Learners Should Have an In-Depth Understanding Of;

5. Company Management.

Learning objectives.

Learners should have an in-depth understanding of;

The Turquand rule and its application.
The powers and duties of a company director.
The business judgment rule and its application to modern day company management.

5.1. Introduction.

This Chapter deals with company management, representation, organs agents/functionaries, their authority and related matters.
A company as defined is a legal entity existing separately from its management and owners.[1]
This concept of a company as a juristic person is only a fiction.[2]
This necessitates entrusting of company’s functions and responsibilities into the hands of its representative organs such as the board of directors.[3] This organ manages the company’s affairs.[4]
A company cannot act on its own person.[5]
A company can only act through organs (company brains) which lays down policy and agents (limbs) acting within their powers and authority.
In courts cases involving the company (litigation) , the courts requires a copy of a directors’ resolution sanctioning the litigation and an affidavit from its legal representative stating that he/she was duly appointed as legal representative.
Signatures on documents on behalf of the company are deemed to be that of the company itself eg. On cheques or other negotiable instruments.

5.2. Company organs

Company organs in general are ; (i) company in general meetings,

(ii) Board of directors as a properly constituted body which practices management of the company.

One organ may not interfere with affairs of another. This is in line with modern day business practices of good corporate governance.
Eg the company’s general meeting may not interfere with the board of directors in respect of management.[6]
However, the general meeting may; (i) appoint and dismiss directors (section 175),

(ii) ratify director’s actions exceeding their authority if lawful not ultra vires or fraudulent on minority members,

(iii) act in the event of the directors (all) stopping being as such ( died, become disqualified, resigned etc), OR the board refuses or otherwise is unable to take action.

5.2.1. The Board of directors

The board of directors performs the management functions of a company.
The Board only performs this management function if it is properly constituted. This means individual directors cannot exercise the management function.
Directors functions through resolutions at properly constituted meetings.
Articles can allow for directors to function or exercise their management functions through unanimous assent, that is, by the circulation of a written proposal that must be signed by all and minuted thereby acquiring the status of a resolution at a meeting).
Notice of meetings must be given to every director who is accessible unless board regularly meets at fixed times and a fixed place.
The articles regulate the mode of notices, quorums and proceedings.

5.2.2. Directors

This part will discuss issues relating to the appointment of company directors, their qualifications and disqualifications, powers, duties, liabilities and removal from office.
Directors (plural) mean the board, that is, the organ managing the company’s business.
A director is defined in section 2 of the Companies Act as to include ‘ any person occupying the position of director of alternative director of accompany, by whatever name he may be called.
The effect of this provision is that it is not the name that one calls self that determines whether such is a director but rather whether such a person exercises the functions of managing a company normally attributed to a director.
An alternative is a substitute director.
A de factor director is someone occupying the position of a director without valid appointment.

(a) Appointment (nomination and acceptance).

A person becomes a director on acceptance of appointment.
A director‘s powers are determined by articles.
The terms of appointment eg tenure of office, remuneration etc are determined in terms of the articles or a contract with the company.
Appointment entails election by members or others eg creditors.
Subscribers to the memorandum are deemed to be the first directors unless provided otherwise.
Subsequent directors are appointed in terms of the articles.
Acceptance must be in writing.
The company must keep available for inspection, a register of directors and officers at its registered office, containing personal particulars of directors.

(b). Qualifications

The Act disqualifies rather than prescribing for qualifications.

Section 173 disqualifies from appointment as a director the following persons;

(i). a body corporate- an artificial person cannot be a director of another artificial person (company). This is because as a director, one is expected to as the company’s agent so a body corporate which itself requires an agent (natural person) to act on its behalf cannot be an agent of another.

(ii). A minor or any other person under legal disability. A woman married in community of property ( a marriage regime where the parties thereto jointly own and control the property of the marriage) may be a director only if he husband gives his written consent to that effect.

These two grounds are absolute disqualifications.
The following may only be directors with the consent of the court;

(i). an unrehabilitated insolvent (section 173 (1)(c)),

(ii). Person convicted in Zimbabwe or elsewhere of theft, fraud, forgery, or uttering a forged document or perjury and having been sentenced in relation thereto, to serve a term of imprisonment without the option of a fine or to a fine not exceeding a certain limit (section 173 (1) (d)),

(iii). any person who is subject to an order under the Companies Act, and,

(iv). any person removed by a court from an office of trust on account of misconduct.

(c). Remuneration of directors.

Directors are not employees of the company.
They are not entitled as a right to remuneration.
However, the model Articles in Table A of the Companies Act empowers a general meeting to fix director’s remuneration.

(d). Powers of company directors.

