Directors’ standards of conduct under the South African Companies Act and the possible influence of Delaware law

• Jurisdiction: South Africa
• Author: Tshepo H Mongalo
• Citation: (2016) 2(1) JCCL&P 1
• Pages: 1-16
• Date: 16 August 2019
• Published date: 16 August 2019

1

DIRECTORS’ STANDARDS

OF CONDUCT UNDER THE

SOUTH AFRICAN COMPANIES ACT

AND THE POSSIBLE INFLUENCE

OF DELAWARE LAW*

TSHEPO H MONGALO†

Associate Professor of Law, University of the Witwatersrand,

Johannesburg

ABSTRACT

Fiduciary duties in Delaware and, indeed, in most states of the United

States of America, are less burdensome than they are under the

South African Companies Act 71 of 2008. To begin with, Delaware’s

fiduciary duties consist of only the duty of loyalty and the duty of

care. There is no separate duty of skill and diligence in Delaware,

which is home to over 51% of all publicly traded companies in the

United States (hereafter referred to as the US). Moreover, a Delaware

director does not owe a greater degree of the duty of skill if that

director happens to possess a heightened set of skills on the board

of a Delaware corporation. The law is different in South Africa as

the standard of care, skill and diligence expected of a South African

director depends to a large extent on the degree of care and skill such

a director possesses.

This paper will assess whether the re-iteration of the common law

duties and standards of liability of directors under the South African

Companies Act 71 of 2008 has had the unintended consequence of

making corporate directorship more burdensome and less attractive

in South Africa than is the case in leading corporate law states, such

as Delaware.

South Africa is home to far fewer public companies than Delaware,

a state within the US which is considered to be the leading corporate

* This paper was initially presented at the Society of Law Teachers of Southern Africa

(SLTSA) Conference on 8 July 2015 at Varsity College in Durban North, South

Africa. The updated version of the paper has been made possible by the funding

of St John’s College, Cambridge, through the Colenso Visiting Scholarship at

the University of Cambridge, which was undertaken by the author during the

Michaelmas term of 2015.

† BProc, LLB (Natal), LLM (Cambridge), PhD (Cape Town).

(2016) 2(1) JCCL&P 1

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2(2016) 2 (1) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

law state there. In fact, the corporation law of Delaware is so

influential throughout the US that it has been given the status of

being the unofficial national corporate law of that country.

With such influence, it is not surprising that most corporate

law developments throughout the world are increasingly being

benchmarked against Delaware corporate law. South Africa’s recent

corporate law reform project, which culminated in the enactment of

the Companies Act, 2008, has also used Delaware corporate law as

a benchmark in a number of respects. However, the policy makers

and the legislature in South Africa deviated from Delaware law and

practice in the important area of directors’ standards of conduct and

liability, choosing, instead, to continue with the legal position which

existed prior to the reform, which position was largely inherited from

the English corporate law. In doing so, South Africa appears to have

adopted a far stricter and seemingly burdensome regulatory regime

over directors, in clear contrast to the Delaware position, which still

holds sway in the US as the preferred jurisdiction for incorporation

of corporations trading publicly in the US stock markets.

South Africa appears to have been influenced by the understandable

inclination to steer away from being associated with the jurisdiction

that has witnessed some of the colossal and spectacular corporate

collapses occasioned by the failure of corporate governance

requirements. This paper will investigate the wisdom of the position

adopted in South Africa, particularly as the country desperately

needs economic growth to reduce, among other things, poverty and

inequality.

I INTRODUCTION

Prior to the commencement of the Corporate Law Reform Project in

South Africa in 2003, a team of five American lawyers,1 made up of

1 The team consisted of the following eminent American corporate law practitioners

and scholars: (a) R Franklin Balotti, who was a partner of the Wilmington,

Delaware law firm of Richards, Layton & Finger, PA and a member of the

American Bar Association’s Section of Business Law; (b) James J Hanks Jr, who was

then a partner in the Baltimore office of the law firm Ballard Spahr Andrews &

Ingersoll, LLP, an Adjunct Professor of Law at Cornell Law School and an Adjunct

Professor of Management at Cornell Business School. He was then a member of

the Committee on Corporate Laws of the Section of Business Law of the American

Bar Association; (c) John F Olson, a senior partner in Gibson, Dunn & Crutcher’s

Washington, DC office and who was then serving as a member of the Council

of the ABA’s Business Law Section and of the Committee on Corporate Laws;

(d) Samuel C Thompson Jr, who was then a Professor of Law and Director of

the Center for the Study of Mergers and Acquisitions at the University of Miami

School of Law; and (e) Craig Owen White, who was then a partner in the law firm

of Hahn Loeser & Parks LLP, Cleveland, Ohio, and a member of the Corporate

Laws Committee of the Section of Business of the American Bar Association.

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