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M1 TRAVAILS
THE TRAVAILS OF CORPORATE OFFICERS
An examination of the South African authorities and the case law in other similar jurisdictions on the fiduciary duties of directors and senior management of companies (and members of close corporations) indicates the pervasiveness of the strict adherence to the fiduciary duty in this area of law. Apart from the fiduciary duties imposed in terms of the Companies Act 61 of 1973 and the Close Corporations Act 69 of 1984 (a discussion of which falls outside the ambit of this article), the corporate officers who control the assets and who have the power to act on behalf of the corporate entity are at common law required to exercise their powers and rights of control for the benefit of the corporation and to exercise good faith and reasonable care and skill in carrying out their functions.
One can hardly take issue with this duty. However, whether this duty should disqualify former corporate officers from usurping for themselves or diverting to another person or company with whom or with which they associated, a business opportunity after the resignation or termination of their employment, is a topic which I will address in this article. I will also briefly discuss under what circumstances and for what period such duty is to endure.
The fiduciary concept expounded in Spieth and Canaero
The fiduciary obligation of a corporate officer was considerably expanded in the decision of Spieth and Another v Nagel 1997(3) All SA 316(W).
The importance of this decision is that it is the first South African case which, in the context of a corporate opportunity, precludes a corporate officer from continuing to exploit such opportunity for himself after his resignation. Significantly the court rules that the fiduciary duties survive any voluntary departure
‘and that there is no reason in principle why in an appropriate case, a company should not, while such duty survives, be protected by way of an interdict from an irreparable loss it may otherwise suffer if the director, following his resignation, is allowed to continue to exploit a commercial opportunity created in breach of his fiduciary duty’.
In considering the matter Schwartzman J referred to Canadian, English and South African authorities and in particular was persuaded by the reasoning and principles laid down in the case of Canadian Aero Services v O’Malley 1974 DLR (3d) 371 (SCC), to which I will refer as Canaero, which is a decision of the Canadian Supreme Court.
The facts in the Spieth case can be summarized as follows: Spieth established a company (Lutro) the business of which was that of a supplier and installer of spray painting and banking plants for motor vehicles. The business acquired the exclusive agency for the importation of certain products for distribution in Southern Africa. The business was run successfully as a one-man concern by the applicant who was contemplating retirement in due course. Nagel (the respondent) was employed and became a director and shareholder. A series of events over a period of two years resulted in the respondent being suspended from his employment. The applicant contended that the respondent had approached the distributor with the intention of having the distributorship awarded to him and that his solicitation of the distributorship constituted a breach of his fiduciary duty as a director. The applicants (Spieth and Lutro) sought an interdict to prevent the respondent from exploiting the commercial opportunity.
The court had no difficulty in concluding on the facts that the respondent had breached his fiduciary duties as a director and that the interdict sought by the applicant was appropriate in the circumstances.
However, the more problematic issue for consideration was whether such interdict ought to survive the termination of the respondent’s employment and directorship and, if so, for what period it should endure. There are accordingly two issues that need to be dealt with: first, the protection of the company from the exploitation of a corporate opportunity by a director after termination of his service and second the justification of obtaining relief against the respondent for an unrestricted period of time.
Prior to the Spieth case, there had been no South African decision in which a director, after his resignation, had been interdicted from continuing to exploit for himself a corporate opportunity created in breach of his fiduciary duty. Referring primarily to Canadian and English authorities and in particular to the Canaero decision, Schwartzman J granted a final interdict without any restriction as to time (save to add a rider that in the event of a material change of circumstances the respondent could apply for a variation or rescission of the interdict). The judge cited various passages from Canaero with approval and found the reasoning contained therein persuasive. Thus a brief consideration of the decision in the Canaero case and its ramifications is appropriate. Considering all that has been claimed for it, the facts and actual decision in Canaero are unexceptional.
The plaintiff company was engaged in the business of topographical mapping and geophysical exploration. The president, director and chief executive officer of the company (M) and the executive vice president and director (Z) were both experts in this field and became interested in the possibility of an aerial mapping project in Guyana. After much research and certain interruptions because of adverse political conditions in Guyana, the project was eventually approved. M and Z both resigned their positions with their former company and formed a new company which tendered for and was awarded the contract. The former company brought suits against M and Z alleging that they had breached their fiduciary duties by depriving it of a corporate opportunity which it had been developing. The action succeeded on appeal and the Supreme Court had little difficulty in deciding that senior officers and employees such as M and Z could not spend a number of years developing a business opportunity for their company and then, when it was about to be realized, leave the employment and seize the opportunity for themselves. The fact that M and Z resigned did not relieve them of their fiduciary obligations.
