This is in relation to the scheduled training which is meant to equip shareholders with an understanding of the principle of personal legal personality. Historically, companies and shareholders were treated as a unit, implying that the burden of the company was equally the burden of the shareholders. In that aspect, shareholder assets and properties were less secure particularly when a company underwent liquidation, ran into losses or debts since the individual assets would be used to settle the debts or losses.[1] Th companies, in the principles’ absentia were at a position of making any individual liable provided they owned or worked in, or on behalf of the company in the event they committed an offence. Moreover, the company could make agreements that could render both the person and the person liable. It was until 18967 when the principle of separate legal personality was applied in Salomon v Salomon & co. Ltd case.[2]
The principle of separate legal personality is a doctrine which makes a company a “legal person”, different from its owners. According to the principle, the company and the owner are two different legal entities which can be individually held liable for their offences.[3] As stipulates the principle, the company has its own legal rights, its own obligations, its own existence that are different from the person opening the company. subject to the provision, the company owns similar rights to that of a natural person, implying that it can incur debts or losses, sue and be sued. As previously mentioned in the introduction section, the principle was first applied in Salomon v Salomon & co. Ltd [1897].[4] In this case Mr. Salomon had registered a company under the Company Act 1862[5], making himself and the family members to be the company shareholders. After sometime, the company went into liquidation, that is, it went into financial difficulty. Noteworthy, there was a rule at that time which held that in the event a company went into liquidation, the first persons to be remunerated would be the secured creditors while the left-over sum of money would be issued the unsecured creditors. The unsecured creditors filed a lawsuit against Mr. Salomon, objecting his first payment as they claimed that he and the company were the same. The ruling court, in its decision relied on a different opinion but followed the rule which directed for the first payment of the creditor. In its decision, the court outlined in its judgment that the company was distinct, completely different and had its own existence that differed from that of a person who runs it. The judgment favored Mr Salomon, as it applied the concept of separate legal entity mentioning that the company Salomon & co. Ltd and Mr. Salomon were two entirely different personalities.[6]
The doctrine outlines three outstanding features that are worth noting. Firstly, under the doctrine, a company has the ability of suing and getting sued in its own name. In that regard, the company remains at a position of practicing its right of suing a director should it when they engage in businesses of acts that are not in conformity with the dictates of the company.[7] Moreover, when, assuming there is a contractual breach between a director and a second party, the primary aspect to be considered is whether there can be an element of holding the director personally liable for the breach. Typically, a director may be held personally liable when they engage in insolvent trading, signed a personal guarantee, overpaid themselves or when they dispose company assets for free or at a price below the market value.[8]
The Three Features of the Doctrine
Secondly, the doctrine allows a company to conclude contractual agreements in it own name unlike previously when the agreements could be concluded through the name of the owner or its members. This allows the company to be personally held liable should there be breach of a contractual agreement. Finally, the element of limited liability was set in with the imposition of the doctrine.[9] Limited liability is a strategy of securing shareholder or company members’ individual assets should the company incur debts. According to the doctrine, the company can incur debts as a natural person, implying that it remains at a position of settling its debts rather than individual shareholder assets being frozen should it incur debts or undergo liquidation. A case worth mentioning in this regard is (Itzikowitz v. Absa Bank Ltd, [2016]).[10] The plaintiff Gary Itzikowitz (Itzikowitz) filed a lawsuit against Absa Bank (Absa), seeking to recover an amount that had been reduced from his shareholding in a project. The issue in question was who was at loss between the plaintiff and the defendant with the ruling made in favor of the plaintiff.
