The derivative action under Maltese Company Law : time to reconsider?

Abstract

The aim behind this dissertation is to question whether in Malta there exists the necessity to include in our Companies Act legislation regarding the derivative action similar to Section 260-269 of the U.K. Companies Act. The notion was developed under common law primarily as a corollary to minority shareholder protection. Since time immemorial, a struggle to strike the right balance between the general principle of majority rule and minority protection in the company law field has led both the legislature and the judiciary, particularly in England, to strive towards developing mechanisms to reconcile the opposing needs and interests of controllers and minorities. The rule in Foss v. Harbottle, 1 as it has come to be known, has two intrinsic elements: first, the proper plaintiff in an action in respect of a wrong alleged to be done to the company is, prima facie, the company itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company by a simple majority of the members, no individual member of the company should be allowed to maintain an action in respect of that matter for the simple reason that one should not, in theory, question the will of the majority of the members. Although the rule implies certain obvious advantages, such as operational efficiency and the avoidance of vexatious suits, it is lacking in one serious aspect. Where the directors are themselves the wrong doers, they may decide not to sue, a decision that may be approved by the company in a general meeting where the wrongdoers may likewise control a majority of the votes. This situation was not acceptable and consequently exceptions to the rule in Foss v. Harbottle were developed whereby an individual shareholder could sue by means of a 'derivative action The dissertation shall engage, inter alia, in a general analysis of the reasons behind the inception of the notion under English law and a critical analysis of the various conflicting opinions and inevitable questions raised by the notion. The first chapter sets out the relevant basic company law principles behind the very nature of a company and its management and control. Such aspects will be critically discussed in the light of the perceived degree of checks and balances which the derivate action sets out to offer, even within the ambit of corporate governance. Chapter two delves into the history of the notion, the principal factors leading to its inception, and its development. This will be supplemented by a comparison of the earlier and contemporary perception of the action in the light of relevant UK jurisprudence. The extent to which the Maltese Courts adopted and developed the reasoning of English Courts is analysed in chapter three, through a critical analysis of predominant Maltese judgments on the notion. This analysis will be followed by a fourth and final chapter discussing whether Section 402 of the Companies Act, which is akin to the derivative action, ought to be widened in scope, restricted to curb potential abuse, or discarded and revisited altogether, giving reasons for each scenario.