UNIVERSITY OF ZIMBABWE
FACULTY OF LAW
NAME : TENDAI MUKARIRI
REG NO : R207633D
PROG : BACHELOR OF SUBSTANTIVE
LAWS
COURSE : PROJECT
LECTURER : P. CHIGUMBA
DUE DATE :
PROJECT PROPOSAL
SHAREHOLDER PRIMACY AND DERIVATIVE ACTION IN
ZIMBABWEAN COMPANY LAW: IS THERE A NEED FOR FURTHER
REFORM?
Introduction
Corporate governance is the system of rules, practices, and processes by which a firm is
directed and controlled. It involves balancing the conflicting interest of many company
stakeholders, such as shareholders, executives, customers, suppliers, financiers, the
government, environment and the community.1 This dissertation will explore the position
of shareholder primacy and derivative action, and the business judgment rule as adopted
from the common law and introduced in the new 2019 Companies and Other Entities Act
(Chapter 24:31).
It is trite law that a company is a legal persona which stand on its own separate from its
members. A company can make decisions on its own through its directors, it can sue and
be sued as a legal persona, independently from its members. This position creates limited
control of the company by the shareholders who would have formed the company solely
to withdraw benefits from their entrepreneurship. That limited control is given on the basis
that they also have limited liability in regards to the creditors of the company. Thus to
safeguard the interest of shareholders the world over there has been a shareholder-centric
form of corporate governance. Secondly there has been a remedy called shareholder
derivative action to offer the shareholders a remedy to safeguard the best interests of the
company if directors act contrary to those interests. Thirdly there has been a rule
referred to as the business judgement rule (BJR) which states a guideline as to how
directors should make decisions. This rule is invoked to review the merits of directors’
decisions. The rule is intertwined to the principle of shareholder primacy and shareholder
derivative action.
Cornerstone to a country’s economic development is having vibrant companies. For this
reason the societies and the governments in particular do not want companies to fail. Thus
there is need to regulate the companies activities, protect the interest of other
stakeholders and at the same time allowing shareholders to maximise benefits for the risk
they take in investing in a corporate body. To strike a balance between these conflicting
interest there is need to create a corporate governance framework that takes into account
shareholder primacy, allows for fair shareholder derivative action and also provide for
1
James Chen, Corporate Governance definition: How It Works, Principles, and Examples, (August2022)
directors’ protection through a practical business judgment rule. Thus these issues cannot be
discussed separately. In other words, over focusing on shareholder primacy and ignoring
the interest of other stakeholders leads to companies failing and hence the need for
directors to act within the framework provided by the business judgment rule. It is
important then also to allow shareholders to utilise the derivative action as remedy in
cases where directors act in a manner contrary to the business judgment rule and the best
interest of the company.
It is important to note that a company is made up of different stakeholders who have
different and sometimes conflicting interests. The law recognises the existence of these
conflicting interests but however, lacks clear and proper guidance on how these interests
are to be balanced. The writer will therefore explore shareholder primacy and shareholder
derivative action, the rationale and link of the two. He will also bring out the negative effects
of these principles on other non-shareholder participants (stakeholders) in a company.
Background
Shareholder primacy is a norm of corporate law which states that the company through its
directors should give primary focus to the interest of the members (shareholders ) of the
company in corporate decision making. This is a shareholder-centric form of corporate
governance which considers shareholders as the primary beneficiaries of the company.2
Shareholder derivative action is a claim brought before a court by a complainant seeking
redress on behalf of a company, when the directors are unable or unwilling to do so 3 or the
wrongdoers who commit a wrong against the company are the directors themselves. 4
According to Section 61 of the Companies and Other Entities Act (Chapter 24:31), this
claim should be done by a shareholder representing the company enforcing rights the
rights of the company but such shareholder does not represent the other shareholders.5
Thus shareholder primacy provides that the best interest of the company is tied and
permanently linked to the interest of the shareholder which is to maximise profit in most
cases.
2
C. Borduas, ‘stakeholders’ Primacy: a paradigm shift confirmed(2019), Canada
3
4 Weidner, DJ “Dissatisfied members in Florida LLCs: Remedies” (2019) 18 Florida State
University Business Review 1 at 6
4
Cassim, MF “The statutory derivative action under the Companies Act of 2008: The role of good
faith” (2013) 130/3 The South African Law Journal 496 at 499.
5
In Kufandada v Dairiboard Zimbabwe Ltd [2015] ZWHHC 564
The new Companies and Other Entities Act (Chapter 24:31) simply confirms this
position in many of its Sections but the writer shall restrict himself to Section 61 which
seem to cement shareholder primacy by giving only shareholders the right to undertake
derivative action to the exclusion of other stakeholders.
Problem statement
With the evolution of corporate governance and the coming into effect of the fourth industrial
revolution is it still relevant to exercise a shareholder-centric model of corporate governance?
