Background:

This article marks the beginning of a series that delves into essential legal principles relevant to transactions involving a company. It aims to shed light on aspects that all parties involved in such transactions should be aware of. Part 1 will examine the origins of a company’s powers and the fundamental principles of agency law, Part 2 will discuss the forms of authority, a concept of agency law and forming the core thereof and lastly Part 3 will focus on how and to what extent the principles of agency and authority apply when contracting with a company.

Powers of a company

A company is regarded as an artificial person who can’t act by itself. Instead, it needs duly appointed directors and officers to make decisions and take action. Usually, people see the board of directors and other top managers as the ones who carry out the functions of management and represent the company. The authority of a company lies with the directors as a group, not as individuals. This is laid out in section 66(1) of the Companies Act 71 of 2008 (“Companies Act”), which says:

“The business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that this Act or the company’s Memorandum of Incorporation provides otherwise.”

This section places a positive obligation on the directors to manage the company. These powers, as outlined in section 66(1) of the Companies Act, will be in effect from when a director is appointed to the board of a company and the application of these powers is in terms of the board collectively acting as a unit. The powers are thus interchangeably linked to the role of being a director.

The significance of overseeing the business and affairs of the company is twofold. Firstly, this authority is now inherent and not delegated as it was under the Companies Act No. 61 of 1973 (“Old Companies Act”). Under the Old Companies Act, directors’ powers were delegated to them by shareholders through the articles of association. Consequently, for instance, shareholders of the company cannot, in accordance with the Companies Act, aside from where explicit provision is made in the memorandum of incorporation, pass a resolution to authorise directors to execute and enter into a contract on behalf of the company. Subsequently, the business and affairs of a company must be managed by or under the direction of its board of directors. Furthermore, the board possesses the authority to exercise all the powers and perform all the functions of the company, except to the extent that the company’s memorandum of incorporation or the Companies Act provides otherwise.

General agency principles

In practice, the board of directors often delegates their authority to other individuals, including fellow directors and officers, while managing the company. When the company, whether represented by a single representative or the entire board, enters into contracts with third parties, agency principles apply.

These principles determine whether a delegated individual, acting on behalf of the company, will legally bind the company to such contracts. This depends on whether the individual has the authority to contract on the company’s behalf and if they are performing the functions entrusted to them within the scope of their delegation. The delegate is considered to stand in the shoes of the board and may act on behalf of the company within the limits of their delegation.

According to agency law, when an agent enters into a contract with a third party on behalf of the company, the contract binds both the third party and the company (the principal) as if the contract were directly made between them. The agent acts as an intermediary and assumes no personal liability under the contract. Once the contract is executed with the third party, the agent’s role concludes.

However, if an agent enters into a contract with a third party without the necessary authority, the agent fails to bind the principal to the contract and may be liable to compensate the third party for any losses resulting from the breach of the warranty of authority.

Concluding remarks:

In conclusion, the powers of a company, as outlined in the Companies Act, are vested in the board of directors collectively, who are tasked with managing the company’s affairs and exercising its functions. Unlike the Old Companies Act, the Companies Act affords inherent authority to the board, eliminating the need for delegation from shareholders. This underscores the importance of agency principles when individuals, acting on behalf of the company, enter into contracts with third parties. Such delegates operate within the parameters set by the board and are bound by agency law, which holds them accountable for their actions. Thus, while acting as intermediaries, agents have the power to bind both the company and the third party to contracts, provided they have the necessary authority. Failure to do so may result in legal repercussions, emphasising the critical role of agency law in corporate transactions.

VDMA’s team of experts is at your disposal for any company law assistance that you or your business may require.

Published 18 June 2024