CORPORATE MANAGEMENT (1)
Essentially, we will be discussing how companies are managed. To have a grasp of this topic, you must understand the organs of companies. This stems from the fact of nature of companies. You must have your CAMA in hand. Study the provisions and understand them.
As discussed earlier, a company becomes a juristic person upon registration. By juristic, we mean the company is an artificial entity. There is an ascription of personality on a company, this means that the law takes them as person but they are distinct from natural persons who can be touched and seen. When we look at S. 37 CAMA, we can see that they can do a variety of things. But there is a problem with companies being juristic; they don’t have a body to act on their own. Thus, natural persons are needed to run the affairs of the company. This is why corporate administration is important (because of the nature of companies).
The question is often asked about who are the organs or agents of a company that help companies to run their businesses. Who can be said to be persons or organs running the affairs of the company? The law has helped us to some extent. The law recognizes four basic organs of the company: a. The General Meeting b. The Board of Directors c. Officers or agents appointed by the General Meeting or Board of Directors d. The Managing Director. Basically, we shall be dealing with three of these organs; the General Meeting, The Board of Directors and the Managing Director. Each of the three organs has the capacity to appoint officers or agents and give them powers to (help) run the affairs of the company. The reason we need to know these organs is because before a company can be liable for acts done by its representatives, it must fall within the aforesaid three. In essence, there are lots of people involved in a company but our interest is in those category of persons who can represent the company…to the world. Also, there are shareholders of the company. Can the shareholders run the affairs of the company? There is no straightforward answer to this question. As we shall see later, much depends on the company’s articles.
When a company that involves five subscribers is registered, who can be said to be the corporate body in the light of S. 37 CAMA? It is the subscriber of the memorandum together with such other persons as may, from time to time, become members of the company that shall be a body corporate by the name contained in the memorandum. Does it then mean that individual shareholders of a company can represent the company in running the affairs of a company? The answer is clearly No! Thus, the fact that one is a member of a company doesn’t mean they can run the affairs of that company otherwise there would be a conflict especially since the members of some companies run into hundreds or even thousands. We also have the Board of Directors. The law says there must be at least two directors. But there are companies with more than two directors depending on their preferences or structure (how big or small the company is). One thing is however certain, there can’t be less than two directors. The question is when we talk about the Board of Directors, can an individual Director represent the company as an organ or mouthpiece of the company. The answer is also No except the Managing Director (MD). The provisions of S. 63 (1) CAMA and S. 65 CAMA deal with those who can represent the company. The implication of these provisions is that a company shall act through the General Meeting, Board of Directors, Managing Director or such other officers or agents appointed by the three. The act of these organs carried on in the usual way the business of the company shall be treated as the act of the company itself and the company shall be criminally and civilly liable therefore to the same extent as if it were a natural person.
In practice, it is not unusual to find a company with a Managing Director and another as the Chairman of the Board. What is the significance of this distinction? Can the acts by the Chairman of the Board bind the company? First, it is important to point out that the Chairman of the Board is not mentioned in the Act. But recourse may be had to S. 263 CAMA specifically subsections (4) and (6). There is a rule here for the chairman to be appointed by the Board. The Board may also delegate any of their powers to a committee and the latter is also at liberty to appoint a Chairman. Please note that though a Director may be appointed as a Chairman of the Board, he is not on equal footing with the Managing Director as the law doesn’t give him such recognition. But the company may also act through the Chairman of the Board where the latter has been appointed by the Board in a particular capacity. Here, the Chairman becomes an agent of the company with regard to S. 63(1) CAMA.
We now know those who can act for the company. But the law provides other circumstances. If we have three or four organs that can act for a company, the question then is what sort of powers can these organs exercise? Do they have equivalent powers? The guidance is in S. 63 (2) CAMA. The respective powers of the General Meeting and the Board of Directors shall be as determined by the company’s articles (Articles of Association).
This brings us to the important document called articles. What is the role of articles in the life of an incorporated company? They provide regulation for the internal management of the affairs of the company. The law is a bit silent on it. Except where the law specifically says the General Meeting or the Board of Directors must do this, the powers are determined by the company’s articles. Unlike the Memorandum of Association which content is specifically stated in S. 37 CAMA thereby statutory, the content of the articles is not found anywhere in the law.