Articles of a company determine what powers its directors have.
If the Articles entrust the directors with the powers to manage the company, the shareholders cannot interfere with this. If the shareholders disapprove of the director’s acts, they must alter the Articles or alternatively remove him from his position. The shareholders cannot take over the functions of a director.
Scott v Scott (1943)- the company in a general meeting resolved first to pay dividends to preference shareholders and second that the financial affairs of the company be investigated by an accounting firm. The court held that such resolutions were invalid for they amounted to the general meeting interfering with the powers of the directors under the Articles.
If however, the directors’ acts are in excess of their powers, the general meeting can ratify those acts done without authority by an ordinary resolution.
Directors acts as a board rather than individuals.
Directors can thus exercise their powers at a properly constituted board meeting.
This meeting can be summoned by a director any time after giving appropriate meeting (in the mode prescribed by the Articles).

(i)Powers to bind the company.

(ii)

The acts of a director are valid and binds the company regardless of any defect in the way the director was appointed.
A director may however not bind the company on ordinary rules of agency if: (i) the person claiming to be a director was never appointed as such (N/B) There is a difference between a defective appointment and where there was never an appointment at all.

(ii). If the board exceeds it authority, the company will not be bound. This is because the company is only bound by authorised acts.

However, the company may be bound by estoppel.
Here, a third party dealing with the company through an unauthorised director would be trying to show that the company itself is the one which mislead him to believe hat the director had authority therefore by such misrepresentation on the company should be held bound to the unauthorised acts.
The party relying on estoppel to bind the company need to establish the following;

(i). he was induced to enter into the contract in question by the agent being represented as occupying a certain position in the company,

(ii). That the representation was made by person with actual authority to manage the company, and,

(iii). That the contract was one that a person in the position of the agent was held out as occupying would usually have authority to occupy.

Freeman and Lockyer v Buckburst Park Properties (1964).- a director who was never appointed as a managing director assumes powers of management with the company’s approval. Subsequent thereto, he entered into a contract with another. The company was held liable to the performance in terms of the contract because the nature of the contract was within the scope of authority of a managing director of a company. The other party was not obliged to enquire whether the person was properly appointed .it was enough that the Board had allowed the Director to act as an MD thus misleading the other party to think that he had authority.
The principle in the Royal British Bank v Turquand is relevant here. This principle is known as the TURQUAND RULE.
if the articles do not prohibit authority, but requires that certain internal pre-requisites be met before authority exists, and an outsider dealing with the company cannot with reference to the public documents (articles, memorandum) to which she/he has access, establish compliance with such pre-requisites for authority to exist, the company will be bound to any transaction/contract involving such a third party regardless of lack of compliance with the pre-requisites for authority.
The rule protects bona fide outsiders in that they may assume that the pre-requisites where complied with.
Examples of such pre-requisites are;

(i)Directors may only after prior approval of the general meeting, conclude loans exceeding a stated amount. From the articles we cannot know whether the general meeting did consent or even whether it was required to.

(ii) The board may delegate powers to committees, managing directors etc. We cannot by reading the articles, find out whether person X was appointed to that position and if so, the power/ authority in question was in fact delegated to X.

In terms of the Turquand rule, a bona fide third party may assume compliance unless (i). He/she knows of no compliance.

(ii). the articles prohibit a particular transaction.

(iii). the third party ought to have suspected lack of authority or no-compliance, eg. If a transaction clearly does not fall within the normal functions of the purported agent, or is clearly outside the company’s capacity (ultra vires).

The Turquand rule cannot held an outsider to bind the company, if he/she have realised that the transaction is beyond the usual scope of the official (purported agent) concerned.

(e). Directors’ duties.

Primarily a company does business for profit.[7] It becomes paramount that directors are given room to make independent decisions as company functionaries albeit subject to checks.[8]
Duties of company directors flow from this relationship.[9]The directors’ chief duty is always to act in the company’s best interest.[10] It has been argued that other duties flow from this duty, such as fiduciary duties,[11] obligations of care, skill and diligence and those prescribed under statutes including a company’s Articles of Association.[12]

1. Fiduciary duties.

(i). This is a sui generis (stand on its own/ of its own kind) common law duty that result from the fiduciary relationship (one of trust) between the company and all directors (see Howard v Herrigel (1991)).

This duty applies to executive and non-executive directors; nominees and alternative directors.
A board and individuals act bona fide in the best interest of their company as a whole (present and future members).
Fiduciary duties encompass a host of obligations bestowed by common law on company directors.
These are discussed below;

(ii). Duty to exercise unfettered discretion.

Directors must in themselves, decide what is best for the company.
They may not take instructions from those who nominate them.
Directors may vote each other into board but may not use a majority vote to ratify fraud. ( InCook v Deeks 3 of the company’s 4 equal shareholders who were also directors , obtained a lucrative contract to the exclusion of the 4th member and then used their majority vote to resolve that the company was not interested . It was held that it was still their duty to act in the company’s best interest and to pretend that it was a member’s resolution amounted to fraud on the minority.

