This blog was co-authored by Atish Dullabh, Candidate Attorney.
The Western Cape High Court judgment of Big Catch Fishing Tackle Proprietary Limited v Kemp dealt with the fiduciary duties of a director after their resignation. Big Catch Fishing Tackle Proprietary Limited (Big Catch) traded as a supplier of fishing equipment. Kemp had been a director and employee of Big Catch. After a falling out, Kemp resigned as a director and employee of Big Catch and later engaged in fishing charters, tours and selling fishing related products and employed one of Big Catch’s former employees, Wale. Allegedly, Kemp arranged fishing trips for Big Catch customers to destinations operated by Big Catch’s service providers. Big Catch and the other applicants applied for a wide-ranging interim interdict restraining Kemp and other respondents based mainly on alleged future breaches by Kemp and Wale of fiduciary duties to Big Catch.
Directors owe fiduciary duties to a company, including the duty not to use the company’s confidential information or to appropriate corporate opportunities that properly belong to the company, for themselves or others. The applicants argued that a director or employee may not appropriate any business opportunities of their former employer, even after resignation.
The court held that, although fiduciary duties of a director survive the termination of their relationship with the company, the content of that duty does not remain the same. After the office ceases, the default position changes. In the absence of special circumstances, a director’s fiduciary duties are not breached merely because the former director take steps to ensure that, upon ceasing to be a director, they can continue to make a living by establishing a business in competition with the company concerned or by joining a competitor and pursuing similar opportunities to those targeted by the company.
The judgment reasoned that, if directors could not establish a business or join a competitor after resigning, then directors would have to change careers every time they left a company. If that were the case, there would be no need for a restraint of trade remedy and the extensive jurisprudence surrounding its reasonableness. It would mean that common law fiduciary duties of directors have the same function as a restraint of trade. The general policy of the courts is not to impose undue restraints on post-resignation activities to avoid a drastic invasion of a former director’s or employee’s section 22 constitutional right to occupational freedom.
The court clarified that special circumstances would arise where the former director’s conduct “violates an interest of the company that is worthy of protection in some way”. A special circumstance would include the former director using, to the prejudice of the company, confidential information or client lists or connections, obtained while a director. The legal position remains that, even after resignation, a director is precluded from usurping for the director or diverting to another a maturing corporate opportunity which the company is actively pursuing when it can fairly be said that the director’s resignation was prompted by the misappropriation of the corporate opportunity instead of a fresh initiative that led the director to the opportunity.
Ultimately, the court refused to grant the interdict because it found that the applicants had not proven any special circumstances in respect of the respondents’ future conduct. Regarding past breaches, the court was of the view that there is no remedy other than disgorgement of profits. It should be borne in mind that because this was an application for an interim interdict, where there was a genuine dispute of fact, the court had to accept Kemp’s version. It is open to argument that Kemp’s past breaches were evidence of the likelihood of future breaches, but this appears to have been outweighed by the fact that Kemp had resigned almost a year before.
Where a company wants to restrain a director from competing with the company after the termination of the office, it would be prudent for the company to insist on a restraint of trade being agreed to before appointing the person to the office. If there is no restraint of trade, the company must justify the interdict in both law and fact by showing the existence of a special circumstance.