Models for Reform: The Directors’ Duty of Care in a Modern Commercial

• Jurisdiction: South Africa
• Citation: (2009) 20 Stell LR 373
• Pages: 373-406
• Date: 16 August 2019
• Published date: 16 August 2019

373

MODELS FOR REFORM: THE DIRECTORS’

DUTY OF CARE IN A MODERN COMMERCIAL

WORLD

Julie Cassidy

LLB (Hons) PhD

Associate Professor, School of Law, Deakin University

1 Introduction

Major corporate collaps es in recent decades,1 caused by boa rd misman-

agement, have s purred many count ries to consider whether the directors of

corporations meet the standard of care that investors legitimately expect in the

modern commercial world. South Africa has lagged behind other nations such

as Australia th at undertook relevant law reform reviews in the late 1980s and

early 1990s.2 The recommend ations contained in these reviews led to sign i-

cant legislative amendment to Australian directors’ duties in 1992,3 19994 and

2001 5 and to judicial reform, par ticularly in the early and mid-1990s.6

In South A frica, the review proc ess began in 2004 with the publication of

the Department of Trade and Indu stry policy paper entitled South African

Company La w for the 21st Centur y: Guide lines for Cor porate Reform.7 The

paper proposed an “overall review of company law” t o develop a “legal

framework based on the principles reected in the Compa nies Act, the Close

Corporations Act, and the common law.”8 Specically with regard to directors’

duties, the goal was to clarify director s’ responsibilities, duties and liabilities.9

Interestingly, the policy pap er stressed that the objective of the review was

not to “u nreasonably [jettison] t he body of jurispr udence built up over more

1 Australia experien ced major c orporate collapse s th rough mismanagem ent i n t he 1980s (notably the

Bond Corp oration group of companies) an d more recently in the earl y 2000s (notably the HIH g roup of

companies) Globally, the fa te of the Enron gr oup of compa nies provide s another example of a notable

corporat e collapse The cur rent financ ial crisis has al so provided examples of c orporate colla pses, many

through m ismanagement

2 Senate Standing Committee on Legal and Const itutional Affa irs Company Di rectors’ Duties: Repo rt on

the Socia l and Fiduci ary Dutie s and Obligat ions of Com pany Director s (1989) (“the Cooney Report”);

House of Represent atives Standing Co mmittee on Legal a nd Constitutiona l Affairs Report on C orporate

Practices a nd the Rights of Shareh olders (1991) (“the Lavarch Repor t”)

3 Corporate Law Refor m Act 1992 (Cth)

4 Corporate Law Econ omic Reform Progra m Act 1999 (Cth)

5 Corporations Act 20 01 (Cth)

6 The judicial reform began with a series of i nsolvent trad ing cases (Commonwealth B ank of Aus tralia v

Friedrich 1991 9 ACLC 946; Group Four Industries Pty Ltd v Brosnan 1991 9 ACLC 1181, 1992 10 ACLC

1437; Statewide Tobac co Servic es Ltd v M orley 1990 8 ACLC 827, 1992 10 ACLC 1233) which in t urn

spurred j udicial reform of th e duty of care: see AWA Ltd v Dan iels (Trading as Delo itte Haskins & S ells)

1992 10 ACLC 933; Daniels v Anderson 1995 13 ACLC 614

7 GN 1183 in GG 200 4-0 6-23

8 Para 1 3

9 Para 2 2 3

(2009) 20 Stell LR 373

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than a c entury.”10 Where the cur rent law meets the desi red objectives, “it

should remain as part of company law.” 11 The con sequent review process

over the following two years involved consultations with industry participants

and compa ny law experts and was aimed at the possibility of incorporati ng

international b est practice into the South African context.12

The South African review cul minated in the Compa nies Act 71 of 2008

(“the Companies Act”) which repealed the Companies Act 61 of 1973. While

originally it was proposed that the Close Corporations Act 69 of 1984 would

also be repealed,13 it will now c ontinue indenitely, but will not be used t o

incorporate new entities.14 The new Companies Act15 rewrite s South Africa’s

company law legislation, and includes the introduction of legislative directors’

duties in Part B, Chapt er 4. The new duty of care is found in subsection 76(3)

(c) of the Companies Act. This marks the rst statutor y incorporation of South

Africa’s directors’ duties.

This article cr itically eval uates both the curr ent South Af rican com mon

law and the new s tatutory directors’ duty of ca re in light of the equ ivalent

duties i n Austr alia16 and the United States.

17 The ana lysis wil l ultim ately

focus o n whether th e approach t aken in any of these jur isdictions provides

usefu l g uidance with reg ards to reform option s r elating to the duty of

care.

The r st issue is whethe r legislative stand ards should ope rate in addit ion

to, o r override, the co mmon law. It will b e seen that it is unclear whether

subsect ion 76(3)(c) of the Companies Act operates in addition to the common

law direc tors’ duties. It is concluded t hat care must be take n to ensure that a

two-layere d approach does not impose an unneces sary burden for all involved.

