Can a director establish his own competing company?

“I am currently a director in a printing company. I find that the owners are very conservative and are not interested in my ideas for expanding the company. I’ve now started thinking that I should start my own company, which will probably compete directly with my current company. I don’t have a restraint of trade, but I am worried that as a director I could get into trouble if I do this. Can I start my own company?”

This is not a straightforward question to answer. Assuming there are no contractual restrictions prohibiting you and ignoring aspects of unlawful competition, the question boils down to whether your fiduciary duty as a director of your current company, prohibits you from opening a competing business.

A director of a company is relied on for his expertise and experience in the business of the company. As such directors have a fiduciary duty towards the company that in essence demands that a director be loyal to the company and act in good faith and in the best interest of the company when conducting business on behalf of the company. Such a duty includes avoiding conflicts of interest and the promotion of self-interest. These duties were embodied in our common law, but are now given statutory force through section 76 of the Companies Act 71 of 2008.

This section addresses the position of a director, but leaves it open whether these duties can be extended to a director that has resigned. Our courts, on interpreting this section have deemed it appropriate to in certain circumstances extend the fiduciary obligation of a director beyond his resignation. For example, our courts have prohibited a director who has resigned from a company from exploiting corporate opportunities which rightfully belonged to the company for himself after he had resigned as a director of the company. It was held that resignation from the office did not terminate the director’s fiduciary obligation owed to the company.

The reason that our courts are open to the extension of the obligation beyond resignation is an understanding that if not extended a director could with impunity exploit opportunities for himself after merely having resigned at the expense of the company he was a director at. This implies though that the courts would not deem this to apply to a situation where a former director acquired an opportunity after his resignation or where the opportunity was not an opportunity that could be classified as belonging to his previous company.

The point remains, that resignation from the position of director does not, in itself, breach the fiduciary relationship between the resigning director and the company. It is the reasons behind the resignation which may result in the fiduciary duties being considered to have been extended post-resignation and consequently breached by certain conduct. Some of such reasons could include:

Where a director resigns in order to personally benefit from a maturing corporate opportunity that the company was actively pursuing.
Where the director acquires the opportunity in his/her personal capacity.
Where the resignation of the director is influenced by a desire to acquire the corporate opportunity for his/her own benefit.
Where the position of the director in the company was the cause which led his/her to the opportunity which he/she acquired after his/her resignation.

Notwithstanding the above, our courts have also held that the setting up of a competing business after resignation is not in itself unlawful. It is only when a resigning director takes advantage of his position in the company and divests interests or opportunities of the company to the new competing business which he is desirous to start, that things get tricky and a potential breach of fiduciary duty must be considered.

In your case, it does not sound like you are contractually restricted from setting up a competing business. Additionally, as stated, the setting up of a competing business is also not of itself unlawful. Where it becomes more complex is whether you would be taking advantaged of your current position as a director to create opportunities for your new business. It is advisable to obtain legal assistance to help you carefully navigate the setting up of your competing business to ensure that no fiduciary duty is breached and to ensure that you start your new business on a good footing.

May 8, 2017
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