CAMA has three forms of regulations. Some provisions of this Act are mandatory in the sense that strict compliance is required. One of such provisions we will find in S. 22 CAMA which states the things which must be contained in the article. Some are empowering or enabling in the sense that they do not provide regulation but simply state companies may regulate a particular thing in its articles. Thus, the companies need not regulate these things. Some are in default form in the sense that in case the company doesn’t provide for these things, these are the regulations provided by the Act but the company has the power to change this default to suit its taste. An example is S. 38(1) CAMA These three are of significant value. It is on this basis we must note that S. 63 (2) CAMA is an empowering section since the determination of the powers of the two organs is left to the company through its articles. By S. 63(3) CAMA, we understand that where the articles of a company are silent on who shall manage the business of the company, the Board of Directors shall do so. But please note that the Board shall not exercise such powers where the Act or the articles state that such power shall be exercised by the General Meeting. This is a default provision. In other words, the company can use its articles to modify powers of the Board to run and manage the affairs of the company but where this is not stated, it is the Board that can do so. Please note that if one has two companies, the power to manage the business (es) of these companies may be different and it may even be the same. Why is it so? They will be the same, if the two companies have not varied the default provision of the articles but where one varies its, the power to manage the businesses of these two companies would now be different.
Once you limit, you limit. But if you don’t limit, then the Board manages all business not even the General Meeting can interfere. When we have a cursory look at S. 63(4) CAMA, it provides that where the Board of Directors is acting within the powers conferred upon it by the Act or the company’s articles, it shall not be bound to obey the directions or instructions of the members in General Meeting provided that the directors acted in good faith and with due diligence. It is however important to state that the company’s articles may provide otherwise. This is why it is important to define the powers first. Thus, where there is a dispute as to whether the decision of the Board can override that of the General Meeting with respect to an act, the starting point of enquiry would always be the company’s articles.
S. 63(5) CAMA gives us instances where the General Meeting can act notwithstanding that the Board is charged with the responsibility of handling the business of the company. Members in General Meeting may:
a. act in any matter if the members of the board of directors are disqualified or are unable to act because of a deadlock on the board or otherwise.
Please note that before this section can be triggered, there must have been a deadlock or the members of the board must have been disqualified to act. Unless and until this happens, the GM can’t act.
b. institute legal proceedings in the name and on behalf of the company, if the board of directors refuse or neglect to do so.
The question here is in what circumstance can the GM contend that the board neglected or refused to institute legal proceeding bearing in mind that the power to manage the business of the company includes the power to institute an action? The power to institute an action is a core aspect of the managerial powers. This power also includes the power to decline to sue if in one view one considers that it would be in the best interest of the company not to sue. If the Board then declines to sue, can the GM contend that the former has refused or neglected?
The main question here is how the shareholders would know whether the Board has refused or neglected to institute an action. If the Board thinks it would be in the company’s interest not to sue but the GM thinks otherwise, whose interest would prevail? This is about argument. Get arguments in this regard.
Simply not taking an action may amount to neglect but it is not refusal. Refusal means there is an active obligation to do something but one has declined to do so.
c. ratify or confirm any action taken by the board of directors.
Under what circumstance will ratification by the GM be possible? Where the board has acted without the requisite authority to act. In what circumstance will it not be possible for the board to act without authority? If the Articles has specified the scope of powers of the Board and the Board has exceeded its powers, can the GM ratify such act?
On the issue of confirmation, why would the GM need to confirm an act which is within the scope of powers of the Board? What is the essence of confirmation? When do you confirm an act? The above questions would make no sense where the legislature had intended that ‘ratify’ and ‘confirm’ should mean the same.
Again, we would like to ask. If the law gives the GM the power to ratify or confirm an act, what happens to the legality or enforceability of that act? Does it mean that the Board has to wait for confirmation or where the Board has taken action over matters it has to take action, can the GM ask the Board to wait for confirmation? There is a conflict of authorities in this regard. The only way to resolve this has been stated in the law. The law has given that clarity to the actors. Use your articles to resolve any share of power. If you have not done so, then the power of management goes to the Board. If the power is being exercised by the board, then what is the essence of confirmation?
d. make recommendations to the board of directors regarding action to be taken by the board.
