It is a well-established rule of Company Law that directors have a fiduciary duty to exercise their powers in good faith and in the best interests of the Company. They may not make a secret profit or otherwise place themselves in a position where their fiduciary duties conflict with their personal interests (Robinson v Randfontein Estates Gold Mining Co Ltd 1921 AD 169 at 177). A consequence of this rule, which finds its roots in South Africa’s Common Law, is that a director, under certain circumstances, has a duty to acquire economic opportunities for a Company. Such an opportunity is said to be a “corporate opportunity” and in terms of our law, a Director will breach his/her fiduciary duty if he/she acquires this corporate opportunity for him/herself or for the benefit of a third person even under circumstances where it could be said that the Company would not have been in a position to acquire it due to finances or due to the fact that the other party would not be willing to contract with the Company.
There are at least 3 scenarios where the duty to acquire corporate opportunities for a Company attaches to a director. The first example is where the company has given a specific mandate to the director to acquire a particular corporate opportunity. The second example is where a general mandate has been given to the director to acquire opportunities for the company or to pass on information to the Company about opportunities which fall within the scope of the Company’s business. The third example is where no director of a Company may usurp an opportunity which the Company is actively pursuing or an opportunity which, at least insofar as its directors are concerned, can be said to belong to the Company. Once the duty has been established, a Director cannot appropriate the corporate opportunity for anyone other than the company unless he/she obtains the express consent of the Company. As mentioned above, once the duty has been established, it will not matter if the Company was not in a financial position to take it or if the person from whom the opportunity would have been acquired would not agree to part with it to the Company, the fact will remain that should a Director acquire the opportunity for his/her benefit or for the benefit of a third party without the Company’s consent, he/she would have breached his/her fiduciary duty.
If a Director breaches this fiduciary duty and acquires such an opportunity for him/herself without consent the law will, as between the Company and the Director, treat the acquisition as having been made on behalf of the Company. This means that the Company may claim the opportunity from the delinquent Director and the law will refuse to give effect to the Director’s intention and will treat the acquisition as having been made for and on behalf of the Company (Da Silva and Others v CH Chemicals (Pty) Ltd 2008 (6) SA 620 (SCA) (“Da Silva Case”). In the event that no such claim is possible the company may, in the alternative, claim any profits which the director may have made as a result of the breach or damages in respect of any loss it may have suffered thereby. The Common Law principle has in fact been codified in section 76 of the Companies Act 71 of 2008 (“the Companies Act”) and a Director cannot necessarily divest himself of this duty by resigning from the Company.
While it is well known that a breach of a fiduciary duty by a director can give rise to a claim for the disgorgement of profits or damages, the principal that the law will refuse to give effect to the directors intention and will treat the acquisition as having been made on behalf of the company is an interesting one in certain circumstances where the Director has established a company (“NewCo”) specifically as the vehicle to acquire the corporate opportunity. The implications could be easily determined where the delinquent Director is the sole director and shareholder of that NewCo but one wonders how the court would determine the consequences under circumstances where the delinquent Director is one of many shareholders of the NewCo.
By way of example, let us say that a Company (“Company A”) has given a specific mandate to a director to purchase another Company (“Target Company”). Where the said director sets up a NewCo and negotiates the purchase and sale of the Target Company for the NewCo’s benefit instead, this will without a doubt be a breach of that directors fiduciary duty. Where the delinquent director is the only shareholder and director of the NewCo, by lifting the corporate veil, the law could treat the acquisition as having been made on behalf of Company A, as this would be an acquisition for the benefit of the director himself and not for a third party.
If, however, the director acted in conjunction with other third parties as shareholders of the NewCo, it would appear that the legal basis for Company A’s claim could be found in the principle that where someone owes a fiduciary duty to a company, and makes a profit for himself through a breach of his fiduciary duty, the law will not allow the director to retain the benefit that he acquired by such breach (Symington and Others v Pretoria-Oos Privaat Hospitaal Bedryfs (Pty) Ltd (2005) 4 all SA 403 (SCA). In this instance, Company A’s claim against the delinquent director could therefore be for the disgorgement of profits. What is interesting is that the term ‘profits’ is a wide one and is not confined to money, but covers every gain or advantage made by a wrongdoer (Robinson v Randfontein Estates Gold Mining supra). Would Company A therefore be entitled to claim the transfer of the shares held by the Director to its name? The controversial Supreme Court of Appeal decision in the Da Silva case could perhaps be used as a counter argument to such a claim by arguing that it was not the intention of Company A to acquire shareholding in another entity which owned the Target Company but rather that Company A’s intention was to acquire 100% of the Target Company and in light of this fact, the corporate opportunity envisaged by Company A had not been misappropriated.
One wonders whether the courts would enforce a claim by Company A to treat the acquisition as having been made on behalf of Company A under circumstances where it can be proved that all parties involved in the acquisition of the Target Company for the NewCo were aware that the director had been mandated to acquire the Target Company for Company A.
Regardless of the relief sought by Company A, it is clear that once the misappropriation of a corporate opportunity has been established, the courts will ensure that the rights of the Company are protected. Directors should therefore ensure that at all times, the provisions of section 76 of the Companies Act which, inter alia, call for open communication between the Company and its directors are upheld at all times and that it is better to err on the side of caution rather than face the consequences of misjudgement.