Reflecting on the corporate opportunity rule in company law through a jurisprudential review of Modise v Tladi Holdings (Pty) Ltd 2020 4 All SA 670 (SCA)

3 1 Facts and issues

In the Modise case, the first and second appellants were Jacob Modise (Mr Modise) and Batsomi Power (Pty) (Batsomi). Mr Modise was one of Batsomi’s directors. The main issue was that Mr Modise who was also the respondent’s chairman, Tladi Holdings (Pty) Ltd (Tladi), had diverted a corporate opportunity belonging to Tladi to Batsomi.

The facts and events that gave rise to the issues are as follows. Mr Modise and Jonathan Sandler (Sandler) were the representatives and main witnesses of Batsomi and Tladi respectively.30 Sandler and Mr Modise once previously worked together for Johnnic Holdings Ltd (Johnnic). Sandler left in the year 2000 and subsequently acquired a 68 per cent shareholding in Muvoni Contracting Services (Pty) Ltd (Muvoni), a small electrical company through a family trust.31 Sandler’s interests extended to doing business with municipalities and State-Owned Enterprises and to successfully do so it was supposed to be compliant with the requirements of Broad-Based Black Economic Empowerment (BEE).32 As Muvoni gained goodwill in the market, its major electrical supplier was ARB Electrical Wholesalers (Pty) Ltd (ARB).33

In May 2004 ARB began negotiations to complete a BEE transaction through its Chief Executive Officer, Craig Robertson (Robertson), and Chief Financial Officer (CEO), Billy Neasham (Neasham).34 The two sought Sandler’s expertise and called Sandler for a meeting.35 However, at trial, Robertson and Neasham could not recall intricate details of the said meeting, due to the time period on record, which was 14 years.36 According to Sandler’s testimony, ARB was to allocate 30 per cent shareholding valued at R30 million to a potential BEE partner, a transaction that was to be funded by Nedbank.37 Against the backdrop of failures of other BEE ventures, the perception was that the deal negotiated between ARB and Umbani Mentis Electrical (Pty) Ltd (Umbani) would also fail.38 Sandler was prepared to then exploit the potential ARB opportunity, should the failure of the ARB-Umbani deal materialise.39 In August 2004 and unknown to Sandler, ARB managed to conclude a BEE deal with Umbani.40 Hence, Sandler continued to pursue opportunities for Muvoni in the electrical field and focused on researching ARB, Cullinan Industrial (Pty) Ltd (Cullinan) a manufacturer of ceramic insulators, and Weltex specialising in boring underneath roads.41

In September 2004, Sandler approached his previous business partner and Ghanaian businessman Sir Sam Jonah to discuss the said opportunities and create an electrical conglomerate.42 The conglomerate would include Muvoni, ARB (should the Umbani deal flop), and three other entities, Aberdare, Altech, and Cullinan.43 The two formed Empalane Investments (Pty) Ltd and invested R5 million each into the company. Empalane ultimately became a major shareholder of Tladi.44

It was common cause that Mr Modise was a well-established black businessman, BEE compliant, and potentially interested party. Sandler in his testimony alleged that on 7 November 2004, he approached Mr Modise with the same business idea that was presented to Jonah.45 The related opportunities included the ARB one and the 68 per cent share ownership by Muvoni in the Electrical Holding Company which would be named Tladi.46 This meeting was a bone of contention in the court a quo where Mr Modise refuted having discussed the ARB opportunity.47 However, after cross-examination in the trial court, it was correctly held that there were inconsistencies and some evidence of circled words in Mr Modise’s diary that directed the court to conclude that Mr Modise was actually at the meeting.48

Sandler testified that there were further meetings that Mr Modise and himself held, including meeting all potential BEE partners, like Jonah and his son.49 The initial agreements had a general and widely crafted “non-competition clause” because Sandler had explained that similar ventures existed between Sandler and Mr Modise.50 How the ventures between Mr Modise and Sandler worked was as follows: firstly, they would continue to pursue their own interests and secondly, they would pursue mutual interests. Such mutual interests included the ARB opportunity.51 In his testimony, Mr Modise contended that he understood that the parties could still compete.52