Schwartzman J, in applauding the decision handed down in Canaero and in sanctioning the principles enunciated therein, makes it likely that the growth of the corporate opportunity doctrine as applied in South African company law will lead in the same direction as the experience in America and Canada. A series of cases in the United States illustrate the expansion of the corporate opportunity doctrine where a broad ‘fairness’ and ‘equity’ test has been applied. The Canaero judgment, and by extension the Spieth decision, makes it clear that an action will lie whenever there has been a taking of a corporate opportunity for property that in equity belongs to the corporation. The crux of the matter is to determine the proper scope and application of the fiduciary obligation and the courts in both cases adopted a broad approach in determining liability. The fluid test laid down in Canaero was approved in Spieth. The following passage from Canaero is quoted in Spieth with approval at 323 1:
‘In my opinion this ethic disqualifies a director or senior officer from usurping for himself, or diverting to another person or company with whom or with which he is associated, a maturing business opportunity which his company is actively pursuing. He is also precluded from so acting even after his resignation, where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company, where it was his position with the company, rather than a fresh initiative that led him to the opportunity which he later acquired’.
Practical implications
If criticism can be leveled against the fluid test formulated in Canaero and approved in Spieth, it may be directed at the broad equitable approach to the corporate opportunity doctrine expressed in these decisions. The wide approach suggests that directors and senior employees should pass on to the company any and all opportunities of which they became aware, irrespective of the nature of the opportunity and its affinity to company interests, and irrespective of the manner in which knowledge of such an opportunity was acquired. Every opportunity would therefore constitute a corporate opportunity which vests with the company even after the termination of service. From a practical standpoint, it does not narrowly define or limit the corporation’s interest in such a way that directors and senior officers are given viable guidelines for their conduct. In holding that a director’s fiduciary duty can survive the termination of his directorship, the position of erstwhile and current directors and senior corporate officers in pursuing a commercial opportunity is extremely tenuous.
In articulating general principles of equity and fairness, the Canaero and Spieth judgments clearly have implications beyond the circumstances in which the decisions were rendered. Applying the expanded concept of corporate opportunity presented in these decisions which prescribe that a fiduciary must not put himself in a position where his duty and interest may conflict, there will no doubt be hard cases and decisions with which our courts will need to grapple in the future. The evidentiary difficulties alone (not to mention the discharging of the onus of proof on a balance of probabilities) may leave the applicant without remedy. It may well be prudent for a company in its articles of association or service contracts to detail comprehensively the fiduciary duties of its directors and senior officers both during and after their term of employment and to spell out clearly the consequences which follow upon a breach being committed. This could alleviate some of the difficulties which might be encountered in subsequent litigation.
Limitation as to time
Dealing now with the second issue, relating to a justifiable time span which should endure in prohibiting the delinquent director and/or officer from diverting corporate business to himself even beyond the termination of office, our courts have recognized the existence of the company’s right to restrain such party from doing so indefinitely. The continuing apprehension of further harm being caused to the company after termination of office has motivated the granting of a final interdict in many instances, so as to settle the rights and duties of the parties permanently and to ensure that the applicant in a suit is not forced to return to court for an interdict time and time again. As was cautioned by Schwartzman J in Spieth, there is no compelling reason for limiting the interdict as to time; he expressed a justification for such finding, stating at 234 that:
‘to afford such protection must accord with public policy and the boni mores of the commercial community. To do so is not to punish the delinquent director for his past misconduct but to secure the cessation of the unlawful course of conduct ….’.
Conclusion
The world has changed dramatically for both corporations and their senior officers. It is a world of immediate communication, where business opportunities often present themselves. There are more and more instances of conflict arising between the personal interests of a director and those of his company. Fiduciary law has accordingly come under judicial examination in recent years and in England the Law Commission, in a 1995 report, has considered this area of law as a possible object of legislative treatment. Issues such as the nature and extent of fiduciary duties, the question of remedies for breach of such duties and the relationship between the general principles of fiduciary law and of statutory regulation, have been scrutinized, assessed and debated. Although certain fiduciary relationships are easily established and generally acknowledged, the term ‘fiduciary’ denotes in essence the subsistence of a relationship of trust and confidence. Some argue that as the interests of the directors and senior officers are on a par with those of the company which they serve, the courts should be reluctant to impose upon parties in a commercial relationship who are in a relatively equal position of strength the higher standards of conduct which equity prescribes. On the issue of competition by a director and his company, opinions range from a total prohibition on compensation between a director and his company to a total disregard of any such prohibition. The problem not only arises because of the changing attitudes to the role of the company directors but is clouded by the fact that both the nature of the competition and the position of the particular director may vary considerably.
The dichotomy relating to departed directors and employees arises in distinguishing between those persons who obviously have not departed of their own volition in order to exploit a corporate opportunity and those whose resignation is motivated by that purpose. The remedy, under these different circumstances, I submit, should not be the same. In the former case the equities give rise to different considerations from those in the latter case. A policy by our courts to mete the same punishment in both instances would be wrong. Clearly the latitude provided to a departing fiduciary whose services have been terminated under incidents of duress, victimization, unfair labour practice and the like, must be greater than that given a resigning fiduciary motivated solely by personal use of the corporate opportunity. This matter must be decided on a case-by-case basis; assessing and evaluating the factors in each particular matter then applying a test predicated upon such detailed examination rather than the application of a rigid test.
The challenge for the courts will be to countenance the interests and protection of the company while still recognizing the rights and interests of the individual corporate officer(s) who, in essence, via their initiatives, skills and entrepreneurial spirit promote the juristic entity. All the characteristics and qualities of a company are simply a consequence of the wills and acts of the persons who function as its organs, without which the company would have no existence.