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THE DUTIES OF A DIRECTOR & THE BUSINESS JUDGMENT RULE IN TERMS OF THE COMPANIES
ACT 71 OF 2008

/ Uncategorized / By Lisa Boogaard

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.”

Read moreOverview of POPIA Compliance

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.”

Read moreDuties And Responsibilities Of The Information Officer

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

Read moreLiability & POPIA

 February 15, 2019

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