DIRECTORS , DUTIES AND

LIABILITY
Chapters 10, 11,12- Cassim et al
Contemporary Company Law
 INTRODUCTION
DIRECTOR – Co.
(Fid. Relationship)

SEPARATE LEGAL
INCORPORATION PERSONALITY
(Corporate Veil) (S 19 (1) (a) - Act)
(S 66 (1) – Act)

PRINCIPAL AGENT
(Company) (Director)
CORPORATE GOVERNANCE IN
SOUTH AFRICA – VERY BRIEF INTRO
 Undeniably, the King Codes which have, over the years, provided for
a voluntary basis of corporate governance (CG) as juxtaposed with
a legislated basis of governance, have played a key role in shaping
corporate governance in SA and even in Africa broadly
 There is no singularly accepted definition of CG but King IV
effectively defines it as “the exercise of ethical and effective
leadership by the governing body towards the achievement of the
following goals: (i) Ethical culture (ii) Good performance
(iii) Effective control and (iv) Legitimacy
 To the King Committee, CG is about ethical leadership and
effective governance/leadership.
 Ethical leadership is exemplified by values like competence,
integrity, transparency, accountability, responsibility, fairness etc,
while effective leadership is results-oriented
Corporate governance cont.
 Two main organs responsible for governance in a company are (i)
the board of directors and (ii) the shareholders acting through a
duly constituted shareholders’ meeting.
 In a company, certain powers per either a company statute or the
company’s constitution (MOI), may be exercised by the board, while
other substantive powers may be exercised by or are reserved for
the shareholders – see English case of John Shaw and Sons (Salford)
Ltd v Shaw [1935] 2 KB 113 (CA) whose principles were adopted in
SA through Van Tonder v Pienaar 1982 (2) SA 336 (SE), also see
Letseng Diamond Ltd v JCI Ltd; Trinity Asset Management (Pty) Ltd v
Investec Bank Ltd 2007 (5) SA 564 (W) para 16.2
 Nonetheless, per Principle 6 of the King IV, it is beyond question
that the company board or “the governing body should serve as the
focal point and custodian of corporate governance in an
organisation”, i.e. in a company
The Board of Directors’ Strategic
Role in a company per King IV
Steers and sets
strategic Approves policy
direction with regards & planning that give
to : effect to the strategy and set
(i) Organisational strategy direction
(ii) Approach to governance

The Company Board’s

Primary Role &
Responsibilities

Ensures Oversees and

Accountability Monitors the
for organisational
performance by means of implementation and
reporting & disclosure execution by management
 DIRECTORS AND BOARD
COMMITEES
•Definitionof ‘Director’:
A ‘director’ is defined as ‘a member of the board of a
company ... or an alternate director of a company and
includes any person occupying the position of a
director or alternate director, by whatever name
designated’(section 1 of the Companies Act of 2008)
• Pay attention to key words in the definition
•The King Code identifies three types of directors:
•Executive directors
•Non-executive directors
➢ Any need to distinguish between Exec & Non-Exec directors? See Howard v
Herrigel 1991 (2) SA 660 (A) 678 A- once appointed, a dir is a fiduciary in
relation to his co & is obliged to display the utmost good faith towards his co &
in his dealings with the co and on its behalf – same fiduciary duties apply
•Independent directors
•Prescribed officers and board committee members are regarded as directors for
certain purposes.
 Types of directors
The Companies Act of 2008 (S 66)
recognises the following 5 types of directors:
◦ Ex officio director (s66(4(a)(ii)): Holds office
as a director of a company solely as a result
of holding another office or title or status
◦ Memorandum of Incorporation appointed
director (s66(4)(a)(i)): The Memorandum of
Incorporation can specify how and /or by
whom such a director is appointed
 Types of directors (continued)
◦ Alternate director: Elected or appointed to serve as
a member of the board of a company in substitution
for a particular elected or appointed director of that
company. Useful innovation to allow the work of the
board to continue in the absence of elected directors.
The MOI must provide for this.
◦ A director elected by shareholders: In the case of a
profit company at least 50% of the directors must be
elected by shareholders
◦ Temporary director: Appointed in order to fill a
vacancy.
Other types of directors in SA law cont.
 De Jure director is validly & formally appointed, consented to it – Re
Hydrodam (Corby) Ltd [1994] BBC 161 at 162.
 Temporary director – appointed to fill a vacancy on a temporary
basis – s68(3)
 Nominee director – e.g. owes nomination to a creditor but especially
a shareholder who controls sufficient voting power in a company &
represents her/his or its interests. Commentary on usefulness and
potential challenges
 Puppet director – placed on the board to blindly follow instructions of
his/her/its controller – per S v Shaban 1965 (4) SA 646 (W) at 652, our law
will punish this practice of puppet directors as fraud
 De facto director – a person who claims to act and purports to act as
a director, without having been so appointed either validly or at all –
Corporate Affairs Commission v Drysdale (1978) 141 CLR 236 at 242-243
 Shadow director – defined in English law as a person in accordance
with whose directions or instructions the directors of the company are
accustomed to act – see Re Hydrodam for what needs to be proved, not
easy to prove in other words
 Duties of directors

