ARTICLE 3

The Business Judgement Rule Explained

A Practical Guide for Directors of South African Companies

By Leon Terblanche, LL.M

“A director will have satisfied the obligations of subsection (3)(b) and (c) if …”
— section 76(4), Companies Act 71 of 2008

This article provides general governance guidance. It is not a substitute for legal advice on the facts of a particular matter.

Key Takeaways

• What is the Business Judgement Rule in South Africa? Section 76(4) of the Companies Act 71 of 2008 provides a statutory safe harbour for directors who make informed decisions, manage personal financial interests correctly, and rationally believe that the decision is in the company’s best interests.

• Does it protect every Board decision? No. It does not protect dishonesty, an improper purpose, uninformed decision-making, undisclosed conflicts, reckless trading or a failure to exercise independent judgement.

• What must a director do before voting? Become reasonably informed, identify and disclose any personal financial interest under section 75, consider material risks and alternatives, and ensure that there is a rational basis for the decision.

• Can a director rely on an accountant, attorney or manager? Yes, but only where reliance is permitted by sections 76(4)(a) and 76(5), the person relied upon is reasonably believed to be reliable and competent, and the director still applies an independent mind.

• Can directors be personally liable for a bad outcome? A bad commercial result does not by itself establish liability. Personal liability may arise under section 77 when a director breaches a fiduciary duty, the duty of care, skill and diligence, or other specified provisions and the company suffers loss.

• Why do Board minutes matter? Contemporaneous minutes can demonstrate what information was considered, what risks were discussed, whether conflicts were disclosed and why the Board believed its decision served the company’s interests.

• How does King V support the rule? King V Principles 1, 3, 8 and 9 reinforce ethical and effective leadership, strategy and sustainable value creation, risk governance and compliance. These practices support—but do not replace—the statutory duties in the Companies Act.

Introduction

A director is often required to make an important decision without knowing exactly how events will unfold. A new product may fail, a major customer may leave, a proposed acquisition may underperform, or an investment made on sound assumptions may be overtaken by an economic shock. The question that naturally follows is whether directors can be held personally liable simply because the decision produced a poor result.

South African company law does not require directors to predict the future or guarantee commercial success. It does, however, require them to follow a responsible decision-making process. The statutory Business Judgement Rule in section 76(4) of the Companies Act 71 of 2008 recognises that business necessarily involves risk and that courts should not use hindsight to punish directors who made an informed and rational decision in the company’s interests.

The protection is not automatic. It is earned through preparation, independence, disclosure and rational judgement. Directors who arrive at a meeting unprepared, accept management’s recommendation without enquiry, conceal a personal interest or ignore obvious warning signs cannot expect section 76(4) to rescue them later.

This distinction is particularly important in small and medium-sized enterprises, family companies and start-ups. In these businesses, the shareholders, directors and senior managers are often the same people. Decisions may be made informally, Board packs may be brief or non-existent, and the accountant may be treated as the person who “sorts out” compliance. None of those features removes the director’s statutory responsibilities.

1. The Legal Framework

1.1 Section 76(3): the starting point

Section 76(3) provides that a director, when acting in that capacity, must exercise the powers and perform the functions of a director:

• in good faith and for a proper purpose — section 76(3)(a);
• in the best interests of the company — section 76(3)(b); and
• with the degree of care, skill and diligence reasonably expected of a person carrying out the same functions, while also taking account of that director’s own knowledge, skill and experience — section 76(3)(c).

The standard in section 76(3)(c) combines an objective and a subjective element. A director cannot fall below the standard reasonably expected of someone performing the same functions, but a director who has specialist knowledge or experience may be judged against that higher personal capability. An accountant serving as a director, for example, may be expected to recognise financial warning signs that a director without financial training might reasonably miss.

1.2 Section 76(4): a safe harbour, not blanket immunity

Section 76(4) states that, in relation to a particular matter, a director will have satisfied the obligations in sections 76(3)(b) and 76(3)(c) if the statutory conditions are met. This wording is important. The rule provides a safe harbour in relation to the duty to act in the company’s best interests and the duty of care, skill and diligence. It does not expressly excuse a failure to act in good faith and for a proper purpose under section 76(3)(a).