The doctrine makes a company to be liable for the debts it has incurred thus protects the creditors or shareholders from debts or liabilities of the company. Additionally, when such debts have been incurred by the company, the shareholders are well protected from being sued by creditors but the remains at a position of suing or getting sued by the company as held in (Lee v. Lee’s Air Farming Ltd, [1959].[11]
Limited liability; limited liability of the company arises from the fact that it is a separate person different from its shareholders. Thus, it worth mentioning that the liability of a company separately is unlimited. However, it is only the liability of the members which remains limited.[12]
Contractual capacity; since a company is considered to play a similar position to that of a natural person, the principle makes it to have the capacity of entering a binding contractual agreement just like a natural person. As such, neither its members or shareholders becomes liable for its contractual obligations. Besides, the members lack the authority or capacity to sue for enforcement of contract made by the company but the company remains liable for acts committed buy its authorized agents. [13]
Corporate property: Persons who no longer intend to be company members are typically entitle to whatever price they can gain from their shares. Additionally, a shareholder lacks the legal interest in the company’s property, thus cannot get the property insured against theft, damage and so forth Macaura v. Northern Insurance Co.[14]
Whether director X is liable for breach of director duties?
Generally, director duties are codified within s75 and 76 of the Companies Act 71 of 2008. Directors may at times be held to be personally liable for certain breaches provided it can be established that their acts fell short of the standards set down within the aforementioned sections. [15]
Section 76(3)(c) requires directors to exercise reasonable skill, care and diligence in their service delivery to a company. For the court to establish whether the director exercised skill, care and diligence, both objective and subjective tests have to be employed. Under objective test, the court primary attempts to define what a reasonable director would do when found in similar circumstances.[16] Consequently, the subjective test focuses on the expectations of a qualified and experienced director. In determining whether the director exercised diligence, skill and care, the business judgment rule (s76(4)) must be invoked. Under this rule, a director is to be considered to have acted to the best interest of he company and with the required skill, degree of care and diligence when they took reasonable step of getting informed of the matter. Also, the skill, care and diligence shall have been exercised when the director had no material financial interest in the subject matter of their decision or when they made or supported their decision believing it would be in the best interest of the company(Visser Sitrus (Pty) Ltd v. Goede Hoop Sitrus (Pty) Ltd, [2014]) [17]
Limited Liability
In X’s situation, there is a significant number of sections of the Act he could rely on in defending his position thereby relieving himself of any liability. While the shareholders and ABC holds that X is liable for making incorrect decisions with regards to the company’s finances, X claims that he had no financial interest in the matter. He points out that after getting informed of the company’s financial affairs, his decision was made in good faith and was based on the information he had requested and obtained from the company’s auditors. X’s standpoint can solidly be defended within the prospects of s75 of the Act which imposes a duty on directors of disclosing any personal financial interest in matters of the company to the directors. The provision stipulates that should a director find themselves in a position which would bring them into conflict with the company on financial grounds, the information should immediately be disclosed to the directors thereby avoiding any ground of belief that the director had a conflict of interest while performing their duties. Contrary to the provision, X argument sufficiently defends his position of not having any personal financial interest. In addition to the provision, X mentions that the decision made was in good faith and in line with the information requested from, and represented by the company auditors. In light of the provided facts, it could be adequate to argue within the lenses of s76(3)(a) and s76(3)(c).
The business judgment rule would sufficiently defend X’s position based on the facts mentioned in the case. Firstly, X mentioned that he was fully informed of the financial affairs of the company which meets the business judgment rule necessitating that a director should make reasonable step of getting informed of the matter.[18] In such an aspect, X could posit that the decision was made following what he knew concerning the financial status of the company. Moreover, the second business rule requirement making it necessary for a director not to have personal financial interest would be well fulfilled by X argument of not having personal financial interest in the matter. Finally, the decision was made following the provisions from the audits. In so far as directors are required to make independent judgment[19], they may consult experts or certain documents including audits to help them in making relevant decisions.
Conclusion
X appears to have exercised reasonable skill, care and diligence as established in the business judgment rule. Therefore, X has no liability with respect to breach of director duties.[20]
Whether X (agent) has authority that would bind the company (principal) and the B (third party)?
