The Steinhoff saga: Do directors of a company owe fiduciary duties to its shareholders?
The Steinhoff saga: Do directors of a company owe fiduciary duties to its shareholders?
It is trite that in terms of South African common law, directors of a company owe fiduciary duties to such company and that generally, such fiduciary duties do not extend to the shareholders of the company.
The recent judgment of De Bruyn v Steinhoff International Holdings NV and Others (29290/2018) grappled with the issue of whether Steinhoff International Holdings Proprietary Limited, Steinhoff International Holdings NV (collectively, Steinhoff or the Steinhoff companies), their directors or their external auditors, Deloitte, owed any duty of care to existing and prospective Steinhoff shareholders, who made pivotal investment decisions based on the misstatements in the financial statements of the Steinhoff companies.
The applicant (as a Steinhoff shareholder and as a representative of certain classes of Steinhoff shareholders) sought to hold the Steinhoff companies, their directors and Deloitte liable by recourse firstly, at common law (for the losses caused to the shareholders for the negligent misstatements contained in the financial statements) and secondly, by way of statutory liability for contraventions of certain provisions of the Companies Act 71 of 2008 (Companies Act).
The shareholders pleaded that the Steinhoff directors, and through them, the Steinhoff companies, engaged in the impugned transactions which were unlawful because they caused the assets, income and profits of the Steinhoff companies to be overstated in the financial statements, and the liabilities of these companies to be understated. They further pleaded that this gave rise to a duty to disclose to existing and potential shareholders the true nature of these transactions and to reflect them in the companies’ financial statements.
The court assessed the common law claims with reference to a series of case law and confirmed the following positions –
- The appointment to the office of director gives rise to fiduciary duties owed by a director to the company. It is the company that enforces these duties and seeks to remedy their breach.
- There is no general fiduciary duty owed by directors to shareholders of the company. The assumption of office and the relationship between the directors and the company entails no such duty.
- The fiduciary duties of directors to the company may co-exist with a fiduciary duty owed by directors to the shareholders.
- The recognition of a fiduciary duty owed by a director to the shareholders (whether individually or collectively) requires the showing of a special factual relationship between the directors and the shareholders. An example where our courts have recognised that a special factual relationship exists is where directors have persuaded outside shareholders to sell their shares in the company to the directors.
The court held that a case could have been pleaded that the conduct of the Steinhoff directors was in breach of the directors’ fiduciary duties but that those duties were owed to the company and any harm suffered as a result of such breach was actionable by the company to whom the duties are owed. The court further acknowledged that the breach may have also caused harm to shareholders and potentially to other classes of persons (such creditors, employees, suppliers and customers) but emphasised that the harm caused did not establish that the duty is owed to all persons who suffer it.
The court further held that the proposed cause of action didn’t plead a special factual relationship between the Steinhoff directors and the shareholders or prospective shareholders of Steinhoff and held that no cause of action was established because, without wrongfulness, there is no delict. The diminution in the value of shares caused by the impact of the directors’ conduct upon the pricing of the shares, was simply one of many risks assumed by investors when they acquire risk assets in a market.
The court then proceeded to assess the statutory claims against the Steinhoff directors and the Steinhoff companies. The statutory claims rested upon sections 218(2) and 20(6) of the Companies Act, and a prospectus claim in terms of section 104 of the Companies Act (liability for untrue statements in a prospectus) and section 105 of the Companies Act (liability of experts and others). The prospectus claim will not be dealt with for the purposes of this article.
The applicant alleged that the Steinhoff directors, and through them, the Steinhoff companies, having engaged in the impugned transactions, failed to state the true financial position of the companies in their financial statements, and contravened the following sections of the Companies Act – section 22 (provisions related to reckless trading); sections 28 to 30 (provisions related to accounting records, financial statements and annual financial statements); section 40 (consideration for shares) and section 76 (standards of directors conduct) and that these contraventions gave rise to liability to the shareholders, jointly and severally, for any damages suffered by them in terms of sections 218(2) and 20(6) of the Companies Act.
