Corporate

Capacity
 Pertinent Questions
You know you understand this topic if you are able to answer the following questions:
1. What is meant by legal capacity of a company?
2. What is the ultra vires doctrine?
3. What are the consequences if a company acts outside its capacity?
4. Under what circumstances does a person have the authority to represent a
company and bind it to a contract?
5. What is the doctrine of constructive notice?
6. What is the purpose of the Turquand rule and how does it operate under the new
Companies Act?
 Legal Capacity
 Legal Capacity is understood from a historical and from a modern perspective.
 To understand legal capacity in a modern perspective, it is necessary to examine
the historical development of the ultra vires doctrine.
 Apart from having to comply with the formalities of a valid contract, a contract was
legally binding and enforceable against a company when two additional company
law requirements were fulfilled.
1. The company was required to have legal capacity to enter in to a contract.
2. The director or officer representing the company had to have the authority to
enter into a contract on behalf of the company.
 Legal Capacity (cont..)
What does legal capacity mean in both the modern and historical context?
 Capacity means the legal competency and powers of a company.
What does authority mean in both the modern and historical context?
 Authority refers to the power of a company director or officer or any other
individual to act on behalf of the company.
 The Legal Capacity of a Company was determined by the main object of the
company that were set out in the objects clause of its memorandum of
incorporation.
 Legal Capacity (cont..)