When it comes to managing the day-to-day operations of a company and matters pertaining to authority, the company is referred to as the principal while the directors are referred to as agents. Normally, there is always a contract between the principal and the agent which creates the agent’s authority. Exercise of such authority between the agent and the third-party results into creation of a privity of contract between the principal and the third party. An agent -principal relationship results into three distinct authorities. These could be actual express authority, actual implied authority and ostensible authority.
Contractual Capacity
Express authority arises when the principal expressly gives the agent the authority either orally or through writing to undertake certain duties.[21] As established in (Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd, [1964]) [22], express authority arises when there is an agreement between the principal and the agent which indicates that the agent is given the power to act on behalf of the principal and the agent’s authorized conduct binds the principal. In other words, there are certain undertakings which the company would like a director to perform while certain limits would as well be set. When the company specifically outlines such duties, either orally or through writing, the director shall have gained express authority and any agreement entered between the director and a third party, the agreement remains to be binding.
Implied authority on the other hand is implied from the parties’ conduct. Such conducts range from doing things that are incidental necessary in effecting the principal’s express instructions like undertaking certain actions or preparing certain documentations and so forth. When the agent’s conduct falls within the scope of business, within which the authority is conferred, the principal will usually be bound and liable unless the actions were limited within their agreement. Some of areas within which the principal will be liable should an agent undertake include entering contractual agreement on behalf of a company, purchase or sale of company property or goods, employing suitable persons, receiving and making payments among others.
Ostensible authority deals with what the third party knows concerning the authorization of the agency and the agent.[23] As for this type o authority, an agent shall bind the principal in a contractual agreement provided they reasonably appear to be an agent even when they lack express or implied authority. In (Pacific Carriers Ltd v. BNP Paribas, [2004][24] for example, the most striking question was what a reasonable person would have understood them to mean, based on the surrounding circumstances and the wording.
In common law, a company lacks the capacity to act on its own. This makes the remain dependent on their representatives in concluding contracts. Thus, when a company authorizes an agent to act on its behalf, the agent possesses actual authority, which could be express or implied. Any act therefore, performed by an agent on behalf of the company and falling within the limits of what they were hired to do remains binding to the company. Moreover, a company may as well be bound by a contract based on estoppel which is basically ostensible authority. Aside from the common law approach to authority existing between the principal and the agent, s20(1)(a) of the Company Act holds that a contract shall remain valid if the directors lacked the authority to authorize an action by the corporation especially as a result of a limitation, qualification or restriction being in existence against the capacity of the company.[25]
Subject to the above principles, the case facts specify that director X had authority issued by ABC company to act on its behalf. The authority allowed her to enter into loan contracts with the company with the prior written approval of all directors of the company. In that aspect, the director would be acting within her express authority given that such authority is typically given orally or in written form. Equally, by the virtue that X is a director, her authority would be acquired through conduct which in that case would be considered as implied authority. When X acts within the implied or express authority, the contracts initiated between her and the third parties will be binding unless she acts beyond the scope of her authority. As the principal -agent relationship suggests in the case scenario, the director was allowed to enter into contract agreements particularly for loans but had to first obtain prior approval from directors. In that regard, an agreement entered between X and B would remain binding in the event the agreement is primarily approved by other directors.
Corporate Property
Conclusion
Director X would be acting within her express or implied authority when she enters a contractual agreement with B. However, the agreement only remains binding when the director acts within the scope of her authority for which she was hired to perform her duties.
Whether A and C are entitled to first be afforded an opportunity to subscribe to the new shares?
