Fiduciary Duties of Directors

Question 1

when and where were directors duties developed

Answer 1

in English courts in the 18th and 19th century on a case by case basis

Question 2

what law does SA follow with regards to directors duties

Answer 2

English law but they have been developed to suit a more localized context

Question 3

what are the 2 primary duties placed on directors at common law

Answer 3

1. fiduciary duties

2. duty to act with care and skill

Question 4

what are directors duties always in relation to

Answer 4

the company, i.e for the best interests of the company - it refers to both present and future shareholders

Question 5

what four elements makes up fiduciary duties

Answer 5

1. conflict of interest
2. exercise power for proper purpose
3. duty not to exceed powers
4. duty to maintain an unfettered discretion

Question 6

what is the core fiduciary duty

Answer 6

the duty to avoid a conflict of interest

Question 7

what are the common law duties of the duty to avoid a conflict of interest

Answer 7

• the no profit rule

- the corporate opportunity rule

Question 8

what is the no profit rule

Answer 8

Directors may not retain any profit made by them in their capacity as directors while performing their duties as directors. even if the company could not have made the profits themselves, the profits must be disgorged.

Question 9

why is the application of the no profit rule wide

Answer 9

it applies to any situation in which the director has made some sort of gain

Question 10

which case best illustrates the no profit rule

Answer 10

Regal Hastings v Gulliver

Question 11

what did the court find in Regal Hastings

Answer 11

profits made by previous shareholders were profits that rightfully belonged to the company

Question 12

what was the distinguishing factor of the Phillips case

Answer 12

the person charged with failing to uphold his fiduciary duties was not a director but an employee who was given discretion to do business in SA.

Question 13

how did the employee in the Phillips case breach fiduciary duties

Answer 13

the employee used the opportunity to make a profit for himself which rightfully belonged to the company

Question 14

what did the court in Phillips conclude

Answer 14

even though he was not a director he owed a fiduciary duty to the company, the scope of his duties meant that he exercised a discretion similar to that of a director

Question 15

what did the court in Phillips say did not matter once a fiduciary duty had been breached

Answer 15

it made no difference that the company had not suffered any loss or damage or that the company would not have been able to take up the opportunity itself. As soon as the breach is proved the director becomes liable.

Question 16

what does the corporate opportunity rule prohibit

Answer 16

prohibits a director from using any contract, information or another opportunity which properly belongs to the company for their own benefit when the opportunity came to them by virtue of their position as a director

Question 17

what case separated the corporate opportunity rule from the no profit rule

Answer 17

originally they were treated the same but this changed in the Da Silva case

Question 18

when does a director fall foul of the corporate opportunity rule

Answer 18

where he or she takes an opportunity for himself where the opportunity is in line with the business of the company or closely related to it and where the company was relying on the director to acquire the opportunity for it.

Question 19

what classifies as a corporate opportunity

Answer 19

something that forms an asset in the estate of the company but it is not confined to property or assets only but extends even to confidential corporate information which director has used to make a profit for himself

Question 20

what concepts does S76 (3) (b) and (a) emphasize

Answer 20

good faith and the best interest of the company

Question 21

what is the essential characteristic of statutory fiduciary duties

Answer 21

honesty

Question 22

what does a director’s duty entail in terms of S76 (3 (a) and (b)

Answer 22

a director must always act in a manner that he or she honestly believes to be in the best interests of the company

Question 23

what does proper purpose mean

Answer 23

the director must exercise the power for the purpose for which the power was given and not for a collateral or ulterior purpose

Question 24

what does S75 make compulsory for a director to disclose

Answer 24

a director must disclose a conflict of interest/ personal financial interest/ another entity that has an interest

• personal financial interest
• any material information
• any observations or pertinent insights

Question 25

what does the rule in S75 state

Answer 25

where there is more than one director there is a duty on the director that has a financial interest in a matter that it to be considered by the board to disclose this duty to the board meeting before the matter is considered

Question 26

what must the director disclose

Answer 26

all material interests

Question 27

what happens after the director discloses a conflict of interest to the board

Answer 27

the board will in the absence of the director determine how best to proceed

Question 28

what happens to the disclosure requirement if there is one director who holds all the beneficial interest in the company

Answer 28

the disclosure requirement will not be applicable, it only applies to companies with more than 1 director

Question 29

what provision of the Companies Act is similar to the no profit and coroporate opportunity rule under the common law

Answer 29

S76 (2) (a)

Question 30

which provision of the Companies Act contains a new fiduciary duty that is not in the common law and what is it ?

Answer 30

S 76 (2) (b) - a director must communicate any information coming to his attention unless it is immaterial, generally known to the public or he has a legal obligation not to disclose it.

Question 31

What is the new fiduciary duty in S76 (2) (b) aimed at protecting

Answer 31

it aims to protect the company because corporate information is a valuable asset to the company

Question 32

what is the ambit of the new fiduciary duty under S76 (2) (b)

Answer 32

wide - even if the information comes to the director through personal means he has a duty to disclose this information to the company if it is relevant

Question 33

what constitutes a personal financial interest under S75

Answer 33

anything that has financial or economic value that the director may benefit from but also material in the sense that it would affect his decision making capacity

Question 34

to whom does a company owe a fiduciary duty to

Answer 34

the company - exercise of power solely for the benefit of the company

Question 35

what does the duty to act in the” best interests of the company”make clear

Answer 35

that directors only owe a fiduciary duty to the company . Except for special circumstances directors do not owe fiduciary duties to individual shareholders

Question 36

what is the enlightened shareholder approach

Answer 36

allows for profit maximization but stakeholder interests are taken into account

Question 37

what is a good example of proper purpose

Answer 37

S38 of the act which allows directors to issue shares for proper purpose and not for collateral purpose

Question 38

can fiduciary duties be avoided by resigning

Answer 38

no, the corporate opportunity rule still applies

Question 39

under S75 why must the director disclose personal financial interest in advance

Answer 39

this ensures he does not breach his fiduciary duties

Question 40

what does S75 disclosure reequire in order for the contract to be valid

Answer 40

board approval, no disclosure then must be ratified by an ordinary resolution of the shareholders

Question 41

what happens if non-disclosure is ratified by the shareholders

Answer 41

there can be no claim against the director

Question 42

what are the consequences of non-disclosure

Answer 42

• transaction becomes voidable but not automatic

- board can ratify the decision