RESEARCH PROPOSAL

THE ADEQUACY OF THE BUSINESS JUDGMENT RULE AS A DEFENCE FOR DIRECTORS’ BREACH OF FIDUCIARY DUTIES UNDER SECTION 76(4) OF THE COMPANIES ACT 71 OF 2008

1.1 Introduction

Grasping the changes in the South African corporate governance systems since the promulgation of the Companies Act 71 of 2008, also known as “the Act,” will be an interesting topic. One amendment has been the partial codification of the statesome of the directors’ fiduciary duties and the statutory recognition of the business judgment rule in section 76(4).[1] Before the Act became effective on May 1, 2011, the duties of directors were essentially governed by common law principles that were predicated on case-specific judicial interpretation. The rationale for the shift to codification was to provide more certainty, transparency, and accountability in the conduct expected from company directors operating under the South African corporate landscape.[2]

Subsection 76(3) of the Act lays out two principal duties: the fiduciary obligation of managers to act in good faith and for the right purpose, and the duty of care, skill, and diligence. These responsibilities are placed upon both directors of executive and non-executive character, with no formal distinction in law between these two classes.[3] This treatment is further seen as raising the question of the methods by which the court ought to approach this compliance, especially when non-executive directors have rather limited day-to-day involvement in the company’s business.[4] Business judgment rule, codified in subsection 76(4), was borrowed from American jurisprudence as a defense that grants directors immunity from personal liability when their decisions relate to well-informed, irrelevant, and rational business decisions.[5]

Whilst its protective intent has led to considerable academic discord, the operation of the business judgment doctrine in South African company law is debated rather hotly. Whether the requirements of this rule are sufficiently clear for directors to act upon meaningfully in practice and whether codified version of these requirements do really create a flexible margin allowing encouragement of such entrepreneurial risks, while maintain accountability of directors for bad governance, have aroused serious controversy among scholars.[6] With the Steinhoff debacle and the Zondo Commission putting up show on state capture, public scrutiny on directorial behavior has escalated even higher, throwing into question whether the legal structures in existence will sufficiently keep corporate malpractice at bay in the South African context.[7]

This research proposal consists of a doctrinal study that will critically evaluate the utility of the business judgment rule under section 76(4) of the Act. In other words, it looks into whether the statutory formulation of the rule provides a coherent and effective defence mechanism or broad gaps and ambiguities in its design undermine its stated purpose.[8] The analysis will look closely at primary legal sources – the Act itself, the relevant case law, and King IV Report on Corporate Governance, together with secondary academic literature and comparative perspectives on other jurisdictions adopting similar rules.[9]

1.2 Statement of the Problem / Research Problem

Legislature of the business judgment rule in South African company law was rooted in the Companies Act of 2008. The framework prevented an honest director of aggregates from historical liability regarding decisions made in good faith that authorities perceive as unrealistic. Arguably, the rule mostly nurtures consequentialism for the interpretation of the statute and hence does not have factual standing.[10] It was recognized through a legal principle for business judgment, to hold the third limb protected where a director satisfies the requisites found therein; hence he also satisfies the duty as per the third-limb requirements. Hence it was found such compliance requires taking reasonable steps to be informed, not to have any material interest in such decision, or to formally disclose any such interest, and thus to have good reasoning why taking the decision in question was in the best interests of the company.[11]

The statute language of section 76(4), however, poses several interpretative difficulties. For example, using the concept of ‘reasonableness’ to mean ‘having a rational basis’ blurs the distinction between an objective test and a subjective good faith test. The courts must compare genuineness of the director’s belief with that belief being founded on a rational basis. However, the Act itself is silent about the standard for the determination of the threshold.[12] Exegesis of the relationship between the business judgment rule and the overarching fiduciary duty obliging the pursuance of the purpose ruled in section 76(3)(a) remains contentious. Some writers argue that a business judgment rule is only meant to be an escape route for breach of the duty of care, skill, and diligence but not for all breaches of fiduciary duties, such as conflicts of interests; while others have expressed doubt about whether the statutory language excludes such cases.[13]

