Can Shareholders Sue a Company’s Officers for Breaches of Duty?

In many jurisdictions, shareholders have the ability to sue a companyrsquo;s officers, including directors, for breaches of their fiduciary duties. This can happen if directors engage in fraudulent activities or act against the companyrsquo;s best interests. Shareholders can also sue for personal damages if they are directly affected by the directorrsquo;s actions, but they must prove that the actions were illegal, negligent, or harmful to the company or its shareholders to have a strong case.

However, the answer to this question can depend on jurisdiction. The basis for these laws stems from the historic traditions and foundations of the law, as well as the specific provisions in each jurisdictionrsquo;s own Companies Act. In the case of South Africa, for instance, the answer is largely addressed in our specific legal framework, but itrsquo;s likely that the position in the UK and Australia is similar.

The Biggest Problem for Shareholders in Suing Directors: Proving that the directorrsquo;s actions have directly contributed to a loss that the shareholder has suffered is often the biggest hurdle. Even if a director destroys the value of the companyrsquo;s shares, it is challenging to establish direct causation. This is because, by and large, directors owe fiduciary duties to the company, not to individual shareholders.

Proving Causation: It is generally recognized that the correct party to su es a director is the company itself. The courts typically see the liquidator, or in some cases the business rescue practitioner, as acting on behalf of the company. Any damages recovered would accrue to the benefit of the company, and ultimately, the creditors and shareholders would only benefit indirectly, to the extent that they receive enhanced distributions from the companyrsquo;s assets.

Creating Contractual Liability: Even in appointing a director, a shareholder cannot typically ldquo;createrdquo; a contractual basis for liability against the director. This is due to the fact that a director cannot be bound to act in the interests of a particular shareholder even if that director was specifically appointed by that shareholder.

Remedies for Shareholders

There are three primary remedies available to shareholders in the event of a dispute with a director:

Bring a Company Resolution to Remove the Director: This would requires the support of other shareholders and isnrsquo;t always simple to achieve. Apply to Court to Have the Director Declared as a Delinquent Director: This is a formal process that can lead to significant consequences for the director. Apply to Court for an Order Declaring the Director’s Conduct as lsquo;Unfair, Prejudicial, or Oppressiversquo;: This can result in an injunction, which would require the director to cease the offending activities.

Our legal framework in South Africa, and itrsquo;s likely in other similar jurisdictions, provides these options for shareholders. These remedies can help ensure that directors are held accountable and that the company operates in the best interests of all stakeholders.

In conclusion, while the ability to sue a director for breaches of duty is possible, the legal challenges and hurdles can be substantial. Shareholders should be prepared to prove that the actions of a director were illegal, negligent, or harmful before initiating such a lawsuit.