The extent of protection provided by the statutory business judgment rule to directors against personal liability for breaches of some of their duties

• Author: Beja, X.
• DOI: https://doi.org/10.47348/JCCL/V7/i1a1
• Published date: 16 May 2022
• Date: 16 May 2022
• Citation: (2021) 7(1) JCCL&P 1
• Pages: 1-35

https://doi.org/10.47348/JCCL/V7/i1a1

1

THE EXTENT OF PROTECTION

PROVIDED BY THE STATUTORY

BUSINESS JUDGMENT RULE TO

DIRECTORS AGAINST PERSONAL

LIABILITY FOR BREACHES OF SOME

OF THEIR DUTIES

Xolisa Beja*

LLM candidate, University of Witwatersrand

ABSTRACT

This article examines the extent to which s76(4)(a) of the Companies

Act 71 of 2008 protects directors against personal liability for breaches

of their duties to act in the company’s best interests, with due care,

skill and diligence. The essential substantive elements of s76(4)(a)

create (as a minimum) a business judgment rule. Generally, that rule

provides a director with a defence against liability for a breach of

his duty of care, skill and diligence if, when he acted (or omitted to

act), he did so reasonably, honestly, with no self-interest and in the

interests of the company. In analysing s76(4)(a) as an embodiment

of features of a traditional business judgment rule, this article briefly

discusses how a similar rule in Australia is drafted and applied

in practice by their courts. The article concludes that s76(4)(a)

creates protection for directors that is more than the protection

that is provided by a traditional business judgment rule. This

conclusion is based on the extensive nature and scope of authority

and powers which s66(1) of the Act grants to directors. In the same

breath, however, s76(4)(a) manages to make directors appropriately

accountable to the company’s stakeholders, in keeping with some of

the fundamental objectives and purposes of the Act.

Keywords: company, directors, business judgment rule, business

decision, duty of care, skill and diligence, best interests, fiduciary

duties, liability, safe harbour, Australia

* BA LLB (UCT), MBA (Birmingham, UK).

(2021) 7(1) JCCL&P 1

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(2021) 7(1) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

https://doi.org/10.47348/JCCL/V7/i1a1

I INTRODUCTION

Section 66(1) of the Companies Act 71 of 2008 (the Act)1 grants South

African directors a wide (original) authority and powers to conduct

the business and other affairs of a company. This is a necessary and

justifiable statutory invention that promotes and facilitates directorial

entrepreneurship and risk-taking in the pursuit of corporate profit-

making. This is in line with one of the purposes and objectives behind

South African company law reform.2 The exercise of this wide power

and authority can, however, inadvertently encourage directors to be

reckless and take undue risks, which may cause harm to the company

and its stakeholders. To guard against such potential abuse and

resultant harm, apart from enabling shareholders to contractually

limit the s66(1) powers in a memorandum of incorporation, the Act

puts in place appropriate checks and balances. These include imposing

certain duties on directors that, if breached, will make directors

personally liable for their wrongdoing arising from an impugnable

exercise of their powers. Two such duties are the duties to act in the

best interests of the company, which is a fiduciary duty and to act

with reasonable care, skill and diligence, which is a non-fiduciary

duty. In conducting the business and other affairs of the company

pursuant to s66(1), directors must act within the parameters of their

legislative and common-law duties. Those duties create and reinforce

directorial accountability to company stakeholders because should

a director, in exercising his extensive s66(1) authority, be adjudged

to have breached either or both duties, he stands to incur personal

liability under s77(2) of the Act.

However, if such personal liability is left unmitigated, the perennial

risk of incurring such liability would potentially impoverish corporate

governance and retard economic growth and, in the process, create

risk aversion on the part of directors. This would, in turn, stifle

much-needed innovation and entrepreneurship that are aimed at

profit optimisation.3 It would also discourage potential directors

1 ‘The business and affairs of a company must be managed by or under the direction

of its board, which has the authority to exercise all of the powers and perform

any of the functions of the company, except to the extent that this Act or the

company’s Memorandum of Incorporation provides otherwise’.

2 One of the purposes and objectives of the Act is to promote the development of the

South African economy by (among other things) encouraging entrepreneurship

and enterprise efficiency (s 7(b)(i) of the Act). See also generally John F Olson

‘South Africa moves to a global model of corporate governance but with important

national variations’ in T Mongalo (ed) Modern Company Law for a Competitive

South African Economy (2010) 219–47.

3 See M Havenga ‘The Business Judgment Rule – Should We Follow the Australian

Example?’ (2000) 12 SA Merc LJ 25–37 at 29 who argues that‘[b]usiness growth

requires directors at times to take risks. Directors should not be inhibited from

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THE EXTENT OF PROTECTION PROVIDED BY THE STATUTORY BUSINESS

JUDGMENT RULE TO DIRECTORS AGAINST PERSONAL LIABILITY FOR

BREACHES OF SOME OF THEIR DUTIES

https://doi.org/10.47348/JCCL/V7/i1a1

from taking up directorship. This is, in part, why company law

recognises that directors should not be liable for business judgments

that, although made honestly and in good faith, turn out to have

been made erroneously.4 In addition, if a directorial decision turns

out to be injurious to the company, a director can defensively argue

that, in making such unfortunate decision, he acted honestly, in

what he considered was in the best interests of the company and

without self-interest in the subject matter of that decision. This

defence is generally known as the business judgment rule (BJR) and

is contained in s76(4)(a) of the Act.

This article discusses s76(4)(a) of the Act with a view to examining

the extent of protection it offers to directors when they are alleged to

have breached their duties to act in the best interests of the company

and those contained in s76(3)(b) and (c) of the Act.5 This article

also evaluates the extent to which s76(4)(a) of the Act resembles

the traditional BJR in the South African context. Although the BJR

is generally considered to apply only to the duty of care, s76(4)(a)

expressly extends its ambit to the fiduciary duty that is specified

in s76(3)(b), namely the duty to act in the best interests of the

company. The article observes that while s76(4)(a) contains a BJR

with all the essential features of the traditional or conventional

version of that rule, s76(4)(a), however, applies to more than just

business judgments to which a traditional BJR is generally limited and

applied. Section76(4)(a) is, on the contrary, wider in its phrasing

and scope, for it applies to matters arising from not only directors’

business judgments but also the exercise of directorial powers or

performance of any of the directorial functions in relation to the

company. The conclusion is that this type and extent of protection

and defence are sufficiently wide and elastic, having regard to the

extensive powers and authority which s66(1) of the Act confers on

directors in relation to the running of the business and other affairs

of the company — as already indicated above. That conclusion is also

based on the concomitant risk of personal liability for breaches of

taking desirable risks because the merits of their decisions may be subject to

judicial review. Neither should they spend too much of the company’s money on

expert opinions and other measures designed to protect themselves when they

do not take decisions.’

4 J J du Plessis ‘Open Sea or Safe Harbour? American, Australian and South African

Business Judgment Rules Compared (Part 2)’ (2011) 32 The Company Lawyer 377–83

at 380 (Open Sea (Part 2) 2011).

5 An effort has been made in this article to deliberately refer specifically to s76(4)(a)

of the Act, rather than s76(4) in its holistic or general sense, as subsec (b) of

s76(4) deals with a slightly different subject matter to that with which s76(4)(a)

(and this article) deals.

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