The Business Judgement Rule – what directors need to know

businessBy accepting their appointment to the position, directors imply that they will perform their duties to a certain standard, and it is a reasonable assumption that every director will apply his or her particular skills, experience and intelligence to the advantage of the company.

Section 76 of the Companies Act No. 71 of 2008 (“the Act”) sets out the partial codification of directors’ duties as ‘Standards of directors’ conduct’ and section 77 sets out directors’ liability.  Directors’ fiduciary duties have now been codified together with the duty of care and skill. The common law remains applicable insofar as it is consistent with the provisions of the Act. The result is the standard set for directors is very high, with the intention of the legislature to encourage directors to act honestly and to be accountable for their decisions and actions.

Certain situations may arise where a director would be unfairly prejudiced by the statutory law provisions and the business judgement rule is vital in protecting directors’ from liability provided the decision of a director was made in good faith and in the interests of the company.

The Act includes provisions to ensure that directors are allowed to act without constant fear of personal exposure to liability / claims.  This is the reasoning behind the business judgement rule.  Directors need to measure their decisions and actions against the business judgement rule or test.  The rule is available to directors as a defence for escaping liability for a suspected breach of the already mentioned statutory law of ‘Standards of directors’ conduct’.

On the other hand, a blatant disregard of relevant information or advice given to a director combined with mala fide conduct would still render the rule unenforceable and will lead to severe consequences for the director.

It is thus of utmost importance to have knowledge of the imposed directors’ duties and liability.

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