(iii).Duty to avoid conflict of interest (must always act in the company’s best interest)

Company directors must give priority to company’s interests.
They must avoid a conflict of interests, that is, their personal interest must not conflict with those of the company.
Duty to avoid conflict of interest entails that ;

(a)Directors may not get any other advantage (profit from his position of trust) than numeration.

Directors must not misappropriate company’s assets ( S v De Jager).
Misappropriation of company’s assets amounts to theft.
Directors must not make a secrete profit as a result of concluding contracts on behalf of the company. In Robinson v Randfontein Estates, R, chairman of the board of Randfontein , which was interested in land but could not agree with the seller on the price, purchased the land through another company controlled by R at R120 000 and sold it to the company at R550 000. R had to repay profits to the company due to conflict of interest.
In Regal (Hastings) v Gulliver the company itself, could not afford certain shares and its directors openly bought them and later bona fide sold them at a profit. The company’s new shareholders were not satisfied and the directors had to return the profits.
A director must act in the interest of the company, that is. The body of shareholders not in the interest of any individual shareholder even the one who appointed him.

(b). Directors may not abuse company confidential information for own benefit and must account for any such benefit

Magnus Diamond Syndicate v MacDonald & Hawthorne- directors had access to confidential company information of diamond rich land and purchased and exploited it in competition with the company. They had to account for the profits.
Industrial Development Consultants v Cooley- a client refused to deal with the company, persuaded its managing director, Cooley to resign formed his own company and accepted the contract. Because he as the managing director got information about the client, he had to account in spite of the client’s unwillingness.

(c). A director, may, unless prohibited in terms of his contract or articles, be a director of another (competing) company, BUT NOT MANAGING DIRECTOR OF EITHER.

If a director serves on two boards, may not disclose one company’s confidential information of subordinates one’s interests to the other.
Scottish Coo. Wholesale Society v Meyer - a holding company’s directors’s trying to shut down a subsidiary. It was held that it amounts to oppression of the subsidiary.
Atlas Organic Fertilizers v Pikkewyn Ghwano - while still Atlas company’s Managing Director, X sabotaged its chance to obtain a contract then resigned and formed his own company which he obtained the contract. Held Atlas can obtain an interdict to prevent X from contracting or claim from him to account for any benefit if a conflict of interest could be proved, eg. If X did not just seek new means of income while serving a month’s salary).
Sibex Construction v Injectaseal CC- a director resigned and formed a close corporation doing similar business (sealing leaks in pipes with unique process) and was then also joined by the company’s manager. Both had access to the company’s tender documents and undercut the tender to the company’s biggest client. The company obtained an interdict preventing the CC from submitting a tender for that year.

(d). Contracts between a director and the company are voidable if company so wishes.

This is unless articles permit them in which case they are valid or unless the general meeting after a full disclosure authorises them.
Where the articles allow it or the company concludes contracts with a 3rd party in which directors has interest, the director must fully disclose his interest.

(iv). Directors must exercise their powers for the purpose conferred.

Directors must exercise any powers conferred upon them in order to frustrate the wishes of the majority shareholders.
Punt v Symons & C.- an issue to secure enough votes to pass a special resolution to remove the right of certain members to appoint / dismiss directors was set aside. The reason being that such a share issue was not meant to raise capital per se but rather secure more power for a certain group. See similar cases in Piercy v S Mills & Co( an issue to prevent a vote in favour of a resolution to appoint more directors, putting present directors in the minority); In Mears V African Platinum Mines – unpaid capital was called in the hope that a member who opposed a particular proposal , would be unable to pay and lose his vote in terms of the articles, the call was successfully interdicted.

(v). Directors are liable for damages if they exceed their authority and the company is bound, because of the operation of the TURQUAND Rule OR ESTOPPEL.

They are also liable if their actions are utra vires and the company is bound by virtue of section 9.

2. Duty to act with reasonable care and skill of a reasonable person with his/her knowledge and experience.

N/B. The material used to compile notes used for this part is adapted from Nzero I. ‘The company director’s duty of care and skill under the 2008 South African Companies Act: an analysis (a research paper submitted in fulfilment of an LLM (Business Law)Degree, unpublished, University of KwaZulu-Natal (2008-2010)).

In the 19th Century, Courts of Chancery treated directors’ duties of care and skill as being of trustees and quasi-trustees.[13]
Directors were simply (hopeful) amateurs[14] exempt from liability save for culpable and gross negligence.[15]
The legacy of this background manifested in the case that forms the bedrock of modern common law duty of care and skill -re City Equitable Fire Insurance Co.[16]

(a).Requirements of the duty of care and skill.