Duty not set in stone

2017-05-24 06:00
Candice Reynders

Candice Reynders

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Question:

I am a director in a printing company. I find that the owners are very conservative and are not interested in my ideas for expanding. I think that I should perhaps start my own company, which will probably compete directly with my current company. I do not have a restraint of trade, but I am worried that as a director, I could get into trouble if I do this. Can I start my own company?

Answer:

This is not a straightforward question to answer.

Assuming there are no contractual restrictions prohi­biting you, and ignoring aspects of unlawful competition, the question boils down to whether your fiduciary duty as a director of your current company prohibits you from opening a competing business.

A director of a company is relied on for his expertise and experience in business. As such, directors have a fiduciary duty towards the company that in essence demands that a director be loyal to the company and act in good faith and in the best interest of the company when conducting business on behalf of the company.

Such a duty includes avoi­ding conflicts of interest and the promotion of self-interest. These duties were embodied in our common law, but are now given statutory force through Section 76 of the Companies Act 71 of 2008.

This section addresses the position of a director, but leaves it open whether these duties can be extended to a director that has resigned. Our courts, on interpreting this section, have deemed it appropriate to under certain circumstances extend the fiduciary obligation of a direc­tor beyond his resignation.

The reason that our courts are open to the extension of the obligation beyond resignation is an understanding that if not extended, a director could with impunity exploit opportunities for himself after merely having resigned, at the expense of the company he was a director at.

The point remains that resignation from the position of director does not, in itself, breach the fiduciary relationship between the resigning director and the company. It is the reasons (of which there could be several) behind the resignation, which may result in the fiduciary duties being considered to have been extended post-resignation and consequently breached by certain conduct.

Our courts have also held that the setting up of a competing business after resig­nation is not in itself unlawful. It is only when a resigning director takes advantage of his position in the company and divests interests or oppor­tunities of the company to the new competing business which he is desirous to start, that things get tricky and a potential breach of fiduciary duty must be considered.

In your case, it does not sound like you are contractually restricted from setting up a competing business.

Additionally, as stated, the setting up of a competing business is also not in itself unlawful.

Where it becomes more complex, is whether you would be taking advantage of your current position as a director to create opportunities for your new business.

It is advisable to obtain legal assistance to help you navigate the setting up of your compe­ting business to ensure that no fiduciary duty is breached and that you start your new ­business on a good footing.

– Candice Reynders, ­associate, Phatshoane Henney Attorneys

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