The Business Judgement Rule is therefore best understood as a statutory standard for reviewing the process by which a director reached or supported a decision. It is not a general exemption from directors’ duties, and it does not legitimise an improper purpose merely because the director gathered information before acting.

1.3 Section 75: personal financial interests

Section 75 regulates a director’s personal financial interests. Where the section applies, a director must disclose the nature and extent of the interest and must generally leave the meeting after making the disclosure, without participating in the consideration or decision. Section 76(4) expressly links the safe harbour to the absence of a material personal financial interest or proper compliance with section 75.

For a small company, conflicts are common rather than exceptional. A director may own the premises leased to the company, have an interest in a supplier, employ a family member or sit on the Board of another business competing for the same opportunity. The existence of an interest does not always prohibit the transaction. Concealment, informal treatment or participation contrary to section 75 is the real danger.

1.4 Section 77: when liability may follow

Section 77 sets out circumstances in which a director may be personally liable. Under section 77(2), liability for breach of fiduciary duties is determined according to common-law principles where the company suffers loss because of a breach of sections 75, 76(2), 76(3)(a) or 76(3)(b). A breach of the duty of care, skill and diligence in section 76(3)(c) may attract liability in accordance with the common-law principles of delict.

Section 77 primarily regulates liability owed to the company for loss suffered by the company. Recent decisions have emphasised that it is not a free-standing remedy for every creditor or third party. In Efficient Lubrication (Pty) Ltd v Small Enterprise Finance Agency SOC Ltd [2025] ZAGPPHC 73 and Maharaj v Strate (Pty) Ltd [2023] ZAGPJHC 1095, the courts confirmed the importance of identifying the proper plaintiff and the precise statutory basis for liability.

This does not mean that directors can never incur liability to outsiders. Depending on the facts, liability may arise under another statutory provision, through a personal delict, by contract, or in exceptional circumstances through disregard of separate corporate personality. The Supreme Court of Appeal in Venator Africa (Pty) Ltd v Watts 2024 (4) SA 539 (SCA) cautioned against using broad statutory provisions to bypass the carefully structured liability regime of the Companies Act.

2. The Four Practical Requirements of the Business Judgement Rule

2.1 Take reasonably diligent steps to become informed

The first condition is procedural: the director must take reasonably diligent steps to become informed about the matter. The Act does not demand perfect knowledge. What is reasonable depends on the importance, complexity, urgency and risk of the decision, as well as the director’s role.

For routine expenditure, a short management explanation may be enough. For a material loan, acquisition, long-term lease, related-party transaction or expansion into a new market, the Board should ordinarily expect financial forecasts, commercial assumptions, legal implications, funding terms, material risks and credible alternatives.

Reasonable diligence usually involves reading the papers before the meeting, identifying gaps, asking questions, requesting additional information where necessary and allowing sufficient time for proper consideration. A director should not allow urgency manufactured by management or another shareholder to replace judgement.

2.2 Have no disqualifying material personal financial interest—or comply with section 75

The second condition requires the director either to have no material personal financial interest in the matter and no reasonable basis for knowing that a related person has such an interest, or to comply with section 75. A director who benefits personally from a transaction cannot simply insist that the transaction is nevertheless good for the company and remain in the room.

In De Wit NO v Smit [2025] ZAWCHC 348, directors caused substantial loans to be advanced on terms favourable to a trust of which they were beneficiaries. The Court held that they acted in their personal interests rather than the company’s interests and specifically identified non-compliance with the conflict and Business Judgement Rule requirements. The practical lesson is clear: disclosure and recusal are not administrative formalities; they are central to the integrity of the decision.

2.3 Make or support an actual decision

Section 76(4) protects a director who made a decision, or supported a decision of a Board or committee, regarding the particular matter. It is not designed to protect passivity. A director who does nothing while a company drifts into difficulty cannot convert inaction into a protected business judgement.

