Generally, and as a matter of principle, the exercise of corporate power in a company is predominantly by the majority shareholders. This is an established norm in the construct of corporate entities and for this specific reason, some shareholders would rather not invest in any entity where they do not have adequate corporate power and thus control of the company and its affairs. The exercise of power by the majority and the tenet that their decisions are binding even on non-consenting minority shareholders is what is known in legal parlance as the “majority rule”.

The law however recognizes that the exercise of corporate power by the majority opens up the company to possible abuse either by its majority shareholders or directors acting in the majority. This often happens in circumstances where the majority rule is used to carry out, perpetuate or condone actions detrimental to the company’s interests. In such regard, the majority abuses its power to push through actions or decisions that are against the best interests of the company as a corporate body. Usually this happens at the expense of the minority shareholders who while they recognize the negative impacts of the majority decisions on the company remain lacking in adequate corporate power to initiate change or veto decisions of the majority. For this reason, the common law intervened by providing a remedy to the minority shareholders who wish to defend the company’s best interest but are being defeated at the instigation of the majority and this intervention is the derivative action.

The derivative action is an avenue which allows a minority shareholder to institute legal proceedings on behalf of the company even though, the majority of either the board of directors or shareholders in a general meeting, are against such an action. In other words, a minority shareholder derives standing or locus standi to act on behalf of the company even in the absence of a company resolution to that effect. Thus, a minority shareholder can be allowed to commence legal proceedings in defence of the company’s interests even against a decision by the majority. In terms of the common law, justification for the derivative action has always been the best interest of the company over the democratic exercise of the majority rule. Noble as the common law derivative action was and remains, it had and still has some problematic consequences which are herein not a subject matter save to recognize their existence. As such various legal jurisdictions chose to address these challenges by enacting statutory versions of the derivative action. In similar fashion, Zimbabwe introduced its statutory derivative action in the recently enacted COBE Act.

In terms of the statutory derivative action, a shareholder or shareholders with an interest of 10% or more, can either singly or as a class, institute an action on behalf of a company against any of its managers, officers or directors for recovery of damages caused to the company through violation of a duty owed to the company by the concerned company officials. This thus allows a minority shareholder room to defend the company’s interests against the manipulation of corporate power by the majority.

It is important to note and recognize that the derivative action exists exclusively for the defense of the company’s interests and not those of the minority shareholder even though one would observe that the defense of the company’s interest also indirectly and by extension preserves the interest of the minority shareholder as well. The derivative action is therefore very instrumental as a remedy in giving voice to minority shareholders who are faced with the predicament of having to see their shareholder value and investment interests being mismanaged to the benefit of the majority. The action however has some specific nuances which need to be strictly followed and observed for one to be able to successfully initiate it and the advice and guidance of a good corporate lawyer would be beneficial in that regard.