◦ The Companies Act of 2008 has

partially codified the common law
duties of directors
◦ This statement of directors’ duties
preserves the common law.
◦ NB: Relating to Directors duties, Co
Act includes all prescribed officers
and members of board committees
in definition of director
Prescribed officers
 Companies Regulations 38:
 Even if not director, person is prescribed
officer if they:
 Exercise executive control over and
manage whole or significant portion of
business
 Regularly participate in exercise of
executive control over and management
of whole or significant portion of business
A FIDUCIARY RELATIONSHIP: Who is a
fiduciary & what are the implications?
 Examples of fiduciaries are trustees, agents, partners,
directors and attorneys, but the list is not closed
 Bristol and West Building Society v Mothew [1998] Ch 1
at 8– a fiduciary undertakes to act on behalf of another
person in circumstances that give rise to a relationship of
trust and confidence
 Three elements to this relationship: (1)one party is
vulnerable to and at the mercy of the other; (2)a
fiduciary has some discretion or power and (3) is able to
unilaterally exercise that power or discretion so as to
affect the beneficiary’s legal or practical interests.
FIDUCIARY DUTIES VIS-À-VIS DUTY OF
CARE, SKILL & DILIGENCE
See BM Mupangavanhu ‘Fiduciary Duty and Duty of Care under Companies Act
2008: Does South African Law Insist On The Two Duties Being Kept Separate?’
Stell. Law Rev. 2017
 Duties are both owed by a fiduciary (director – agent) and stem from
a fiduciary relationship
 Different origins and different causes of the two duties
 Fiduciary duties derived from R-D Law, while duty of care derive
from SA law’s rich English law heritage
 Fiduciary duty is preventive in nature – seeks to prevent a fiduciary
from acting in conflict with the interests of the company. Thus ,
according to Velasco, it seeks to prohibit conduct harmful to a
company; while
 A duty of care mandates affirmative conduct or imposes a positive
duty to be careful and an obligation to be competent by paying
attention to duties while applying the skills or abilities such as
fiduciaries have to the advantage of their companies
Different causes of action between a
fiduciary duty & duty of care
 For basis of liability also see BM Mupangavanhu ‘Fiduciary Duty and Duty of Care
under Companies Act 2008: Does South African Law Insist On The Two Duties
Being Kept Separate?’ Stell. Law Rev. 2017
 There are different bases of liability and different cause of action for fiduciary duties
and the duty described as the duty of care, skill and diligence (or simply duty of
care);
 The cause of action for breach of the duty of care at common or statutory law is
delict or based on breach of contract for an executive director for e.g., while for a
fiduciary duty it is based on breach of trust, it’s neither delictual nor contractual – it
is rather sui generis. The standard of care in SA common law (inherited from English
law) addresses the question of delictual conduct in the form of negligence, whereas
the fiduciary duty addresses honesty.
 With respect to the duty of care, the conduct of the director must be delictual in
nature, rather than the director’s conduct constituting a delict. To succeed in a case
of this kind of delict, a litigant needs to prove the following elements; that there was
an impugned conduct, that such conduct was wrongful or unlawful, that there was
fault in the form of negligence, an element of causation and proof that the company
suffered loss or damages – see Ex parte Lebowa Development Corporation Ltd 1989 3
SA 71 (T) 106 where the court confirmed that liability for negligence is Acquilian, i.e.
common law remedies are derived from thefrom “the actio doli and actio legis Aquiliae
for patrimonial loss resulting from the fraud or negligence”
Duty to avoid a conflict of interest –
common law & statutory law dimensions
 Considered a very important fiduciary duty, and it is evident from
the attention given to it in case law and even by our Companies Act
2008
 Directors (as fiduciaries) are under a duty to avoid placing
themselves in a position in which their duties to the company
conflict with their personal interests – Robinson v Randfontein
Estates Gold Mining Co Ltd 1921 AD 168 at 178-179.
 It is an inflexible and strictly applied rule in our law and other
jurisdictions – see Sibex Construction (SA) (Pty) Ltd v Injectaseal CC
1988 (2) SA 54 (T) at 66D which cited with approval the dictum in
Canadian Aero Service Ltd v O’Malley (1974) 40 DLR (3d) 371 (SCC)
that “…persons in positions of trust may be less tempted to place
themselves in a position where duty conflicts with interest if the
courts recognised and enforced the strict ethic in this area of law”.
Duty to avoid conflict of interest cont.
 Two, possibly three strands or separate principles to this duty apply
at common law – (i) a duty or obligation to avoid a conflict of
personal interests (the no-conflict rule), (ii) an obligation not to make
a profit from the fiduciary’s position as a director (this crystallises
into the no profit rule & the corporate opportunity rule) and albeit the
lesser known (iii) obligation not to compete improperly with the
company by becoming a director of a rival concern which will
result in duties and interests conflicting – see Atlas Organic
Fertilizers (Pty) Ltd v Pikkewyn Ghwano (Pty) Ltd 1981 (2) SA 173 (T)
at 198H-199A; see Cyberscene Ltd v i-Kiosk Internet and Information
(Pty) Ltd 2000 (3) SA 806 para 31
 At times it is difficult to draw clear contours between the first two
strands but they are separate and distinct
‘The no-profit rule’
 The rule provides that directors may not retain any profit made by
them in their capacity as directors while performing their duties as