Pillay v Stokes [2025] ZAGPJHC 733 reiterated that non-executive status does not remove a director’s legal responsibilities. The judgment, drawing on the principles applied in OUTA v Myeni, stressed that directors must exercise active oversight and cannot avoid responsibility merely because they were not involved in daily operations.

2.4 Have a rational basis for believing—and actually believe—that the decision is in the company’s best interests

The final condition contains both an objective and a subjective component. The director must actually believe that the decision is in the company’s best interests, and there must be a rational basis for that belief. The Court does not ask whether it would have selected the same option. It asks whether the belief was honestly held and rationally connected to the information and considerations before the director.

A rational basis is not a guarantee that the decision is wise, profitable or ultimately successful. It requires more than instinct, loyalty to a dominant shareholder or untested optimism. The minutes and supporting material should reveal a logical connection between the company’s interests, the risks considered and the decision reached.

3. Reliance on Accountants, Attorneys, Employees and Experts

Directors of SMEs frequently rely on accountants, attorneys, tax practitioners, engineers and senior employees. The Companies Act recognises this reality. Section 76(5), read with section 76(4)(a), permits reliance on specified persons where the director reasonably believes that person to be reliable and competent in relation to the matter.

Reliance is not abdication. The Board must still understand the advice sufficiently to make its own decision, ask questions where assumptions are unclear and consider whether the adviser’s mandate covers the issue before the Board. An accountant may prepare cash-flow forecasts, but the directors must decide whether the underlying assumptions are credible. An attorney may explain contractual risk, but the Board must determine whether the commercial exposure is acceptable.

Ex Parte Gasa [2026] ZAKZPHC 33 reaffirmed that directors’ duties remain grounded in good faith, proper purpose, the company’s interests and due care, while recognising the statutory right to rely on appropriate assistance under section 76(5). The practical message is that reasonable reliance can support a decision; blind reliance cannot replace it.

4. A Practical SME Example

Consider a family-owned manufacturing company with an annual turnover of R18 million. Management proposes purchasing an automated production line costing R6 million. The equipment could improve margins, but the business would need a five-year loan and would be exposed if its largest customer reduced orders.

A responsible Board process would include:

• a written proposal explaining the strategic rationale;
• cash-flow forecasts showing base, optimistic and downside scenarios;
• the finance terms and security required by the lender;
• technical confirmation that the equipment is suitable and maintainable;
• an assessment of customer concentration and expected demand;
• consideration of leasing, outsourcing or postponement as alternatives;
• disclosure of any director’s interest in the supplier or financier; and
• minutes recording the questions asked, risks considered and reasons for the decision.

Assume the Board approves the purchase after this process, but a recession causes the major customer to close and the investment fails. The loss does not, without more, prove that the directors breached their duties. Their strongest protection is evidence that they followed the requirements of section 76(4) at the time.

Now change the facts. The directors approve the purchase after a brief verbal presentation, do not ask for cash-flow forecasts, fail to disclose that one director receives commission from the supplier and record only that “the proposal was approved”. That process is unlikely to attract the same protection, even if the equipment initially performs well.

5. King V and Responsible Decision-Making

King V superseded King IV and applies to financial years beginning on or after 1 January 2026. It is a principles-based governance code rather than a replacement for the Companies Act. Its value lies in showing how a governing body can organise its conduct to achieve ethical culture, sustainable performance and value creation, effective control and prudent risk management, and legitimacy.

Four King V principles are particularly relevant to the Business Judgement Rule:

King V principle	Practical relevance
Principle 1 – Leadership	The governing body should lead ethically and effectively. Integrity, competence, responsibility, accountability, fairness and transparency support honest and independent judgement.
Principle 3 – Strategy, performance and sustainable value creation	The Board should ensure that purpose, strategy and the business model support sustainable value. Significant decisions should be connected to an approved strategy rather than made opportunistically.
Principle 8 – Risk	The governing body should govern risk in a way that enables the organisation to sustain and optimise its strategy and objectives. Risk consideration is part of the decision, not a compliance exercise performed afterwards.
Principle 9 – Compliance	The governing body should govern compliance with applicable laws and adopted standards. A decision that ignores legal constraints is unlikely to represent sound judgement.

