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SA court considers the meaning of frivolous, vexatious and without merit in setting aside a derivative action

On 7 August 2020, the Western Cape High Court, in Marib Holdings (Pty) Ltd v Parring NO and Others, considered the meaning of “frivolous, vexatious or without merit” and the onus or standard of proof that the company must meet when launching an application to set aside a notice for a derivative action.

What is a derivative action?

Derivative actions are proceedings instituted by persons seeking to litigate, for and on behalf of a company in circumstances where a company is failing to take action itself. These actions are provided for in the Companies Act, 2008. In terms of the Act, specific stakeholders, including shareholders, directors and registered trade unions, may serve a demand upon a company to commence or continue legal proceedings, or take related steps to protect the legal interests of the company.

A company that has been served with such a demand may apply, within 15 business days, to court to set aside the demand only on the grounds that it is frivolous, vexatious or without merit. If the company does not comply with the notice and take the steps prescribed in the Act, or if the demand is not set aside, the person who made the demand may apply to court for leave to bring or continue proceedings in the name and on behalf of the company.

This case concerned Marib Holdings (the “company”), which operates the tollgate on Chapmans Peak Drive in Cape Town. The Parring Family Trust was a shareholder of the company and served a demand on the company, demanding that the company commence legal proceedings against its directors to recover remuneration paid to them. It was common cause that the directors had received payments in the form of directors’ fees and that no special resolution was passed approving these payments, as required by the Act. In the circumstances, the Trust argued that the company did not have authority to make these payments to the directors, and that the payments should be recovered by the company. The company and its board of directors (the latter represented the majority of its shareholders) brought an application in terms of the Act to set aside the demand on the grounds that it was frivolous, vexatious, and without merit.

The definition of vexatious, frivolous and without merit

Examining the meaning of frivolous, vexatious or without merit, the court reiterated that “frivolous” usually refers to a contemptuous attitude adopted by a litigant and the use of intemperate language during proceedings, or gross impertinence.

“Vexatious” may refer to proceedings instituted by a litigant which is designed to frustrate and harass a defendant or proceedings instituted to cause annoyance to a defendant.

As regards the standard of proof, the court referred to LF Boshoff Investments v Cape Town Municipality, where frivolous and/or vexatious proceedings were described as proceedings that are “obviously unsustainable and this must appear as a matter of certainty and not merely on a preponderance of probabilities”.

The court went on to refer to Amdocs SA Joint Enterprise (Pty) Ltd v Kwezi Technologies (Pty) Ltd, in which the court  held that the words “frivolous, vexatious or without merit” should be given their ordinary meaning and that “an applicant for relief in terms of section 165(3) is entitled to succeed if he is able to demonstrate that the demand is without merit in the sense that it cannot succeed.”

The court in the Amdocs case held that in approaching this enquiry, one should ask “whether, on the available evidence, a company might conceivably succeed in their envisaged action/s. I specifically say 'might conceivably' for it seems to me that issues of probability cannot properly be taken into account at this stage. The threshold which a complainant has to cross is a low one. Conversely, the onus and burden of persuasion which an applicant for relief in terms of section 165(3) bears is a rather heavy one.”

The final case referred to by the court in the present case was Lewis Group Ltd v Woollam, in which the court disagreed with the Amdocs judgment and held that the nature of the onus was no different to that which ordinarily applies in civil litigation. In other words, the company has to prove on a balance of probabilities that the demand is frivolous, vexatious, or without merit. The court, in the Lewis case, held that “(h)eaviness does not enter the equation: there is no presumption in favour of the complainant that its demand is not frivolous, vexatious, or without merit, anymore than there is one in favour of the company that it is. The statutory provisions do not give rise to any inherent probabilities one way or the other”.

The decision

The court, in the Marib Holdings case, agreed that the onus is that which ordinarily applies in civil litigation – on a balance of probabilities - but also agreed with the views in Amdocs that the evidentiary burden placed on a company under section 165(3) was not easy to discharge given the narrow basis provided for in section 165(3). It went on to say that the court’s function is a limited one and it is certainly not called upon to adjudicate the merits of the demand, but merely to ascertain whether there is a serious issue that merits investigation.

Ultimately, the court held that the company had not proved on a balance of probabilities that the demand was frivolous, vexatious or without merit as remuneration paid to directors without the requisite special resolution would be ultra vires the powers of the company. There was, on the facts, a serious question to be answered and it could not be said that the demand was without substance or merit.

These cases show the approach that is likely to be followed in the Western Cape courts. Whether it will be followed by the other courts in the country or the Supreme Court of Appeal, remains to be seen.

Michael Gradidge

Dispute Resolution | Executive

+27 83 679 0150

Samantha Copeman-Michau

Dispute Resolution | Associate

+27 82 562 9717