An analysis of the business judgment rule under Section 76(4) of the South African Companies Act 71 of 2008

Abstract

This study examines the relevance and reasons for the limited judicial application of the business judgment rule in section 76(4) of the Companies Act. The rule was introduced to shield directors from personal liability arising from honest decisions that harm the company. The study finds that the business judgment rule is relevant as it aligns with the purposes of the Companies Act such as promotion of entrepreneurship and good corporate governance. It further finds that the broad scope of the rule and the blending of the fiduciary duty to act in the best interests of the company with the duty of care, skill and diligence limit its application and consign it to legal uncertainty. The study makes several recommendations which include narrowing the definition of business judgment, specifying the scope of the business judgment rule and imposing the burden of proof on the plaintiff.