Enforcement of the law is practically impossible. This is because the Companies and Intellectual Property Commission (CIPC) of South Africa does not have the institutional capacity to enforce the law of director duties in practice and is heavily reliant on shareholder-initiated derivative actions registered under section 165 of the Act.[14][15] Big corporate collapses in the country, including the fall of Steinhoff International and the exposure of governance failure at state-owned enterprises highlighted by the Zondo Commission, show an immense gap between the standard of directorship required by law and the actual means of holding directors accountable.[16] The main research question is whether the business judgment rule, as worded in section 76(4), is a reliable ‘safe harbor’ defense, or if its current wording gives leeway to negligent or self-interested directors to get away with absolutely no liability.[17]

1.3 Research Questions

The study will seek to answer the following research questions:

First, what is the scope and nature of the business judgment rule as codified in section 76(4) of the Companies Act 71 of 2008, and how does it interact with the fiduciary duties and the duty of care, skill, and diligence under section 76(3)?[18][19]

Second, does the statutory formulation of the business judgment rule create interpretive ambiguities, particularly regarding the concepts of “rational basis” and “reasonably diligent steps,” that may undermine its effectiveness as a defence mechanism for directors?[20][21]

Third, how have South African courts interpreted and applied the business judgment rule in reported decisions, and what gaps or inconsistencies are evident in the emerging jurisprudence?[22][23]

Fourth, how does the South African statutory business judgment rule compare with the equivalent provisions in comparable jurisdictions such as Australia and the United States, and what lessons can be drawn from those comparisons to strengthen the South African framework?[24][25]

1.4 Research Aims and Objectives

A study with an overarching aim is to critically analyse whether or not there is a reasonable defence to be employed for fiduciary breach and skill and care violation duties charged against directors under Section 76(4) of the Companies Act No. 71, 2008.[26] The study aims to detect flaws in the provision and suggest reforms that would clarify and probably enhance the rule’s application within the given context of corporate governance in South Africa.[27]

In pursuit of this aim, the study will be guided by the following specific objectives: The first objective is to examine the statutory provisions of sections 75, 76, and 77 of the Act to establish the legal framework which provides for directors’ duties and the business judgement rule, whilst the second objective is to analyse South African case law which has considered or applied the business judgement rule, with particular attention to discussion about its requirements.[28][29] The third objective is to compare the South African business judgement rule with the equivalent provisions in Australian and American corporate law, upon which the Corporations Act 2001 (Cth) and case law from Delaware in the United States will be specifically referred to.[30][31] The fourth objective is to evaluate the rule’s practical efficacy regarding the backdrop of recent corporate governance failures in South Africa and suggest necessary legislative or judicial reforms where found lacking.[32][33]

1.5 Research Methodology

The research will engage in qualitative doctrinal legal research methods. Doctrinal (sometimes thrown as “black-letter”) legal research envisions a structured analysis of legal norms, principles, and abstract concepts as they appear in legally binding sources, such as statutes, cases, and learned literature.[34] Such an approach seems to be very suitable for the purpose of this study, as the research problems demand a deep analysis of the legal-textual meaning covering statutory provisions, legal interpretations and academic discussions concerning the business judgement rule in South African company law. No empirical data collection through a human participatory approach will be materially required.[35]

Research will depend solely on the involvement of secondary and primary sources. Basis for the former shall remain to feature Acts of Companies 71 of 2008, Companies Regulations 2011, relevant sections of Companies Amendment Act 16 of 2024, and South African case laws, especially from the Supreme Court of Appeal and High Courts.[36] It seems the author will also consider case laws from comparative jurisdictions – Delaware Court of Chancery and Australian Federal Court, keeping in view their legal strength. Among the secondary sources that can be referred to are academic publications in law journals, South African law textbooks on company law, and King IV Report on Corporate Governance for South Africa, 2016.[37]

The methodology to be used shall be a triangulation of the descriptive, analytical, and comparative approaches. The descriptive approach would involve the mapping of the legal position as known in South Africa in regard to the business judgement rule. The analytical approach will consider whether the statutory formulation sufficiently satisfies its specific objectives.[38] The comparative content will look for the best practice as well as reforms against the South African yardstick in the comparison with other jurisdictions in the common law world. The methodological ethos will not look to paint a full picture of the legal position but rather to base one’s critique in the critical evidence of law and thereby provide a guide to the types of legal principle that could be achieved – to this end it is planned as a practical piece of normative jurisprudence research.[39]