Mr Modise joined Muvoni’s Board on 1 December 2004 as a Director and was appointed as a Chairman of Tladi on 14 December 2004, during that same day a shareholder agreement was concluded.53 The parties to the agreement were Empalane, Batsomi Investment Holdings (BIH), Hapang Business Solutions, Lukhele, Bounomano, and Boomerang Trading 4 (Pty) Limited, which was later renamed Tladi.54 On 22 February 2005, Hapang withdrew from the agreement, and a new agreement was signed effective from 14 December 2004.55 Sandler testified that he spoke with Neasham after the coming into effect of the above agreements to inform him that Mr Modise was interested.56 It appears that it makes sense to assume that since Mr Modise was now the Chairman of Tladi and on the board of Muvoni, which had a business relationship with ARB, he would not have skipped the conversation about the ARB opportunity.57

On 27 October 2006, and in terms of the then section 220(3) of the Companies Act of 1973 (the old Companies Act) Tladi passed a resolution that Mr Modise breached his fiduciary duty and that he be removed from the board.58 In particular, Mr Modise denied having been introduced to any member of ARB including Neasham by Sandler at a meeting held at a Christmas party in 2004, although in Mr Modise’s testimony, there was an insinuation that he may have met Neasham (a board member of ARB).59 It was gathered that further discussions about the ARB opportunity were held at Tladi’s strategic meeting held in February 2005; at that time Sandler was unsure whether the ARB-Umbani deal was completed and Modise was tasked to pursue the ARB opportunity when it became available.60 In May 2005, about 9 months after the ARB-Umbani deal was sealed, their relationship started failing.61 Then ARB sought to terminate the relationship with Umbani in order to find another BEE partner.62 In doing so Robertson identified Mr Modise as an ideal candidate, hence, Robertson invited Mr Modise to a meeting with him and Alan Burke, ARB’s chairman.63 In the meeting, Burke offered Mr Modise and his company (Batsomi Power) a deal, the one that Sandler had earlier identified as a possible opportunity.64

Mr Modise did not disclose the said meeting to Tladi, even though Sandler asked about the progress of the ARB deal.65 In his testimony, Mr Modise stated that in the meeting ARB was not willing to sell shares to Sandler or companies he was associated with because he was white and Burke wanted to deal only with black persons.66 However, in his testimony, Mr Modise failed to give a plausible explanation of how the sale of ARB shares to Sandler arose at the meeting.67 The unreliability of Mr Modise’s testimony, inability to recall Robertson, and failure to call Burke to testify cemented Sandler’s testimony and decisions of both the court a quo and Supreme Court of Appeal to draw a negative inference on Mr Modise’s evidence.68 In December 2006, unbeknown to Sandler, Mr Modise, and Batsomi Power concluded a deal with ARB in which Batsomi acquired 26 per cent shareholding in ARB.69 Notably, Sandler only became aware of the ARB-Batsomi deal through the newspaper after which he sent a letter to Mr Modise to which Mr Modise did not respond. The omission by Mr Modise led to Tladi’s board convening a meeting that passed a resolution that Mr Modise had appropriated a corporate opportunity in favour of his company.70

Mr Modise contended that neither he personally nor Batsomi had the fiduciary duty to procure the ARB opportunity for Tladi.71 He argued that this was so because the corporate opportunity did not accrue by virtue of his association with Tladi.72 Further, he argued the opportunity was not available to Tladi because ARB clearly did not want to do a BEE deal with Sandler because he was white.73 Mr Modise further argued that he did not use confidential information in which either Sandler or Tladi had a proprietary interest.74

3 2 Supreme Court of Appeal: reasoning, rationales, and functional purposes of fiduciary duties

The court a quo and the Supreme Court of Appeal surveyed the fiduciary duties under common law and codification of these duties under section 76(3)(c) of the Companies Act, which specifically deals with the fiduciary duty of directors to exercise their powers in good faith and in the best interests of the company.75 I submit that the court a quo and Supreme Court of Appeal correctly reinforced that the director’s duty to act in good faith and in the best interests of a company as codified in section 76(3)(c) of the Companies Act is one of loyalty and is “unbending and inflexible” to ensure that it is not abused.76 In the same light, the Supreme Court of Appeal correctly upheld that the duty encompasses three rules, namely: directors may not place themselves in positions of conflicts of interest or duty (the no-conflict rule); make secret profits (no profit rule); or acquire economic opportunities for themselves (the corporate opportunity rule) that properly belonged to the company.77 These rules often overlap even though they are distinct.78

