimbabwe's new statutory derivative remedy. As it currently stands, minority shareholders’ voices will not be heard.⁹⁴

As proof of the archaic nature of the contemporaneous ownership rule, 21st century company law legislation in both developed and developing states does not include it. For example, section 260(4) of the 2006 UK Companies Act (UKCA) states that, “[i]t is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company”.⁹⁵ Similarly, the Malaysian Companies Act, which was adopted in 2016, makes no reference to the rule. Although there is no explicit reference to the rule in the SA Companies Act, calls have been made for the South African judiciary firmly to reject it.⁹⁶ A summary of all these factors provides a sufficiently compelling basis for a submission that the rule should not have been made part of Zimbabwe's new statutory derivative remedy.

Lastly, unlike in Zimbabwe, the maintenance or retention of the contemporaneous ownership rule might be appropriate and justified for the USA due to the litigious propensity of the shareholders in that jurisdiction.⁹⁷ That propensity is attributable to the extremely high level of development of that jurisdiction's financial markets, which are highly sensitive to negative publicity “provoked by pending shareholder derivative litigation”.⁹⁸ Therefore, although the threat of strike suits is no longer as serious as it was at the inception of the rule, there remain some remote incentives for mischievous shareholders to commence litigation with the hope of attracting and concluding a settlement agreement.⁹⁹ It is submitted that, while this may be a sound justification for the retention of the contemporaneous ownership rule generally, it is obvious that the threat of strike suits does not exist in Zimbabwe.¹⁰⁰

Shareholder threshold requirements

Under the New Act, a prospective derivative plaintiff shall not be eligible to institute proceedings unless s/he holds interests or shares representing at least 10 per cent of the related company's voting power.¹⁰¹ In the case of a private or public company, this shall mean 10 per cent of the votes attached to the ordinary shares.¹⁰² Where two or more plaintiffs bring an action together, their cumulative shareholdings are counted for this purpose.¹⁰³ This kind of eligibility-related prescription is known as shareholder threshold or quorum requirements. There are no shareholder threshold requirements in the USA, South Africa or the UK.

It is submitted that the inclusion of shareholder quorum requirements in the New Act may preclude minority shareholders with genuine concerns from pursuing or obtaining recourse on behalf of the company. Threshold share ownership requirements might also encourage directors, especially those in closely-held companies who might also be majority shareholders in the company, to make self-interested decisions contrary to the interests of the company. Although minority shareholders might have personal recourse through other mechanisms such as the oppression remedy, the company as a legal person would have been injured. The linkage made by the legislature between the number of shares owned and the genuineness of the proposed derivative proceedings needs to be qualified. Does it imply that the more shares one owns in a company the more meritorious one's application to pursue derivative proceedings is likely to be? It is submitted that threshold share ownership requirements should not be used to determine a claimant's eligibility for standing, as the derivative action is not a personal action but one that is brought on behalf of and for the benefit of the company.¹⁰⁴ It is further submitted that the application of such threshold requirements might blur the distinction between personal and derivative / indirect actions. Also, section 61(3)(c) of the New Act can be strongly criticized for textual ambiguity as it is devoid of clarity as to how shareholder “interests” are to be assessed for compliance with the 10 per cent threshold.

It is well-documented that the dearth of derivative litigation in continental Europe is directly attributable to prescribed shareholder threshold or quorum requirements.¹⁰⁵ For example, Grechenig and Sekyra have observed that there are “practically no [derivative] suits in continental Europe”.¹⁰⁶ The paucity of derivative litigation in continental Europe has been explained on the basis that, since quorum requirements effectively mean that not all shareholders are eligible to launch derivative actions, management can misappropriate company resources and then collude with and / or bribe the potential qualifying plaintiff shareholders.¹⁰⁷ In the end, majority shareholders become accomplices to company mismanagement rather than assisting with the monitoring of management.¹⁰⁸ Due to the harshness and arbitrarily restrictive nature of shareholder quorum requirements, some zealous proponents¹⁰⁹ of these requirements have either done away with them or significantly reduced the threshold percentage, number of shares or the voting interest required to commence or continue derivative litigation. For example, Germany initially lowered its threshold from a 10 per cent shareholding or DM 2,000,000, to a 5 per cent shareholding or EUR 500,000.¹¹⁰ However, the current German statutory derivative suit introduced in 2005 requires only a 1 per cent shareholding or EUR 100,000.¹¹¹ Italy introduced derivative suits in 1998 but the remedy remained unused for the first five years.¹¹² Since “derivative suits failed to emerge in practice”, the threshold for Italian public companies was reduced from a 5 per cent to 2.5 per cent shareholding in 2006.¹¹³