The study will not involve the use of quantitative variables, surveys, interviews, or any mode of data collection needing some research ethics. It is purely a desk-based, doctrinal investigation, rooted in the study of existing legal literature. In areas of ambiguous statutory interpretation, this study will balance and critically discuss several authoritative scholarly opinions and reasonable conclusions supported by judicial pronouncements.[40] Conaty’s description was being utilised to allow the new conceptual framework to invoke the abduction of the interpretive one. Thus, the researcher could in this manner move back and forth between law-based observations and theoretical explanations to consolidate a coherent effect of rule adequacy.[41][42]

1.6 Significance of the Study

This research report holds several implications. In theory, it adds to our understanding of directors’ duties under the South African reformed company law regime. Even so, much attention has been given to the broader principles constituting director fiduciary duties since the inception of the Companies Act. Little focus had been put particularly on the business judgement rule as a standalone defence mechanism with regard to the coherence of those statutory conditions being questioned objectively.[43] Within this gap-in-research context, the current study offers investigations of the implications and interpretations of these imported cases operating in the South African legal context.[44][45]

On a practical level at least, the findings of this study would prove extremely beneficial to all directors, legal practitioners, or even corporate governance advisers – as just a few examples – managing the defence or advising directors as to the standards of conduct required to invoke the protection in the business judgement rule. As the recent graft in the corporate world in South Africa increased, the importance was likewise growing for practitioners to determine the exact boundaries surrounding a business judgement rule in order for policymakers to seriously consider whether its current formulation justly supersedes public interest.[46] The findings and recommendations of this study could possibly be relocated, therefore, to the drafts and practice behind legal support and legislative reform efforts, also amendments that may follow any such change post-Companies Amendment Act 14 of 2024.[47][48]

1.7 Limitations of the Study

It is essential to raise some limitations before anything is discussed. The research focuses on the doctrinal analysis of South African company law, highlighting insights derived from Australia and the United States in comparative terms, while ignoring the empirical investigation of whether directors, in actual situations, employ or appreciate the business judgement rule’s importance in their decision-making processes.[49] Such a study would need ethical clearance and thus does not fall anywhere within the scope of the proposal.[50]

Another constraint lies in the relative paucity of South African case law interpreting and applying the business judgement rule. Hence, there has yet to be scholarly evaluation for judicial administration in South Africa; the later parts of the study fiddle more with comparative analysis than much else.[51] Any study of the business judgement rule must not operate in a vacuum and take into account the operative differences that exist across nations in respect of the rule. There is an element of great risk in forcefully transferring judicial views from one jurisdiction to another without due heed to the fundamental background context. The study will constantly keep in mind these differences while it undergoes comparison.[52][53]

In any event, the investigation is restricted to the existing law up to the time of writing. Amendments to Section 76 of the Act, and new regulations evidently to be drafted pursuant to the Companies Amendment Act of 2024, may well change the legal landscape even after the conclusion of this study.[54][55]

1.8 Chapter Outline

The proposed mini-dissertation will be structured as follows:

Chapter 1: Introduction. This chapter will introduce the research topic, provide background to the study, state the research problem, outline the research questions, aims, and objectives, describe the methodology, and explain the significance and limitations of the study.

Chapter 2: Statutory Framework of Directors’ Duties and Business Judgement Rule under the Companies Act 71 of 2008. This chapter serves the purpose of in-depth analysis of sections 75, 76, and 77 of the Act and tracing the evolution of the law of directors’ duties from the ‘common law position’ to the current statutory arrangement, considering all the important requirements of the business judgement rule per s 76(4).[56] Particular emphasis will be laid on the interplay between the fiduciary duties under ss 76(3)(a) and (b) and the care, skill, and diligence duty under s 76(3)(c) and how the business judgement rule relates to each.[57]

Chapter 3: Judicial Interpretation of the Business Judgement Rule in South Africa. The chapter looks at South African case law addressing the business judgement rule or its underlying principles. Case law such as Modise v Tladi Holdings (Pty) Ltd, 2020, 4 All SA 670 (SCA), Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus (Pty) Ltd and other pertinent decisions shall be analysed in an attempt to assess how the courts have interpreted it in light of the statutory requirements and discover in the process present gaps or inconsistencies in the nascent jurisprudence.[58][59]

