THE BUSINESS JUDGMENT RULE (PART 1)

Abstract

The office of director, by its very nature, imposes duties and responsibilities on its bearer. Taking into account the characteristics and nature of companies, it is inevitable that the scope of directors’ activities varies from company to company. A director, irrespective of the individual personality of the company, owes the company the duty of care and skill. Coupled with the duty of care and skill much emphasis, particularly in the 21st century, has been placed on the concept of corporate governance. It is within this context that the personal liability of company directors for mere errors of judgment must be considered. The object of part one of this article is to examine the characteristics of the American business judgment rule. Part 1 explores the origin of the rule and takes into account the various purposes that the rule fulfills in American law. The law relating to director liability in America is examined and the place of the business judgment rule in an American context is considered. Attention is paid to the rule’s basic requirements, the application of the rule and the subsequent consequences of the application thereof. Where possible, the requirements of the rule are illustrated through a discussion of case law. In part 2 the South African position relating to the director’s common-law duty of care and skill is considered. The Companies Act, recommendations of the King Committee, and the Department of Trade and Industry’s report on corporate law
reform are taken into account. The efficiency of the current law in South Africa is evaluated in light of the advantages and disadvantages of the importation of a foreign legal rule into South African law. In the conclusion an assessment is made of whether it is indeed desirable or necessary to import the business judgment rule into South African law.