 The objects clause was taken to define the existence of a company as a

legal person.
What is the link between legal capacity and the ultra vires doctrine?
 According to the doctrine, a company existed in law only for the
purposes of the objects stated in the objects clause of the memorandum.
 Beyond this, the company did not have legal existence.
 The Ultra Vires Doctrine
If a company entered in to an agreement or transaction that exceeded its legal
capacity as determined by its objects clause, the company ceased to exist as a
legal person and the contract was rendered null and void.
 The case of Ashbury Railway Carriage and Iron Co v Riche (1875) LR 7HL 653
set out the precedent and the standard of the ultra vires doctrine.
 The decision was problematic but the court’s approach was to try and protect
the interests of the shareholders and avoid unfairness to third parties.
 shareholders and investors were protected so that they would know the
purposes for which their money was used.
Ashbury Railway Carriage and Iron Co Ltd
v Riche (1875) LR 7 HL 653
Introduction
• This is a UK company law case, which concerned the objects clause of
a company's memorandum of incorporation. Prior to this case, the
position of a company performing a lawful activity, which is outside of
the scope of its objects clause was unclear. For the first time, the
House of Lords laid the jurisprudence on this issue when it dealt with
the Ashbury v Riche case.
 Facts of the Ashbury Railways case
The Ashbury Railway Carriage and Iron Company Ltd. was incorporated under the
Companies Act 1862, and its memorandum, clause 3, stated that its object was to “to
make or sell, or lend, or hire, railway carriages and wagons, and all kinds of railway
plants, fittings, machinery, and rolling stock; to carry on the business of the mechanical
engineers and the general contractors; to purchase and sell, as merchants, timber, coal,
metals, or other materials; and to buy and sell any such materials on commission, or as
agents.” And clause 4 stated that activities beyond the scope of clause 3 will need a
special resolution. But the company agreed to give Riche a loan to build a railway from
Antwerp to Tournai in Belgium. Later, the company denied the agreement. Riche sued,
and the company pleaded that the action was ultra vires
 Ashbury Railways case (cont…)
• Issue : whether the contract was valid? If not, whether it could be
ratified by the members of the company?
• Held : the House of Lords held that the contract was ultra vires the
memorandum of the company and thus, null and void and cannot be
ratified by the members.
 Application of the law and arguments
• The contract was beyond the objects as defined in the objects clause
of the memorandum therefore it was void;
• The Company had no capacity to ratify the contract;
• The contract of employment with Mr Richie was ultra vires for the
words in the objects clause;
• To make sell or lend on hire …all kinds of railway plants to carry on
the business of mechanical engineers and general contractors DID
NOT extend to the construction of an actual railway line;
 Application of the law and arguments
• An ultra vires act or contract is void because the Company lacks the capacity to
make such a contract, how can they have capacity to ratify it. If the shareholders
are permitted to ratify an ultra vires contract, it will be permitting to do the Act
which Parliament is prohibiting to do so.
• The company incorporated under the companies Act has power to do only those
things which are authorised by it object clause of its memorandum and anything
not authorised (expressly or impliedly) is ultra vires the company and cannot be
ratified or made effective even by the unanimous agreement of the members.
• The Directors were made personally liable .
 Conclusion/Significance of the
case
• The precedent set by the Ashbury Railways case established the
ultra vires rules and limited the company's activities to those
permitted under the object clause of the memorandum.
 Ultra Vires Doctrine (cont..)
 The other reason for the court’s approach was to protect the creditors who in theory
would assess the risk of dealing with the company simply from the main object of the
company.
 The judgement also elucidated on an important aspect of company law which was the
protection of shareholders and creditors.
 The protection of shareholders and creditors is still regarded as an important aspect in
company law.
 The ultra vires doctrine became a failure because it developed into an illusory protection
for the shareholders and a pitfall for unwary third parties dealing with the company.
( Cassim et al The Law of Business Structures 2ed (2015) Juta & Co Ltd )
 Legal Capacity in the modern context
 Professor Cassim states that the modern approach to the legal capacity of a
company, is that it is archaic and outdated to restrict a company to a specific
business activity.
 In line with this approach the Act States that a company has the legal capacity
and the powers of an individual. [section 19]
 The intention of this approach is to allow a company to conduct any lawful
activity it chooses.
 it is important to note that this provision does not necessarily mean that a
company may do everything that a natural person does.
 The Doctrine of Constructive Notice
 The ultra vires doctrine is related to the principle of constructive notice.
 The doctrine of constructive notice states that anyone dealing with a company is deemed to be
aware of the contents of the company’s memorandum and articles of association and other public
documents that were lodged with the Registrar of Companies and were open to public inspection.
 This was regardless of whether they read the documents or not.
 Following the trends in other jurisdictions , Zimbabwe has abolished the doctrine of constructive
notice. [section 22]
 A person is not deemed to have notice or knowledge of the contents of any document relating to
a company because it has been filed or accessible to the Companies office.
 The Turquand Rule
 This was a Common Law Principle that was developed by English Courts, which
mitigated the harsh effects of the Doctrine of Constructive Notice. It ensured that if
no act had taken place that was obviously contrary to the provisions of the
documents of the company that were lodged with the registrar, the third party
could assume that there was compliance with all the internal requirements of the
company.
 The Turquand rule is derived from the case of Royal British Bank v Turquand [1856]
6 E&B 327.
 The case was concerned with the restrictions placed by the constitution/MOI of a
company on the authority of the directors to contract on its behalf.
 Royal British Bank v Turquand [1856] 6
E&B 327.
Facts :The managing director of The Royal British Bank, Turquand, entered into
a loan agreement with a bank. The company’s articles of association provided
that directors have the power to borrow money on behalf of the company, subject
to certain conditions. The bank relied on the belief that Turquand had the
apparent authority to borrow on behalf of the company. However, it later came to
light that the board resolution authorizing the borrowing was not recorded in
the company’s minute book. As a result, the company refused to repay the loan,
arguing that the borrowing was not properly authorized. The central issue
brought before the court was whether, despite the irregularity in the board
resolution, the bank could still recover the loan from the company.
 Royal British Bank (cont…)
• The court, ruling in favour of the Royal British Bank, determined that
the bank had the right to recover the loan from the company despite
the irregularity in the board resolution.
• In rendering its decision, the court applied the indoor management
rule, which establishes that individuals dealing with a company can
reasonably assume that all internal company regulations have been
followed, even if there are deviations.
 The Turquand Rule (cont….)
 The rule is known as the internal management rule and has been codified in
section 24 of the COBE Act.
 In terms of this rule, those dealing with the company are not affected by the
company’s internal irregularities.
 The rule protects bona fide third parties who are not aware of internal
irregularities that affect the validity of their contracts with the company.
 The rule entitles the third parties to assume that all the company’s internal
regulations have been complied with.
 The rule is only applicable to third parties in good faith.
 The Turquand Rule (cont..)
 The effect of the rule is to prevent a company from escaping liability under an
otherwise valid contract solely on the grounds that some internal formality
has not been complied with.
 The rule does not protect a third party who knows that an internal formality
has not been complied with.
 Where a third party suspects that an internal formality has not been
complied with, but turns a blind eye, the rule will not protect him.
 The Turquand rule does not protect a third party who relies on a forged
document.
 The Turquand Rule (cont..)
 Directors and other insiders may not rely on the Turquand rule.
 The directors of a company are taken to know that the companies
internal formalities have not been complied with.
 Directors are not entitled to assume that internal formalities have
been complied with, when due to their neglect these internal
formalities have not been complied with.
 If a director acts as an outsider contracting with the company,
can he rely on the Turquand Rule?
 Representation
 A company is an artificial person that cannot act on its own It acts through the
medium of its directors and officers .
 The principles of agency law are of particular importance to corporate law.
 Subject to the provisions of the Act, the general principles of the common law in
respect of agency and representation apply.
 There is nothing sinister about agency principles in company law if the basic
rules are applied.
 The rules in a contract of agency are that there are always three parties involved.
(the principal, agent and third party.)
 Representation (cont..)
 In terms of agency law, if an agent contracts with a third party on behalf of the
company, the contract will bind the third party and the principal (company).
 The agent is merely an intermediary. Once the contract with the third party is
concluded, the agent falls out of the picture.
 An agent who contracts with a third party without any authority incurs liability to
compensate the third party for any losses.
 The same principles apply to those who contract on behalf of the company.
 The director must have authority to act on behalf of the company. Such authority
may be actual or ostensible .
 Actual Authority
 Section 197(3) of the New Companies Act provides that the
board of directors have the authority to bind the company .
 Authority can either be conferred by actual or express
authority.
 Express authority is authority given orally or in writing.
 Implied authority is authority which arises as reasonable
inference from the conduct of the principal.
 Ostensible Authority.
 Ostensible authority is known as apparent authority.
 Ostensible authority arises where a person has by his words or conduct created the impression that someone is
his or her duly authorised agent thereby inducing an innocent third party to deal with the agent in that capacity.
 The significance of this doctrine lies in the protection it offers to third parties who enter into agreements under
the reasonable belief that the agent has the authority to do so. Ostensible authority may not be actual authority
explicitly given by the principal to the agent, but is rather a form of authority that is projected to the public or to
specific third parties based on the principal’s conduct or representations.
 The test for ostensible authority involves establishing that a representation was made by the principal to the
third party, either directly or indirectly through allowing the agent to act in a certain way, which led the
third party to reasonably conclude that the agent had authority. Crucially, it must also be established that the
third party relied on this representation when entering into the contract or transaction.
 Ratification
 Ratification is retrospective authority or conferral authority by the
principal or the company.
to approve after the event; it is not possible to ratify something that was
void from the start [void ab initio]
 The company or the agent adopts and ratifies the unauthorized
contract and it becomes fully binding with retrospective effect.
 Pre-incorporation contracts
• It is an agreement entered into before the incorporation of a company
by a person who purports to act in the name of or on behalf of the
company with the intention or understanding that the company will
be incorporated and will there after be bound by the agreement.
• According to section 32 of the COBE Act there are certain
requirements that the promoters have to comply with.
 Requirements of pre-incorporation
contracts
• Contract must be in writing.
• Person making the contract must profess to an agent or trustee.
• Memorandum must contain as one of its objects the ratification or
adoption of pre incorporation contract.
• The original copy or a certified copy must be lodged with the registrar
together with the memorandum of association.
• Contract must be legally enforceable.
Ratification of Pre-incorporation contracts