directors
 Profits so made must be disgorged and paid back to the company –
Dorbyl v Vorster [2011] JOL 27671 (GS) (even if the company could
not have made a profit itself) unless shareholders ratify the action
– and profit means more than money but every gain conceivable -
Robinson v Randfontein Estates
 Leading case for the strict application of the no-profit rule in the
common law world is Regal (Hastings) Ltd v Gulliver [1942] 1 All ER
378 (HL); [1967] 2 AC 134. Directors in good faith, attempted to help a
company Regal (R Co) to buy two cinemas for purposes of selling three at a profit.
They formed a subsidiary in which they then had to subscribe for shares to enable it
to have a paid-up share capital of 5000 pounds since the holding co did not have the
money to do so. Thereafter they sold their shares in the subsidiary company for a
profit to themselves. The House of Lords ruled that the directors were accountable
to R Co for profits made by them on the sale of their shares. Liability to account
arose from the mere fact of the profit having been made regardless of how honesty
and well intentioned the defendants were. It was irrelevant that the profits made
were not made at the holding company’s expense
Cont.
 The principles in Regal (Hastings) Ltd v Gulliver on the no-profit and
the no conflict rules were approved and applied in SA in Phillips v
Fieldstone Africa (Pty) Ltd 2004 (3) SA 465 (SCA), which case was
also eager to point that the principles were consistent with those
enunciated in Robinson v Randfontein Estates
 The SCA ruled in Phillips v Fieldstone ruled that once a breach of a
fiduciary duty occurs, it is of no relevance that the company has
suffered no loss or damage, or that the profit was not made at the
expense of the company, nor is it relevant that the company could
not have exploited the opportunity or used the information (para
31)
 The court in that case also ruled that the duty of a fiduciary to
avoid a conflict of interest could extend beyond the employee’s
term of employment
 Court in Canadian Aero Service Ltd emphasised that there are
situations were disgorgement of profits should be ordered by a
court though profits were not gained at the expense of the co –
coz a fiduciary must not be allowed to abuse his position
‘the corporate opportunity rule’
 The rule precludes a fiduciary from diverting a company’s corporate
opportunity for themselves or for another person. This includes usurping
any contract, information or other opportunity that properly belongs to
the company and that came to him/her as a director of the company
 In Da Silva v CH Chemicals (Pty) Ltd 2008 (6) SA 620 (SCA) a corporate
opportunity was described as ‘property of the company’ (para 18).
 Da Silva court admitted that it’s not easy to define a corporate opportunity
but it can be understood to be one that the company was actively pursuing
or one which falls within the ‘existing or prospective business activities’ or
is related to the operations of the co within the scope or line of its
business (para 19)
 It is irrelevant whether the opportunity could or could not have been
taken up by the company
 The USA developed a ‘line of business test’ which was initially narrow to
relate to the opportunity being closely related to the co’s business (Guth v
Loft Inc 5 A 2d 503 (1939. It was extended to include one which is naturally
in the co’s business, closely associated with it or had resolved to pursue it
(Canadian Aero Service Ltd)
 Of interest is the ‘interest’ or ‘expectancy’ test developed in the USA – see
Lagarde v Anniston Lime & Stone Company 28 So 199 (Ala 1899)
Corporate opportunity rule important cases
cont.
 Cook v Deeks [1916] 1 AC 554 (PC) – classic illustration of corporate
opportunity. Four directors who were also shareholders in a railway construction
company T Co decided to usurp a co’s corporate opportunity with an existing
client, and used their majority as shareholders to declare that the co had no interest
in the contract because they wanted to divert it themselves. Court ruled that the
benefit of contract belonged to T Co and the resolution had no effect, and directors
could not use their majority (which in any case was oppressive of the minority) to
divert a corporate opportunity to themselves, and that the directors as fiduciaries
cannot sacrifice the interests of the co which they are meant to protect. The
defendants were not entitled to make a gift to themselves of corporate assets. Even
a majority of 75% is not enough, unanimous assent required.
 Robinson v Randfontein Estates Gold Mining – Robinson was director &
chairperson of the board of plaintiff co. Plaintiff co had struggled to agree with the
seller to purchase the farm it wanted to buy. Robinson used his influence to
persuade the seller to sell the farm to him, and thereafter sold the farm to plaintiff
co at a huge profit. Court ruled that the co was entitled to claim back (disgorge)
profits from Robinson. The court ruled that where a man stands in a position of
confidence/trust in relation to another, involving duty to protect the interests of
that other, he is not entitled to make a secret profit at the expense of the other or
to place himself in a position where his interests conflict with his duty
Corporate opportunity cases cont.
 Canadian Aero Service Ltd v O’Malley – just like in the Randfontein case, two
senior officers of Canaero, though not directors, had attempted by failed to obtain a
contract to carry out topographical surveying and mapping services for a part of
Guyana. They subsequently resigned from Canaero, formed their own surveying co
and managed to obtain a contract the contract. Court held that the defendants
were in a fiduciary relationship, and were liable to Canaero for breach of a fiduciary
