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The Corporate Opportunity Rule: Are Directors Allowed To Make A Secret Profit At The Expense Of The Company?

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The Corporate Opportunity Rule: Are Directors Allowed To Make A Secret Profit At The Expense Of The Company?

24th May 2019

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Directors are responsible for the day-to-day operations of the Company. They are privy to information which they can either use to gain an advantage for themselves, other persons or knowingly cause harm to the Company in order to make an illegitimate profit at the expense of the Company.

Overview

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Arguably, the Common Law Rules of Corporate Opportunity Rule and the No Profit Rule were codified in section 76 of the Companies Act 71 of 2008 (the Act), which sets the standards of Directors’ conduct.

Section 76(2)(a)(i) & (ii) of the Act states that a Director must not use his/her position or information to gain an advantage for himself/herself/another; or to knowingly cause harm to the Company.

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For purposes of this article, the Corporate Opportunity Rule will be discussed in great detail. The rule stipulates that where a Director has taken for himself/herself any property or economic opportunity that belongs to the Company, the Company has a claim against the Director.

Test to determine Corporate Opportunity Rule:

What constitutes Corporate Opportunity?

  1. be in line of the business or is the Company actively pursuing the matter
  2. be taken at the expense of the Company;
  3. Need unanimous assent

In terms of the law, a Director may not make a profit from his/her position as a Director, and if a Director does make a secret profit, it must be returned to the Company. An opportunity is a “Corporate Opportunity” if the opportunity is either in the line of business of the Company or the Company is actively pursuing.

Practically this means that a Director usurps an opportunity which the Company is actively pursuing and acquires it for himself/herself, so that the Director could in turn sell it to the Company at a profit.

Therefore, the Director took an opportunity at the expense of the Company.

The errant Director effectively breached his/her fiduciary duty (made a profit). The errant Director must return all profit to the Company and will be held liable for damages.

Another possible scenario is when a Director resigns and then takes the opportunity. This will still contravene the Corporate Opportunity Rule, as the Company is still actively pursuing the opportunity. The Director’s resignation is irrelevant, because he/she obtained the information about the opportunity while he/she was a Director.

Conclusion

As long as an opportunity comes to a Director, it is a Corporate Opportunity unless there is unanimous consent from Shareholders that the Director can pursue that opportunity and it is not in line with the business. Failure to adhere to this principle will constitute a breach of the Corporate Opportunity Rule and he/she must give the profits back to the Company in addition to any other remedy in law the Company may have.

For expert Commercial Law advice to safeguard your Company feel free to contact SchoemanLaw Inc today. 

Written by Petrus Khumalo, Candidate Attorney, SchoemanLaw

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