The liability of company directors for decreases in a company’s share price

11 November 2019 ,  Damian Viviers 141
“I'm the only shareholder in my company, a cleaning products business. I have two directors who run the business for me. I’ve been building up the business over the years with a view to selling it as my retirement plan. However, the auditors have just informed me that the shares, in my mind worth about R10 million are now worth no more than about R3 million because of reckless management by the directors, selling of assets and even falsifying financial information and accounts. The nest egg I’ve been building is now nearly worthless because of their conduct. Can I recover what my company is worth less from them?”

To answer your question, we have to unpack some of the nuances of a company. A company exists independently from the persons who incorporate and run it on a day-to-day basis, and is therefore capable of having rights and incurring obligations in its own name and right. Every company must, however, be represented by individuals, who are empowered to act on the company’s behalf. These persons are known as directors, who are empowered to incur rights and obligations on the company’s behalf.

It further becomes important to understand the difference between directors and shareholders of a company:

  • A director of a company is an individual who is a member of the board of directors of the company. The board is responsible for the management of the affairs of a company and exercises all of the powers and performs all of the functions of the company.
  • A shareholder of a company is the holder of shares issued by the company. The shares of a company essentially represent the ownership of the company.
The ultimate control of a company rests with the shareholders, as owners of the company. Whilst the directors of a company may direct and manage the affairs of the company, the shareholders are empowered in terms of the Companies Act to participate in the appointment and removal of directors from office. Shareholders, where they are natural persons (or the representatives of entities) may also be the directors of a company, but this does not necessarily have to be the case.

The directors are entrusted by the shareholders of the company with the ultimate responsibility for the functioning of the company. The Companies Act extends to directors the authority to perform all the functions and exercise all the powers of the company. The Companies Act also sets out the minimum standard of conduct required by directors, and provides for personal liability where a director falls short of this standard.

In considering whether the shareholders of a company may hold the directors personally liable for losses sustained as a result of a decrease in the share price of the company due to conduct of the directors, our courts have recently had occasion to consider the issue.

In terms of the current legal position, the shareholders of a company are not able to bring a claim against the directors of a company as a result of conduct of directors which results in a decrease in the share price of the company. Our courts have determined that decreases in the share price of a company are regarded as losses suffered by the company and not the shareholders and that such loss is merely reflected in the share price.

The more appropriate remedy for you would therefore be in terms of the Companies Act where a director can be held liable for any loss, damages or costs sustained by the Company as a direct or indirect consequence of the director having breached the Companies Act (specifically section 77). This section includes conduct involving managing and operating the business of a company in a reckless manner or under insolvent circumstances, as well as falsifying financial statements.

To summarize: You will not be in a position, in your capacity as shareholder, to bring a claim for reflective losses against the directors of the company for losses you have sustained as a result of the decrease in the company’s share price. Your company may, however, through you as shareholder, have a claim in terms of the Companies Act against these directors as a result of the directors having breached their legal duties. Our advice is to contact your attorney to discuss these merits of such a claim against your directors.