duty in diverting to themselves or another, or a co with whom they were associated,
a maturing business opportunity that the co was actively pursuing – court further
held that the defendants could not usurp a corporate opportunity even after their
resignation, which in any case had been prompted by a desire to acquire for
themselves an opportunity sought after by the co.
 Da Silva v CH Chemicals (Pty) Ltd – Da Silva, was an MD of CH Chemicals
(Pty) Ltd (CHC)when Resinex a foreign company was contemplating either entering
into the SA market by means of joint venture with CHC or establishing its own
business in SA in competition with CHC. Resinex abandoned negotiations with
CHC and informed Da Silva it contemplated entering the SA market on its own, and
invited him to become the MD of its subsidiaries in SA. Da Silva did not inform
CHC of the offer but continued to negotiate on behalf of CHC with Resinex.
Eventually Da Silva accepted the offer, resigned from CHC but was involved in
setting up business for Resinex such as securing premises for the two subsidiaries
and bought three containers of LLDPE for Resinex’s subsidiaries during his notice
period
Da Silva cont.
 Admittedly the Da Silva case involved complex issues for the court to decide
 The SCA ruled that directors may not make a secret profit or otherwise place
themselves in a position where their fiduciary duties conflict with their personal
interests – coz a director is in certain circumstances obliged to acquire an
economic opportunity for the company
 The court also characterised the corporate opportunity as ‘property’ of the co or
as a ‘corporate asset’
 The court remarked that it was not a breach of duty for a director during his notice
period to incorporate a co which will in the future compete with his current co.
 However, coz Da Silva, by purchasing and selling containers of LLDPE on behalf od
Resinex subsidiaries while in the employment of CHC, he breached his fiduciary
duty to CHC and violated the corporate opportunity rule coz any transaction
involving the purchase and sale of plastic products fell within the scope of CHC
business (para 55)
 With respect to the Resinex transaction which CHC had pursued through Da Silva,
the court ruled that Da Silva had not breached his fiduciary duty to CHC with
respect to the Resinex transaction. The SCA reasoned that the transaction between
Da Silva and Resinex was not the same transaction that CHC pursued. Da Silva
pursued a contract of employment, not a joint venture with Resinex.
 Given the complexity of cases exemplified by the facts of the Da Silva case, and the
difficult to prove that a person in Da Silva’s position acted in bad faith, it is
understandable that some academic commentators like Maleka Femida Cassim are
critical of the SCA judgment in this case.
 Directors’ personal financial
interests (section 75)
◦ If a director has a personal financial
interest in a matter to be considered at
a board meeting or knows that a related
person has a financial interest in the
matter he must disclose the interest
before the matter is considered at the
meeting
◦ In certain circumstances this may also
be done after the matter has been
considered by the board.
 Duty not to abuse his position or information
obtained as a director (statutory manifestation of the
duty to avoid a conflict of interest) (section 76(2)(a))
 Section 76(2)(a) provides that a director must not abuse his
position, or any information obtained as a director, to either
(i) gain an advantage for himself or for another person, other
than the company or a wholly-owned subsidiary of the company,
or
(ii) to knowingly cause harm to the company or a subsidiary of
the company
 Encapsulated are common law principles of loyalty and fidelity and the duty of
directors not to make a profit out of their position and access to information. An
e.g. of contravention of this duty is a director’s use of inside information –
confidential price-sensitive information to gain an advantage for himself or for
someone else.
 By extension this could include situations when nominee directors convey
information to their nominators and situations of multiple directorships if the
companies happen to be competitors
 Duty also comprehends the common law no-profit rule, the corporate
opportunity rule is implied and precludes directors from self dealing
Duty to communicate information to the
board (section 76(2)(b))
• Section 76(2) (b) provides that a director must communicate to the
board at the earliest practicable opportunity any information
that comes to the director’s attention, unless the director
(i) reasonably believes that the information is immaterial to
the company, or is generally available to the public or
known to the other directors, or the director
(ii) is bound not to disclose that information by a legal or ethical
obligation of confidentiality
• In Kukama v Lubelo 2012 JDR 0662 (GSJ), a case that related to a
delinquent director and information about a fraudulent transaction, the
court applied s76(2)(b)
• Duty to communicate follows the understanding that corporate
information is an asset to and the property of a co and has become an
invaluable commodity, and a director is duty bound to disclose unasked
information acquired when acting for the company, which can liely
influence decision-making, and this is in the best interests of the co,
manifests good faith and is part of fair dealing on the director’s part
 Duty to act in good faith and for a
proper purpose
(section 76(3)(a))
 A director of the company, when acting in that capacity, must
exercise his powers and perform his functions in good faith and
for a proper purpose
 Two duties decoupled at common law are combined under the Act.
 Test of good faith is subjective, not objective
