For employees who think a fiduciary duty – a legal duty to act solely in another party’s interests – exists only between company directors and the company, this is not so, writes Gareth Cremen, partner at Ramsay Webber Attorneys.
A fiduciary duty can exist between a company and its non-directors – and if the fiduciary duty is breached, it can result in legal consequences for the non-director. The Companies Act 71 of 2008 comes into this – another reminder of the importance of understanding the Act and all its requirements and consequences.
A case that highlights this is that of Phillips v Fieldstone Africa and another 2004(3) SA 465 (SCA), which dealt with the fiduciary duties of employees in relation to their employer, in cases where the employee is not a director of the employer.
This shows the importance of understanding that the fiduciary duties of directors also extends to non-directors.
The main issue in this case concerned the liability of an employee to account to his employer about secret profits made by the employee out of an opportunity arising in the course of his employment.
Briefly, here are the facts:
• The Appellant was an employee of Fieldstone Private Capital Group, which subsequently established Fieldstone Africa (Pty) Ltd to render services on their behalf in South Africa.
• In June 2007 the Respondent and Safika Wireless entered into an agreement whereby the Respondent would assist Safika in raising capital to finance the acquisition of all, or part of, the ordinary share of MTN Holdings (Pty) Ltd.
• The Appellant was duly seconded to the Respondent for purposes of carrying out the above mentioned agreement.
• During August 1997, the Appellant acquired 10% of the shareholding in Safika for an amount of R 732 000, and on condition that he took up full-time employment with Safika.
• In August 2000, the Respondent issued summons in which they claimed from the appellant the difference between what he sold the shares for and the amount he paid for the shares. They alleged that the appellant had acted as their agent in dealing with Safika; that he owed them duties of loyalty and good faith; and that he had breached those duties in acquiring the shares and failing to account to them.
The court held that whether the appellant was under a fiduciary duty to the respondents in relation to the offer and acquisition of shares depended upon the facts, and that each matter had to be decided on its own set of facts.
In deciding whether or not the appellant stood in a fiduciary relationship to the respondent, the court referred to the judgment of Frame v Smith (1987) 2 SCR 99 (SCC), which suggests that relationships in which a fiduciary obligation has been imposed are marked by three characteristics, namely:
• Scope for the exercise of some discretion or power;
• That power or discretion can be used unilaterally so as to effect the beneficiary’s legal or practical interests; and
• A peculiar vulnerability to the exercise of that discretion or power.
The court eventually held that the appellant stood in a fiduciary relationship towards the respondent and that he breached such duty by failing to inform the respondent of the offer of the shares, or the terms thereof. The appellant succumbed to a potential conflict of interest between his duty to his employer and his self-interest.
Under the Companies Act 71 of 2008, the fiduciary duties that apply to directors are extended to apply to prescribed officers of the company as well.
“Prescribed officers” are described as a person who, despite not being a director of a particular company, is a “prescribed officer” of the company for all purposes of the Act if that person exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the company or regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company.
The Courts will decide on a case-by-case basis whether or not a person can be termed a “prescribed officer”. Irrespective of the title the person holds in the company, he or she may still be deemed to be a prescribed officer and the same duties that apply in respect of directors can also be applied to them.
Therefore, it does not matter what an employee’s title is in the company, one needs look at his or her duties and functions in relation to their employment to ascertain whether or not the same fiduciary duties that applies to directors can apply to said employee.
Taking all this into account, it is clear that a fiduciary duty can exist between a company and its non-directors and that if the fiduciary duty is breached it can result in legal consequences for the non-director.
Applying the Companies Act and the test as set out in the case of Phillips v Fieldstone Africa and another 2004(3) SA 465 (SCA) showed that fiduciary duties that apply to directors can apply to non-directors where they perform certain functions within a company, and legal consequences for breach of these duties can apply.
For more information, contact Ramsay Webber on (011) 778 0600 or email@example.com.