An argument that derivative suits have been similarly almost non-existent in other continental European jurisdictions, such as France and Switzerland, that do not have shareholder threshold or quorum requirements in place is unsustainable. The low rate of derivative suits in these two jurisdictions has been directly attributed to the costs of litigation and not necessarily the presence of threshold requirements.¹¹⁴ Consequently, both the European Jurists Forum as well as the German Jurists Forum have called for the regulation of directorial and management misconduct to be strengthened.¹¹⁵

Considering the content and tenor of this discussion, it is difficult to envisage how a wholesale application of shareholder threshold or quorum requirements will enhance the efficacy of Zimbabwe's new derivative litigation scheme if it has produced negative results in other jurisdictions. Furthermore, the legislature set the threshold at 10 per cent, one of the highest in the world.¹¹⁶ Share ownership patterns in Zimbabwe point to a widely held model, which makes the 10 per cent threshold a very challenging feat for prospective derivative litigants. It is therefore submitted that section 61(3)(c) of the New Act arbitrarily limits shareholders’ access to justice and fails to promote directorial and managerial accountability, which are key tenets of any credible derivative regime.

Demand requirement

According to the demand requirement, before instituting a derivative action, a shareholder must first request the board of directors to rectify the impugned conduct and its effects.¹¹⁷ The rule constitutes a pre-suit requisite that a “potential” plaintiff should serve a demand on the board or any other comparable authority before s/he can legally assert the company's rights.¹¹⁸ As a result, shareholders who intend to commence derivative litigation are, as a matter of law and policy, required first to “attempt to secure corporate action through a demand on the board that it initiate the litigation”.¹¹⁹ This rule is a US legal export,¹²⁰ which is also a progeny of the well-known rule in Foss v Harbottle. ¹²¹ Throughout the USA, the demand requirement is recognized as either a statutory provision or a matter of judicial interpretation.¹²² In Delaware, to satisfy the demand requirement, the plaintiff must “state with particularity any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and the reasons for not obtaining the action or not making the effort”.¹²³ Essentially, the Delaware approach entails a two-stage process. First, the complainant requests the board of directors to institute action on behalf of the company.¹²⁴ The second stage depends on the board's response to the plaintiff's request. If the board is of the opinion that a valid claim has been served on it, which it rarely is,¹²⁵ then it will commence action to protect the company's interests.¹²⁶

In an effort to strike a balance between directors’ autonomy and shareholders’ need for access to justice,¹²⁷ the SA Companies Act¹²⁸ introduced the demand requirement into South Africa's statutory derivative litigation scheme.¹²⁹ Any person with standing can serve a letter of demand on the subject company, requesting it to commence or proceed with derivative litigation or take related steps to protect the company's interests.¹³⁰ After being served with a demand, the board must appoint an individual or committee to investigate the merits of instituting an action if either the company did not make an application to the court to set aside the demand or the court did not set it aside.¹³¹