 It is whether the director honestly believed that he or she acted in
the best interests of the company
 Subjectivity constrained by other considerations
 E.g. absence of reasonable grounds for believing that the director is
acting in the interests of the co may be the basis for finding bad
faith or rather lack of good faith
 Proper purpose - not defined. This refers to the objective purpose
for which the power was given, NOT a collateral purpose. See
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC)
Howard Smith Ltd case –Proper purpose
 Board of directors of RW Miller (Holdings) in favour of a higher take-over bid by
Howard Smith Ltd, which they preferred to a competing and lower takeover bid
made by a majority shareholder, Ampol Petroleum and another co. The board
consequently allotted shares to Howard Smith Ltd in order to dilute the majority
shareholding of Ampol P. Ltd and to ensure the success of the takeover bid made by
Howard S. Ltd. In setting aside the allotment of shares to Howard S. Ltd, the court
stated that it was unconstitutional for directors to use their fiduciary powers to
issue shares to a company for the purpose of destroying an existing majority or
creating a new one. This applies regardless of whether directors believed they were
acting in the best interests of the co or not, and regardless the fact that directors
may not have obtained a personal advantage for themselves or to retain their
position as directors of the company.
 Court set aside the allotment of shares coz directors exercised their powers for an
improper purpose
 See also Punt v Symons & Co Ltd [1903] 2 Ch 506 where directors issued shares
to friends to deprive existing shareholders of special rights conferred on them, and
thus to gain support to enable them to alter the company’s constitution
 Where there are multi purposes for a decision, a court should decide what the
dominant or substantial purpose was.Also see Piercy v Mills [1920] 1 Ch 77.
Four-step process for the Proper
purpose test
Extrasure Travel Insurances Ltd v Scattergood
[2003] 1 BCLC 598 (ChD) 619
 Court - not necessary to prove dishonest or that the director
knew that he was pursuing a collateral purpose
 4-step process is as follows:
✓ identify the particular power that is being challenged;
✓ Identify the proper purpose for which the power was given to the
directors;
✓ Identify the substantial purpose for which the power was in fact
exercised; and
✓ Decide whether this purpose was proper
 If directors are found guilty of breach of this duty , their decision is
set aside, and they will be jointly and severally liable to compensate
the co for any loss suffered.
 Duty to act in the best interests of
the company
(section 76(3)(b))
A director of the company when acting in that capacity
must exercise his powers and perform his functions in the
best interests of the company.
▪ Part of the quintessence or core of the fiduciary duties is the duty
of loyalty and honesty, which is pat of this duty and good faith
▪ Important questions need to be asked about this duty and
answers need to be given:
▪ What is the meaning of the phrase ‘the best interests of the
company’ in s76(3)(b)? Legal entity or collective interests of
present/future shareholders or both? Matter of interpretation
▪ To who is the duty owed? Who is the proper plaintiff when the
duty is breached
▪ Who decides what is in ‘the best interests of the company’?
“Best interests of the company” –
What’s the meaning of the phrase?
 Phrase not defined under the Act
 Company is defined in s1of the Act to mean ‘juristic person incorporated
in terms of the Act.’
 While a co is seen as distinct from the shareholders under the Act and at
common law, the phrase, ‘the best interests of the company’ does not
exclude collective interests of the shareholders
 It has been interpreted to mean the collective interests of ‘all the
shareholders, the present and the future’ – see Greenhalgh v Arderne
Cinemas Ltd 1951 Ch 286 para 291
 This common law meaning was noted in the King Report on South Africa
2009 (King III)
 King III goes a step further and suggests that the s76 (3) (b) should be
interpreted to include consideration of interests other than those of the
collective body of shareholders. The implication of s7 (a) should be a
departure from the traditional narrow interpretation of ‘the best interests
of the company.
S 76 (3) (b) cont:To who is the duty
owed?
 Fiduciary duties are owed to the company and the co alone. This is
unexceptionable and flows from the fact that the directors are agents of
the co and stewards of its affairs – and not stewards of affairs of
shareholders – see Sharp and Others v Blank and others [2015] EWHC
3220 (Ch). See Perceval v Wright [1902] 2 Ch 421
 In general directors do not, solely by virtue of their office of director, owe
fiduciary duties to shareholders, collectively or individually – Peskin v
Anderson [2001] 1 BCLC 372 at 29
 There are however circumstances where directors have been held to owe
particular fiduciary duties to shareholders – there must be a ‘special factual
relationship’ between the director and the shareholders in the particular
case - Peskin v Anderson at para 33
 Only the company can sue for wrongs done to the company, under the
rule in Foss v Harbottle (1843) 2 Hare 461 –Proper Plaintiff rule -
Who decides what is in ‘the best
interests of the company’?
Link btn duties to act in good faith
& in the best interests of the co
 Re Smith & Fawcett Ltd [1942] Ch 304-
exercising powers conferred bona fide in
what they consider – not what a court
may consider to be in the best interests
of the company – why? Coz directors
have more intricate knowledge of what
happens in a co than judges do.
Duty to act with a certain degree of
care, skill and diligence
(section 76(3)(c))

