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Legal Talk
Can Shareholders Claim Damages From Directors For A Drop In The Market Value Of Their Shares
South Africans have no choice but to adapt to the disruptions caused in our daily routines (be it in the work, business, social, home or personal sphere of our lives) affected by the wave of load shedding that we are subjected to, at any rate for at least the next 18 months or so.
The impact the disruption of electricity has on our economy is considerable and counting. Corruption, maladministration and the so-called "State Capture" of many of our state-owned enterprises such as ESKOM, SAA, PRASA have been fingered as being the root causes in our dismal state of affairs.
However we are not the only country besieged with these economic woes. Economic uncertainty is now a global phenomenon. An example of the turbulent times we live in must be the global panic and health concerns following the outbreak of the Corona virus named, CO-VID19 which started in China and how quickly this has affected other countries as well.
CO-VID19 has had a direct impact on the economies across the world. In light of these economic challenges, both local and global, fluctuations in share prices are to be expected. The question is can a shareholder who suffers a drop in the market value of his shareholding recover damages from the director In order words does the shareholder have recourse against the company directors for wrong decisions made by the directors
Whilst there are a host of considerations to be made, the short answer to the question is no, a shareholder cannot recover damages under these circumstances. This is accepted as being an international common law principle.
Off- course that is not to say that in South Africa a shareholder will be left without recourse, in the face of a delinquent director. The Companies Act 2008 provides remedies to shareholders especially minority shareholders, against the company directors if they can prove a claim based on unfair prejudice, where the directors have for example failed to carry out their fiduciary duty to the company, or have made improper payments with regard to dividends or remuneration, or there are claims of mismanagement of the affairs of the company.
Provided they act as claimants on behalf of the company as a whole, shareholders can also bring a derivative claim against a director or a third party for the loss suffered by the company for negligence or a breach of the directors' fiduciary duty of care towards the company.
Any proceeds of awards made by the court will belong to the company itself. In the case of Hlumisa Investment Holdings RF Ltd v Kirkinis 2019, the minority shareholders of African Bank Investment Limited took the company directors to court saying that the value of their shares had diminished under the directors' term of office.
The shareholders argued that the directors should be personally liable as they were reckless in their trading and said this was the reason for the share price to drop. The Gauteng High Court dismissed the shareholders claim. The court re-iterated that a company has its own legal persona, which is distinct from that of its shareholders.
The court said that the shareholders failed to provide a sufficient causal link of the harm, which the company suffered as a result of the directors' breach of their duty of care and the drop in the price of its shares.
The court found that it was African Bank itself who suffered a loss and said that the company itself (and not the shareholders) could pursue a claim of damages against the other defendants.
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