For a small company, proportional application is essential. King V does not require a family business to imitate a listed company. It does require the Board to apply governance deliberately and explain how its arrangements are appropriate to the organisation’s size, risks, ownership and complexity.

6. Recent Case Law: What Directors Should Learn

6.1 De Wit NO v Smit [2025] ZAWCHC 348

The directors approved loans on unusually favourable terms to a trust from which they stood to benefit. The Court found breaches of sections 75 and 76, including the requirement linked to section 76(4). The decision illustrates that the Business Judgement Rule cannot protect a transaction distorted by personal interest.

Director’s lesson: disclose the interest before deliberation, follow section 75 precisely and allow disinterested directors to decide whether the transaction serves the company.

6.2 Pillay v Stokes [2025] ZAGPJHC 733

The Court considered director delinquency and reiterated that non-executive directors are subject to the same core legal duties as executive directors. A director cannot rely on title, limited operational involvement or deference to others as an answer to a failure of oversight.

Director’s lesson: every director must read, question and exercise independent judgement. “I left it to management” is not a governance process.

6.3 Core Logistix (Pty) Ltd v Rooks [2026] ZAGPJHC 199

The Court found serious breaches involving undisclosed conflicts, unauthorised transactions, secret profits and personal enrichment. Judgment was granted against the former managing director, who was also declared delinquent for seven years under section 162.

Director’s lesson: the Business Judgement Rule protects bona fide judgement, not misconduct dressed up as a commercial decision.

6.4 Ex Parte Gasa [2026] ZAKZPHC 33

The Court restated the statutory standards in section 76 and recognised the circumstances in which a director may rely on others under section 76(5).

Director’s lesson: professional advice is valuable evidence of a careful process, but the Board must select competent advisers, understand the advice and remain responsible for the final decision.

7. Common Misconceptions

“The rule protects every bad decision.” No. It protects directors who satisfy the statutory process. A careless, conflicted or irrational decision remains exposed.

“If the shareholders approved it, the directors are safe.” Not necessarily. Shareholder support does not automatically cure a breach of directors’ duties or non-compliance with section 75.

“My accountant recommended it.” Advice may support the process, but the director must still apply an independent mind and determine whether the decision is in the company’s interests.

“We do not need formal minutes because we are a small company.” The Companies Act does not create a lower standard of conduct for informal or family-owned companies. Good minutes are practical evidence of compliance.

“A non-executive director has less responsibility.” The core statutory duties apply to all directors. Functions and circumstances may affect how conduct is assessed, but the title does not remove the duty.

“If I abstain without explaining why, I cannot be liable.” Silence or unexplained abstention may not demonstrate proper oversight. A director should disclose conflicts, record concerns and ensure that dissent is accurately minuted where appropriate.

8. Best-Practice Decision Protocol for SME Boards

For every material decision, the Board should create a short decision record that answers seven questions:

• 1. What decision is required and why is it necessary now?
• 2. What information and professional advice did the Board receive?
• 3. What assumptions underpin the proposal?
• 4. What material risks and alternatives were considered?
• 5. Does any director or related person have a personal financial interest?
• 6. Why does the Board believe the decision is in the company’s best interests?
• 7. Who is responsible for implementation, monitoring and reporting back?

This need not become a bureaucratic exercise. A two-page Board paper and clear minutes may be adequate for many SME decisions. The objective is to create a disciplined process and a reliable contemporaneous record.

