Minority shareholders often find themselves in a difficult position. They have invested in a company, yet have little say in how it is run, and even less power to do anything when the people in control, usually the directors, act improperly. The problem becomes especially acute where the wrongdoers are the very directors who would ordinarily decide whether the company should sue. Wrongdoing directors are unlikely to authorise a lawsuit against themselves, leaving the company without recourse for the harm caused to it. This is where the "derivative action" comes in – a mechanism that allows certain persons to sue on the company's behalf, even though the wrong was done to the company and not to them personally.
The Proper Plaintiff Rule and Why Court Permission Is Needed
In law, a company is a separate legal entity, distinct from its shareholders. This means that, ordinarily, only the company itself can sue for wrongs done to it, a principle known as the "proper plaintiff rule", derived from the old English case of Foss v. Harbottle [1843] 67 ER 189. This is the foundational reason why a statutory mechanism such as section 216A of the Companies Act 1967 is necessary: it provides an exception to the proper plaintiff rule, allowing a shareholder to step into the company's shoes to pursue a corporate wrong, rather than a wrong suffered in the shareholder's own personal capacity.
Because this is an exception to a deeply entrenched rule, the law does not allow shareholders to commence such actions freely. Court permission, or "leave", must always be obtained first, whether the action is brought under the statutory route (section 216A) or under common law principles.
Statutory versus Common Law Derivative Actions
Singapore is somewhat unusual in that it retains two parallel routes for derivative actions. The statutory derivative action under section 216A was introduced to simplify what had become an uncertain and procedurally awkward common law process built around the narrow “fraud on the minority” exception to the “proper plaintiff rule”. Unlike in the UK, where the statutory derivative action effectively replaced the common law version, Singapore allows both to co-exist. This matters practically because the statutory derivative action is only available for companies incorporated in Singapore; shareholders of companies incorporated elsewhere, or of listed companies (at least historically, before the 2014 amendments (which came into force in 2015) extended the regime to listed companies), have had to rely on common law principles instead.
Who Can Bring a Statutory Derivative Action
Under section 216A, the person bringing the action, referred to as the ‘complainant’, must generally be a member of the company. The Minister may also apply in certain cases involving companies under investigation, such as for fraud. Importantly, the court retains a residual discretion to allow any other person it considers a ‘proper person’ to bring the action, even if that person is not strictly a shareholder. This flexibility ensures that the gateway to derivative actions is not unduly narrow, while still filtering out applicants with no genuine stake in the company's affairs.
It is also worth noting that a statutory derivative action cannot be brought once a company has entered liquidation. As the Court of Appeal held in Petroships Investment Pte Ltd v Wealthplus Pte Ltd, section 216A is unavailable once a company is in liquidation: control of the company passes to the liquidator, and the board of directors - whose inaction the derivative action is meant to remedy - is by then functus officio.
The Three Conditions for Obtaining Leave
Before a complainant can commence or intervene in an action on the company's behalf, the court must be satisfied of three things. First, the complainant must have given the company's directors fourteen days' notice of the intention to apply for leave, giving the board a genuine opportunity to act on the matter themselves. This notice does not need to specify every cause of action in painstaking detail, but it must sufficiently identify the substance of the complaint. Where strict compliance with the notice period would be impractical - for instance, where there is a risk that evidence or assets might be hidden in the interim - section 216A(4) allows the court to make interim orders pending the giving of notice. The courts have stressed, however, that this does not dispense with the notice requirement altogether: outright dispensation is granted only in the rarest of cases, and a complainant worried about the destruction of evidence is expected to apply for a search order rather than bypass notice (see Lee Seng Eder v Wee Kim Chwee [2013] SGHC 287).
Second, the complainant must be acting in good faith. As established in Pang Yong Hock v Leow Gim Siong [2004] SGCA 18, this requires an honest belief that there are good grounds for the action, and an absence of any improper collateral purpose. Mere personal animosity between the complainant and the alleged wrongdoer is not, by itself, evidence of bad faith; something more, such as a vendetta clouding the complainant's judgment, would typically be required.
Third, the proposed action must appear, on a prima facie basis, to be in the interests of the company. This involves both an assessment of the legal merits of the claim and a broader, more commercial inquiry into whether pursuing the litigation makes practical sense for the company, taking into account matters such as the likely costs versus the recoverable damages.
Knowing When a Derivative Action Is Not the Right Tool
Not every grievance involving a director calls for a derivative action. Where the loss in question is suffered personally by a shareholder, rather than by the company itself, a derivative action is not the appropriate remedy; the better course is an action for minority oppression under section 216 of the Companies Act. The Singapore courts continue to grapple with where exactly the line between a ‘corporate’ wrong and a ‘personal’ wrong should be drawn, particularly because the remedies available under both provisions can overlap.
A Practical Word for Business Owners and Shareholders
For minority shareholders who suspect mismanagement or breach of duty by those controlling the company, section 216A offers a structured, if procedurally demanding, route to vindicate the company's rights. For directors and majority shareholders, it serves as a reminder that inaction in the face of a genuine wrong to the company can itself open the door to court intervention. Given the procedural and evidential thresholds involved, proper notice, good faith, and a credible case that is in the company's interests, obtaining tailored legal advice before commencing or responding to a derivative action application is strongly advisable.