In assessing the various alleged contraventions of the Companies Act, the court ruled as follows –
- Reckless trading contravention – the court relied on section 77(3)(b) of the Companies Act which provides for director liability in the case of damages sustained by the company for actions conducted by a director knowingly in contravention of section 22(1). The court held that it is the company’s loss that is claimed and it is the company that is the person upon whom the right is conferred to make good its loss, which is consistent with the interpretative construction of the common law that directors owe their duties to the company, and if they fail in those duties by knowingly acquiescing in the company’s reckless conduct, it is the company that should exact compensation for its loss.
- Financial statement contraventions – the court found that the financial statement contraventions that were relied upon by the applicant had no basis in the Companies Act. The applicant sought compensation for the losses suffered by the shareholders and not those of the Steinhoff companies, which is not the kind of loss that is contemplated by section 77(3)(d)(i) and no other civil liability was recognised for the financial statement contraventions.
- Standards of directors’ conduct – Section 76 of the Companies Act sets the standards of conduct required of directors and the liability of directors for failing to meet these standards is set out in section 77. Both sections stipulate that a director may be liable in accordance with the principles of the common law for either a breach of a fiduciary duty or a breach related to delict. The importation of the principles of common law into these sections serves to set out the parameters of the liability and to determine to whom such fiduciary duties are owed in order to pursue any liability for a breach of such fiduciary duties. This led the court to hold that this claim must fail on the basis that, at common law, directors do not owe any fiduciary duties to the shareholders of a company.
Section 218(2) of the Companies Act states that any person who contravenes any provision of the Act will be liable to any other person for any loss or damage suffered by that person as a result of that contravention and section 20(6) states that each shareholder of a company has a claim for damages against any person who intentionally, fraudulently or due to gross negligence causes the company to do anything inconsistent with the Companies Act; or a limitation, restriction or qualification contemplated in section 20, unless that action has been ratified by the shareholders in terms of section 20(2).
The language in section 218(2) is plain and imposes liability for loss or damage suffered as a result of a contravention of any provision of the Companies Act but the court held that despite the simple language used in section 218(2), it should not be interpreted in a literal way. The provision recognises that liability for loss or damage may arise from contraventions of the Companies Act, which confers a right of action, but what that right consists of, who enjoys the right, and against whom the right may be exercised, are all issues to be resolved by reference to the substantive provisions of the Companies Act.
The court further noted that although it is a well-established principle of interpretation that legislation must be interpreted in conformity with the common law, section 218(2), read with the substantive provisions of the Companies Act, gives rise to a statutory scheme of liability and this does not displace the common law (except in instances of a common law claim for breach of statutory duty) but rather exists alongside the liability recognised at common law. Section 218(2) must be interpreted so that it is consistent with the common law and the limitations upon liability imposed by the common law, such as the principle of reflective loss which states that a shareholder cannot sue for the diminution in value of its shares where that loss is simply a reflection of the loss suffered by the company. The court concluded, in respect section 218(2) of the Companies Act, that a claim could not be sustained because the specific contraventions relied upon did not accord shareholders a right of action against the Steinhoff companies or their respective directors.
Lastly, the court held that section 20(6) could not, logically, be of any application to confer a right of action against the Steinhoff companies as this section confers a claim against any person who causes the company to do anything inconsistent with the Companies Act or ultra vires the powers of the company. A company cannot cause itself to do something and, as the provision makes plain, liability rests with the persons who cause the company to act (i.e. those persons who cause loss to the company) and not with the company that acts as a result of what persons cause it to do. The court found that no claim could be made by the Steinhoff shareholders against the Steinhoff companies in terms of section 20(6) either. The Steinhoff judgment signifies the importance of understanding how the different sources of law in South Africa interact with one another and highlights that sections 218(2) and 20(6) of the Companies are not intended to override common law principles. Whilst shareholders cannot claim pure economic loss caused to them by the actions of the directors, since the common law provides that directors do not owe fiduciary duties to shareholders, there are limited instances where directors do owe duties of care to shareholders, namely where a special factual relationship subsists between the directors and the shareholders.
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