Chapter 4: Comparative Analysis – Australia and the United States. This chapter will compare the South African business judgement rule and its counterpart in the Australian Corporations Act 2001 (section 180(2)) and the Delaware common law business judgement rule. The comparison shall suggest possible changes in provisions and lessons that South African law may learn from the two counterparts.[60][61]

Chapter 5: Conclusion and Recommendations. In this last chapter, I will summarise the major findings of this study, conclude on the adequacy of the business judgement rule under section 76(4), and provide recommendations of a legislative, judicative, or corporate governance best-practice nature in regard to addressing identified deficiencies.

BIBLIOGRAPHY

Primary Sources

Legislation

Companies Act 71 of 2008 (South Africa).

Companies Amendment Act 16 of 2024 (South Africa).

Companies Regulations, 2011 (South Africa).

Corporations Act 2001 (Cth) (Australia).

Constitution of the Republic of South Africa, 1996.

Case Law

Grancy Property Ltd v Gihwala 2025 (2) SA 76 (SCA).

Lewis Group Ltd v Woollam and Others (2017) 1 All SA 192 (WCC).

Modise v Tladi Holdings (Pty) Ltd 2020 4 All SA 670 (SCA).

Organisation Undoing Tax Abuse v Myeni [2020] ZAGPPHC 169.

Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus (Pty) Ltd 2014 5 SA 179 (WCC).

Corporate Governance Codes

Institute of Directors South Africa, King IV Report on Corporate Governance for South Africa 2016.

Secondary Sources

Books

Cassim FHI, Cassim MF, Cassim R, Jooste R, Shev J and Yeats J Contemporary Company Law 3rd ed (Juta 2021). Available at: https://juta.co.za/catalogue/contemporary-company-law_28776

Daniel BK, Harland T and Wald N Higher Education Research Methodology: A Step-by-Step Guide to the Research Process (Routledge 2024).

Davies PL, Worthington S and Hare C Gower: Principles of Modern Company Law 11th ed (Sweet & Maxwell 2021).

Delport P Henochsberg on the Companies Act 71 of 2008 Revision Service 33 (LexisNexis 2023).

Maroun W Corporate Governance in South Africa (De Gruyter 2022). Available at: https://doi.org/10.1515/9783111337401

Mishra SB and Alok S Handbook of Research Methodology (Educreation Publishing 2022).

Saharan VA, Kulhari H, Jadhav H, Pooja D, Banerjee S and Singh A ‘Introduction to Research Methodology’ in Principles of Research Methodology and Ethics in Pharmaceutical Sciences (CRC Press 2024) 1-46.

Journal Articles

Bidi SS ‘”Foreseeable”: Conceptualised in the Duty of Care, Skill, and Diligence?’ (2023) 37(1) Speculum Juris 36-58. Available at: https://www.saflii.org/za/journals/SPECJU/2023/3.pdf

Cassim MF ‘The No-Conflict and No-Profit Rules Revisited: Grancy Property Ltd v Gihwala 2025 (2) SA 76 (SCA)’ (2025) De Jure Law Journal. Available at: https://www.dejure.up.ac.za/cassim-mf

Cassim R ‘Declaring Directors of State-Owned Entities Delinquent: Organisation Undoing Tax Abuse v Myeni’ (2021) 138(1) South African Law Journal 1-20. Available at: https://doi.org/10.47348/SALJ/v138/i1a1

Chitimira H and Hamadziripi F ‘A Comparative Analysis of Company Directors’ Accountability and the Statutory Duty of Care, Skill and Diligence in South Africa and Zimbabwe’ (2021) 10(2) Perspectives of Law and Public Administration 38-49. Available at: https://www.proquest.com/openview/19a9f5c538b59f82c99bc880010c1b25/1

Conaty F ‘Abduction as a Methodological Approach to Case Study Research in Management Accounting: An Illustrative Case’ (2021) 27 Accounting, Finance & Governance Review.

Firdaus F, Zulfadilla Z and Caniago F ‘Research Methodology: Types in the New Perspective’ (2021) 3(1) Manazhim 1-16.