A’s situation is a typical example of situations where the right of pre-emption comes into play. Right of pre-emption simply refers to the right owned by a private company shareholder in terms of being considered in priority in matters pertaining purchase of additional shares when issued within the company. According to s39 of the Company Act 71 of 2008, all shareholders within a private company, ae entitled to the right, in priority to anybody else, who are not shareholders in the company, to subscribe and be offered a percentage of shares proposed or issued, equal to the shareholder’s voting power before the offer can be made to other persons. The right of pre-emption was literally formulated with the intent of guarding against the dilution of ownership in private companies. Shareholders of private companies are entitled to the right of pre-emption to the newly issued shares that a company provides. In that regard, when new shares have been issued by a private company, such shares must first be offered to the existing shareholders in a proportionate manner to the shareholders’ current shareholding. However, there are certain exemptions in place that goes against this provision. Firstly, the right of pre-emption shall not be exercised in the event that shares are issued in form of options or conversation rights. also, the rights fail to exist when the shares are issued as capitalization shares and finally, the right is never exercised when the shares are issued with the intent of having them into consideration in future.
In reference to the provided question, an outstanding area worth determining is whether the A qualifies to be protected under the right of pre-emption. The initials Pty Ltd in the ABC company’s name indicates that it is a proprietary limited company which implies that it is privately owned company. As such, the right of pre-emption shall apply. Checking at the exemptions set in place, none of them features in the provided case scenario. When the provision is followed, the shareholders are likely to retain equal voting powers as before the issuance of the shares was made. Contrarily, when the shares are issued to D as proposed by B, the existing shareholders shall have their voting powers reduced with half of the voting powers (50%) being granted to D. The remaining shareholders shall share the remaining 50% of the voting powers in proportionality with shares held by them.
Conclusion
A and C are entitled to the right of pre-emption since they are existing directors and ABC is a private company. They can solidly defend their stand under s39 of the Act which directs that the existing shareholders should be served in priority in matters relating to issue of new shares.
References
Bayern, Shawn et al, ‘Company Law and Autonomous Systems: A Blueprint for Lawyers, Entrepreneurs, and Regulators’ (2017) 9 Hastings Sci. & Tech. LJ 135
Brayne, Sarah, Karen Levy and Bryce Clayton Newell, ‘Visual Data and the Law’ (2018) 43(4) Law & Social Inquiry 1149
Chiu, Iris HY, ‘Regulatory Duties for Directors in the Financial Services Sector and Directors’ Duties in Company Law-Bifurcation and Interfaces’ [2016] Journal of Business Law
Coulding, Simon, Company Law (Cavendish, 2018)
Davies, Paul, Introduction to Company Law (Oxford University Press, 2020)
Dignam, Alan, Company Law (Core Texts Series, 2020)
Hannigan, Brenda, Company Law (Oxford University Press, USA, 2018)
Hudson, Alastair, Understanding Company Law (Taylor & Francis, 2017)
McLaughlin, Susan, Unlocking Company Law (Routledge, 2018)
Nkem, Amadike, ‘Corporate Personality in Company Jurisprudence: Divergences in Theoretical Perspectives’ (2019) 10(1) Nnamdi Azikiwe University Journal of International Law and Jurisprudence 183
Nou, Jennifer, ‘Subdelegating Powers’ (2017) 117 Colum. L. Rev. 473
Swart, Christiaan WJC and M Lombard, ‘Representation of Companies Under the Companies Act 71 of 2008’ (2017) 80 Journal of Contemporary Roman-Dutch Law 666
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Wild, Charles, Smith & Keenan’s Company Law (Pearson UK, 2019)
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964) 1964(I9641) QB 2 480
Itzikowitz v Absa Bank Ltd (2016) 4 SA 432
Lee v Lee’s Air Farming Ltd (1959) 1959 NZLR 393
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
Salomon’s Case (1897) 1897(1895–99) AC 22
Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus (Pty) Ltd (2014) 5 SA 179
THE COMPANIES ACT 1862
‘Companies Act 71 of 2008 | South African Government’ <https://www.gov.za/documents/companies-act>
‘Macaura v Northern Assurance Co Ltd [1925] AC 619’, Simple Studying (18 February 2020) <https://simplestudying.com/macaura-v-northern-assurance-co-ltd-1925-ac-619/>
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