Question 1
Lesego is a director of One Stop Groceries (Pty) Ltd. When the company needed to appoint a
new marketing agent to advertise its products in Gauteng, Lesego persuaded the board to
appoint ‘The Best CC’ by convincing them that The Best CC would be ideal for this task.
However, Lesego did not disclose the fact that his brother had a substantial member’s
interest in The Best CC. The Best CC was appointed, but a few months later it became clear
that One Stop Groceries (Pty) had suffered substantial losses in Gauteng because its products
were not being advertised effectively, since The Best CC had no experience in this type of
work. A number of shareholders in One Stop Groceries (Pty) ltd now want to hold the
company’s directors liable for breach of their duty to act in the best interest of the company
and their duty to care, skill and diligence by appointing an inexperienced close corporation
as their marketing agent.
Advise Lesego and the other directors of One Stop Groceries (Pty) Ltd on whether they can
escape liability on the basis of the business judgment rule.
Duties as Directors
Section 76 requires a director to act in good faith and in the best interest of the company1. A
director should act with the degree of care, skill and diligence that may reasonably be
expected of a person carrying out such functions and having the same skill and experience of
that director – the reasonable man/woman test.
Directors are required to disclose any “personal financial interest”. They may not use their
position as director or information gained as a director to make a secret profit or gain
advantage for themselves or someone else or to cause hare or detriment to the company.2
Business judgment rule
According to the business judgment rule (section 76(4)), the director will be regarded as
having acted in the best interest of the company and with the required degree of care, skill
and diligence if the director:
- Took reasonable steps to become informed about the matter;
- had no material personal financial interest in the subject matter of the decision or
had no reasonable basis to know that any related person had a personal financial
interest in the matter, or disclosed his/her interest;
- made or supported a decision in the belief that it was in the best interest of the
company.
A director will also escape liability where he or she had a rational basis for believing, and
actually believed that the decision was in the best interest of the company3.
1
Companies and other Business Structures in South Africa, Davis D, Geach W, Mongalo T, Butler D, Loubser A,
1
Coetzee L and Burdette D, page 108
2
The Companies Act, no 71 of 2008, an explanatory guide, DTI
3
Learning Unit 3, UNISA, provisions of the Companies Act.
Page 1 of 19
Lesego is a director of One Stop Groceries (Pty) Ltd. When the company needed to appoint a
new marketing agent to advertise its products in Gauteng, Lesego persuaded the board to
appoint ‘The Best CC’ by convincing them that The Best CC would be ideal for this task.
However, Lesego did not disclose the fact that his brother had a substantial member’s
interest in The Best CC. The Best CC was appointed, but a few months later it became clear
that One Stop Groceries (Pty) had suffered substantial losses in Gauteng because its products
were not being advertised effectively, since The Best CC had no experience in this type of
work. A number of shareholders in One Stop Groceries (Pty) ltd now want to hold the
company’s directors liable for breach of their duty to act in the best interest of the company
and their duty to care, skill and diligence by appointing an inexperienced close corporation
as their marketing agent.
Advise Lesego and the other directors of One Stop Groceries (Pty) Ltd on whether they can
escape liability on the basis of the business judgment rule.
Duties as Directors
Section 76 requires a director to act in good faith and in the best interest of the company1. A
director should act with the degree of care, skill and diligence that may reasonably be
expected of a person carrying out such functions and having the same skill and experience of
that director – the reasonable man/woman test.
Directors are required to disclose any “personal financial interest”. They may not use their
position as director or information gained as a director to make a secret profit or gain
advantage for themselves or someone else or to cause hare or detriment to the company.2
Business judgment rule
According to the business judgment rule (section 76(4)), the director will be regarded as
having acted in the best interest of the company and with the required degree of care, skill
and diligence if the director:
- Took reasonable steps to become informed about the matter;
- had no material personal financial interest in the subject matter of the decision or
had no reasonable basis to know that any related person had a personal financial
interest in the matter, or disclosed his/her interest;
- made or supported a decision in the belief that it was in the best interest of the
company.
A director will also escape liability where he or she had a rational basis for believing, and
actually believed that the decision was in the best interest of the company3.
1
Companies and other Business Structures in South Africa, Davis D, Geach W, Mongalo T, Butler D, Loubser A,
1
Coetzee L and Burdette D, page 108
2
The Companies Act, no 71 of 2008, an explanatory guide, DTI
3
Learning Unit 3, UNISA, provisions of the Companies Act.
Page 1 of 19