The UKCA reflects a clear departure from the traditional pro-director approach adopted in the USA and South Africa. The current UK system shifts the power to determine whether to institute¹³² or continue¹³³ derivative litigation from the board of directors to the judiciary.¹³⁴ Legislation in this leading jurisdiction has introduced a system that depends on the court's discretion to determine whether or not derivative litigation should be allowed to continue.¹³⁵ The system consists of a two-stage approach for leave to proceed with derivative litigation.¹³⁶ First, the complainant must establish a prima facie case for permission to continue.¹³⁷ The second stage involves the judiciary's consideration of factors listed in section 263(2) and (3) of the UKCA.¹³⁸ Accordingly, the UK's current statutory derivative litigation framework is largely dependent on the courts’ interpretation of these factors.¹³⁹ Of further interest is the open-ended nature of the section 263(3) factors, “which makes them inherently uncertain”.¹⁴⁰

Against this backdrop, the Zimbabwean legislature must be applauded for adopting and codifying the pre-litigation demand rule in section 61(3)(d) of the New Act. Under that section, a prospective derivative action plaintiff must have previously requested in writing¹⁴¹ that the company's board rectify the acts that are the subject of the complaint. Further, the plaintiff's request must have either been refused or not responded to within 30 days.¹⁴² However, upon proof of good cause, the court can dispense with this latter requirement.¹⁴³

The demand on the directors is intended “to give the derivative corporation itself the opportunity to take over a suit which was brought on its behalf in the first place, and thus to allow the directors the chance to occupy their normal status as conductors of the corporation's affairs”.¹⁴⁴ The demand requirement also seeks to afford the subject company the opportunity to decide whether to invest the company's resources¹⁴⁵ in litigation.¹⁴⁶ Furthermore, the rule acts as a mechanism to filter out derivative actions that would “result in a waste of corporate assets”.¹⁴⁷ Most importantly, the requirement fends off strike suits.¹⁴⁸ However, the effectiveness of this rule may be undermined by the lack of essential textual detail in the pertinent provisions of the New Act, which may result in ambiguity and related challenges in their interpretation and application.

It is submitted that, for a rule as vital as the demand requirement, an elaborate statutory provision is indispensable. One of the main reasons for the codification of common law rules is the establishment of legal certainty. As such, it is a fair expectation that the Zimbabwean legislature would have provided more guidance, especially regarding the company's response to a demand. Section 61(3)(d) falls short of providing critically important detail and should therefore be amended with immediate effect. It is especially troubling that the provision is unclear as to whether, upon receipt of the demand, a company may apply to a court to set the demand aside if it is unmeritorious.

The New Act does provide that the court may dispense with the demand requirement for good cause. However, what does “good cause” really mean? Two views come to mind. First, “good cause” might refer to the US-style demand futility principle, according to which the demand requirement can be waived because serving it would be futile, unavailing or useless.¹⁴⁹ Secondly, “good cause” might be akin to what is required under section 165(6) of the SA Companies Act. According to this provision, a derivative applicant may apply to a court for leave without making a demand and the court may grant leave only if it is satisfied that there may be:

“(a) … (i) irreparable harm to the company; or (ii) substantial prejudice to the interests of the applicant or another person;

(b) there is a reasonable probability that the company may not act to prevent that harm or prejudice, or act to protect the company's interests that the applicant seeks to protect; and

(c) that the requirements of subsection (5)(b) are satisfied”.

It is hoped that the courts in Zimbabwe will interpret section 61(3)(d) of the New Act as though its wording were similar to that of section 165(6) of the SA Companies Act, as the wording of the latter is significantly more consistent with the purposes of the New Act. It is also hoped that the Zimbabwean judiciary will shun the US-style demand futility doctrine because it is too onerous¹⁵⁰ and overly technical.¹⁵¹