Hamadziripi F and Chitimira H ‘The Integration and Reliance on Technology to Enhance the Independence and Accountability of Company Directors in South Africa’ (2021) 24 Potchefstroom Electronic Law Journal 1-32. Available at: https://doi.org/10.17159/1727-3781/2021/v24i0a10737

Hamadziripi F and Osode PC ‘The Nature and Evolution of the Business Judgment Rule and its Transplantation to South Africa under the Companies Act of 2008’ (2019) 33(1) Speculum Juris 27-41. Available at: https://www.saflii.org/za/journals/SPECJU/2019/3.pdf

Hamadziripi F and Osode PC ‘A Critical Analysis of Zimbabwe’s Codified Business Judgment Rule and its Place in the Corporate Governance Landscape’ (2021) 24 Potchefstroom Electronic Law Journal 1-34. Available at: https://scielo.org.za/scielo.php?script=sci_arttext&pid=S2077-49072021000100019

Mupangavanhu B ‘Standard of Conduct or Standard of Review? Examination of an African Business Judgment Rule under South Africa’s Companies Act 71 of 2008’ (2019) 63(1) Journal of African Law 1-24. Available at: https://doi.org/10.1017/S0021855319000068

Mudzamiri J ‘Reflecting on the Corporate Opportunity Rule in Company Law through a Jurisprudential Review of Modise v Tladi Holdings (Pty) Ltd 2020 4 All SA 670 (SCA)’ (2023) 56 De Jure Law Journal 206-219. Available at: https://doi.org/10.17159/2225-7160/2023/v56a15

Nel G, Scholtz H and Engelbrecht W ‘Relationship between Online Corporate Governance and Transparency Disclosures and Board Composition: Evidence from JSE Listed Companies’ (2022) 23(2) Journal of African Business 304-325.

Taherdoost H ‘What Are Different Research Approaches? Comprehensive Review of Qualitative, Quantitative, and Mixed Method Research, Their Applications, Types, and Limitations’ (2022) 5(1) Journal of Management Science & Engineering Research 53-63.

Theses and Dissertations

Cassim R ‘A Comparative Analysis of Director Tenure in South Africa and Selected International Jurisdictions’ (2021) 54(1) Comparative and International Law Journal of Southern Africa 1-37. Available at: https://doi.org/10.25159/2522-3062/8999

Hamadziripi F Derivative Actions in Contemporary Company Law: A Comparative Assessment from an Enhanced Accountability Perspective (LLD thesis, University of Fort Hare 2020).

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[1]Cassim FHI, Cassim MF, Cassim R, Jooste R, Shev J and Yeats J Contemporary Company Law 3rd ed (Juta 2021) 563.

[2]Hamadziripi F and Osode PC ‘The Nature and Evolution of the Business Judgment Rule and its Transplantation to South Africa under the Companies Act of 2008’ (2019) 33 Speculum Juris 27 at 28.

[3]Chitimira H and Hamadziripi F ‘A Comparative Analysis of Company Directors’ Accountability and the Statutory Duty of Care, Skill and Diligence in South Africa and Zimbabwe’ (2021) 10(2) Perspectives of Law and Public Administration 38 at 40.

[4]Cassim (n 1) 570.

 

[6]Hamadziripi F and Osode PC ‘A Critical Analysis of Zimbabwe’s Codified Business Judgment Rule and its Place in the Corporate Governance Landscape’ (2021) 24 Potchefstroom Electronic Law Journal 1 at 5.

[7]Cassim R ‘Declaring Directors of State-Owned Entities Delinquent: Organisation Undoing Tax Abuse v Myeni’ (2021) 138(1) South African Law Journal 1 at 3.

[8]Mudzamiri J ‘Reflecting on the Corporate Opportunity Rule in Company Law through a Jurisprudential Review of Modise v Tladi Holdings (Pty) Ltd 2020 4 All SA 670 (SCA)’ (2023) 56 De Jure Law Journal 206 at 208.

[9]Institute of Directors South Africa King IV Report on Corporate Governance for South Africa (2016).

[10]Mupangavanhu B ‘Standard of Conduct or Standard of Review? Examination of an African Business Judgment Rule under South Africa’s Companies Act 71 of 2008’ (2019) 63(1) Journal of African Law 1 at 6.

