Company Law Introduction Company Law (CML2001F) Part 1: Introductory Topics The Societal Context of the Corporation ‘[T]he company has become an organization whose significance almost rivals that of the state. It is the primary institution for organizing and employing much of our capital and labour resources and the primary supplier of goods and services in our community.’ -- Mary Stokes ‘Company Law and Company Theory’ in Wheeler (ed) The Law of the Business Enterprise (1994) at 107. Company Law (CML2001F) Introductory Topics Scope of Course • Business entities, primary focus on companies • Should be able to compare and contract various types of business entities according to: Formation Legal personality Existence Termination Ownership of assets Business owners Management Representation Capital contribution Distribution of profits Liability to creditors Audit and accounting Company Law (CML2001F) Introductory Topics Learning outcomes: Introductory Topics By the end of this module, you should appreciate: • the practical and legal significance of incorporation; • how the regulation of corporate entities has evolved; • the nature and significance of agency in a commercial context; • the nature and implications of a fiduciary relationship, and how and why these are regulated; • the various forms of authority in terms of which a person may validly bind another to a contract with a third party, and the implications of a lack of authority on the 2 contracts involved. • the nature and elements of delictual liability, and how it differs from criminal, contractual, and statutory liability. Company Law (CML2001F) Legal Status and Juristic Personality • Why incorporate a business? • What are the benefits? • What to consider when incorporating - Number of persons involved - Management & ownership - Process of incorporation - The size of the business - Tax implications Introductory Topics Company Law (CML2001F) Introductory Topics Fundamental Concepts • Legal status - What does legal status refer to and why is it significant? • Juristic personality - What is the difference between a juristic and natural person? • Principles of agency - Because a juristic person has no physical body/presence it necessarily relies on human agents to do its bidding. - Agency is an important consideration in determining whether the principal (e.g. the juristic person) is liable on a contract entered into by the agent with a third party. Company Law (CML2001F) Introductory Topics Fundamental Concepts • Fiduciary law - E.g. agency: when an agent acts on behalf of another person, the latter is often left vulnerable to abuse o This is especially relevant to juristic persons - The law must therefore protect the vulnerable party o The conduct of ‘fiduciaries’ is held to a higher standard o This is achieved by imposing ‘fiduciary duties’ o Standard is dependent on the nature of the relationship o Examples of fiduciaries include: partners in an unincorporated partnership, trustees of a trust, directors of a company, and members of close corporation. Company Law (CML2001F) Juristic Persons: Development and History • Corporation – derived from Latin word corpus • Roman Law & the middle ages • Later developments in England: - The British Bubble Act of 1720 - Joint Stock Companies Act of 1844 - Limited Liability Act of 1855 - Salomon v. Salomon & Co • United States – generally enabling legislation embraced Introductory Topics Company Law (CML2001F) Introductory Topics Juristic Person: Definition “A collection of many individuals united into one body, having perpetual succession under an artificial form, and vested, by policy of the law, with the capacity of acting, in several respects, as an individual, particularly of taking and granting property, of contracting obligations, and of suing and being sued, and of exercising a variety of political rights, more or less extensive, according to the design of its institution, or the powers conferred upon it...” – A Treatise on the Law of Corporations, Stewart Kyd (1793–1794) DEVELOPMENT AND HISTORY Company Law (CML2001F) Introductory Topics Common Law Juristic Persons • It is possible for an entity to be considered a juristic person despite not being registered in terms of a generally enabling statute or created in terms of a specific statute • What is required? • Then why register at all? • Important proviso that applies to common law juristic persons ensures that businesses have to register Company Law (CML2001F) Introductory Topics Statutory Juristic Persons • Juristic persons created by legislation/statute • Two options, as mentioned above: - Specific legislation creates the juristic person o Eskom, in terms of the Electricity Act 42 of 1922 - Registration in terms of a ‘generally enabling statute’ o Close Corporations Act of 1984 (no new registrations) o Companies Act 71 of 2008 (‘Companies Act’) Company Law (CML2001F) Introductory Topics The Company as a Juristic Person • Recognized as separate legal person i.t.o. Companies Act (s 19): From the date and time that the incorporation of a company is registered… the company— - is a juristic person, which exists continuously until its name is removed from the companies register in accordance with this Act; - has all of the legal powers and capacity of an individual, except to the extent that o a juristic person is incapable of exercising any such power, or having any such capacity; or o the company’s Memorandum of Incorporation provides otherwise Company Law (CML2001F) Introductory Topics Key Features of (Separate) Juristic Personality • Limited liability of members; • Assets are the exclusive property of the company; • The company must seek redress where a wrong was committed against it (Foss v Harbottle: the ‘proper plaintiff rule’); • A company can contract with its members; • A company can acquire rights and duties separate from its members; • The owners/shareholders have no automatic right to manage; • Profits belong to the company. Company Law (CML2001F) Introductory Topics Key cases • Salomon v A Salomon & Co Ltd [1896] UKHL 1 • Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530 • Read summaries in the appendix to