7) Validity of Corporate Actions Flashcards
What does the Companies Act say about companies capacity to contract?
In terms of the Companies Act, a company has the same capacity that a natural person has except where it is incapable of performing the act in question or the MOI restricts capacity.
So, technically if the MOI restricts capacity by including an objects clause the company technically does not have capacity to perform the act and according to the ultra vires doctrine the transaction would be void.
What does acting ultra vires mean?
It means to act beyond one’s legal authority.
What is the position of the doctrine of ultra vires under common law?
- (External) Historically, a contract that is ultra vires is deemed to be null and void.
- (Internal) The consequence will be that the directors may incur a liability for breach of their fiduciary duties and the shareholders of the company are entitled to restrain the company from entering into ultra vires contracts.
What the position of the doctrine of ultra vires under Company Act?
The Company’s Act 71 of 2008, in terms of Section 20(a), states that no act of a company is void by virtue of it being ultra vires.
- It is outdated to restrict a specific business activities. In terms of Section 19 (1b) of the Company’s Act a company has the same legal capacity and powers of an individual, to enter into any business transaction.
- (External) The contract will be valid unless capacity was limited in the company by their MOI and the company is ring-fenced.
- (Internal) The consequence will be that the directors may incur a liability for breach of their fiduciary duties and the shareholders of the company are entitled to restrain the company from entering into ultra vires contracts.
What is an Objects Clause in relation to companies?
- Objects clause of companies is used to state the objective of the company since it was an ultra vires document.
- In the past, if the company breached the objects clause, it could be sued by the shareholders and as such companies made their objects clause incredibly broad as to avoid liability to shareholders.
- This made the objects clauses useless and hence, why the new Act does away with it.
What is the Ultra Vires Doctrine?
- Doctrine that states that an act that is outside the capacity of a company is void.
What is the Constructive Notice Doctrine?
Means that a 3rd party knows that there is a procedural requirement, but they are unsure whether or not it has been complied with.
What is the Turquand Rule?
States that a third party dealing with a company is entitled to presume that all of the procedural requirements and formalities have been complied with by the company.
- Can be used by a third party when they are trying to enforce the contract, but the company is denying liability for the contract due to a lack of authority.
- A 3rd party cannot use the turquand rule against a company that is ring-fenced due to the fact that a requirement of the turquand rule is that you assume that they have complied with their internal regulations.
- If you are a RF company, the fact that there is RF in the company name indicates that the 3rd part should look into the restriction in the MOI before contracting.
Provide a summary of Section 20(a)
An action of the company isn’t void simply because that action was prohibited by a limitation in the MOI or because the directors lacked authority to authorise the action in question, due to the limitation.
- An act is no longer void simply because it is ultra vires/simply due to the fact that there is a lack of capacity.
- Companies Act abolishes the ultra vires principle in relation to company contracts/the MOI/an internal requirement.
Provide a summary of section 20(b)
In legal proceedings between i) the company and its shareholders, directors or prescribed officers as well as ii) legal proceedings between the shareholders and directors or prescribed officers, these people are allowed to assert that the action in question is void due to the limitation in the MOI.
If a company contracts with a 3rd party when the company is outside of its capacity, the contract is no longer void when the party attempts to enforce it by virtue of the ultra vires law
Changing the range of the ultra vires doctrine to not apply externally/to third parties means that the company will still be liable to shareholders for breaching capacity but just not to third parties.
The doctrine of ultra vires has been abolished externally by the Act but still has contractual force internally.
Internally this means that the director can be held liable for breach of this capacity
What are the principles related to shareholders claim for damages?
Essentially, each shareholder can claim damages from any person who caused (intentionally, fraudulently or negligently) the company to act inconsistent with the Companies Act or the limitation as stipulated in the MOI.
How may third parties seek to enforce a contract that a company denies liability due to a lack of capacity?
The Turquand Rule
- If a company denies liability on the grounds that the contract was unauthorized due to internal procedural deficiencies, the third party can invoke the Turquand rule. They can argue that they had the right to assume that the necessary internal approvals and processes were completed by the company’s agents, and thus, the company should be bound by the contract.
Estoppel or Ostenible Authority
If the company had, by its conduct, led the third party to believe that the agent had the authority to enter into the contract, and the third party relied on that belief to their detriment, the company may be estopped from denying the agent’s authority. This means the company cannot claim lack of capacity if it previously represented (implicitly or explicitly) that the agent had the authority to act.
When could company raise constructive notice in response?
Constructive notice means that a third party knows that is a procedural requirement but they are unsure as to whether or not it has been complied with
Can only be used as a defence against a 3rd party in ring-fenced (RF) companies
If the company isn’t ring-fenced, then this doesn’t work as the third party requires actual knowledge as opposed to implied knowledge about the MOI
What is a ring-fenced company?
Ring-fenced means that the company that is ring-fenced has some sort of restriction in their MOI and hence the third party should have gone to look at the MOI after having seen that the company was ring-fenced.
Provide a summary of the Statutory Turquand Rule (Section 20 (7))
Section 20(7) of the Companies Act states that third parties dealing with a company are entitled to assume the company has followed all formal and procedural requirements unless the third party knew or should have known otherwise (RF Companies).