[11]Section 76(4)(a) of the Companies Act 71 of 2008.

[12]Bidi SS ‘”Foreseeable”: Conceptualised in the Duty of Care, Skill, and Diligence?’ (2023) 37(1) Speculum Juris 36 at 42.

[13]Cassim MF ‘The No-Conflict and No-Profit Rules Revisited: Grancy Property Ltd v Gihwala 2025 (2) SA 76 (SCA)’ (2025) De Jure Law Journal.

[14]Nel G, Scholtz H and Engelbrecht W ‘Relationship between Online Corporate Governance and Transparency Disclosures and Board Composition: Evidence from JSE Listed Companies’ (2022) 23(2) Journal of African Business 304 at 310.

[15]Section 165 of the Companies Act 71 of 2008.

[16]Cassim (n 6) 8.

[17]Mupangavanhu (n 9) 12.

[18]Section 76(3) and 76(4) of the Companies Act 71 of 2008.

[19]Hamadziripi and Osode (n 5) 10.

[20]Bidi (n 11) 45.

[21]Cassim (n 1) 580.

 

 

 

 

[26]Section 76(4) of the Companies Act 71 of 2008.

[27]Maroun W Corporate Governance in South Africa (De Gruyter 2022) 45.

[28]Hamadziripi F and Chitimira H ‘The Integration and Reliance on Technology to Enhance the Independence and Accountability of Company Directors in South Africa’ (2021) 24 Potchefstroom Electronic Law Journal 1 at 15.

[29]Chitimira and Hamadziripi (n 3) 44.

[30]Hamadziripi and Osode (n 5) 18.

[31]Corporations Act 2001 (Cth), s 180(2) (Australia).

 

[33]Cassim (n 6) 15.

[34]Taherdoost H ‘What Are Different Research Approaches? Comprehensive Review of Qualitative, Quantitative, and Mixed Method Research, Their Applications, Types, and Limitations’ (2022) 5(1) Journal of Management Science & Engineering Research 53 at 55.

[35]Mishra SB and Alok S Handbook of Research Methodology (Educreation Publishing 2022) 12.

[36]Companies Act 71 of 2008; Companies Regulations, 2011; Companies Amendment Act 16 of 2024.

[37]Daniel BK, Harland T and Wald N Higher Education Research Methodology: A Step-by-Step Guide to the Research Process (Routledge 2024) 30.

[38]Saharan VA, Kulhari H, Jadhav H, Pooja D, Banerjee S and Singh A ‘Introduction to Research Methodology’ in Principles of Research Methodology and Ethics in Pharmaceutical Sciences (CRC Press 2024) 1 at 8.

[39]Mishra and Alok (n 30) 25.

[40]Firdaus F, Zulfadilla Z and Caniago F ‘Research Methodology: Types in the New Perspective’ (2021) 3(1) Manazhim 1 at 6.

[41]Conaty F ‘Abduction as a Methodological Approach to Case Study Research in Management Accounting: An Illustrative Case’ (2021) 27 Accounting, Finance & Governance Review.

[42]Taherdoost (n 29) 60.

[43]Bidi (n 11) 38.

[44]Mudzamiri (n 7) 210.

[45]Hamadziripi and Osode (n 2) 35.

[46]Cassim (n 6) 18.

[47]Companies Amendment Act 16 of 2024.

[48]Maroun (n 27) 60.

[49]Mudzamiri (n 7) 215.

[50]Chitimira and Hamadziripi (n 3) 46.

[51]Hamadziripi and Osode (n 2) 33.

[52]Cassim (n 1) 575.

[53]Mupangavanhu (n 9) 20.

 

 

[56]Sections 75, 76 and 77 of the Companies Act 71 of 2008.

[57]Cassim (n 1) 706-746.

[58]Modise v Tladi Holdings (Pty) Ltd 2020 4 All SA 670 (SCA).

[59]Mudzamiri (n 7) 206-219.

[60]Corporations Act 2001 (Cth) s 180(2); Smith v Van Gorkom 488 A.2d 858 (Del. 1985).

[61]Hamadziripi and Osode (n 5) 25.