'Diminution' in share value and third-party claims for pure economic loss: The question of director liability to shareholders

• Jurisdiction: South Africa
• Pages: 107-128
• Published date: 27 November 2019
• Citation: (2019) 31 SA Merc LJ 107
• Author: Mupangavanhu, B.M.
• Date: 27 November 2019

‘DIMINUTION’ IN SHARE VALUE AND

THIRD-PARTY CLAIMS FOR PURE

ECONOMIC LOSS: THE QUESTION OF

DIRECTOR LIABILITY TO SHAREHOLDERS

BRIGHTON M MUPANGAVANHU*

Senior Lecturer in Law, University of the Western Cape

Abstract

When a shareholder suffers pure economic loss as a consequence of a

reduction in shareholding value, the natural temptation for a

shareholder is to seek a remedy that includes a personal claim against a

director. This is because directors, as agents of a company, are

decision-makers in a company. However, the common law in South

Africa and elsewhere holds that a shareholder does not have a cause of

action to recover personal damages against a director simply because a

company in which he or she holds shares, suffered damages. This

article argues that the Supreme Court of Appeal (SCA) in Itzikowitz v

Absa Bank Limited confirmed that this principle still applies in South

African common law. Yet, despite the SCA clarifying the contours

between delicts committed against a company and those committed

against a shareholder, there are still cases in which shareholders seek

damages against directors for pure economic losses suffered by him or

her. This article identifies the ambiguity in section 218(2) of the

Companies Act 71 of 2008 as part of the problem. Suggestions are

made to adopt a judicial approach to the interpretation of section

218(2) in order to distinguish between instances where the general

remedy under section 218(2) is applicable and instances when it is not.

The focus first falls on the correct position at common law regarding a

remedy for pure economic losses. Thereafter, the focus moves to the

proper interpretation of section 218(2) in order to ensure that courts

do not arrive at an absurd outcome — that is, to avoid an absurdity so

glaring that it could never have been contemplated by the legislature.

* PhD Commercial Law (UCT), LLM Environmental Law (UKZN), LLB (Fort Hare).

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(2019) 31 SA Merc LJ 107

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I INTRODUCTION

One of the most vexing questions in South African law and elsewhere is

whether third parties, such as shareholders, who suffer pure economic

loss as a consequence of the actions of company directors can institute

personal claims against the directors. The question is a troubling one

especially in the case of shareholders who suffer pure economic loss as a

result of a reduction in share value on the stock market. Faced with

consequential losses f‌lowing from company losses, the default position

for shareholders is to sue directors in an attempt to recover economic

losses suffered. As recently as August 2018, the North Gauteng High

Court dealt with exceptions (brought by defendant directors) to the

particulars of claim by plaintiff shareholders who were suing former

directors of the African Bank in a developing case (the main action).

1

The plaintiffs in the main action were attempting to recover pure

economic loss directly from defendant directors as a result of a loss in the

value of their shares in African Bank Investment Limited (‘ABIL’).

2

The

excipients (defendant directors in the main action in Hlumisa) argued

that the plaintiffs’ particulars of claim did not disclose a cause of action

against them because the loss the plaintiffs were seeking to recover was

not the plaintiff shareholders’ loss, but that of the company.

3

Hlumisa is not the only recent case in which shareholders have

attempted to recover pure economic loss directly from directors arising

from a devaluation of their shares, which they blamed on the conduct of

the directors. While I am unaware of any reported case arising from the

much-publicised Steinhoff scandal, there appear to be moves in the

direction of court action to recover pure economic loss. Following the 90

per cent fall in the Steinhoff share price in the aftermath of 2017

scandal,

4

the shareholders/investors have reportedly embarked on a

class action in an attempt to recover pure economic loss against

directors.

5

This is also a ‘case-in-progress’. Generally, the plaintiff

shareholders appear to adopt a default position that when they have little

1

Hlumisa Investment Holdings (RF) Limited & another v Kirkinis & others 2019 (4) SA 569

(GP).

2

ABIL had as its wholly-owned subsidiary, the African Bank, which carried on the

business of banking. See Hlumisa paras 6–7.

3

See Hlumisa paras 15–16.

4

See Cronje J, ‘A Steinhoff guide for dummies—updated for 2018’ Fin 24 8 December

2017, available at https://www.f‌in24.com/Companies/Retail/a-steinhoff-guide-for-dummies-

20171208, accessed on 22 November 2018.

5

Thompson W, ‘Steinhoff class-action lawsuit begins in Joburg’, available at https://

www.businesslive.co.za/bd/national/2018–08–08-exclusive-steinhoff-class-action-lawsuit-

begins-in-joburg/, accessed on 22 November 2018.

(2019) 31 SA MERC LJ

108

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