1. Introduction

During consultation with directors of companies that have a single shareholder or a dominant majority shareholder, one often finds that the effective control of the company mostly vests in the shareholder of the company and that the directors are mainly appointed to act out the wishes of the shareholder.  Effectively, therefore, one would say that control of the company vests in the single shareholder or the dominant majority shareholder.

This is not at all what the Companies Act 71 of 2008 (the Act) envisaged when the duties, responsibilities and liabilities of directors were legislated. This is particularly so with wholly owned or subsidiary companies.

2. What does the law require?

The principle of a separate legal personality of a company implies that a third party, aggrieved by an action of the company could, generally, not hold the shareholders of the company liable for the actions of the company. Such an aggrieved third party would institute action against the company.

However, in terms of the Act, a director must act in good faith and for a proper purpose, act in the best interests of the company and act with the degree of care, skill and diligence that may be reasonably expected of a person carrying out the same functions in relation to the company as those carried out by that director and having the general knowledge, skill and experience of that director.

In the event that an aggrieved third party can prove that a director acted in contravention of the above mentioned duties, a third party could hold that director personally liable for any loss, damages or costs incurred by such third party. Furthermore, the director may be held personally liable for any loss, damages or costs incurred by the company. This also applies to non-executive directors, as the Act does not make a distinction between executive and non-executive directors.

3. Does a shareholder have the right to manage the company’s business

A shareholder does not have the right to act on behalf of the company or to manage the company’s business or affairs, not even when the shareholder holds all of the shares of the company.

Section 66(1) of the Act states that the business and affairs of a company must be managed by or under the direction of its directors and that the directors have the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that the Act or the Memorandum of Incorporation (MOI) of the company provides otherwise.

Therefore, unless a matter is specifically excluded from the authority and powers of the directors by the company’s MOI or the Act, the directors must manage the business and affairs of the company. The shareholders are not involved in the business and affairs of a company, unless the company’s MOI or the Act requires their involvement or approval of a decision of the directors.

4. What is the risk

The directors of a company owe their duties to the company and not to the shareholders of such a company. Therefore, if a director follows the instructions of a single shareholder or a dominant majority shareholder, without any consideration for the duties he/she owe the company, the director could be held personally liable for any loss, damages or costs incurred by the company or suffered by an aggrieved third party if his/her actions resulted in a breach of his/her duties as a director.

5. Conclusion

The directors of the company owe the duties of their office to that company, and not to the shareholders of the company. In order to exercise the duties that they owe the company as required by the Act, directors must be allowed to perform their function in the management of the business and affairs of the company independently, as they could be held personally liable in the event that they are found to have been in breach of the same. The director of a company, therefore, cannot afford to merely act as a puppet director for a single shareholder or a dominant majority shareholder, without proper consideration of his/her duties and responsibilities owed, first and foremost, to the company, as that director bears the consequences of his/her actions and not the shareholder upon whose instructions are being acted.   

Phillip Kruger

Legal Advisor, Johannesburg