The Nature and Evolution of the Business Judgment Rule and its Transplantation to South Africa under the Companies Act of 2008

  • Patrick C Osode
  • Friedrich Hamadziripi
  • LLD Candidate, Nelson R Mandela School of Law, University...

The business judgment rule is a judge-made company law doctrine developed by American courts to protect company directors from civil liability for the decisions they make on behalf of the company. Essentially, the rule operates as a mechanism that shields directors from civil liability originating from corporate transactions concluded in good faith and upon an informed basis, for the best interests of the company, in circumstances where the decision-maker had no personal interest in the outcome. This article argues that the business judgment rule is a sound doctrine as it, inter alia, encourages entrepreneurial risk taking by company directors, protects them from hindsight bias and preserves corporate decision-making as the directors’ prerogative. The rule manifests either as an abstention doctrine, standard of liability doctrine or as an immunity doctrine. It remains largely uncodified in those jurisdictions in which the doctrine has been adopted with the notable exceptions of Australia and South Africa. The focus of this article is the development, adoption and transplantation of the rule in the USA, Canada and South Africa, which has for the first time in its legal history, enacted the rule in its Companies Act 71 of 2008. Unlike the other manifestations of the business judgment rule, if a director claims immunity, s/he bears the burden of proving that s/he is entitled to such immunity. It is therefore recommended that South African courts should embrace the immunity version of the business judgment rule as it is the one most aligned to the purposes of the Companies Act.

Speculum Juris Volume 33
Issue : 
Issue 1
  • 2019