The business judgment rule : its application in South Africa

Abstract

The business judgment rule is used by American courts to establish whether a director has fulfilled his duty of care. It is based on the concept that the directors are legally empowered to manage a corporation's affairs, and the courts accordingly do not interfere with the exercise of those powers unless a board's action is tainted by fraud or self-interest. The courts will not review a business decision where, acting in good faith, the board has truly applied itself to making an informed decision. In certain circumstances, where self-interest on the part of directors is more likely to be a factor, a stricter test is applied. The business judgment rule is implicit in the judgments of English and South African courts and the King Committee has recommended its formal recognition in South Africa. The need for such formal recognition and stricter interpretation of the duty of care and skill discussed.