Introduction

It is a high-handed aphorism that “let the majority rule, while the minority should have their way”. Of course, this is one of the fundamental axioms of the theory of evolution of a democratic society. This aphorism is also applicable to company as a legal entity; corporate governance. Meanwhile, its jurisprudential relevance to corporate governance is the rule established in the locus classicus case of Foss vs Harbottle (1843) 2 KB 461. To my understanding, Foss vs. Harbottle (supra) established mainly dual rules which are; “majority rule” and “proper plaintiff rule”. The ‘majority rule’ postulates that the sovereignty of the administration and management of the company belongs to the majority (shareholders) of the company while the ‘proper plaintiff rule’ postulates that it is only the company that can sue in court of law for its legally cognisable rights in any event. Since the Nigerian Legal System largely excelled from the common law principles, the principle in Foss vs. Harbottle (supra) was incorporated in section 299 of the Companies and Allied Matters Act, (hereinafter called CAMA) in Nigeria. However, section 300 (a), (b), (c), (d), (e), and (f) of the CAMA creates certain circumstances as the exception to the ‘majority rule’ in order to protect the minority against the illegal and oppressive conducts of the majority in the company. Notwithstanding the exceptions created by the CAMA, the company remains the ‘proper plaintiff’ for all intent and purposes to sue for any wrong committed against the company; only to the extent that any member of the company can sue the company for any of his/her personal rights when breached by the company.

Consequently, in the event that the wrong that is committed against the company is by the decision makers of the company who are generally charged with the responsibilities of acting in the best interest of the company; one of the remedies available to the minority as provided by the CAMA is that the minority can apply to the Federal High Court (hereinafter called ‘court’) for leave to commence an action in the name of the company for the wrong committed against the company. This procedure is technically known as ‘derivative action’. The simple meaning of this esoteric terminology is that the minority or a shareholder of a company can only by the permission of the court; derive the power to commence the action in the name of the company from the company. However, company proceedings are sui generis; hence, a common misconception of the technical procedures of this derivative action. I intend by this essay, attempt to unravel the common misconception of the technical procedures of the derivative action by using the Supreme Court’s decisions in Agip (Nig.) Ltd vs. Agip Petroli Intl. (2010) All FWLR (pt. 520) S.C 1198 as my guide.

Nature of Derivative Action

According to the Supreme Court in Agip’s case “derivative action also known as a shareholder derivative suit is a law suit brought by a shareholder on behalf of a company against a third party. Often the third party is an insider of the corporation such as the directors or executive officers.” The Supreme Court further explained that “Derivative suits are unique because under the traditional corporate law, management is responsible for bringing and defending the corporation against suit. The basic requirements at common for a derivative action are;

  1. That the alleged wrong or breach of duty is one that is incapable of being ratified by a simple majority of the members and
  2. That the alleged wrongdoers are in control of the company, so that the company which is the claimant cannot claim by itself.

It is very clear from the above Supreme Court’s description of derivative action that it is an exception to the traditional majority rule. Though, the company remains the proper claimant even in derivative action. The technical difference in the derivative suit from the normal proper plaintiff rule is that it is a special procedure that allows the minority or a shareholder in the company to derive the legal competence to take action on behalf of the company.

It could also be discerned from the Case that the circumstances when the minority or a shareholder can benefit from the derivative action are basically three and are follows:

  1. When the wrong committed against the company amounts to fraud on the minority.
  2. The wrongdoers are in control of the company such as the directors, officers or employees of the company whose breach of their duties is causing harm to the company. And;
  3. The activities causing the harm to the company are such activities that cannot be legally ratified by the company in any event

The Court with Jurisdiction in Derivative Action

Generally, the Federal High Court is vested with the exclusive original jurisdiction by virtue of the provision of section 251 of the 1999 Constitution of the Federal Republic of Nigeria as (amended) to determine matters pertaining to the administration of the provisions of the CAMA only to the extent that section 245C of the Constitution (Third Alteration) Act, 2010 also vests the National Industrial Court of Nigeria with the exclusive jurisdiction in matters relating or connected with employment. Therefore, the exclusive jurisdiction of the Federal High Court on company’s cause of action that is predicated on the administration of the provisions of CAMA should not be conflated with the cause of action that is predicated on the administration of the provisions of CAMA but relating or connected with company’s employer and employee relationship. In the latter circumstance, the National Industrial Court is vested with the exclusive jurisdiction.

It is discernable from the above that derivative action is an action that is brought on behalf of the company arising from the administration of the provision of CAMA. Derivative action by its very nature, it is rightly submitted that the Federal High Court is the proper channel.

The Common Misconception of the Procedure for Derivative Action

By implication of the provision of section 303 of the CAMA, it is a condition precedent for the shareholder who intends to commence the derivative action as a minority protection to apply to court for leave to bring the action in court in the name or on behalf of the company. Consequent upon this provision, the applicant usually adopts the provisions of the Federal High Court (Civil Procedure) Rules in applying for the leave via motion experte or motion on notice. This is absolutely a wrong procedure which affects the competence of the suit ab initio. I shall hereby refer straight forward to the Agip’s case for the better understanding.