ADDITIONAL AREAS OF WEAKNESS IN THE NEW ZIMBABWEAN DERIVATIVE ACTION REGIME

Lack of provision for continuation of ongoing derivative proceedings

Section 61(1) of the New Act provides that a shareholder in a company may “bring an action in court in such person's name and on the company's behalf against any … director … to enforce, or to recover from that … director damages caused to the company by violation of, duties owed by that … director to the company under this Act …”. The legislature did not, in this text, clarify whether this refers to commencing or continuing derivative proceedings. It is humbly submitted that this is another case of a clear and unjustifiable departure from clause 60 of the October 2018 Bill, which specifically provided for the continuation of derivative proceedings.¹⁵² The enactment of a statutory provision for commencing derivative litigation is certainly welcome. However, permission for intervention in and continuation of such proceedings is also essential for an effective and contemporary derivative remedy. In this regard, the SA Companies Act is prototypical as it provides for the commencement or continuation of derivative actions as well as the taking of related steps to protect the subject company's interest.¹⁵³ There are some circumstances where intervening in ongoing proceedings would be justified. For example, in the UK, following the institution of a derivative action by one shareholder, another may apply to the court to continue the claim on the ground that “the manner in which the proceedings have been commenced or continued by the claimant amounts to an abuse of the process of the court, the current claimant has failed to prosecute the claim diligently, and it is appropriate for the applicant to continue the claim as a derivative claim”.¹⁵⁴ It is submitted that the phrase “bring an action” is more associated with commencing rather than intervening to continue ongoing proceedings. Accordingly, it is recommended that the Zimbabwean courts adopt a liberal approach, allowing derivative intervention aimed at protecting the company's interests, especially in the circumstances mentioned above.

Absence of provision for institution of multiple derivative actions

Furthermore, the New Act merely provides for the institution of derivative actions without specifying whether multiple or double derivative actions are also permissible under section 61 of the act. A multiple or double derivative action¹⁵⁵ arises in the context of groups of companies and holding companies when a shareholder in a holding or parent company institutes litigation on behalf of a subsidiary or associated company.¹⁵⁶ When the UK codified derivative actions in the UKCA, it also did not explicitly provide for multiple derivative actions. Ideally, the Zimbabwean legislature should have specifically provided for double and multiple actions to avoid the problem the UK experienced in its transition from common law to statutory derivative proceedings.¹⁵⁷ Until the court's decision in Universal Project Management Services Ltd v Fort Gilkicker Ltd,¹⁵⁸ it was almost certain that multiple derivative actions could no longer be brought under the UK's statutory derivative scheme,¹⁵⁹ which excludes common law.¹⁶⁰

It is submitted that a statutory provision for multiple derivative suits is an essential and invaluable provision that recognizes the prevalence of company group structures in the contemporary business environment.¹⁶¹ Without the possibility of multiple derivative actions, erring parent company directors would be unfairly protected from liability for their wrongdoing as a result of the control they exercise on the group structure.¹⁶² It is obvious that a holding company's control¹⁶³ of a subsidiary may influence its decision-making, including its unwillingness to litigate.¹⁶⁴ It is, therefore, submitted that multiple derivative actions are highly desirable in the interests of justice. It is further submitted that, during such proceedings, the court should consider whether the boards of both the wronged subsidiary and the holding company unjustifiably refused to litigate.¹⁶⁵

Failure to provide for the continuous ownership or continuing interest rule

Another important aspect that is not addressed in Zimbabwe's new statutory derivative scheme is the question of whether the plaintiff should maintain a continuing interest for the duration of the suit. Baum and Puchniak explain that the continuing ownership rule is premised on the policy rationale that “only a plaintiff shareholder with an ongoing interest in the company will properly represent the interests of all shareholders”.¹⁶⁶ Proponents of the rule argue that plaintiffs who have ceased to be shareholders may abuse the derivative remedy by invoking it for their personal benefit, disregarding the company's interests.¹⁶⁷ It is also arguable that giving standing to former shareholders may open the floodgates to unmeritorious frivolous actions and strike suits. In the absence of the good faith muster, it is submitted that the continuing ownership rule becomes indispensable.¹⁶⁸ Accordingly, Zimbabwe should have adopted and provided for the continuous ownership rule.

