Shareholders of African Bank Investments Limited failed in their claim for over R720 million against the directors and auditors of African Bank. The plaintiffs sued unsuccessfully under section 218(2) of the Companies Act 2008 alleging that the conduct of the defendants resulted in a loss to the shareholders because of the drop in the share price.
The scope of section 218(2) of the Companies Act has been debated since the law was enacted. It reads ‘any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention’.
There was no allegation of unlawful conduct by the directors and auditors against the plaintiffs. The loss which was claimed was the reduction in the value of the plaintiffs’ shares in the company which was a loss suffered by the company, ABIL, and African Bank. To the extent therefore that section 218(2) requires a loss ‘as a result of that contravention’, no such loss had been proved.
The only breach by the directors relied on by the plaintiffs was a breach of section 76(3) relating to the conduct of directors who are required to act in good faith, in the best interests of the company and with care, skill and diligence. Section 77 of the Companies Act provides that in the event of a breach a director may be held liable for the loss sustained by the company.
Where a statute expressly and specifically creates liability for a breach of a section, then a general section such as 218 cannot be invoked to establish co-ordinate liability. The common law allows the company to sue directors for such losses and one of the principles of statutory interpretation is that a statute does not alter the existing common law more than necessary. Nothing in section 218(2) indicates that the legislature intended to alter the common law and allow shareholder value loss claims to be brought under that section. Section 218(2) cannot be read to establish liability against a director by parties who the director has not met, has not heard of, and is entirely unaware of. This section is not a backdoor for investors in shares to derive the advantage of a claim against directors expected to personally carry the cost of the shareholders’ business risk. A loss to a company as a result of a fall in its share price is not an actionable loss to a shareholder.
The claim against the auditors also failed. It was based on the delict of negligent misstatement. The company suffered the loss, not the shareholders. It is a bedrock principle of company law in South Africa that shareholders have no personal claim for damages in these circumstances; only the company suffering the loss has a claim against the third party causing the loss.
Shareholders benefit from limited liability and are not, except in very exceptional circumstances, liable for the debts incurred by the company. The corollary of this limited liability is limited rights. Because a shareholder is normally not exposed to the liabilities of a company, it is normally not the beneficiary of claims accruing to the company.
This clarity about the limitations of section 218(2) is very welcome because it will discourage all-comers seeking remedies under the section.