Legal Aspects of the Current Framework Regulating Directors’ and Senior Managers’ Indemnification and Directors' and Officers' Liability Insurance in South Africa

Abstract

There is a measure of controversy and tension as to the conflicting imperative to shield directors and officers from personal liability for damages in the event of bona fide negligent breaches of their duties and the ever-increasing need to hold those in effective management of corporations accountable, especially considering recent local and global corporate failures. In regulating this position, the legislature in section 78(2) of the Companies Act 71 of 2008 has retained a framework introduced by the Companies Act 23 of 1939. The effect of these provisions, which have survived the recent reform of corporate laws, is that they further entrenched the prohibition against exemption clauses in articles of a company or any agreement which purports to exempt directors and senior managers against liability which, in the absence of such provision, would by law attach to the director or officer in respect of any negligence, default, breach of duty or breach of trust. The research is interested in the convergence or interplay between ethical principles, such as good faith and the law. While the law is clear on the standard of care expected of directors and senior managers and the liability consequences that follow for violations of this duty the question remains whether it also provides adequate protection to directors and senior managers that are prepared to take aggressive good faith risks aimed at maximising value for all relevant stakeholders including the company. The current enforcement framework permits indemnification through liability insurance and the business judgment rule as the main protection available to directors and senior managers for certain permissible faults or breaches of applicable standards. The rationale for the continued prohibition of exemption clauses is unclear. The findings reveal that the current framework does not provide adequate protection to directors and senior managers when they are compared with their counterparts in jurisdictions that make provision for both the inclusion of exemption clauses and indemnification through liability insurance. It is recommended that it is an opportune moment for policy makers to revisit the continued blanket prohibition against exculpatory clauses and to develop methods further that protect directors and senior managers from catastrophic personal financial liability for honest errors of judgment. Re-envisioning the response and model to the director or insurance crisis that may ensue if fiduciaries are held liable and insurance and the business judgment rule are found to be insufficient. These methods will be central to the objectives of transforming and expanding the pool of talented individuals willing to serve in corporate positions on the boards of South African companies.