The ‘best interest of the company’ has evolved to include other stakeholders. It is clear that
Zimbabwean corporate law either statute or common law has not been able to deal with;
the implication of shareholder primacy and has granted only shareholders exclusive right to
derivative action. This position of the law fails to recognise the very significant importance
of other stakeholders namely creditors, customers, employees, government and the
environment (society).
The new Act now spells out the fiduciary duties which the directors owe to the
company6, they are to act in the best interest of the company. Unfortunately where directors
act contrary to the best interest of company, it is only the shareholders who have a
remedy offered to them in the form of derivative action. This is against the background that
in some scenarios it is clear that other stakeholders may recognise the best interest of the
company being infringed but are not offered a remedy.
Put in other words continued adherence to the archaic shareholder primacy and
restricting derivative action to shareholders is not compactable to the fourth industrial
revolution. Boldly, the best interest of the company in the 21 st Century is no longer
limited to the sole purpose of profit maximization. 7 Corporation now have other interests
which may be social, economic, political or environmental.
Research question
- To explore the shareholder primacy principle, its history, present and future in
corporate governance.
- To discuss the history of shareholder derivative action (litigation), as well as it is
enacted in Section 61 of Companies and Other Entities Act (Chapter 24:31).
6
Section 54, 55 and 56 of Companies and Other Entities Act (Chapter 24:31).
7
IM Esser and JJ du Plessis “The stakeholder debate and directors’ fiduciary duties” (2007) 19/3 SA
Mercantile Law Journal 346 at 347–48.
- To discuss the link between shareholder primacy and shareholder derivative action.
To explore the problems associated with shareholder primacy and limiting derivative
action to shareholders.
- To discuss if it is necessary to have stakeholder-centric model of corporate
governance.
- To the discuss if there is need for reforms to the derivative action and
shareholder primacy.
Literature Review.
The controversy of the stakeholders oriented corporate governance versus shareholder
primacy was first opened up for discussion by the famous Berle-Dodd debate in the
Harvard Law Review during the 1930s. This debate was primarily on the issue of how
company law jurisprudence should be characterised and developed. In 1932, Berle and Means
published a classic book in which they wrote about the emergence and growing importance of
the publicly held firms with dispersed share ownership.8 The same year Berle was engaged in
a fierce debate with Merrick Dodd, a Harvard Law Professor in the Harvard Law Review on
the proper purpose of the public company as business entity. Berle argued that, “all power
granted to a corporation or to the management of a corporation ……. Are at all times
exercisable only for the benefit of the shareholders.”9 Dodd disagreed, and suggested that
including shareholders interest had other interests, so he favoured “a view of the business
corporation as an economic institution which has a social service as well as a profit making
function.”10 Back then there was separation between ownership and control and ownership. There
was general believe and practice that boards of director in companies especially public firms
operated as self selecting and independent decision making bodies. Though they valued
shareholders’ interest they did not value it over the interests of other corporate stakeholders, such
as customers, creditors, employees, and the local community. While shareholders were treated as
an important corporate constituency, they were not the only constituency rate constituency, they
were not the only constituency that mattered. Nor was share price viewed as a reliable proxy for
corporate performance.11
8
Adoph A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (1932)
9
Adolph A, Berle, Corporate Powers as Power in Trust, 45 Harvard Law Review 1048 (1932)
10
E. Merrick Dodd, For Whom Are Our Corporate Managers Trustees? 45 Harvard Law Review
1144, 1148 (1932)
11
Lynn A. Stout, The Toxic Side Effects Of Shareholder Primacy, University of Pennsylvania Law Review, Vol.
161, No. 7 (June 2013), pp. 2003-2023
This debate, hence initiates debate on corporate responsibility which is now a very
significant section of the corporate law and management scholarship and for many years.
The 1932 debate led to a prolonged time of practicing managerialism which had an all
stakeholders-centric mode of corporate governance. This mode of corporate was
exercised in the USA and had its influence the world over as big mergers took place.
This lasted until Milton Friedman in 1970 published in the New York Times an article
suggestion that the social responsibility of a business is to maximise the profit of the
shareholders because they own the corporation. This was then substantiated by the Bear
Market (drastic fall of share prices on the stock market) of 1974 which was attributed to
Managerialism(stakeholders-centric mode of corporate governance). A lot research work
was done thereafter. The key one being In 1976 when Michael Jensen and William
Meckling came up with the Agency Theory which said that directors and manager were mere
agents of shareholders who would have been hired by them. The sole purpose being to
maximise the wealth of the shareholders.12
This shifted the balance of the debate in favour of shareholder primacy. Thus to businessmen
it brought a leverage to their interests and provided a way of measuring the performance
of directors and managers. Thus this led to the preference of the shareholder-centric model
of corporate governance. This position trended in the last part of the 20th century. By the end
of 20th century there was a shift to include other stakeholder (non-shareholders) interests.
