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Does the Directors' Fiduciary Duty to Act in the Best Interests of the Company Undermine Other Stakeholders' Interests?

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Does the Directors' Fiduciary Duty to Act in the Best Interests of the Company Undermine Other Stakeholders' Interests? Does the directors’ fiduciary duty to act in the best interests of the company undermine other stakeholders’ interests? A comparative assessment of corporate sustainability By HAMADZIRIPI FRIEDRICH 201104322 A Dissertation submitted in fulfilment of the requirements for the MASTER OF LAWS DEGREE At the Nelson R. Mandela School of Law, University of Fort Hare SUPERVISOR: PROFESSOR PATRICK C. OSODE 2016 DECLARATION I, Friedrich Hamadziripi, do hereby declare that except for the references indicated as such in the text, and any other help as I have acknowledged, this dissertation is wholly a product of my own research, opinion, analysis and industry and has not been submitted in fulfilment of the requirements for degree purposes or academic examination towards any qualification at any other University. ………………………………………….. Friedrich Hamadziripi Date: East London i ACKNOWLEDGEMENTS My sincere gratitude is extended to my supervisor and promoter Professor Patrick C. Osode for his treasured mentorship and guidance. I should especially thank him for his insightful comments, suggestions and unwavering support during the course of the research which has resulted in this dissertation. I also wish to appreciate Dr. Arthur van Coller and Dr. Tapiwa V. Warikandwa for their encouragment. I further want to thank them for their morale support and belief in my abilities. Furthermore, I want to thank Mr. Samuel Ncoyini of the University of Fort Hare East London Campus Library for his assistance in training me on how to find my way through various online databases. I should thank the University of Fort Hare’s Law Faculty for organising research seminars, the Govan Mbeki Research and Development Centre (GMRDC) for various post- graduate workshops, especially Mr. William Awusi for his presentation on dissertation formatting and Prof Erik Hofstee’s seminar on “Constructing a Good Dissertation”. The financial assistance of the Zimbabwean Government Presidential Scholarship is hereby acknowledged. Finally, I am deeply thankful to my loving family that was so much patient and supported me throughout this research project. The completion of this thesis would not have been possible without them. Thank you Mom Beauty, Fletcher Hamadziripi, Phillip and Munyaradzi Ngonisa, Tawanda Kazingizi, Loydah Zvinairo, Ms F Usayi and Mrs Chidhakwa. I also need to single out my Pastors- Bright and Rejoyce Samundombe, Linos and Betty Masukuta and Godknows and Sarudzai Mupanga for their prayers and morale support. None of this would have been possible without the Almighty God’s grace and the talents He gave me. I thank Him from the bottom of my heart. ii DEDICATION To my loving and hardworking mother Beauty Magaso whom God has allowed to see the fruit of all her labour for me day and night. May the God of Ezekiel bless you with many more years full of joy and health. iii ACRONYMS AND ABBREVIATIONS ABBREVIATION MEANING ADR Alternative Dispute Resolution AIG American International Group Incorporated ALI American Law Institute ASIC Australian Securities and Investment Commission BBBEE Broad-Based Black Economic Empowerment BCCA British Columbia Companies Act BCE Bell Canada Enterprises CBCA Canada Business Corporations Act 1985 CC Constitutional Court CEO Chief Executive Officer CFO Chief Finance Officer CIPC Companies and Intellectual Property Commission CJ Chief Justice CLER Corporate Law Economic Reform Bill CLRSG Company Law Review Steering Group CSR Corporate Social Responsibility DTI Department of Trade and Industry ESV Enlightened Shareholder Value EU European Union FNB First National Bank iv HIH Health International Holdings IDZ Industrial Development Zone IFCOR International Fishing Corporation (Pty) Ltd JA Judge of Appeal JSE Johannesburg Securities Exchange LBO Leveraged buyout LLD Doctor of Laws LRA Labour Relations Act 66 of 1995 MAF MacAndrews & Forbes Group Incorporated MNC Multi-National Company MTN Mobile Telephone Network NEMA National Environmental Management Act NGO Non-governmental Organisation PAIA Promotion of Access to Information Act Para Paragraph SA South Africa SARB South African Reserve Bank SARS South African Revenue Services SCA Supreme Court of Appeal SEC Securities and Exchange Commission UK United Kingdom UNISA University of South Africa v USA United States of America vi ABSTRACT This study sets out to answer the question whether compliance with the directors’ fiduciary duty to act in the best interests of the company undermines other stakeholders’ interests and corporate sustainability. It adopts a comparative approach whereby the South African legal system is compared to that of the