Modise and Another v Tladi Holdings | Corporate Opportunity

The Modise and Another v Tladi Holdings (Pty) Ltd [2020] 4 All SA 670 (SCA) judgment details the application of the corporate opportunity rule in the context of a BEE motivated business relationship. Unfortunately, as is often the case, this relationship proved to be “Skin-deep”, ill-motivated and susceptible to exploitation.

Upholding the corporate opportunity rule is one of a director’s duties. This rule is informed by the common law and governed by the Companies Act (“the Act”). The essence of the rule, according to the seminal case of Da Silva and Others v CH Chemicals (Pty) Ltd [2009] 1 All SA 216 (SCA) (“Da Silva”), is that directors may not acquire economic opportunities for themselves that properly belong to the company. Opportunity includes those opportunities which are naturally, conveniently, and economically within the scope of the company’s actual or intended business. Stated differently in terms of Section 76(2) of the Act, a director of a company must not use the position of director, or any information obtained while acting in the capacity of a director to gain an advantage for the director, or for another person other than the company or a wholly-owned subsidiary of the company.

Modise and Another v Tladi Holdings (Pty) Ltd

The issue in this case centered around a deal between Tladi Holdings (Pty) Ltd (“Tladi”) (the respondent on appeal) and a company called ARB Electrical Wholesalers (Pty) Ltd (“ARB”), a large electrical equipment supplier.

In mid-2004, Jonathan Sandler (“Sandler”), who would become a director of Tladi, identified a potential BEE deal with ARB as a promising opportunity. In pursuit of the ARB opportunity, Sandler laid the foundations for an electrical conglomerate by creating Tladi. He identified Jacob Modise (“Modise”) as an integral part of obtaining the ARB opportunity. Modise was a well-respected businessman and an ideal match insofar as the BEE aspect was concerned. So, Sandler invited Modise to a presentation, there they discussed the ARB opportunity and others.  Sandler explained that the ARB opportunity was going to be pursued by Tladi. Shortly after this, in December 2004, a shareholders’ agreement was concluded which appointed Modise as a director and chairman of Tladi. As chairman and director of Tladi, Modise was mandated to pursue the ARB opportunity for Tladi when it became available.

In May 2005, Modise was invited to meet privately with ARB’s CEO and Chairman.  Aware that the BEE business deal they currently had with another company was failing, they offered Modise, and not Tladi, the opportunity. Modise did not report this meeting to Tladi, nor did he disclose the availability of the ARB opportunity.

About a month after Modise’s meeting with ARB, Sandler enquired about the ARB opportunity. Modise again failed to disclose the ARB meeting, and informed Sandler that ARB’s chairman was not interested in pursuing a business relationship with him. Sandler believed that the chairman did not know about Tladi’s BEE credentials and that this was the reason for the apparent disinterest. Sandler wanted to clarify this and instructed Modise to arrange a meeting with ARB’s chairman, however Modise made no such effort.

Contrarily, in December 2005 Modise concluded a deal with ARB by accepting the offer made to him at the meeting in May. He concluded this deal in his capacity as director of another company, Batsomi Power (Pty) Ltd (“Batsomi”). The conclusion of this deal was also never disclosed to Tladi.

Theft of a Corporate Opportunity

These facts seem to fit squarely within the box drawn by Section 76 and Da Silva regarding theft of a corporate opportunity. Modise piggybacked on Tladi and then usurped the opportunity for his own interest through Batsomi.

Modise was mandated to pursue the ARB opportunity through Tladi. He knew this when he met with ARB in May 2005. This means Modise must have considered the conflict between his personal interests and his duty to Tladi at the May 2005 meeting.  It seems that Modise’s first breach of his fiduciary duties was failing to disclose the May 2005 meeting to Tladi, and that his second was pursuing the ARB opportunity with Batsomi contrary to his duties to Tladi.

Modise raised two contentions in his defence. First, he argued that ARB did not want to do a BEE deal with Sandler because he was white and thus the opportunity was not available to Tladi.

In his view, this meant the duty to procure the ARB opportunity did not exist and accordingly the presentation of the opportunity to him could not be considered connected to his position as director and chairman of Tladi. In Modise’s view, the opportunity was presented to him despite his association with Tladi. Modise’s second contention was that none of the information gathered by Tladi pertaining to the ARB opportunity could be regarded as confidential because Tladi lacked proprietary interest therein.

In dealing with the first contention, the court noted that the likelihood of an opportunity materialising is irrelevant in considering whether the rule is applicable. Once a corporate opportunity arises, the rule operates until the company make a bona fide decision to not take the opportunity, or the rights to take the opportunity are validly waived by the members in a general meeting. Modise was not entitled to pursue this opportunity without disclosing it to, and gaining consent from, Tladi. The Court further noted that the fact that ARB approached Modise was irrelevant for purposes of considering whether the opportunity arose by virtue of Modise’s association with Tladi. The Court held that Modise was bound by his mandate and his duties to Tladi when the opportunity arose.

In dealing with the second contention, the Court noted that the application of the corporate opportunity rule is not subject to a Company having a proprietary interest in any information related to the opportunity. The fact that the opportunity formed part of Tladi’s business strategy and that Modise was chairman and a director of Tladi was sufficient to establish the breach of the rule.  Thus, theft of the corporate opportunity by Modise had been established.

The appropriate relief for a claim of this nature is that the opportunity stolen will reassigned and regarded as if acquired by the company to whom it belonged. In some instances, this is no longer possible. In those circumstances, the company may claim damages suffered from the offending director and disgorge the director of the profits made from the stolen opportunity.

“Skin-deep” relationships

Cachalia JA’s observations in this case should serve as a valuable warning to parties on both sides of the fence, in situations similar to Sandler and Modise respectively.  In this regard, Cachalia JA noted that Sandler made the decision to approach Modise so that he could “comply with BEE requirements”. Modise, in stealing the opportunity, exploited the fact that Sandler needed a black partner to complete the ARB transaction. Tying these two facts together, the judge noted that “relationships between individuals and entities brought together to pursue the objectives of the BEE Act are often skin-deep and not sustainable.”

The corporate opportunity rule is intended to operate as a protection against exploitation of a director’s position in these circumstances, however, fiduciary duties are often blatantly disregarded. Care should be taken to identify the motives and trustworthiness of potential business partners, in pursuit of a meaningful relationship, rather than an expedient or convenient one.

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