The Relevant Facts of the Case

The relevant facts of the Agip’s case are that Agip International was interested in selling its interest in Agip Nigeria Limited where it had 60% shares. It entered a deal with the then Unipetro Nigeria Plc. However before the deal was sealed, the minority shareholders of the Agip Nig. Ltd brought an action in the Federal High Court sitting in Lagos claiming that they were prejudiced by the transaction because they had not been first offered the share contrary to the constitution of Agip Nigeria Limited. They also alleged that there were some illegalities in the said transaction which they needed to take urgent steps against the transaction, in the sense that the acquisition will be completed even before they may be able to go through the rigour of the normal process of instituting an action. Obviously, the Board of Directors who were interested in the said transaction were not interested in instituting any action against the transaction. Consequently, the minority shareholders who were against the selling of the company’s shares sought inter alia the court’s order declaring the sale as illegal. And constitute a fraud, an order nullifying the sale and an order restraining the Agip Petroli Intl. from dealing in the share of the Agip Nig. Ltd.

In commencing the derivative action, the minority shareholders of the Agip Nig. Ltd brought two ex perte applications; one for a substituted service and the other for an order granting the leave to the minority shareholders to bring the action in the name of Agip Nig. Plc.

Amazingly, the trial court erroneously granted both ex perte applications. The ruling of the trial court was subsequently appealed successfully to the Court of Appeal. The Court of Appeal reason for allowing the appeal was that the processes before the trial court were incurably bad which renders the orders granted thereon void for non compliance with the proper procedure.

The minority shareholders being dissatisfied with the decision of the Court of Appeal appealed unsuccessfully to the Supreme Court.

What then is the Proper Procedure?

The last word was spoken by the Supreme Court on the issue and it remains the state of the law as to the correct practice and procedure of derivative action brought in pursuance of the provision of section 303 of the CAMA. For all intent and purposes, the Supreme Court in Agips case extensively addressed the issue.

I find it necessary at this juncture to reproduce the ratio of the Supreme Court in Agip’s Case ipssisma verba for the purpose of better understanding. Therefore, Per Adekeye JSC delivering the lead judgment [Pp. 1231 – 1232, Paras, F- C] eruditely held as follow:

“ The  procedure for obtaining  the requisite leave is not embodied in the ordinary rules of court of the Federal High Court, 2000, but can only be found in the  Companies Proceedings Rules, 1992… It is consequently imperative that a minority shareholder who intends to bring a derivative action in the name of the company must first and foremost apply for leave of court by way of originating summons on notice to the Company. The shareholders will require the court’s consent to sue. The derivative action must be commenced with the claim form referred to in rule 2(2) of the Companies Proceedings Rules, 1992 and an application by the shareholders for the court’s permission or leave to continue the claim. The company must be made a defendant to the claim for the technical requirement of ensuring that the company is bound by any judgment given. The hearing of the shareholder’s application will thereafter proceed in the manner of an ordinary interim application with both sides being afforded the opportunity to submit evidence and submission. The company must be given notice of such hearing so that the company or the directors may be able to appear to present their view of the shareholder’s case”

Interestingly, the above cited ratio of the Supreme Court has covered the field if soberly studied and followed. It is a trite law that Supreme Court’s decision in Nigeria practically represents the state of the law for all time until overridden by itself. It has the greatest force of law as it binds all other courts in Nigeria. Essentially, the procedural defects that were identified by the appellate courts were not treated as mere irregularities which may not affect the jurisdiction of the court. Conversely, they were treated as jurisdictional matters.

Condition for Granting the Leave

Arising from the ratio of the apex court in Agip’s case it is equally important that in applying the provision section 303(2) of CAMA, the court reiterated the parameter to diagnose the justification of granting the leave for derivative action are as follow:

  1. The wrongdoers are the directors who are in control and will not take necessary action.
  2. The applicant has given reasonable notice to the directors of the company of his intention to apply to the court under subsection (1) of this if the directors of the company do not bring, diligently prosecute or defend the action.
  3. The applicant is acting in good faith. And;
  4. It appears to be in the interest of the company that the action be brought, prosecuted, or discontinued.

The above conditions highlighted are conjunctively essential to the granting of any application for leave to bring, intervene or discontinue an action on behalf of the company by the minority or a shareholder of the company.

Conclusion

The practice and procedure of company proceedings is sui generis. They are regulated by the provisions of CAMA and the Companies Proceedings Rules of 1992 made by the then Chief Judge of the Federal High Court in pursuance of the powers vested in him in that behalf via the Constitution. It is a special kind of civil proceeding such as the AMCON matters that are specially regulated by the AMCON Proceeding Rules, 2018 and Fundamental Rights Actions which are also regulated by the Fundamental Rights (Enforcement Procedure) Rules, 2009. In other words, company proceedings are special kind of proceedings that are not regulated by the traditional procedures contained in the Federal High Court Rules.

Therefore, by the community reading of sections 300, 303 of the CAMA and rule 2(1) and (2) of the Companies Proceedings Rules, the minority or a shareholder can commence a derivative action in the name of the company to protect the minority from the illegal and oppressive conducts of  the decision makers in the company. It is however important to get the prior permission of the court to derive such right of action from the company. In seeking the permission of the court to commence the derivative action in court, the Companies Proceedings Rules says it can only be done by an originating summons and not otherwise. This is  in order to put the company and the directors on notice and in line with the almighty principle of fair hearing.

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