There is a key distinction between directives and recommendations. While the former is mandatory, the latter is not. This means that the Board is not bound to act on the recommendations of the GM. But what is the essence of recommending when the Board is at liberty to reject? The recommendation if made but is not acted upon by the Board, can the GM complain on this basis? In our opinion, the best the GM could do in such situation is to streamline the powers of the Board by altering the articles. But such alteration would not affect executed acts (acts already taken by the Board).
We have dwelt so much on the powers between the General Meeting and the Board of Directors because in practice, there is always this rivalry between these two organs. We often find either of these organs instituting an action or defaulting to act and the other one challenging such act or default. Thus, it is important we know which of these organs has the power to manage. As noted above, the starting point of such discussion is the company’s articles but where this document is silent, recourse may be had to provisions of CAMA. We have also noted that the Board of Directors is empowered to act through lesser bodies like the committee of the board. S. 64 CAMA empowers the Board to delegate or act through committees of the Board and the MD while giving them the necessary empowerment they require. But please note that the provision is still subject to the company’s articles unless the company fails to make such alteration in its articles. Thus, the company may by its articles alter this provision. S. 65 CAMA indicates those who may act for the company as the company. We also talked about the Chairman of the Board who is merely appointed to organize meetings of the Board. Can the Chairman act as the company?
We have discussed corporate organization and those primarily charged with the power or responsibility to manage a company. Let us now consider some of the cases in this respect. In Automatic Self-cleansing Filter Syndicate v Cunninghame, the articles of the company vested the authority to manage the business in a board of directors. Further, the directors were empowered under the articles to do anything the company could do not specifically required by statute or the articles themselves to be done by the company and “subject to such regulations as may from time to time be made by extraordinary resolution.” MacDiarmid (plaintiff) and others, collectively, owned 55 percent of Automatic’s outstanding shares. MacDiarmid wanted to sell the company’s assets, which the board felt was not in Automatic’s best interests. MacDiarmid was unable to secure approval of three-fourths of the shareholders. Instead, a simple majority of 55 percent of the outstanding shareholders voted to pass the resolution for the sale of assets. MacDiarmid asked the court to force the sale, which the court refused. MacDiarmid appealed. The court found in favor of the directors, holding that a decision whether to sell the company’s assets and undertaking was a management decision that, on the terms of the company’s articles of association, was within the powers of the boards of the directors.
In Gramophone & Typewriter Ltd v Stanley, Lord Cozens-Hardy noted:
“The fact that an individual by himself or his nominees hold practically all the shares in a company may give him the control of the company in the sense that it may enable him by exercising his voting powers to turn out the directors and to enforce his own views as to policy but it does not in any way diminish the rights or powers of the directors or make the property or assets of the company his as distinct from the corporation’s. Nor does it make any difference if he acquires not practically the whole but absolutely the majority of the shares. The business of the company does not thereby become his business. He is entitled to receive dividends on his shares but no more”
In Scott v Scott, it was held that the resolutions of the General Meeting which might be interpreted either as directives to pay interim dividend or as instructions to make loans mere nullities. In either event the relevant powers had been delegated to the directors, and until those powers were taken away by an amendment of the articles, the members in GM could not interfere with the Board’s exercise.
In Quinn & Axtens v Salmon, the Board was empowered via the company’s articles to carry out a particular transaction involving leases and sale of a particular property. The articles also specified that either A (the Chairman of the company) or B (one of the two MDs) could veto the transaction. A transaction was in fact vetoed by B. The General Meeting was unhappy with this development and passed a resolution to enforce the transaction. The MD of the company approached the court for an injunction to restrain the company from completing the said transaction. The question was whether the General Meeting could enforce such transaction on the company the empowered MD of the board having said No to such transaction. The court granted the order of injunction sought by the MD. It is also discussed that even where the Board which has been given the power to manage has refused to do a particular transaction on the merit, what option do the shareholders have if they are angry? The General Meeting could alter the articles to remove the power they have vested in the Board.