 A director must exercise that 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
 Having the general knowledge, skill and
experience of that director
Brief Examination of content of
duty of care, skill & diligence
See Eisenberg MA ‘The Duty of Care of Corporate
Directors and Officers’ (1990) 51 Univ of Pitt. L. Rev 945
Also see Francis v. United Jersey Bank 432 A.2d 814 (N.J
1981) at 823-824
 The sub-duty to monitor
 Sub-duty to inquire
 Sub-duty to be informed
 Sub-duty to make reasonable decisions
S 76 (4) (a)
(4) In respect of any particular matter arising in the exercise of the powers or the
performance of the functions of 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 a 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
 Business judgment rule (section 76)
 The business judgment rule deems a director to have
exercised his powers or functions in the best interests
of the company and with the requisite degree of care,
skill and diligence provided that:
i. The director had taken reasonably diligent steps to
become informed about the matter in question
ii. Either the director had no material personal financial
interest in the matter of the decision and had no
reasonable basis to know that any related person had
a personal financial interests in the matter OR had
disclosed personal financial interests or interests of a
related person as required by s 75 of the Companies
Act
iii. The director made a decision, supported a decision &
had a rational basis for believing, and did believe, that
the decision was in the best interests of the company.
S 76 (4) (b) of the Act
(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 board’s 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 persons
specified in subsection (5).
 Liability of directors (section 77)

