A breach of fiduciary duty by a director should never be taken lightly. The consequences can be expensive when a director prefers their interests over those of their company.
A stock brokerage successfully sued its former managing director for damages based on the MD’s breach of fiduciary duty and abuse of his position of trust.
The court found that Carlsson exploited his role as MD to stall risk to himself and transfer risk to Tlotlisa Securities. He had the duty and opportunity to protect Tlotlisa Securities from risk but gave preference to his position as investor over that as MD. This was a breach of the common law duty, together with the 1973 Companies Act, to act in the best interests of the company.The judgment made new law as a successful claim for damages (rather than for a disgorgement of profits) against a director for breach of fiduciary duty.
Facts of the case – Tlotlisa Securities v Foveros Investment Holdings and Michael George Carlsson
Tlotlisa Securities was a stockbroker and member of the South African Futures Exchange. Carlsson was the MD of Tlotlisa Securities and the sole director of Foveros Investment Holdings, a company which Carlsson used to trade as an investor for his own account.
Directors and prescribed officers cannot afford to ignore their fiduciary duties. The price of doing so, especially in pursuit of personal gain, is high.
The case concerned trading in single-stock futures, or SSFs. SSFs are derivative contracts which enable a trader to be exposed to the movement of shares without having to own the underlying shares. Sudden and dramatic swings in share prices, coupled with the aggressive gearing of SSF contracts, make for large profits and large potential losses.
Carlsson traded SSFs for his own benefit through a staff account in the name of Foveros Investment Holdings. A rule was in place at Tlotlisa Securities that, where losses were incurred on SSFs, the trader’s account would have to be topped up at the end of each day’s trade.
Tlotlisa Securities did not enforce the rule consistently. When the market took a severe turn for the worse in July 2008 at the onset of the global financial crisis, losses on SSFs began to mount. Tlotlisa Securities called on Carlsson to make good his losses and close out his positions. Despite this he continued to trade.
The Companies Act, 2008
The 2008 Companies Act partly codifies the common law fiduciary duties of directors. It also provides remedies to the company, its shareholders and any person who suffers damages because of a director’s breach of fiduciary duties. Damages can be claimed personally from an offending director.
Directors and prescribed officers cannot afford to ignore their fiduciary duties. The price of doing so, especially in pursuit of personal gain, is high.
