In terms of section 22 of the Constitution of the Republic of South Africa, Act No. 108 of 1996, and in the interests of justice, every citizen has the right to choose their trade, occupation or profession freely. As is the case for all other rights in the bill of rights, this right is not absolute and as a caveat to it, there are laws that regulate how individuals should conduct their trade, occupation or profession. An example of this is the law regulating the issue of corporate opportunities.

Corporate opportunities defined
The term corporate ‘opportunity’ is an elastic concept and as a result there is no settled definition of it in our law but in general terms it is described as any economic or business opportunity, material or immaterial property, to which the company has a claim. The breach of a director’s fiduciary duty in relation to corporate opportunities and competition is a topic which has relished much attention in our law.

A practical example that may give rise to the issue of corporate opportunities is cross ownership, which is when company A owns shares in company B and C, as well as cross directorship which is a situation where an individual serves as a director in more than one company. Common ownership is not prohibited in our law, but such structures may result in competively sensitive information being transmitted between different individuals and entities which raises a potential concern and as a result directors are constantly reminded that they are obliged to acquire corporate opportunities for their company and not themselves or other persons as it is considered to be property which rightfully belongs to the company.

Although it may be challenging at times for a person who holds office of a director for more than one company to appropriately recognise to which of the companies where he or she serves as a director a particular corporate opportunity belongs.

The principle that directors cannot usurp corporate opportunities follows from a rule deep-rooted in company law that directors act as fiduciaries and therefore are obliged to act in accordance with certain duties which stem from common law and the Companies Act No. 71 of 2008 (the “Companies Act”). The common law duties continue to apply to the extent that they are not in conflict with the Companies Act.

Fiduciary duties and the duty of care, skill and diligence in common law
Common law fiduciary duties require a director to act with utmost good faith and in the best interests of the company at all times. This means, without limitation, that directors have a duty not to exceed their powers or to act ultra vires. Directors are expected to exercise independent, unfettered discretion, avoid a conflict of interests and not making a secret profit. Equally, in carrying out their duties, directors are obliged to display the same conduct a reasonable person would display, or a degree of skill that may be reasonably expected from a reasonable person.

The old and the new Companies Act
The previous Companies Act, No. 61 of 1973, did not deal with the directors’ fiduciary duties other than the duty of disclosure of interests. In its section 234(1) it only mentioned that a director of a company who is in any way, whether directly or indirectly, materially interested in a contract or proposed contract, which has been or is to be entered into by the company or who so becomes so interested in any such contract after it has been entered into, shall declare his/her interest and full particulars of it. Section 234(2) further mentioned that section 234(1) applies to any contract or proposed contract which is of significance in relation to the company’s business.  

The penalty for the breach of duty to disclose was set out in section 441(1), which stated that any company, director, officer or person convicted of any offence referred to in section 234 shall be liable to be sentenced to a fine or imprisonment for such a period not exceeding one year or to both such a fine and such imprisonment.
Section 75 of the Companies Act reiterates directors’ duties previously recorded in section 234 of the previous Companies Act and section 76 further codifies the fiduciary duties of directors, including that not to usurp corporate opportunities.
In terms of this section 76(2) of the Act, a director of a company must-
(a) not use the position of director, or any information obtained in the capacity of a director, to

(i) gain an advantage for the director, or for another person other than the company or a wholly-owned subsidiary of the company, or

(ii) to knowingly cause harm to the company or a subsidiary of the company.

Section 76(2) of the Act further elaborates on the fiduciary duties of a director by stating in 76(2)(b) that a director has a duty to communicate to the board at the earliest practicable opportunity any information that comes to the director’s attention.

Furthermore, section 76(3) of the Companies Act states that when acting as a director of a company that the director must at all times exercise the powers and functions of a director (a) in good faith and for a proper purpose, (b) in the best interests of the company and (c) with the degree of care, skill and diligence that may be expected from a person in the same position of the director with the same skill, general knowledge and experience of the director.

It is vital that directors are aware that in the leading case of Da Silva and Others v C H Chemicals (Pty) Ltd (304/2007) [2008] ZASCA 110 the court indicated that fiduciary duties extend to directors post their resignation and in Philips v Fieldstone Africa (Pty) and Another (516/02) [2002] ZASCA 137 the court expanded on this by adding that fiduciary duties extend to both a director and an employee. In the event of a breach of these fiduciary duties, the company will be entitled to seek recourse both in terms of common law and the Companies Act.

Company law remedies in the event of a breach of fiduciary duties
In terms of section 168(1)(b) of the Companies Act, the aggrieved company can file a complaint with the Companies and Intellectual Property Commission (the “Commission”) when a director exploits a corporate opportunity belonging to the company, therefore breaching his or her fiduciary duties. Once the Commission has investigated the matter and found the director in breach of its fiduciary duties, the Commission has the power to:

1. issue compliance notices;
2. enter into consent orders;
3. apply for administrative fines;
4. Refer matters to the National Prosecuting Authority, Companies Tribunal, other regulatory authorities concerned and/or for alternative dispute resolution;
5. issue summons; or
6. enter and search under a warrant.

Section 77(2)(a) of the Companies Act states that a director of a company may be held liable in accordance with the principles of common law relating to a breach of a fiduciary duty, for any loss, damages or costs sustained by the company as a consequence of any breach by the director of a duty in section 75 of 76 of the Companies Act. In case of breach of duty to act with the degree of care, skill and diligence reasonably expected, the director may be held liable in accordance with principles of the common law relating to delict (section 77(2)(b) of the Companies Act). 

In addition, in accordance with section 162(5)(c)(ii) of the Companies Act a court must make an order declaring a person to be a delinquent director if the person took personal advantage of information or an opportunity, contrary to section 76(2)(a) of the Companies Act.

Lastly, section 218(2) of the Companies Act states that any person who contravenes any provision of the Companies Act is liable to any other person for any loss or damage suffered by that person as a result of the contravention. The abovementioned sections illustrate that, following the breach of directors’ fiduciary duties by exploiting a corporate opportunity rightfully belonging to the company, the aggrieved company is entitled to claim the corporate opportunity from the delinquent director. In instances where it is no longer possible to do so, the company is entitled in the alternative to sue for any profit which has accrued to the delinquent director or any damages or loss that the company has suffered as a result thereof.

Conclusion
In light of the above mentioned, directors must be cautious before exploiting a corporate opportunity belonging to the company as they will not escape liability. It is evident that the Companies Act in conjunction with the common law, imposes strict standards on fiduciaries and all individuals who have been placed in a position of trust in order to ensure that they are held accountable at all times.

Written by Thabile Gcabashe, Candidate Attorney (Corporate & Commercial Law) with the assistance of Aleksandra Burr Dixon, Director (Corporate & Commercial Law), Knowles Husain Lindsay Inc.