United Kingdom, Canada, and the United States of America where corporate scandals in the last two decades resulted in the collapse of some large companies. Qualitative research methods namely the critical and evaluation, comparative and legal historical approaches are employed. The adoption of the comparative and historical approach to this study makes it significant for company law literature. The study is hinged on two company law principles. The first one is that a company is a juristic and fictitious person. The second one is the separation of ownership and control of a company. To effectively understand how the directors’ fiduciary duty to act in the best interests of the company has evolved over time, a historical overview of fiduciary obligations is presented. Four different views about the origins of fiduciary obligations are examined. It is submitted that the old English case of Keech v Sandford1 and the South Sea Company Bubble are very significant to the development of fiduciary obligations and their assimilation into company law. Thereafter, a discussion on the nature and scope of the directors’ duty in question is presented. An analysis of the relationship between directors and the company and how rights and duties between the two legal subjects arise is also undertaken. It will be shown that the directors’ fiduciary duty to act in the best interests of the company is broken down into a number of mandatory rules. After outlining some selected company stakeholders, an argument is presented on who the legitimate beneficiaries of directors’ fiduciary obligations should be. Further, the study provides an explanation of the concept of ‘the best interests of a company’ before addressing the tension between the pursuit of sustainability and the best interests of the company. An important question in the context of this study is how can directors’ fiduciary obligations be enforced? Identifying that there is public and private enforcement of fiduciary obligations, this study focusses on private enforcement which mainly consists of judicial and administrative remedies. Judicial remedies especially the derivative action and oppression remedies will be 1 1726 25 ER 223 (Ch). vii examined. A greater part of the discussion will dwell heavily on whether the available remedies are relevant and/or effective in protecting various stakeholders’ interests. Due to the nature of the office of director, it can be contended that directors should not be held liable for every decision they make. As such, American courts have come up with what has come to be known as the business judgment rule. This rule protects directors from civil liability if they act in good faith, with due care, without any personal interest and within the director’s authority. It will be shown that the rule manifests or operates either as an abstention doctrine, as a standard of liability or as an immunity doctrine. As an abstention or standard of liability doctrine, the rule requires the plaintiff to rebut a presumption that directors acted in good faith in the best interests of the company. As an immunity doctrine, the rule requires the director to prove that s/he qualifies for the immunity. Key terms Company directors, history, corporate scandals, fiduciary duty; best interests of a company, company stakeholders, corporate sustainability, derivative action, oppression remedies, business judgment rule viii TABLE OF CONTENTS DECLARATION ……………………………………………….i ACKNOWLEDGEMENTS …………………………………………...ii DEDICATION ……………………………………………………..iii ACRONYMS AND ABBREVIATIONS ………………………………....iv ABSTRACT ………………………………………………. ….....vii TABLE OF CONTENTS ………………………………………ix CHAPTER 1 Introduction to the study 1 1 INTRODUCTORY BACKGROUND ……………………… 1 1 2 RESEARCH PROBLEM ……………………………… 6 1 3 RESEARCH OBJECTIVES ……………………………… 7 1 4 RESEARCH QUESTIONS ……………………………… 7 1 5 SIGNIFICANCE OF THE STUDY …………………….... 8 1 6 DELIMITATION OF THE STUDY ……………………… 9 1 7 RESEARCH METHODOLOGY …………………………….... 10 1 8 STRUCTURE OF THE STUDY ……………………… 13 1 9 REFERENCING ……………………………………………… 15 CHAPTER 2 History of directors’ fiduciary duty to act in the best interests of the company 2 1 INTRODUCTION ………………………………………. 16 2 2 HISTORICAL DEVELOPMENT …………………………….… 17 ix 2 3 THE CONTRIBUTION OF KEECH V SANDFORD AND THE SOUTH SEA COMPANY BUBBLE ……………… 24 2 3 1 Keech v Sandford ……………………………………… 24 2 3 2 The South Sea Company Bubble …………………….... 28 2 4 CLASSIFICATION OF FIDUCIARIES ……………………… 30 2 4 1 Fiduciaries as property holders ……………………………… 31 2 4 2 Fiduciaries as representatives ……………………………… 32 2 4 3 Life tenants and the doctrine of undue influence ……………… 33 2 5 THE APPLICATION OF FIDUCIARY LAW TO COMPANIES …… 34 2 5 1 Directors as trustees ……………………………………… 35 2 5 2 Directors as agents …………………………………….... 36 2 5 3 Directors as managing partners ……………………………… 38 2 5 4 Directors as fiduciaries sui generis ……………………………… 38 2 6 THEORETICAL FRAMEWORK ………………………………
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