The Business Judgment Rule: When is it applicable?

What are the benefits of co-working spaces?
October 6, 2020
Does an employee have the right to freedom of religion?
October 6, 2020

When running a business there are going to be times where the directors in charge will have to make difficult decisions and take risks in order to either save the company or to seal a big deal and gain financially, the notion of “risk for reward”.

As a director, one would be required to make a decision that would be in the best interest of the company, but sometimes these decisions end up being bad for the company, as it suffers financial damage and someone needs to take responsibility for it.

It is important for a director to be able to make decisions without fear, but how would one even take a risk with the “what if it fails” sword hanging over one’s head, knowing that you as a director might have to repay the monies the firm lost out of your own pocket.

This is where the Business Judgment Rule, introduced by the Companies Act 71 of 2008 (“the Act”) comes in, and it serves as protection for directors which allows them to make informed decisions without the fear of liability. However, the Business Judgment Rule can only be used if all the requirements as set out in the Act are complied with.

Section 76(3) of the Act deals with the respective duties of directors, and states that directors perform duties in good faith, in the best interest of the company and with care, skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company as those carried out by that director and having the general knowledge, skill and experience of that director. This is subject to Section 4 and Section 5 of the Act in which the circumstances which indicate whether a director has acted responsibly are set out.

These circumstances are as follows:

Whether the director has taken reasonably diligent steps to become informed about the matter. This would require the director to actively do research about the matter in order to be adequately informed and bare the knowledge to act confidently.

Whether the director had no material personal financial interest in the matter of the decision and had no reasonable basis to know that any related person had a financial interest in the matter. The Act defines personal financial interest to mean a direct material interest of that person, of a financial or economic nature to which a monetary value may be attributed and it does not include any interest held by a person in a unit trust, unless that person has a direct control over the investment decision of that fund.

Whether the director complied with the requirements of Section 75 with respect to any interest contemplated in the abovementioned requirement.

Whether the director made a decision, supported a decision of a committee or board, with regard to that matter, and the director had a rational basis for believing, and did believe, that the decision was in the best interest of the company.

All of the above requirements have to be met in order for a director to be able to use the Business Judgment Rule as a defense and be excluded from liability for actions that were taken in good faith.

Reference List:

  • The Companies Act 71 of 2008

This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Leave a Reply

Your email address will not be published. Required fields are marked *

We use cookies to improve your experience on our website. By continuing to browse, you agree to our use of cookies. For your reference, refer to our PAIA Manual.