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Cracking The Corporate Opportunity Rule

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Cracking The Corporate Opportunity Rule

4th August 2016

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While the term corporate opportunity has not yet been unequivocally defined by our law, generally it refers to any business opportunity, material or immaterial, to which a company has a claim. The corporate opportunity rule relates to a duty that exists on directors of a company to not intentionally take the opportunity for their own benefit or to the company’s detriment.

At common law
Under certain circumstances, a general duty is placed on directors to acquire economically beneficial opportunities on behalf of their company, which could include property or rights. This duty arises from the specific relationship between the director and his or her company to act bona fide; or from the relationship, if any, that exists between the company and the actual opportunity.

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A director would then be in breach of this duty if he or she acquires such an opportunity for him or herself.
Subsequently, the company will have a claim against such a delinquent director. Where this becomes impossible, for instance, where the opportunity has already been sold, the company acquires the right to any profits resulting from the delinquent director’s breach, as well as a claim for damages for any consequential harm or loss suffered by the company.

According to LAWSA Companies: Part 2 (RC Williams, Vol 4(2) at para 148), there are at least three instances in which the corporate opportunity rule is applicable to directors.

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Firstly, where the director acts under a specific mandate, express or implied, to acquire the opportunity in question or to inform the company as to the suitability of the opportunity. It is also applicable where a general mandate exists that requires all directors of a company to acquire opportunities on its behalf, or to provide information regarding any opportunities that they become aware of.

The second instance of this duty arises where he or she controls the company, or those empowered to manage its affairs, to the extent that it cannot acquire corporate opportunities without his or her consent.

Essentially, where a company willingly or compulsorily relies upon a director to acquire such opportunities on its behalf, or where the company cannot do so unless their permission granted, the duty exists. A caveat to this is that the corporate opportunity in question must be one that “naturally, conveniently and economically” falls within the scope of business ordinarily conducted by the company, and not on the basis of a mere possibility of usefulness or benefit to it (Robinson v Randfontein Estates Gold Mining Co Ltd 1921 AD). The scope of business of a company relates to the business currently conducted by it, or to business it intends to conduct by way of agreement between its shareholders and directors.

The third circumstance under which a director is under this duty goes without saying, which is an instance where a company is in the process of actively pursuing the opportunity. Such an opportunity would belong to the company and the director would be prohibited from usurping it.

Once the duty arises, the fact that the company is unable to take the opportunity (due either to financial or practicable reasons) becomes irrelevant. However, where the board of directors has decided bona fide that the company won’t take the opportunity, such an opportunity ceases to be corporate, the duty no longer exists and the director is free to take the opportunity. A company may further, by members at a general meeting, waive its rights to a corporate opportunity provided that they do not defraud any minority in doing so.

Consequently, a director may not rid him or herself from such a duty by resigning from the company in order to acquire the opportunity for their own benefit (Da Silva v CH Chemicals (Pty) Ltd (2009)). Where a director’s resignation is influenced by this intention, he or she remains precluded from taking the opportunity. This also applies where the director’s position in the company, and not his or her own initiative, was what led him or her to the corporate opportunity.

The Companies Act 71 of 2008
The common law rule of corporate opportunity was codified in section 76 of the Companies Act 71 of 2008 (“the Act”), which makes provision for the general standards of directors’ conduct.

Section 76(2)(a)(i) of the Act provides that a director of a company may not use his or her position, or any information gained from such position, to obtain any advantage for his or herself or any person other than the company itself or its wholly-owned subsidiary. Arguably, this provision relates to the no-profit rule at common law, while implicitly relating to the corporate opportunity rule.

A further duty is placed on directors by section 76(2)(b), which sets out that that a director must communicate any information that comes to his or her attention at the earliest practicable opportunity, unless he or she reasonably believes that the information is not material to the company or the information is generally available to the public and/or the other directors, or where he or she is bound not to disclose such information either by a legal or ethical obligation of confidentiality. An argument can be made that this implies that a director is required to offer any information that falls within this scope, rather than waiting to be questioned.

Application of the rule
The Supreme Court of Appeal in Da Silva v CH Chemicals (Pty) Ltd (2009) 1 All SA 216 (SCA) was tasked with declaring whether the exploitation of certain corporate opportunities by a director amounted to a breach of fiduciary duties contemplated by the common law and the Companies Act 61 of 1973 (“the Old Act”). The breach in question related to the resignation of the appellant as managing director of the respondent company, so that he could pursue an opportunity that was direct competition to it.

Scott JA held that a well-established rule exists in company law that sets out that directors have a fiduciary duty to exercise their powers in good faith and in the best interests of the company. Stemming from this, they are not permitted to make a secret profit or in any way place themselves in a position where it would result in a situation where their fiduciary duties would conflict with their personal interests. The court held that a director must acquire an economic opportunity for the company, if it is acquired at all.

The court further stated that a corporate opportunity was one which the company had been actively pursuing or which fell within the company’s existing business activities. Each case required a close and careful examination of all relevant circumstances, including the particular opportunity in question.

It was held that the opportunity remained that of the respondent company and that appellant director would remain accountable.

Stemming from this, arguably, the common law corporate opportunity rule requires the directors of a company to act in the best interests of the company when faced with such an opportunity.

In Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus (Pty) Ltd and Others 2014 (5) SA 179 (WCC), the court held that the duty to act in the best interests of the company was not objective. It required the directors to take reasonable and diligent steps to be informed of the matter; that they subjectively believe that their decision or conduct had been in the best interests of the company and that this belief has a rational basis. While the criteria of rationality is an objective one, this would be easier satisfied than a test undertaken by a court to determine whether a decision or conduct was objectively in the best interests of a company.

Conclusion
The extensive codification of common law company-law principles under the Act highlight a demand for a more accountable corporate landscape in South Africa. A director occupies a position of utmost good faith in the company, and this is especially pertinent in their dealings with corporate opportunities.


Prepared by Robyn Smerdon, BKM Attorneys

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