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Corporate Opportunities and Directors’ Fiduciary Duties

Corporate Opportunities and Directors’ Fiduciary Duties

In the recent Supreme Court of Appeal (“SCA”) matter of Modise v Tladi Holdings (Pty) Ltd, Modise was identified by fellow businessman Sandler as a BEE Partner in his intended electrical conglomerate (“Tladi”) which would seek to do business with State-owned entities and municipalities. Modise became a director and chairman of Tladi. The shareholders’ agreement permitted shareholders to pursue their own interests except for four opportunities to be pursued through Tladi.

One of the Tladi opportunities was to buy a BEE stake in ARB Electrical Wholesalers Pty Ltd, a major supplier of electrical equipment to Sandler’s company, Muvoni.  When the ARB opportunity became available, Modise and his company, Batsomi Power, were offered the same deal that Sandler had identified as the ARB opportunity for Tladi. Modise accepted the offer, and did not disclose his meeting with ARB, or that he had accepted the offer to Tladi. Tladi claimed that Modise had misappropriated its corporate opportunity.

The SCA examined the law in relation to director’s fiduciary duties. At common law directors have an overarching and paramount fiduciary duty to exercise their powers in good faith and in the best interests of the company, as codified by section 76(3) of the Companies Act. The basic duty is of loyalty, which is ‘unbending and inflexible’ to ensure that it is not abused, and encompasses at least three rules, namely:

  • No-Conflict Rule: Directors may not place themselves in positions of conflicts of interest or duty. It does not require an actual conflict to be established, only that a reasonable person would think that there was a real sensible possibility of conflict.
  • No-Profit Rule: Directors may not make secret profits. This applies even if the company would not itself have made a profit, and even if the director has not profited at the company’s expense.
  • Corporate Opportunity Rule: Directors may not acquire economic opportunities for themselves that properly belong to the company. Profit and opportunity is not confined to assets or property only, but also to confidential information used for personal gain.

The Court referred to case law that upheld that corporate opportunities are the ‘property’ of the company and, if acquired by directors for personal benefit, the law will refuse to give effect to the director’s intention and will treat the acquisition as having been made for the company. The director remains under a duty to disclose the existence of, and information pertaining to, the opportunity to the company, even if such opportunity would not have materialised.

From the facts, the SCA characterised the ARB opportunity as a corporate opportunity that Modise had been expressly mandated to pursue. The SCA found that once Modise was aware that Tladi was pursuing the same opportunity offered to him, he was not entitled to secure it in his own interest without disclosure to and approval by Tladi’s board, due to his fiduciary relationship with Tladi.

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