the course outline Company Law Principles of Agency Company Law (CML2001F) : Introductory Topics / Principles of Agency Learning outcomes specific to: Agency By the end of this module, you should appreciate: • The implications of an agency contract for all relevant parties; • the implications of an agent being empowered; • the requirements for an agent to enter into a valid contract with a third party on behalf of the principal; • when an agent may be liable on a contract to a third party; • the implications of ostensible authority for contractual rights of the principal vis-à-vis both the the agent and third party; • the nature and significance of agency in a commercial context; WHAT/WHO IS AN AGENT? • A Company Law (CML2001F) Introductory Topics / Principles of Agency Nature of commercial agency • Agency is a contract in terms of which one person (the agent) is authorised and usually required by another (the principal) to contract or to negotiate a contract on the latter’s behalf with a third person (3rd party to the agency contract). - The principal and agent enter into an agency contract; - This contract creates obligations between P and A - A then concludes another contract with 3rd Party • Thus: - There is a contract between the principal and the agent (usually a contract of mandate) - The agent can be empowered or unempowered. Company Law (CML2001F) Introductory Topics / Principles of Agency Implied terms of the contract of agency • Duties of the agent - To perform the mandate - To be honest and show good faith o o o o No secret profits No conflict of interests No delegation of authority No disclosure of information - To exercise due care - To act in accordance with the P’s instructions - To allow inspection of books and to render an account to P Company Law (CML2001F) Introductory Topics / Principles of Agency Implied terms of the contract of agency • Duties of the principal - To pay the agent the agreed remuneration if the mandate is substantially performed - To reimburse the agent for expenses properly incurred - To indemnify the agent for all losses he or she has suffered as a result of the execution of the mandate Company Law (CML2001F) Introductory Topics / Principles of Agency The agency relationship • Requirements for a person to act as an agent: - The principal must: 1. 2. - be in existence have contractual capacity (to enter into 3rd contract) The agent must: 1. 2. 3. have (at least) limited contractual capacity have authority to perform make it clear to the 3rd party that s/he acts for a principal (P), but need not disclose the P’s name • Remember that the agent may incur liability on the contract where s/he fails to disclose the existence of a principal. Company Law (CML2001F) Introductory Topics / Principles of Agency The agency relationship • Commercial advantages of empowered agents: - Do not need to enter a contract personally - May authorise a representative - Necessary for commercial juristic entities to function • Some issues that may arise: - Does the agent have authority to conclude the contract? - What is the position if the agent acts without authority? - What are the legal consequences where the agent does not disclose that he is an agent? * These same principles apply when a director acts on behalf of a company. Company Law (CML2001F) Introductory Topics / Principles of Agency Authority • In the context of agency, authority is of the essence. • Generally speaking: - If the agent acted with authority, the parties to the contract will be the principal and the third party, the contract is not between the agent and the third party. - The agent incurs no rights or obligations based on the contract with the third party - BUT, if the agent does not have authority he cannot bind the principal and he might himself be liable Company Law (CML2001F) Introductory Topics / Principles of Agency How does an agent acquire authority? • There are broadly five ways for an agent to be authorised: - Express authority - Principal expressly authorises the agent - verbally or in writing - Exact scope of the authority given - Example: Power of attorney (special or general) - Implied authority - No express authority; but can be implied by the circumstances - Test: Hypothetical bystander - Example: ‘transactions reasonably incidental ' Company Law (CML2001F) Introductory Topics / Principles of Agency How does an agent acquire authority? - Ratification - Agent acts without authority but principal elects to ‘ratify’ the action after the fact Ratification - express or implied Ratification only possible if the principal exists at the time - Ostensible authority/apparent authority - - No express or implied authority BUT Principal creates the impression that the person does in fact have authority Principal will be bound by the contract because of the false impression created. The impression is treated as truth. False impression will lead to Principal estopped from relying on the true facts as a defence. Company Law (CML2001F) Introductory Topics / Principles of Agency How does an agent acquire authority? - Requirements for 3rd party to rely on ostensible authority: - Representation made by words or conduct Representation made or permitted by the ‘principal’ Representation made to the contracting third party Such that it could reasonably be expected to mislead the third party Third party must have contracted to his/her detriment How do we differentiate between implied authority and ostensible authority? - Authorisation by operation of law - Mutual mandate in partnerships Company Law (CML2001F) Introductory Topics / Principles of Agency Illustrations from case law • Faure v Louw (1880) 1 SC 3 • Braker and Co v Deiner 1934 TPD 203 • Makete v Vodacom (Pty) Ltd 2016 (4) SA 121 (CC) • Monzali v Smith 1929 AD 382 • Quinn & Co Ltd v Witwatersrand Military Institute 1953 (1) SA 155 (T) • NBS Bank Ltd v Cape Produce Company (Pty) Ltd [2002] 2 All SA 262 (A) Cases in Kopeel’s Guide to Business Law (6ed) pp 316-319 and Collier-Reed et al’s Basic Principles of Business Law (2ed) pp 281-282. Company Law (CML2001F) Introductory Topics / Principles of Agency Exceeding the mandate? • Consequences