CONCLUSION

Zimbabwe, which is traditionally a Roman-Dutch common law jurisdiction,¹⁶⁹ seems to have been inspired by and embraced a blend of ideas and norms from US and continental European legal systems in designing its statutory derivative litigation framework. On the one hand, aspects such as the contemporaneous ownership rule and the demand requirement are US legal exports. On the other hand, shareholder threshold or quorum requirements originate from continental European or Roman-Germanic legal systems. As argued below, this blend appears to have yielded legal rules that are actually inconsistent with the rationale for Zimbabwe's domestic company law reform, the needs of the country's current economic status quo and pertinent global trends.

The importance and contribution of derivative litigation to the effectiveness and credibility of a jurisdiction's corporate governance system is indisputable.¹⁷⁰ There is a positive correlation between good corporate governance practices, which include shareholders’ rights, and investors’ return on their investments.¹⁷¹ To that end, derivative litigation may contribute to the achievement of a country's broader macro-economic objectives, such as inflation reduction¹⁷² and employment creation.¹⁷³ On the one hand, an overly pro-shareholder derivative scheme is vulnerable to abuse and results in unnecessary interference with company management. This may, in turn, discourage directors from entrepreneurial risk-taking and undermine enterprise efficiency. On the other hand, a complex and ineffective system of derivative litigation protects errant directors and decreases investor confidence.¹⁷⁴ The design and textual articulation of a statutory derivative action regime should, therefore, balance the imperatives of directorial accountability and authority. It is against this backdrop that it is suggested that the New Act should be amended to include explicit provisions for intervention in ongoing proceedings, the institution of double and multiple derivative actions and the reflection of derivative complainants’ proprietary interests throughout the proceedings. For the same underlying policy rationale, it is hoped that Zimbabwean courts will adopt a flexible approach in interpreting section 61(3)(a) (which relates to eligible causes of action) to cover cases of directorial negligence, proposed acts or omissions by management and litigation against third parties.

It is further recommended that Zimbabwe's New Act be amended to repeal section 61(3)(b), which entrenches the contemporaneous ownership rule of standing in derivative actions. This is consistent with the foundational principle of derivative actions that proceedings are brought to protect corporate and not personal interests. Additionally, the contemporaneous ownership rule is overly onerous and excessively technical.¹⁷⁵ A shareholder who acquired her or his shares after the impugned conduct or transaction should be allowed to commence or continue derivative proceedings, provided the application is instituted or pursued in good faith.¹⁷⁶ An elaborate demand requirement and judicial diligence in determining the applicant's good faith should be sufficient filtering mechanisms against potential abuse of this remedy.¹⁷⁷

Additionally, it is submitted that section 61(3)(c) of the New Act, which restricts derivative standing to shareholders who own at least 10 per cent of the company's voting power, should be abolished. First, the notion of derivative litigation implies the protection of company rights regardless of the amount of share ownership held by the claimant. Secondly, given the low litigation appetite of Zimbabwean shareholders, there is a low risk of “strike suits”, which is one of the mischiefs that shareholder threshold requirements originally sought to eradicate. These requirements unjustifiably restrict access to justice, weaken directorial accountability and may inadvertently promote misappropriation of company assets.

In its current state, the text of section 61(3)(d) of the New Act, which provides for a statutory demand requirement, is insufficient and vague. Considering that Zimbabwe's common law derivative regime was substantially based on the archaic English wrongdoer control principle, there was a compelling need for the legislature to prescribe a demand requirement in sufficient detail. The textual inadequacies of section 61(3)(d) may result in the judiciary stretching this provision unnecessarily, which may, in turn, lead to conflicting court decisions. However, the demand requirement is a welcome inclusion into Zimbabwe's derivative proceedings regime as it is a necessary filter against unmeritorious and bad faith suits.

Lastly, given the combination of limited causes of action, an onerous and overly technical contemporaneous ownership rule, very high shareholder threshold requirements, and the vague and inadequate demand requirement provision, the inescapable conclusion has to be that the new Zimbabwean regime for statutory derivative proceedings is neither good law nor fit for purpose. Inexplicably, the legislature has enacted a rather conservative and restrictive derivative scheme contrary to the promises articulated in the memoranda to both the March 2018 and October 2018 Bills.