The Duties of a Director & the Business Judgment Rule in terms of the Companies Act 71 of 2008

Section 76(3) of the Companies Act 71 of 2008 (the Act) details the duties of directors (when acting in that capacity) to act in good faith and for a proper purpose; in the best interests of the company and with the requisite degree of care, skill and diligence.

In determining whether a director has breached the duty of care the test is partially objective and partially subjective in that:
– a test of the objective standard expected of any director is applied (i.e. that of a reasonable person); and
– a subjective test is applied (i.e. that the director carries out his duties with the knowledge skill and diligence that he himself possesses).

A director with a higher degree of professional expertise, knowledge or experience will have a higher evidentiary burden in discharging this duty.

Henochsberg on the Companies Act (Publisher: Lexis Nexis) provides “the extent of the director’s duty “depends to a considerable degree on the nature of the company’s business and on any particular obligations assumed by or assigned to him… In that regard there is a difference between the so-called full-time or executive director, who participates in the day-to-day management of the company’s affairs or of a portion thereof, and the non-executive director who has not undertaken any special obligation. The latter is not bound to give continuous attention to the affairs of his company.”

Business Judgment Rule

Unless the requirements of the business judgement rule as set out in section 76(4) of the Act applies, a director who is in breach of his duty of care and skill may be held liable for his misconduct in his capacity as director.

The business judgment rule as provided for in the Act is set out as follows:

“76(4) In respect of any particular matter arising in the exercise of the powers or the performance of the functions of a director, a particular director of a company-
(a) will have satisfied the obligations of subsection 3(b) and (c) if
(i) the director has taken reasonably diligent steps to become informed about the matter;
(ii) either-
(aa) the director had no material personal financial interest in the subject matter of the decision, and had no reasonable basis to know that any related person had a personal financial interest in the matter; or
(bb) the director complied with the requirements of section 75 with respect to any interest contemplated in subparagraph (aa); and
(iii) the director made a decision, or supported the decision of the committee or the board, with regard to that matter, and the director had a rational basis for believing, and did believe, that the decision was in the best interests of the company; and
(b) is entitled to rely on-
(i) the performance by any of the persons-
(aa) referred to in subsection (5); or
(bb) to whom the board may reasonably have delegated, formally or informally by course of conduct, the authority or duty to perform one or more of the boards functions that are delegable under applicable law; and
(ii) any information, opinions, recommendations, reports or statements, including financial statements and other financial data, prepared or presented by any of the person specified in subsection (5).
(5) To the extent contemplated in subsection (4)(b), a director is entitled to rely on-
(a) one or more employees of the company whom the director reasonably believed to be reliable and competent in the functions performed or the information, opinions, reports or statements provided;
(b) legal counsel, accountants, or other professional persons retained by the company, the board or a committee as to matters involving skills and expertise that the director reasonably believes are matters-
(i) within the particular person’s professional or expert competence; or
(ii) as to which the particular person merits confident; or
(c) the committee of the board of which the director is not a member, unless the director has reason to believe that the actions of the committee do not merit confidence.”

As stated in Corporate Governance-An Essential Guide for South African Companies (3rd edition) (Author: R Naidoo) (Publishers: Lexis Nexis): “The rule “is not a standard of conduct, but rather a standard of judicial review” in terms of which decisions of directors which meet the test are given deference, even if they are incorrect.”

Currently, in South Africa, there is limited case law in which directors have been held personally liable for failure to uphold their fiduciary duties however the Act does provide that regard can be had to international law to develop SA company law.

Article by Lisa Boogaard

Boogaard Attorneys

 February 15, 2019