• A company may recover loss, damages

or costs sustained by it from the
directors in terms of the common law
principles relating to breach of fiduciary
duties or a breach of the duty to act with
care and skill
• A company may recover loss, damages
or costs sustained by it from the
directors in various other circumstances,
set out in section 77 of the Companies
Act of 2008.
Recovery of losses by the company-
appropriate circumstances
 In terms of principles of common law relating to breach of a fiduciary duty
➢ At common law, the basis for breach of fiduciary duties is said to be sui generis (of its own kind-unique)

 In accordance with principles of law relating to delict for breach of duty of care, skill
and diligence
➢ The basis for breach of the duty of care, skill and diligence at common law is based on the principles of the
Lex Aquilia, which is fault, i.e. dolus or culpa which results in loss to the plaintiff. In other words, the non-
executive director’s liability will be based on delict, or if there is a contract between the director & the
company, in case of executive directors, then the basis will be breach of contract. With regards to
negligence, the test involves use of both subjective and objective elements. See s76(3)(c) (i)-(ii). For e.g. if a
director is an expert in a particular field, the reasonable person is placed in the same category, namely that
of a reasonable person. A director would have breached his duty of care negligently if he failed to do
something which a reasonable person in his position, and under similar circumstances would have done, or
did something which a reasonable person under the same circumstances would not have done.

 Where a director acted in the name of or signs anything on behalf of the company
without necessary authority, knowing that he lacks such authority (s77(3)(a))
 Where a director participated or agreed to participate in carrying out an activity
knowing that such business is being conducted recklessly or fraudulently
 Director-party to an act or omission by the company despite knowing that such act
of omission was calculated to defraud someone in the company
 See your textbook for more.
Relief of directors by a court (section 77)

 Inany proceedings against a

director, other than for wilful
misconduct or wilful breach of trust, a
court may relieve the director from
liability if it appears to the court that
the director has acted honestly and
reasonably or it would be fair to
excuse the director.
Indemnification and directors’ insurance
(section 78)
◦ Any provision in any agreement, the
Memorandum of Incorporation or rules of a
company or a resolution adopted by the
company, whether express or implied, is void
to the extent that it directly or indirectly
purports to relieve a director of a duty or a
liability
◦ Subject to important limits a company may
take out indemnity insurance to protect:
 A director against liability or expenses for which the
company is permitted to indemnify a director
 Itself against any expenses that it is permitted to
advance to a director or is permitted to indemnify a
director.
 Number of directors
◦ A private or personal liability
company must have at least one
director
◦ A public or non-profit company must
have at least three directors

