Section 76 of the Companies Act No. 71 of 2008 (“Act”) sets out the partial codification of directors’ duties and liabilities. The partial codification of directors’ duties has effectively narrowed the scope of directors’ duties due to the statutory defence available to directors in the form of satisfying the test deemed the business judgment test. Directors may rely upon this test to disprove allegations that they acted in breach of their duties.
The business judgment rule reflects the idea that a director should not be held liable for decisions which yield undesirable results where such decisions were made in good faith, with due diligence and on an informed basis, and which the director thought were in the best interests of the company.
Section 76 of the Act introduces new statutory law, entitled ‘Standards of directors’ conduct’, which includes a fiduciary duty and duty of reasonable care which a director is expected to comply with. Hence, the business judgment rule is available to directors as a defence for escaping liability for a suspected breach of the ‘Standards of directors’ conduct’.
Section 76(4)(a) of the Act provides that a director satisfies his/her obligations if:
- he/she takes the reasonable and diligent steps to become sufficiently informed about the specific matter in question;
- he/she has no material personal financial interest in the subject matter of the decision taken, or he/she discloses such interest to the board or shareholders in accordance section 75 of the Act; and/or
- he/she rationally believes that the decision taken was in the best interests of the company.
In terms of Section 76(4)(b) of the Act, a director is entitled to rely on the performance of certain people or company committees in the following situations:
- he/she reasonably believes one or more employees to be trustworthy and competent in the duties performed;
- he/she relies on the professional advice, reports or statements provided by legal counsel or other professional persons retained by the company; and/or
- he/she relies on the skills and/or expertise exercised by the board or a company committee on a particular matter, which matter the director truly believes is within the particular person’s professional and/or expert competency.
Section 5(2) of the Act empowers our courts to consider foreign company law in appropriate circumstances. The consideration of foreign cases is essential considering the fact that there exists little precedent in South African law on the issue of the application of the business judgment rule.
In the In re Walt Disney Derivative Litigation case, it was held that courts do not measure or qualify directors’ decisions:
“We do not even decide if they are reasonable in this context. Due care in the decision-making context is process due care only. Irrationality is the outer limit of the business judgment rule.’’
In the Canadian Supreme Court case of Peoples Department Stores Inc. (trustees of) v Wise, the court stated that:
“Directors and officers will not be held to be in breach of a duty of care, if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable decisions in light of all the circumstances about which directors or officers knew or ought to have known. In determining whether directors acted in a manner that breaches the duty of care, it is worth repeating that perfection is not demanded.”
In the local case of Fisheries Development Corporation of SA Ltd v Jorgensen: Fisheries Development Corporation of SA Ltd v AWJ investments (Pty) Ltd the court held that:
“The extent of a director’s duty of skill and care depends on the nature of the business the company is engaged in and that the law does not require the director to have special business acumen, and furthermore that directors may assume that officials will perform their duties honestly”.
The principle of holding directors liable for decisions which have an adverse effect on a company is legally sound. However, certain situations may arise where a director would be unfairly prejudiced by the statutory law provisions of ‘Standards of directors’ conduct’. The business judgment rule is vital in protecting directors’ from liability provided the decision of a director was made in good faith and in the interests of the company. A blatant disregard of relevant information or advice given to a director combined with mala fide conduct renders the business judgment rule unenforceable.