Directors’ personal liabilities: It’s not all bad – the “business judgment rule”

Much has been made of how the 2008 Companies Act increased the liabilities of directors. The argument is that as directors were given greater powers in the Act, so their liabilities should also increase. Whilst this is correct, the framers of the Act were it seems also sensitive to the fact that there is a limited pool of executive talent in South Africa and that calculated risk taking is necessary in the running of South African companies.   Accordingly, they built in protections for directors, a significant one being the “business judgment rule”. What does the Act require of directors? The Act sets a very high standard for a director who must act:

       
  • Ethically, honestly and with due care,
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  • With the company’s best interests in mind and,
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  • With the knowledge, skill, work ethic and experience expected of a director.

In addition to setting these standards, the Act makes provision for stakeholders such as unions, employees, shareholders and creditors to sue directors in their personal capacities for “loss, damages or costs” arising from any failure to act as required. Where the “business judgment rule” fits in The “business judgment rule” provides protection to directors who make mistaken decisions.  “Twenty-twenty hindsight” court cases can be debilitating to directors and tend to make them more risk averse than the framers of the Act intended. However, it is not as easy as just raising the rule as a defence – the Act imposes conditions for the rule to apply, namely that a director will attract no personal liability for his or her actions provided that he/she:

       
  1. Diligently examines all the requisite information to make a decision,
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  3. Has no conflicts of interest and believes his/her fellow directors also have no such conflicts,
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  5. Makes a rational decision and believes the decision is in the best interests of the company.

In addition a director may rely on managers within the company or experts appointed by the company if there are no grounds to doubt the advice of such managers or experts. Thus, if you have the appropriate skills and experience and apply yourself diligently to your directorial duties, you need not fear the consequences of any decisions you make. Please also note the importance of keeping a record of the work you did and how you (and your colleagues) reached a decision. This is the balance struck between directors being able to run a business and being accountable for decisions they make. © DotNews, 2005-2013. This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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