The court correctly confirmed the established position that the no-conflict rule does not require an actual conflict to be established; the test is that a reasonable person must think that there was a real sensible possibility of conflict.79 Similarly, the no-profit rule applies even if the company would not have made a profit, that is, even if a director has not profited at the company’s expense.80 In this context, profit is not confined to money but includes every advantage or gain obtained by the offending director.81 Similarly, the corporate opportunity rule is not confined to assets or property only but extends to confidential information used by directors for personal gain.82

The Supreme Court of Appeal referred to Da Silva v CH Chemicals (Pty) Ltd83 in confirming the prohibition of directors from expropriating the economic opportunities of a company for their personal interests.84 The principle is that directors must acquire economic opportunities for the benefit of the company and such “corporate opportunity” is equated to the “property” of the company.85 Should the corporate opportunity be acquired by a director for personal interests at the expense of the company, the company has a claim against the director in breach to disgorge any profits which the director may have made as a result of the breach and damages suffered thereby.86 The Supreme Court of Appeal correctly held that the company could not have taken up the opportunity but that such an opportunity should be properly categorised as a “corporate opportunity”.87 I confirm that the Supreme Court of Appeal correctly held that defining the scope of corporate opportunity is cumbersome; for instance, defining the extent of an opportunity that the company was “actively pursuing” or one “that falls within the company’s existing or prospective business activities;88 or which related to the operations of the company within the scope of its business” or falling within “its line of business”.89

Remarkably, the position in Da Silva, which was confirmed in the Modise case, is that it is irrelevant that the corporate opportunity would not have materialised.90 Regardless, the director remains under a duty to disclose its existence and information pertaining to the opportunity to the company.91 The inquiry would involve a close and careful examination of all the relevant circumstances, including the opportunity in question92 to determine whether the exploitation of the opportunity by the director, whether for the director’s own benefit or that of another, gave rise to a conflict between the director’s personal interests and those of the company which the director was then duty-bound to protect and advance.93

The Supreme Court of Appeal agreed with the court a quo that Sandler initially, and then Tladi, had actively pursued the ARB opportunity as one of the four opportunities open to the company.94 ARB was within Tladi’s business strategy and Mr Modise was tasked with pursuing the opportunity.95 The offer by Burke of the opportunity to Mr Modise in May 2005 created a conflict of interest between his interests and that of Tladi, and Mr Modise should have realised it.96 The Supreme Court of Appeal found not only that Mr Modise failed to disclose the ARB opportunity and concealed the fact that he was pursuing the opportunity for his personal interests.97 Even after concluding the deal with ARB in 2005, Mr Modise actively avoided Sandler,98 who only discovered the ARB-Batsomi deal through a media release.99 The Supreme Court of Appeal correctly confirmed that Mr Modise appropriated the ARB deal instead of acting in good faith and in Tladi’s best interests.100

Mr Modise’s two remaining contentions were that: First, it is argued that the opportunity did not arise by virtue of Modise’s association with Tladi and was in any event unavailable to Tladi.101 Secondly, the information pertaining to it was not confidential because Tladi had no proprietary interest in it.102 It is submitted that the Supreme Court of Appeal correctly upheld that it is irrelevant that the opportunity would not have materialised or for that matter, it had been initiated by ARB.103 Once Mr Modise was aware that Tladi was pursuing the opportunity, the fiduciary duty was triggered since when the opportunity became available he was a fiduciary to Tladi.104 Accordingly, the court was correct when it held that Mr Modise was not entitled to act in his personal interest without disclosing it or getting the approval of Tladi.105 When dealing with Mr Modise’s second contention the Supreme Court of Appeal reinforced the position that a breach of the corporate opportunity rule existed even if Tladi had no proprietary interest in the information. Accordingly, such a position as held by the Supreme Court of Appeal is correct in that there is no legal requirement in the corporate opportunity rule for a company to have a proprietary interest in any information.106 It is sufficient that the acquisition of the ARB opportunity was integral to Tladi’s business strategy for Mr Modise to be saddled with a fiduciary duty.107 Therefore, I submit that the Supreme Court of Appeal should be applauded for correctly concluding that in the given circumstances, Tladi established its claim against Mr Modise.108