◦ Where a company does not have the

prescribed number of directors any act
done by the board or the company will
nevertheless remain valid
 Appointment
A person becomes a director of a company
when that person has been:
◦ Appointed or elected as a director in
terms of the Companies Act or the
Memorandum of Incorporation; or
◦ Holds an office, title, designation or
similar status entitling that person to be
an ex officio director of the company
◦ Has delivered to the company a
written consent accepting the
position of director.
 Ineligibility (section 69)
• A person who is ineligible to be a director is
absolutely prohibited from becoming a
director
• There are no exceptions to the prohibition.
◦ Ineligible persons:
 A juristic person
 An unemancipated minor or person under a similar
legal disability
 Any person who does not satisfy any requirement
set out in the Memorandum of Incorporation.
 Disqualification (section 69)
• A disqualification from being a director is not absolute
• A court has a discretion to permit a disqualified person to
accept appointment as a director.
Disqualified persons:
◦ A person prohibited by a court of law from becoming a director
◦ A person declared to be delinquent by a court of law
◦ An unrehabilitated insolvent
◦ A person prohibited in terms of any public regulation to be a
director
◦ A person removed from an office of trust because of dishonesty
◦ A person convicted and imprisoned without the option of a fine
for theft, fraud, forgery, perjury or other offences as specified in
the Companies Act of 2008
◦ A person disqualified in terms of the Memorandum of
Incorporation.
 Ineligibility and disqualification
(continued)
◦ An ineligible or disqualified person must
not be appointed or elected as a director
◦ A company must not knowingly permit
an ineligible or disqualified person to
serve as a director
◦ The disqualifications apply to directors
and alternate directors, prescribed
officers and board committee members
◦ Certain exemptions apply in particular
instances.
 Application to declare a person
delinquent or under probation
◦ Various persons may apply to court for
an order to declare a person to be
delinquent or under probation upon
certain grounds specified in the
Companies Act
◦ A person declared to be delinquent is
disqualified from being a director
◦ A persons declared to be delinquent
may in certain instances apply to court
to suspend or set aside the order of
delinquency.
 Vacancies on the board
 A person ceases to be a director and a
vacancy arises on the board where:
• The period of a fixed term contract expires
• The person resigns or dies
• The position of an ex officio director becomes
vacant
• The person becomes incapacitated, is
declared delinquent, is placed under
probation under conditions that are
inconsistent with being a director, or becomes
ineligible or disqualified from being a director
• The person is removed from office.
 Removal of directors (section 71)
Removal by shareholders
 Despite anything to the contrary contained
in:
◦ The Memorandum of Incorporation or
rules
◦ Any agreement between a company and
a director
◦ Any agreement between any
shareholders and a director
 A director may be removed by an ordinary
resolution adopted at a shareholders’
 Removal of directors (section 71)
Removal by directors
The board of directors may remove a
director if:
• A company has more than two directors
and a shareholder or director alleges that
a director has become ineligible or
disqualified to be a director
• A director has become incapacitated i.e.
unable to perform his functions
• A director has neglected or has been
derelict in the performance of his duties.
Removal of directors (continued)
◦ The director must be given a reasonable
opportunity to make a presentation to the
meeting before the resolution is voted upon
by the shareholders or the board
◦ If the removal constitutes a breach of
contract the director may claim damages or
other compensation for loss of office
◦ Where the board of directors has resolved to
remove the director he may apply to court to
review the board’s determination.
 Term of office
 A director must be elected by
persons entitled to exercise
voting rights in such an
election to serve either for an
indefinite term or for a fixed
term as set out in the
Memorandum of
Incorporation.
Remuneration (sections 66(8) – 66(9))
◦ A director does not have an automatic
right to remuneration
◦ Except to the extent that the
Memorandum of Incorporation provides
otherwise, a company may pay
remuneration to its directors for their
service as directors, but such
remuneration must be paid in
accordance with a special resolution
passed within the previous two
years.
 Board committees
◦ Except to the extent that the Memorandum of
Incorporation provides otherwise, the board may
appoint any number of committees and may delegate
any of its authority to a committee
◦ The board remains liable for the proper performance
of the duty
◦ Certain companies are required to appoint a social
and ethics committee
◦ Members of the audit committee are appointed by
shareholders and not by directors
◦ The King III Report recommends that a public listed
company should have a remuneration, nomination
and risk management committee.
 Board meetings
CALLING A MEETING
 A director authorised by the board may call a meeting at
any time
 A meeting must be called if required:
◦ by the number or percentage of directors specified in the
Memorandum of Incorporation
◦ by at least 25% of the directors where the board has at least 12
members
◦ by at least 2directors where the board has less than 12
members
 Board meetings
NOTICE
 The board must determine the form
of notice and notice period, provided
there is compliance with the
Memorandum of Incorporation or
rules of the company

QUORUM
 A majority of directors must be
present before a vote may be called
 Board meetings
VOTING
 Every director has one vote, and approval of a
resolution requires a majority of the votes cast
MINUTES
 Minutes of all meetings, including any
declarations and resolutions adopted, must be
kept by the company
ELECTRONIC COMMUNICATIONS
 Meetings may be conducted electronically
provided that all participants are able to
communicate concurrently without an
intermediary and are able to participate
effectively in the meeting.
 Decisions taken without convening a
meeting (section 60)
 Board decisions may be adopted by
written consent of a majority of the
directors, given in person or by
electronic communication, provided
that each director received notice of
the matter to be decided.