Company Law (CML2001F)
Notes
Week 1: Introduction to Company Law
Legal Status and Juristic Personality
Benefits of incorporation:
o Separate legal person (creates limited liability – limits members’ exposure to risk).
o Perpetual succession – continuation of company’s existence despite death,
bankruptcy, change of membership, exit from the business of any member etc.
Considerations of incorporation:
o Number of persons involved
o Ownership (shareholders) vs management (directors)
o Process of incorporation
o Size of the business
o Tax implications
Legal status: company is treated separately from its owners. It has its own capacity to sue or
be sued, to contract, to own property etc.
Juristic Personality:
o Natural person: all human rights apply
o Juristic person: created through law, certain rights apply.
Principles of agency:
o Juristic person has no physical presence – relies on human agents to act on its behalf.
Fiduciary law:
o When agents act on behalf of a principal, the principal is left vulnerable to abuse.
o Law considers certain types of agents as fiduciaries – holds their conduct to a high
standard.
o Fiduciary duty: responsibility to act in good faith and in the principal’s best interest.
Juristic and Natural Persons
Development and History
Corpus (Latin) means corporation – Roman’s first created idea of separate entities.
Corporate law developed further in England:
o The British Bubble Act:
An unincorporated company issued shares. Within weeks, the share price increased
exponentially and then plummeted. Government realised that this was not
sustainable and that further regulation was required – rise of incorporation.
o Joint Stock Companies Act:
Litigation had to be carried out against names of all members (sometimes thousands
of people) – this was cumbersome. The Act created a 2-stage process where could
gain corporate status (did not create limited liability).
o Limited Liability Act:
The members of a company were now only exposed to the risk of losing what they
contributed to a company.
, Juristic Person:
Collection of many individual united into one body, having perpetual succession under an
artificial form, and vested by policy of law, with the capacity of acting in several respects as
an individual, particularly of contracting obligations, suing and being sued, exercising
political rights, more or less extensive according to the design of its institution, or the
powers conferred upon it.
Common Law Juristic Persons
It is possible for an entity to be considered an juristic person despite not being registered in
terms of the generally enabling statute or created in terms of a specific statute.
Requirements:
o Behave like a separate legal person
o Cannot be a for-profit company (i.e. cannot distribute profit to members).
Importance of registering: important proviso that applies to common law juristic persons
ensures that businesses have to register.
Juristic Persons Created by Statute
1. Specific Legislation (Act of Parliament).
2. Registration in terms of the generally enabling statute.
The Company as a Juristic Person
Section 19 of the Act confirms that a company is a separate legal person:
o From the date and time that the incorporation of the company is registered, the
company:
Is a juristic person which exists continuously until its name is removed from
the companies register in accordance with the Act;
Has all the legal powers and capacity of an individual, except to the extent
that:
A juristic person is incapable of exercising any such power, or having
any such capacity; or
The company’s MOI provides otherwise.
Key features of a Juristic Person:
o Limited liability
The Act guarantees limited liability for its members, not the company itself. They are
liable only to the extent of their contribution.
o Assets are exclusively the property of the company
Members cannot use the assets for their own personal benefit.
o Separate legal personality
o Company itself must seek redress when it has been wronged
EG: if the directors are negligent, the shareholders cannot take action against said
directors in their own capacity, but rather that of the company. Directors act for the
company, not for the shareholders.
o A company can contract with its members
o A company can acquire rights and duties separate from its members
This can be done through contracting.
o The shareholders (owners) have no automatic right to manage
They do not fulfil this role – they have other decision making abilities (i.e. voting for
directors etc.)
, o Profits belong to the company
Profits are only distributed if directors feel that it is in the company’s best interests.
Principles of Agency
Agency is fundamental because an entity cannot act for itself and needs agents to act on its
behalf.
The agency relationship gives rise to issue of trust – this is where fiduciary duties come into
play.
There are 3 members to an agency matter: the principal, the agent and the 3 rd party.
o Principal: does not partake in the activity taking place (the company).
EG: company itself does not negotiate a contract.
o Agent: in charge of the activity on behalf of the principal.
EG: negotiates the contract on behalf of the company.
o 3rd Party: the person on the other side of an activity.
EG: the agent negotiates the terms of the contract with the 3 rd party.
NB: at this point, there is only 1 contract between the principal and the agent (agency
contract). The principal has to trust that the agent is acting in the principal’s best interests –
the agent has a fiduciary duty towards the principal.
NB: once negotiations between an agent and a 3rd party has been concluded, the resulting
contract is between the principal and the 3rd party – the agent concluded the contract on
behalf of the principal.
NB: the agent can only enter into a valid contract on behalf of the principal if the agent is
authorised by the principal.
What/Who is an Agent?
Agency is a contract in terms of which one person (agent) is authorised and usually required
by another (principal) to contract or negotiate a contract of the latter’s behalf with a 3 rd
person.
There are 2 contracts:
o Between the principal and agent.
o Between the principal and 3rd party.
The agent is a medium, there is no contract between the agent and the 3 rd party.
Agency problem:
o Agent does not act in the best interests/align their interests with the principal.
o Authorisation issues (what are agents authorised to do/what power do they have?).
o Commonly found in companies where directors act on behalf of companies.
Legal Relationship Between Agent and Principal
There is a contract between the agent and the principal – contract of mandate.
Mandate: instructions given by the principal to the agent in respect of the activity being
done for the principal.
The agent can be:
o Empowered: has authorisation to enter a contract that is bounding on the principal.
o Unempowered.
, Authority
In the context of agency, authority is of the essence.
Generally speaking:
o If the agent acted with authority, the parties to the contract will be the principal and
the 3rd party – not between the agent and the 3rd party.
o The agent incurs no rights or obligations based on the contract with the 3 rd party.
o If the agent does not have authority, the principal cannot be bound by the contract
and the agent might be liable for the obligations incurred.
The agent can acquire authority through:
o Express authority:
The principal expresses, verbally or written, the instruction to act on its
behalf. Must indicate the exact scope of authority (the limit of power).
EG: Power of Attorney:
General: authority for any transaction
Specific: authority for specific transaction (must be in writing).
o Implied authority:
Conduct of the parties must be such that in terms of the rules of common
sense, in the circumstances, there is no interpretation other than that the
parties did intend this act of agency (implied in the circumstances – it goes
without saying).
EG: A farmer hires a manager for his farm. The manager would have implied
authority to buy fertilizer – he would not need express authority every time
he wanted to buy fertilizer.
o Ratification:
Authorising after the fact (after the contract was concluded).
It is retrospectively giving authority.
o Ostensible/Apparent authority:
Estoppel: a person cannot make an assertion which is contrary to a position
that they previously took.
The principal giving impression of authority and not removing it means that
the principal can still be bound to the contract with the 3rd party.
If the principal removes authority from the agent and the agent proceeds as
if he has authority, without letting the 3rd party know otherwise, the
principal may take legal action against the agent.
EG: Scott has a shop and he hires a salesman named Josh. Scott tells Josh
that he may not sell the products on display. Later that day, a customer
comes in and requests one of the display items, and Josh proceeds to sell it to
the customer, even though he does not have authority. The 3rd party can
bind Scott through estoppel – the impression given was that stock on
display was for sale. Scott may take legal action against Josh.
Requirements:
Must be an impression made by the principal to the 3 rd party (i.e.
leaving stock on display).
Must be reasonably expected to mislead the 3rd party (i.e. stock on
display generally indicates items for sale).