Even a minor divergence in common law and statutory standards of conduct18

and/or standa rds of review19 would lead to an u nnecessary complication i n

the administ ration of the rele vant sta ndards. Both th e South African and

Austral ian provisions can be criticised for unne cessary divergence s between

10 Para 1 1

11 Para 1 1

12 DTI Companies Bill [B 61D-2008]: Memorand um on the Objects of the Companie s Bill, 2008 (2008) para

1 15

13 It was intended that the Close Corporation s Act 69 of 1984 would be repeale d after a ten-year experimental

period during which the two Acts would operate concurrent ly See DTI Companies Bill, 2007: Explanatory

Memorandum (2007) 6

14 DTI Memorand um on the Objects of the Co mpanies Bill, 2008 p ara 2

15 The Act was adopte d by Parliament on 19 November 2008, ass ented to on 8 April 2009 and ga zetted on 9

April 2009

16 Namely th e directors’ duty of ca re at comm on law and in terms of subs 180(1) of t he Corporat ions Act

2001

17 Note that the reference to US law is somewh at of a misnomer, since the re is no uniform co rporations law

code in that co untry a nd the law may var y from state to state T herefore, refer ences to US law shou ld

be se en as references to the A merican Law I nstitute’s (“ALI” ) Princi ples of Corpora te Gover nance:

Analysis and Recommendati ons (1994) This largely echoes t he posit ion in, inter alia, Delaware and

Californi an case law

18 Eisenberg “The Divergenc e of Standar ds of Conduct and Standard s of Review in Corporate Law” 1993

(63) Fordham L Re v 437 assert s that th is “states h ow an actor should conduc t a given a ctivity or play a

given role” He tr aces the dist inction betwe en standard s of conduct and s tandards of r eview to Bentha m

A Fragment on Go vernment and an Int roduction to the P rinciples of Morals a nd Legislation (1948) 430

19 According to Eisenbe rg 1993 Fordham L Rev 437, this “states the test a court should apply when it reviews

an actor’s conduct ”

374 STELL LR 2009 3

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the st andards of conduct and /or r eview. It will be suggested, howeve r, t hat

there is a positive aspect t o the two -layered approach adopted i n Australia

and South Africa with r espect to the c onsequences of bre aching the dut y of

care. Stat utory consequenc es, such as civil nes and di squalication orde rs,

can provide useful additional tools for promoting, inter alia, good corp orate

governance in reform-or ientated jurisdictions such as South Afr ica.

A second, and arguably key, issue is whether objective standards of care, skill

and diligence should be adopted in South Africa. Whi le subsection 76(3)(c) of

the Companies Act at rs t glance seems to impose an objective duty of care,

skill and diligence, subsection 76(3)(c)(ii) contains references to the subjective

features of the director that may transform the duty into a subjective one. This

is an unfortunate aspect of the legislation as the imposition of a n objective

standard of conduct would be a positive move towards ensuring that dir ectors

are called to meet the standa rd of care expected of professional persons in the

21st century. Nevertheless, the reform measu res contain some aspects that are

preferable to the Australia n provisions as they are comprehensive in so far as

they introduce objective sta ndards of both care and skill.

The thir d issue the ability of direc tors to delegate and rely on thi rd

partie s in the fullment of t heir dut ies. The need to delega te is a logic al

necessit y in corporate life, particularly in larger c orporations. Unlike the

simplicity of the Aus tralian and Unit ed States’ common law, it is concluded

that the legislative measure s embodied in sec tions 189, 190 and 198A of t he

Australian Corporations Act 2001 (“the Corpor ations Act”) are unnecessa rily

complicated and undermine the obje ctivity of the duty of care. W hile the

South African measures, subsections 76(4)(b) a nd 76(5) of t he Companie s

Act, a re preferable to the Austr alian provisio ns in th at they e mphasize the

reasonable ness of the reliance and the competenc e of the delegate, they

remain overl y complicated. An impl icit or express statem ent that delegation

and reliance needs to be rea sonable would sufce.

Finally, it will be seen t hat the South African reforms introduced in

subsection 76(4)(a) of the Compan ies Act include a legislative modicat ion

of the judicially-developed business judg ment rule in the United States.

Australia has also a dopted the business judgment rule in subsect ion 180(2) of

the Corporations Act. In Australia this provides a defence to both the statutory

and the common law duties of care. It is suggested that the Australian business

judgment defence undermines the objectivity of t he stand ard of care and

involves an un necessary divergence i n the standard of conduct and standard

of review. While the South Af rican provision has features that m ay be

applauded, it too reduces the standard of rev iew to “rationality” rat her than

“reasonableness”, and should be removed.

It is concluded that while t he South African measures at times echo

Australian law in a posit ive man ner, the Australian legislative regime is not

without legitimate criticism. In turn, the South African reforms have correctly

made selective use of the Australian provisions. Nevertheless, some of the

South African reform measu res are equally subject to criticism and thus there

is still r oom for improvement i n South Africa’s di rectors’ duties after the

introduction of the new Compan ies Act.

MODELS FOR REFORM: DIRECTORS’ DUTY OF CARE 375

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