of acting without authority/ beyond mandate: - Agent could be liable based on warranty of authority - If principal liable based on estoppel the agent may in turn be liable to the principal Company Law (CML2001F) Introductory Topics / Principles of Agency Termination of agent’s authority The authority of the A will be terminated on any of the following: • Mutual consent of the P and A; • Revocation by P (even if agency described as irrevocable); • Renunciation by A (but may be liable for damages); • Due performance of respective obligations; • Expiry of period of time for which the authority was granted; • Death of either the principal or agent; • Insanity of the principal; • Insolvency of the principal. Company Law (CML2001F) Introductory Topics / Principles of Agency Application to business entities? • Partners are agents of one another; • The trustee acts as agent on behalf of the trust; • Directors are agents of the company; • Generally speaking members of a close corporation represent the CC as its agents. • These actions taken by agents may have legal consequences for the principal/s in each case. Company Law Fiduciary Law Company Law (CML2001F) Introductory Topics / Fiduciary Law What is a Fiduciary? • From Latin ‘fiducia’, meaning trust, confidence, or assurance. • A person (or a business e.g. bank / stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty. • A fiduciary holds a legal or ethical relationship of trust with one or more other parties. - Typically, a fiduciary prudently takes care of money or other asset for another person. Company Law (CML2001F) Introductory Topics / Fiduciary Law Nature of a Fiduciary’s Responsibility • A fiduciary's responsibilities are both ethical and legal. • A fiduciary is held to a standard of conduct and trust above that of a stranger or of a casual business person. • When a party knowingly accepts a fiduciary duty on behalf of another party, they are required to act in the best interests of another party (e.g. whose assets they are managing). • He/she/it must avoid ‘self-dealing’ or ‘conflicts of interests’ in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts him/her/it. - E.g. a stockbroker must consider the best investment for the client and not buy or sell on the basis of what brings him/her the highest commission. Company Law (CML2001F) Introductory Topics / Fiduciary Law Establishing a Fiduciary Relationship • Fiduciary duties arise when there is a fiduciary relationship • In general, such a relationship has the following characteristics: 1. Scope for the exercise of some discretion or power; 2. That power or discretion can be used unilaterally so as to affect the beneficiary’s legal or practical interests; 3. A peculiar vulnerability to the exercise of that discretion or power. Company Law (CML2001F) Introductory Topics / Fiduciary Law Fiduciary Duties “There is no magic in the term “fiduciary duty”. The existence of such a duty and its nature and extent are questions of fact to be adduced from a thorough consideration of the substance of the relationship and any relevant circumstances which affect the operation of that relationship…while agency is not a necessary element of the existence of a fiduciary relationship…, that agency exists will almost always provide and indication of such a relationship” – Phillips v Fieldstone Africa (Pty) Ltd [2004] 1 All SA 150 (SCA) Company Law (CML2001F) Introductory Topics / Fiduciary Law Examples of Fiduciary Duties • The duty to act in good faith - Must at all times be open and honest in his dealings - Must avoid a conflict of interest o Hargreaves v Anderson 1915 AD 519 - Must hand over any profit made in the course of carrying out the mandate/fulfilling duties - Must disclose relevant/pertinent information • The duty to account • Must keep the beneficiary informed of progress • Must keep his own property separate • Must maintain proper records of dealings and transactions • Must account for any transactions concluded during mandate Company Law (CML2001F) Examples of Fiduciaries • Fiduciaries that will be dealt with in this course: - Partner in a partnership; - Trustee of a trust; - Director of a company; - Member of a close corporation. Introductory Topics / Fiduciary Law Company Law Principles of Delict Company Law (CML2001F) Introductory Topics / Principles of Delict The nature of a ‘delict’ • Civil wrong (delict) vs. criminal wrong (crime) • Civil liability (compensation) vs. criminal liability (punishment) • Civil action (Plaintiff→ Defendant) vs. criminal trial (S→ Accused) • Committing a delict creates an obligation to compensate - Based on the Roman Law branch of law known as ‘the law of obligations’, a person could incur a civil obligation to compensate another in broadly 3 ways: Entering into an agreement enforceable by law (contract) Committing a wrong against another (delict) Forming ‘quasi contract’ (≈ unjustified enrichment) Company Law (CML2001F) Introductory Topics / Principles of Delict The definition of a ‘delict’ • A delict refers to wrongful and blameworthy conduct which causes harm to a person. • For conduct to be actionable, it must not only cause harm to another person, but such act/omission must be blameworthy (the perpetrator must have been at fault), and wrongful (it must not be unreasonable to impose liability in the circumstances). • Elements of a delict: - Fault/blameworthiness - Wrongfulness - Causation (factual or legal?) - Loss Company Law (CML2001F) Introductory Topics / Principles of Delict Consider the following conduct (Delicts?): • Director makes careless decisions in expanding the company's business. • Shop employee knocks over a shelf onto a customer. • Company manufactures fake merchandise and passes it off as a genuine/original brand. • Company places advertisements exposing the corrupt business practices of its competitor. • Company auditor fails to request certain records that s/he notices are missing because s/he is in a rush to meet the deadline. • Director fails to vote against a resolution when s/he should have realised (but did not realise) that the necessary requirements of the Act for passing such resolution had not been met.
