Corporate Law Corporate Capacity Agency The Turquand Rule

Corporate Law Corporate Capacity, Agency & The Turquand Rule

Learning Outcomes � Understand the ultra vires doctrine & the Turquand Rule � Understand explain the legal capacity of a company and the authority of directors to represent the company

The Ultra Vires Doctrine � To protect investors and shareholders � What is ultra vires? ◦ Literally “outside the powers” ◦ In common law ultra vires acts were void ◦ Company therefore not bound � Companies Act of 2008 abolishes doctrine of ultra vires externally but it is preserved internally ◦ Section 20 (1)

Section 20(1) � An act (except if contra to Act) is not void only because: ◦ Company did not have capacity to perform the act because of limit or restriction imposed by MOI ◦ Directors did not have authority to perform the act

Internal application � Ultra vires doctrine exists internally within company insofar as ◦ Directors will be liable for breach of fiduciary duty ◦ Shareholders entitled to restrain company from entering into or performing an ultra vires contract ◦ See Section 20(1) (b) (i) and (ii)

External Application � Doctrine does not apply � Shareholders may ratify any acts by company or directors that were ultra vires � Shareholders have claim for damages against any person who causes company to act ultra vires (Sec 20(6)

Doctrine of Constructive Notice � Persons doing business with a company are deemed to have knowledge of a companies constitutional documents as they are public documents open for inspection � 2008 Act abolishes doctrine of constructive notice � No one is deemed to have knowledge of company documents merely because documents filed or open for inspection

� However: ◦ Person deemed to have knowledge of any provision in a MOI if Notice of Incorporation (or amendment) has drawn attention to that provision ◦ See Sec 19(5)

The Turquand Rule � What is it? ◦ Essentially, that anyone dealing with a company can presume that the person they are dealing with has complied with internal requirements and is entitled to act accordingly � 2008 Act formalises the rule in section 20(7) � Provides protection to third parties dealing with company � Directors, shareholders etc may not rely on it internally

Section 20(7) A person dealing with a company in good faith, other than a director, prescribed officer or shareholder of the company, is entitled to presume that the company, in making any decision in the exercise of its powers, has complied with all of the formal and procedural requirements in terms of this Act, its Memorandum of Incorporation and any rules of the company unless, in the circumstances, the person knew or reasonably ought to have known of any failure by the company to comply with any such requirement.

Representation & authority of directors � Company cannot act on its own � It acts through its directors � Business of copany must be managed under direction of the board of directors (section 66(1) � Board has authority to exercise all powers and perform all functions of the company except as specifically prohibited by Act or MOI

Representation of company � Board can delegate its powers to individual directors or managers � Contractual arrangement � Law of agency