3 3 Reflective assessment of the decision in the Modise case

Directors, especially those serving on multiple boards must be extra vigilant when presented with corporate opportunities during the subsistence of their directorship. The Modise case holds lessons for directors who sit on multiple boards requiring them to understand the rules surrounding handling corporate opportunities before expropriating one. The wisdom behind the difficulty to serve two different boards is well-established and its roots can be traced back to more than a thousand years ago. For example, the difficulty to serve two boards can be likened to the analogy given in the King James Bible, by Jesus Christ of Nazareth himself on one occasion where he pointed out that “No man may serve two masters; for either he will hate one and love the other or else he will hold to one and despise the other”.109 Directors who sit on different boards of companies competing in the same market face extreme difficulties in pursuing opportunities because the pursuit of the same will normally be tainted with conflicts of interest. Therefore, section 75(3) of the Companies Act could be a catch-all provision that requires directors in the named circumstances to recuse themselves and in other scenarios disclose such conflicts of interest.

This article argues that once a director accepts that position in a company the fiduciary duty is triggered, thus, any personal interest should be expressly disclosed and authorised; otherwise, every act should be in the best interests of the company. The rules of the corporate opportunity ought to be stringent to ensure that anyone who signs up as a company director is compliant. Accordingly, this article concurs with the straight-jacket nature of the judgment in the Modise case because it does not allow directors to misrepresent expropriated corporate opportunities as opportunities that were not obtained by virtue of their position.

The decisions of both the court a quo and the Supreme Court of Appeal are jurisprudentially significant in the context of fiduciary duties and in particular the corporate opportunity rule because they further clarify the position of directors when faced with potential conflicts of interest.110 This article further agrees with the decisions of the court a quo and the Supreme Court of Appeal because by holding that it is irrelevant that the opportunity would not have materialised because ARB initiated it, the courts closed the gap where directors at fault may find an escape hatch.111 The court a quo and the Supreme Court of Appeal were correct when they held that the moment a director becomes aware that the company is or was pursuing the opportunity, the fiduciary duty is automatically triggered.112

The court a quo and the Supreme Court of Appeal also reinforced the principle that there is no legal requirement in the corporate opportunity rule for a company to have a proprietary interest in any information.113 Such a decision ensures that directors are on the lookout for the company and acting in the best interests of the company whenever faced with any corporate opportunity.114 In this case, the court a quo and the Supreme Court of Appeal correctly held that Mr Modise was under a fiduciary duty to Tladi because he was a director and he unlawfully expropriated a corporate opportunity that belonged to the company. Further, the courts confirmed the legal position that requires directors in the position of Mr Modise to disclose to the company or seek express permission from the company should they be faced with potential conflicts of interest in the pursuit of corporate opportunities.115

This article supports the reasoning of both the court a quo and the Supreme Court of Appeal which confirm and advance one of the broader objectives of the Companies Act on directors’ duties, namely, “to promote the best interests of the company”.116 The Supreme Court of Appeal and the court a quo decisions are in line with the statutory objectives under section 158 of the Act, which provides that courts ought to interpret the law in a manner that improves the realisation and enjoyment of the rights enshrined in the Act.117 I submit that by looking beyond South African borders for guidance in corporate opportunity, the court a quo and the Supreme Court of Appeal committed themselves to developing the law within the context of corporate opportunity rule. Accordingly, the judgments by the court a quo and the Supreme Court of Appeal are in accordance with the law since both the Constitution and the Companies Act encourage the courts to look into foreign law for guidance and development of the laws.118 The sanction of disgorgement of ill-gotten profits is best suited for circumstances where directors unlawfully appropriated the corporate opportunity belonging to the company.