Fiduciary Duties of Directors Flashcards
when and where were directors duties developed
in English courts in the 18th and 19th century on a case by case basis
what law does SA follow with regards to directors duties
English law but they have been developed to suit a more localized context
what are the 2 primary duties placed on directors at common law
- fiduciary duties
2. duty to act with care and skill
what are directors duties always in relation to
the company, i.e for the best interests of the company - it refers to both present and future shareholders
what four elements makes up fiduciary duties
- conflict of interest
- exercise power for proper purpose
- duty not to exceed powers
- duty to maintain an unfettered discretion
what is the core fiduciary duty
the duty to avoid a conflict of interest
what are the common law duties of the duty to avoid a conflict of interest
- the no profit rule
- the corporate opportunity rule
what is the no profit rule
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.
why is the application of the no profit rule wide
it applies to any situation in which the director has made some sort of gain
which case best illustrates the no profit rule
Regal Hastings v Gulliver
what did the court find in Regal Hastings
profits made by previous shareholders were profits that rightfully belonged to the company
what was the distinguishing factor of the Phillips case
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.
how did the employee in the Phillips case breach fiduciary duties
the employee used the opportunity to make a profit for himself which rightfully belonged to the company
what did the court in Phillips conclude
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
what did the court in Phillips say did not matter once a fiduciary duty had been breached
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.
what does the corporate opportunity rule prohibit
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
what case separated the corporate opportunity rule from the no profit rule
originally they were treated the same but this changed in the Da Silva case
when does a director fall foul of the corporate opportunity rule
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.
what classifies as a corporate opportunity
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
what concepts does S76 (3) (b) and (a) emphasize
good faith and the best interest of the company
what is the essential characteristic of statutory fiduciary duties
honesty
what does a director’s duty entail in terms of S76 (3 (a) and (b)
a director must always act in a manner that he or she honestly believes to be in the best interests of the company
what does proper purpose mean
the director must exercise the power for the purpose for which the power was given and not for a collateral or ulterior purpose
what does S75 make compulsory for a director to disclose
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
what does the rule in S75 state
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
what must the director disclose
all material interests
what happens after the director discloses a conflict of interest to the board
the board will in the absence of the director determine how best to proceed
what happens to the disclosure requirement if there is one director who holds all the beneficial interest in the company
the disclosure requirement will not be applicable, it only applies to companies with more than 1 director
what provision of the Companies Act is similar to the no profit and coroporate opportunity rule under the common law
S76 (2) (a)
which provision of the Companies Act contains a new fiduciary duty that is not in the common law and what is it ?
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.
What is the new fiduciary duty in S76 (2) (b) aimed at protecting
it aims to protect the company because corporate information is a valuable asset to the company
what is the ambit of the new fiduciary duty under S76 (2) (b)
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
what constitutes a personal financial interest under S75
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
to whom does a company owe a fiduciary duty to
the company - exercise of power solely for the benefit of the company
what does the duty to act in the” best interests of the company”make clear
that directors only owe a fiduciary duty to the company . Except for special circumstances directors do not owe fiduciary duties to individual shareholders
what is the enlightened shareholder approach
allows for profit maximization but stakeholder interests are taken into account
what is a good example of proper purpose
S38 of the act which allows directors to issue shares for proper purpose and not for collateral purpose
can fiduciary duties be avoided by resigning
no, the corporate opportunity rule still applies
under S75 why must the director disclose personal financial interest in advance
this ensures he does not breach his fiduciary duties
what does S75 disclosure reequire in order for the contract to be valid
board approval, no disclosure then must be ratified by an ordinary resolution of the shareholders
what happens if non-disclosure is ratified by the shareholders
there can be no claim against the director
what are the consequences of non-disclosure
- transaction becomes voidable but not automatic
- board can ratify the decision
