This blog was co-authored by Jos Fogle, Candidate Attorney.
In August 2024, the High Court found that a shareholder does not have the authority to institute legal proceedings on behalf of the company it is a shareholder of without (1) a resolution from the underlying company’s board of directors or (2) express authority in the underlying company’s memorandum of incorporation (MOI).
In ongoing court proceedings, the applicant company had obtained an urgent interdict against the matter’s respondents. The order required the applicant company to institute further proceedings by a certain date. The proceedings were instituted within this period, however, they were instituted by a shareholder on behalf of the applicant company not by the company itself.
The shareholder asserted that he was duly authorised to institute the proceedings in his capacity as a shareholder of the applicant company, by a power of attorney granted by the other majority shareholder, and that he was a director of the applicant company. The respondents raised the preliminary point that, unless duly authorised, a shareholder lacks standing to act on behalf of a company.
The court had to consider whether and when a shareholder can institute legal proceedings on behalf of a company it is a shareholder of.
The Companies Act, 2008 expressly provides that the business and affairs of a company are managed by or under the direction of a company’s board. This means that a company acts through its duly authorised board, not through its shareholders.
The court found that the fact that the shareholder was vested with control over his shares, had a proxy in respect of the other majority shareholder’s shares, and was a director of the applicant company, neither individually nor collectively, gave the shareholder the authority to act on behalf of the applicant company. A shareholder will always require a board resolution or express authorisation in a company’s MOI to act on behalf of a company and institute legal proceedings. The application was accordingly dismissed.
This case shows that when a shareholder wishes to act on behalf of a company, they must ensure they have authority to perform the specific act – either by way of a valid board resolution or express authorisation in terms of the company’s MOI. Failure will result in the shareholder lacking standing and the purported acts may be void.