The Supreme Court of Appeal ("SCA") recently decided a case which demonstrates that directors who decide to serve on multiple boards may potentially become exposed to claims for personal liability and disgorgement of any undue benefits arising from their position on the respective company boards.

Messrs Jonathan Sandler and Jacob Modise established a joint venture company, Tladi Holdings (Pty) Ltd ("Tladi") with the aim to form an electrical conglomerate.  However, what unravelled was an intricate series of unfortunate events.  

It is not necessary to go into the full details of the case for purposes of this note. In short, after teasing out conflicting testimonies from the aforesaid protagonists, the court established that Mr Sandler had identified and presented a business opportunity to Mr Modise to structure a potential BEE deal with ARB Electrical Wholesalers (Pty) Ltd ("ARB") at a strategic time in the future.  

It later transpired that Mr Modise thereafter concluded a transaction to acquire shares in ARB directly via his own shareholding company, Batsomi Power (Pty) Ltd ("Batsomi").  When Mr Sandler learnt of this 'betrayal' from his local newspaper, he invited Mr Modise to attend a board meeting at Tladi.  Attempts to contact Mr Modise to explain this news were to no avail, and so the board resolved to take legal action. 

 

Tladi instituted a claim against Mr Modise and Batsomi for disgorgement of profits on the basis that such parties had misappropriated a corporate opportunity to buy shares in ARB that properly belonged to Tladi. 

Mr Modise attempted to persuade the court that the lack of a restraint in the shareholders' agreement (and the removal of this from an initial iteration during negotiations) meant he did not owe a duty to Tladi to not pursue the share transaction with ARB for his own personal gain.  Mr Modise further argued that he should avoid liability on the grounds that Tladi could not have taken up the opportunity as it did not meet the specific BEE deal requirements and so was not in reality prejudiced by Mr Modise's opportunistic conduct. 

The court, however, held that the corporate opportunity rule prohibits a director from usurping any contract, information, or other opportunity that properly belongs to the company they serve and which comes about by his or her position as a director at the company.  If directors do wrongfully seize a corporate opportunity for themselves personally or for a related person, the errant director must account to his or her company.  

Our courts have consistently held that it is of no consequence that the corporate opportunity would or could not have been taken up by the company, merely that it is an opportunity that the company was either actively pursuing or one that can be said to fall within the company's existing or prospective business activities.  Similarly, the no-profit rule applies even if the company would not have made a profit.  

The no conflict rule does not require an actual conflict to be established, only that a reasonable person would have foreseen the real possibility of a conflict. 

Directors who serve on multiple boards need to take special care that they do not place themselves in a position of conflict of interest.  A director carries a paramount duty to consider and act in the best interests of the company they serve.  Where a director serves on the boards of multiple companies, he or she can easily become conflicted.  

In particular, decisions which involve contracts between such companies or if the opportunity being considered overlaps with the scope of the business activities of another company they serve could create issues with complying with the no-conflict rule.  

The claim against Mr Modise and Batsomi ultimately failed and was dismissed by the SCA on a technical legal ground that the claim had prescribed (having arisen more than three years prior to being instituted). 

This case, however, is a sobering reminder to directors that they are tasked with being good custodians of the management of the business and that they must exercise loyalty as well as reasonable care and skill in performing their managing role.  

If directors breach their fiduciary duties, by for example becoming involved in the misappropriation of corporate opportunities, they can become personally exposed to claims for liability.  The no conflict rule is imposed by default at law and will apply even without having entered into any restraint undertakings.

To mitigate against the risks of personal exposure, the board of the company should consider how it scopes the business and the opportunities it pursues.  Additionally, limiting the powers of directors and implementing suitable decision-making processes and corporate rules can also help manage these risks.  

These terms can be addressed in a suitable shareholders' agreement and company rules which carefully defines the scope of the business and deals with the process for decision-making as well as the disclosure of personal financial interests and recusal of conflicted directors.  It is important that any contractual terms are given constitutional effect by amending or adopting a customised memorandum of incorporation which is aligned to these protections, failing which our company legislation deems the shareholders' agreement and rules to be void to the extent of the inconsistency with the memorandum of incorporation or the Companies Act, 2008.