According to McDonnell (2004)This was influenced by the wealth gap between
shareholders and employees which left employees poor and scrambling for work, a
situation that left governments failing to respond and give solutions to the crisis. 13 This
led to the realisation that the best interest of a corporation was not necessarily the
maximization of profits for shareholders. Thus in the landmark Canadian case of People
Department Inc. (Trustee of) v Wise (2004) the court emphasised that directors and officers
should strive to make the corporation a better corporation and “when determining what
is the corporation’s best interest, directors may look to the interest of inter alia,
shareholders, employees, creditors, consumers, governments and the environment to inform
their decision”14
12
Michael C. Jensen and William H. Meckling, Theory of the Firm Managerial Behavior , Agency
Costs and Ownership Structure, 3 j. Fin Econ. 305 (1976)
13
B. McDonnell “Corporate Constituency Statutes and Employee Governance” (2004) 30 William
Mitchell LR 4, at 1235.
14
People Department Inc. (Trustee of) v Wise (2004)
The Canadian Supreme Court in the case of BCE Inc. v 1976 Debentureholders (2009)
confirmed what had been reasoned in the Wise case and further deviated from the
shareholder primacy model.
On the same length as shareholder primacy was becoming the model of corporate
governance it brought with it a shareholder remedy known as derivative action or litigation.
This is a clear departure from the well-known “proper plaintiff” rule which was
developed in Foss v Harbottle.15 The development of the derivative action has moved in the
same direction with the world’s view on shareholders primacy. Where authors have
advocated for an inclusive all stakeholder-centric approach to corporate governance and
they have complemented it by advocating that derivative action should be take not only
by shareholders but by all stakeholder. 16 Thus recent scholars, among them Allaire and
Rousseau, have advocated for a hybrid all stakeholder derivative action in the eye of the
American tech bubble of 2002 and the world financial crisis of 2008 which is mainly
blamed on the exercise of shareholder primacy model of corporate governance.17
The main argument to for a stakeholder centric corporate governance is the fact that a
company operates within an environment where its success depends on other players
(constituencies) other than shareholders. As such directors should owe fiduciary duty not
only to shareholders but to all stakeholders. As argued by Blair and Stout it will be highly
prejudicial to other constituencies to give primacy to one constituency.18
The repealed Companies Act (Chapter 24:03) had made strides towards the implementation
of an all-stakeholders centric model of corporate governance. Its Section 189 though it was
directory read as follows;
“in the exercise of their function, the directors of a company may have regard to
the interest of the company’s employees and the dependants of those employees, as
well as the interest of the company members.”19
This was been watered down by section 195 of the new Companies and Other Entities Act
(Chapter 24:31) which prioritise shareholder interest ahead of the interest of other
15
Foss v Harbottle [1843]2 Hare 461
16
Cassim, MF “The doctrine of contemporaneous share ownership and aspects of locus standi in the
new derivative action” (2018) 1 South African Law Journal 101 at 102.
17
Y. Allaire and S. Rousseau, “To Govern in the Interest of the Corporation: What is the Board’s
Responsibility to Stakeholders Other than Shareholders?” (2015) 5:3 Journal of Management and
Sustainability, at 2. [Allaire and Rousseau]
18
Margaret M. Blair and Lynn A. Stout, A Team Production Theory of Corporate Law, 85 Va. L.
Rev. 247, 303 (199)
19
Section 189 of the repealed Companies Act (Chapter 24:03)
stakeholders. Though it introduces the Business Judgement Rule and the Shareholders’
derivative action as control measures on how the various stakeholders’ interests are
balanced. The Act does away with this positive improvement towards a stakeholder centric
model of corporate governance as had been developed in the previous Act.
Research Methodology
The method of research will be Desktop Study with information being gathered from case
law, company law legislation, journals and commentaries. I shall use a reciprocal cross
jurisdictional comparative approach. The Zimbabwean position will be compared to other
jurisdictions, mainly the following; South Africa, United Kingdom, USA and Canada.
Chapter Synopsis
Chapter One
This chapter contains the introduction, summary of the contents, research methodology as
well as the objectives of this dissertation.
Chapter Two
This chapter will explore the concept of shareholder primacy at law as a mode of corporate
governance, its origin, history and justification, factors of its importance and recognition in
Zimbabwe company law and other jurisdictions.
Chapter Three
This chapter will discuss the shareholder derivative action (litigation) and the business
judgment rule, as they are enacted in Section 61and 54 of Companies and Other Entities Act
(Chapter 24:31). Their link and limitation to shareholder primacy.
Chapter Four
This chapter will discuss if it is necessary to have stakeholder-centric model of corporate
governance. Has our law dealt with the issue and to what extend. Should such concept of
corporate governance dealt only as social policy?
Chapter Five
This chapter will conclude and recommend the necessary reforms that are needed at law in
regards to shareholder primacy, shareholder derivative action and business judgement rule
for perfect 21st Century corporate governance.