In Shaw & sons (Salford) v Shaw, Peter, John and Percy Shaw had a company together. They had an argument over owing the company money, and the result was a settlement. Peter and John would resign as governing directors, promised they would not take part in financial affairs, and independent directors would be appointed and given control over the company's financial affairs. When the independent directors required John and Peter to pay money to the company, John and Peter refused. The independent directors resolved to bring a claim against them. Just before the hearing, an extraordinary general meeting was called, whereas the majority shareholders Peter and John procured a resolution to discontinue the litigation. The company, and Percy, contended the resolution was ineffective. The court noted that:
“A company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers. The only way in which the general body of the shareholders can control the exercise of the powers vested by the articles in the directors is by altering their articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders.”
In Marshall’s Valve Gear v Manning, Wardle & Co., the directors of the plaintiff company failed to pass board resolutions to institute legal proceedings against the defendant company for its infringement of the patent owned by the plaintiff company three of the directors who were interested in the defendant company opposed the resolutions. A majority shareholder brought an action on behalf of the plaintiff company to sue the defendant. It was held that under the company’s articles, the majority shareholders had the right to bring such an action. In its judgement, the court stated that the board may exercise all such powers of the company, the members in General Meeting could control the acts of the directors by way of an ordinary resolution and the board is bound by it, provided that such control does not contravene any provisions of the company’s articles or of the legislation. The case of cuninghame was distinguished on the basis that in this case, the management power vested in the board was stated to be subject to the regulations prescribed by the general meeting; whilst in cunninghame, it was stated to be subject to an extraordinary resolution passed by the general meeting. Since no specific form of resolution is referred to in the provision, it appears that members if general meeting could direct the board of directors simply by an ordinary resolution.
In Odutola Holdings v Ladejobi, the issue before the court was whether directors of a company can authorize action to protect the company’s business interest. The court answered this question in the affirmative in the light of the provision of S. 63(3) CAMA. The only exception to this rule is where the company’s articles provide otherwise.
In AVOP v A-G., ENUGU, one of the shareholders of a company had allegedly interfered in the management of the affairs of the company by suspending the management and setting up an indigenous management team. This had happened without a resolution by the GM. Having considered that there was indeed an interference, the court went on to consider whether such interference was unlawful. The court first pointed out that the management of the company was a function of the directors of the company as spelt out in the company’s articles. The court held that by virtue of S. 63(1) & (3) CAMA the several acts of interference of the appellant by the respondent were in flagrant disregard and contravention of both the MEMAT and CAMA and therefore unlawful.
In Virgin Tech Ltd v Mohammed & PHB, a director of a company had transferred a sum from the company’s account to her personal account. Attempts at persuading the director to return the money failed. The CEO then instituted an action in court in the name of the company against the director and some others. The director challenged the locus standi of the CEO to institute the suit in the name of the company. The trial court upheld the objection and struck out the suit. On appeal, the appellate court noted that the combined effect of sections 63 and 65 CAMA are to enable the principal officers of a company to take steps to arrest and nib in the bud activities taken by persons, which may be inimical to the company. The court held that since the director’s act of transferring the company’s funds to her personal account was inimical to the company, the CEO did right by taking steps to arrest the activity. The appeal was therefore allowed.
By virtue of S. 65 CAMA, we understand that if any of the aforesaid bodies is carrying out an act in the usual way the company’s business is being carried out, then the act binds the company as if it were the act of the company and a party is entitled to sue to enforce such act or agreement which the company has entered. But the Act doesn’t stop there. The proviso to that section states further that where the other party had actual knowledge at the time of the transaction in question that such organ “had no power to act in the matter or had acted in an irregular manner or if, having regard to his position with or relationship to the company, he ought to have known of the absence of such power or of the irregularity”, the act would not bind the company. The proviso also states that if in fact a business is carried on by a company, any such transaction entered into by the principal organs and another person in respect of such business would bind the company notwithstanding that such business was not stated in the company’s memorandum. Note the ultra vires rule as discussed previously. But in practice, the rule is of little or no practical effect. This is because lawyers have been able to ‘invent’ clauses allowing companies to do practically anything that is profitable.
