Where a director has taken reasonable steps to become informed of a matter and has made, or supported, a decision in relation to that matter (which they rationally believed was in the best interests of the company), then that director cannot be seen to have breached their fiduciary duties if the decision later turns out to have a negative effect on the company. In other words, the assessment of the appropriateness of a decision made by a director, in deciding whether a director breached his or her statutory or legal duty, will not be based solely on the outcome of the decision taken, but will also be based on the process that the director took to arrive at their decision. This ‘business judgment’ rule can however only be relied on if all requirements of the Companies Act 2008 (the Act) have been complied with and where a director was acting in furtherance of a lawful and legitimate corporate purpose.
The ‘business judgment rule’ protects directors who make informed decisions in relation to their business, but which decisions do not necessarily result in the best outcome for a company.
Directors’ duties in South Africa are found in the Act as well as in the common law. For listed companies, these director duties are coupled with the listing requirements of the relevant exchange. South African director duties consist of both fiduciary duties ( such as the duty to act in the best interests of the company and the duty to ensure that a company does not carry out its business recklessly)and the duty to exercise due care and skill. The extraordinary circumstances triggered by the COVID-19 pandemic have materially changed the position the country finds itself in, and it follows that in determining the best interests of a company, boards will have to take these changes into account.
In South Africa, where the ‘enlightened shareholder’ approach is favoured (requiring the interests of all stakeholders in a company to be taken into consideration), boards may find themselves in a position where they need to deal with a juxtaposition of interests: job security for employees on the one hand, and value maximisation for shareholders on the other.
The issue that many boards need to consider is the best way to carry out their duties and minimise their personal exposure to liability.
Although the business judgement rule allows directors to take decisions without the threat of liability constantly presenting itself, it is essential that good corporate governance is employed in making decisions that directly affect the management of a company’s business. Every stakeholder must be considered when taking decisions to try and mitigate the economic implications resulting from financial distress. Stakeholders include employees, creditors, shareholders and clients.
It seems likely that South African courts will be more deferential to decisions made by boards who have followed best practices and processes in relation to their oversight and management function, as long as these decisions were lawful and the outcome, although in hindsight unfavourable for the company, fell within a range of reasonable alternatives.