9. Director’s Checklist

• ☐ I understand the decision and my role in it.
• ☐ I have read the relevant papers and obtained additional information where necessary.
• ☐ I have considered the financial, legal, operational and reputational risks that are material to the decision.
• ☐ I have considered credible alternatives.
• ☐ I have disclosed any personal financial interest and complied with section 75.
• ☐ I am not acting merely at the instruction of a shareholder, family member or executive.
• ☐ I honestly believe that the decision is in the company’s best interests.
• ☐ There is a rational basis for that belief.
• ☐ The minutes will record the material information, discussion, conflicts and reasons.
• ☐ The Board has allocated responsibility for monitoring the outcome.

10. Frequently Asked Questions

Does the Business Judgement Rule apply to SMEs and start-ups?

Yes. Section 76 applies to directors of South African companies generally. The size of the company affects what is reasonable and proportionate, but it does not remove the duty.

Does the rule protect a decision that causes the company a loss?

Potentially. A loss is not proof of breach. The question is whether the director satisfied the statutory requirements at the time of the decision.

Can the Board approve a related-party transaction?

Possibly, but the interested director must comply with section 75 and the remaining decision-makers must determine whether the transaction is in the company’s interests and otherwise lawful.

Must directors obtain external advice for every major decision?

No. Advice is appropriate where the Board lacks the necessary expertise or the risk justifies specialist input. The requirement is reasonable diligence, not automatic outsourcing.

Are unsigned or brief minutes sufficient?

Minutes should be approved and retained in accordance with the Companies Act and the company’s governance arrangements. They should record enough substance to demonstrate the process without attempting to create a verbatim transcript.

Can a director rely on the rule when the company traded recklessly?

The rule does not excuse reckless trading prohibited by section 22 or the specific liabilities contemplated in section 77. Risk-taking and recklessness are not the same.

Who can sue under section 77?

Section 77 principally provides for recovery of loss suffered by the company. A creditor or other third party must identify a separate recognised basis for a personal claim against a director.

Conclusion

The Business Judgement Rule is not a reward for commercial success and it is not immunity for directors. It is a legal recognition that honest directors must be able to take responsible business risks without being judged solely by hindsight.

The protection in section 76(4) depends on conduct before and during the decision: becoming reasonably informed, dealing properly with personal financial interests, making or supporting an actual decision, and honestly holding a rational belief that the decision is in the company’s best interests. Those requirements are practical governance disciplines, not technical legal obstacles.

For SME directors, the lesson is simple. Read the information. Ask the uncomfortable question. Declare the conflict. Consider the downside. Record the reasons. Then decide.

A poor result may still follow. But where the Board can demonstrate a careful, independent and rational process, the Companies Act recognises the difference between a business risk that did not succeed and a failure of directors’ duties.

References

Legislation

• Companies Act 71 of 2008, particularly sections 22, 75, 76, 77 and 162.
• Companies Regulations, 2011, where applicable to company records and governance administration.

Corporate governance

• Institute of Directors in South Africa, King V Code on Corporate Governance for South Africa (2025), particularly Principles 1, 3, 8 and 9. King V supersedes King IV and is effective for financial years beginning on or after 1 January 2026.

Cases

• Core Logistix (Pty) Ltd v Rooks (8239/2018) [2026] ZAGPJHC 199.
• Ex Parte Gasa (10845/23P) [2026] ZAKZPHC 33.
• De Wit NO and Another v Smit and Others (19076/2024) [2025] ZAWCHC 348; [2025] 4 All SA 387 (WCC).
• Pillay v Stokes and Others (2022/22021) [2025] ZAGPJHC 733.
• Efficient Lubrication (Pty) Ltd and Others v Small Enterprise Finance Agency SOC Ltd (2023-092722) [2025] ZAGPPHC 73.
• Venator Africa (Pty) Ltd v Watts and Another (053/2023) [2024] ZASCA 60; 2024 (4) SA 539 (SCA).
• Maharaj v Strate (Pty) Ltd and Others (21/48263) [2023] ZAGPJHC 1095.

About the Author

Leon Terblanche, LL.M, is an international business law consultant with a particular interest in corporate governance, directors’ duties and practical compliance for South African companies and non-profit organisations.