The following cases discuss the rules of attribution:
Willams v Natural Life Health Food Ltd
Re Supply of Ready Mixed Concrete
Director General of Fair Trading v Pioneer Concrete (U.K.) Ltd
Meridian Global Funds Management v Securities Commission
We now move to officers and agents. By virtue of S. 66 CAMA, acts of officers and agents are not ordinarily attributable to the company. This means that they are not the main organs whose acts are attributable to that of the company as the company’s act. There are however exceptions. First, the acts of these officers and agents would bind the company where one of the three principal organs has authorized (whether expressly or impliedly) them to act accordingly. Secondly, their act would bind the company where the company has represented the officers or agents as having its authority to act in the manner except where the other party had actual or constructive knowledge that the agent or officer had no such authority.
In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd, one director of a Buckhurst, its agent, commissioned Freeman and Lockyer as architects for their Buckhurst Park Estatem project. Buckhurst later refused to pay their invoices, saying that thedirector was not authorised to enter into the transaction which commissioned the architects. The issue before the court was whether the company was bound to pay. The court answered in the affirmative. The trial court noted that despite the fact that the director was never appointed as a managing director by the board, he had acted as such within the knowledge of the directors of the defendant company. On appeal, Lord Diplock distinguished between ‘actual’ and ‘apparent’ authority of an agent…
When a third party deals with an employee below the level of director, the position is more problematic and until recently, the courts have shown a marked reluctance to recognize any ostensible authority even of a manager. But this is now changing and it may be taken that a manager even if he does not have actual authority, will generally have ostensible authority to undertake everyday transactions relating to the branch of business which he is managing (though probably not if they are really major transaction as in the case of Armagas Ltd v Mundogas SA). In that case, the court ruled that where an agent is known to have no general authority to enter into transactions but the agent falsely represented to the third party that he had obtained from principal specific authority to enter into a one off transaction, principal would not be bound by agent’s action. In essence, an agent cannot clothe himself with ostensible authority simply by saying that he has authority.
Please note that the authority of an agent or officer may be conferred prior to any action by him provided he has the knowledge of such action. The authority may also be conferred by subsequent ratification of an agent or officer’s act provided there is acquiescence by any one of the three principal organs. Please note also that ratification by the acting directors or acting MD would be equivalent to ratification by any of the three principal organs. However, nothing in this section shall render the rule of vicarious liability inoperative. Thus, a company is liable for the acts of its servants while acting in the scope of their employment.
Generally, it is not possible for a company to use its articles to exempt the officers or agents from liability; any such provision in the article is void. But the company may indemnify the officer or agent in any proceedings (whether civil or criminal) in respect of any liability incurred by him in defending the proceedings in which judgement is given in his favour or in which he is acquitted.
As regards third parties, the provision of sections 68 and 69 is important. By S. 68 CAMA, a person shall not be deemed to have constructive notice of the contents of the memorandum and the articles or other registered documents with the CAC. S. 69 is the logical extension of S. 68. It entitles a person in a transaction with a company to make certain presumptions:
That the company’s memorandum and articles have been complied with
That such persons acting for the company have duly been appointed by the company or have the authority to exercise the powers and perform the duties customarily exercised or performed by the principal organs
The appropriate secretary and other officers or agents have the authority to issue documents or certified copies of documents on behalf of the company.
A document bearing the company’s seal and signatures of two persons is deemed to have been duly sealed by the company.
A person is not entitled to make such presumptions where he had actual knowledge or should have known…..
Find three or four instances under the Act where the Act empowers the GM to do particular acts. For example, the law gives the GM the power to appoint and remove directors. But the law permits the Board to make appointments in the event of vacancy. If a casual vacancy has been filled, such director must be submitted to the GM for approval or rejection. What section can you find this under the Act?
Having looked at all this, we now look at the individual organs. Let us start with the individual directors as distinct from the Board as a whole or collective group. Please read the case of Longe v First Bank. Both decisions of the Court of Appeal and the Supreme Court are relevant.