By Pieter Strydom – Associate
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In a fast-paced corporate environment directors of companies are frequently tasked with high-stakes decisions that demand sound judgment and careful consideration of the company’s best interests. In the event where a company suffers a loss stemming from a director’s decision, the question arises as to the potential liability of a director owing to an alleged breach of its fiduciary duties and the defence mechanism available to such director.
Duties of a Director
Section 76(3) of The Companies Act 71 of 2008 (the “Act”) provides that a director of a company, when acting in that capacity, must exercise the powers and perform the functions of a director -
- in good faith and for a proper purpose;
- in the best interests of the company; and
- with the degree of care, skill and diligence that may reasonably be 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.
The Defence Mechanism
The Act has over time been broadened to align with international standards and allows, under Section 76, for a defence mechanism commonly known as the Business Judgement Rule (the “Rule”). In order for a director to rely on the Rule as a defence, the following three requirements must be met in accordance with Section 76(4)(a) of the Act:
- The director took reasonably diligent steps to become informed about the matter at hand;
- The director had no material personal financial interest or conflict of interest in the matter, or had dealt with those personal financial interests as required by law; and
- The director rationally believed that the decision made or supported was in the best interest of the company and had acted in good faith in the best interest of the company.
Section 76(4)(b) permits directors to rely on the performance, information, recommendations, and opinions of professional advisors. It should, however, be noted that when a director relies on such recommendations, the director must have a reasonable belief that such advisor is competent in its field of expertise. For Section 76(4)(b) to apply the director cannot baselessly rely on an advisor, but has the duty to further scrutinise the information, advice and recommendation received, prior to basing its decision thereon.
Business inherently involves taking risks in pursuit of potential rewards. In assuming these risks or decisions, directors are required to exercise their judgement. Assessment of the appropriateness of the decisions taken by the directors is not based solely on the outcome, but also on the process and deliberation that the directors followed in arriving at the decision.
Conclusion
The Rule encapsulates the key form of protection for directors, allowing them to make informed judgements without constant threat of personal liability. Its primary purpose is to shield directors from liability towards the company and its shareholders. The Rule is not limited to specific judgements made by the directors, but applies to all decisions made by directors in performance of its powers and functions.
It is, therefore, paramount that directors adhere to principles of good corporate governance, structured decision making and proper due diligence to mitigate risks and minimise the possibility of personal liability towards the company or its shareholders.