Directors not liable to shareholders for decrease in share value

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A key provision upon which they relied was Section 218(2) of the Act, which provides that:

(a)ny person who contravenes any provision of the Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.

The court considered and interpreted the wording of relevant sections of the Act, including Section 218(2) as set out above, Section 77(2)(a) regarding the fiduciary duties of directors and Section 77(3)(b) regarding directors’ liability for loss arising from the business of the company having been conducted recklessly. It concluded that the Act does not alter or extinguish the common law doctrine of “reflective loss”.

In effect, our courts have determined that there is an insufficient causal link between harm suffered by a company as a result of a breach of a duty owed to it and loss suffered by its shareholders in consequence of a fall in the company’s share price. One of the principles which underpins the doctrine of reflective loss is that a company has a legal personality distinct from its shareholders and, accordingly, a loss to the company which causes a fall in its share price is not a loss to its shareholders.

Africa Bank, the company which suffered the loss, would have been the proper plaintiff to sue the directors. A similar conclusion was reached with regards to the shareholders’ delictual claim against the companies’ auditors.