• A pre-incorporation contract becomes enforceable against the

company once it is ratified by the company.
• The power to ratify pre-incorporation contracts lies with the board of
directors of the company. The board may either ratify or reject a pre-
incorporation contract.
• If the board fails to either ratify or reject a pre-incorporation contract
within three months after the company’s incorporation, then the
company is ‘regarded to have ratified’ it.
 Pre- incorporation contracts
Question
• Adam, acting in his capacity as an agent of a “company” , D.E.F Pvt Ltd which
is about to be , but had not yet been registered , entered into a contract for
the supply of goods with H & H Ltd . Despite being paid the contract price, H
& H Ltd has failed to deliver the goods . The company has since been
registered and now wishes to enforce the contract which was entered into
with H & H Ltd.

Advise D.E.F Ltd whether the contract is enforceable. [6 Marks]

• Issue – Whether the promoter of a company can enter into contracts on behalf of
the company before its incorporation.
• Rule – (Pre-incorporation contract) A company can adapt or ratify contracts
made on its behalf before its incorporation if certain conditions are met.
• Application – Section 32 of the COBE Act states that a contract that is in writing
entered into by an agent or trustee of a company or PBC not yet formed or
registered , can later on be ratified or adopted and made binding by the company
or PBC after its registration if the following two conditions are met :
i. Upon registration, the entity’s constitutive documents contain as one of the
entity’s objects the adoption/ ratification of rights & obligations in respects of
such contracts; &
ii. Such contract or a certified copy of it must be submitted simultaneously to the
Registrar with the entity’s constitutive documents at the time of registration.
• Conclusion – My advise to D.E.F Ltd is that the pre-incorporation contract is
enforceable if the two conditions stated above are met.
COMPANY MEETINGS & RESOLUTIONS
 Important Terms
• Proxy – A person who is appointed to represent a shareholder at a meeting of shareholders.
• Resolution – a formal decision of the board of directors or shareholders of a company.
• Ordinary Resolution – A decision taken at a shareholders 'meeting ,with the support of
more than 50% of the voting rights exercised (i.e 50%+1)
• Special Resolution – A decision taken with the support of at least 75% of the voting rights
exercised on the resolution.
• Quorum – the number of persons needed to be present at a shareholder’s meeting for the
meeting to begin.
• Unanimous assent – where all the shareholders agree to pass a resolution.
 Introduction
• A meeting is a lawful assembling or gathering of two or more persons, on a fixed date,
time and place, to discuss some pre-determined matters and to take decisions.
• A meeting can either be a general meeting, for company shareholders, while a board
meeting is a meeting for the company Directors.
• Sec 170 (10) States that, if the Articles of a Company so permits or through resolution,
a) A Private Company may hold a virtual meeting i.e a meeting at which the members can
hear & see each other through electronic means.
b) A Public Company may also permit the participation of members who are not physically
present at the meeting , but can be heard & seen by other members via electronic
means.
 Persons present in a meeting
• Persons who are entitled to attend a meeting must be present in a
meeting meaning:
a. Present in person, or
b. Able to participate electronically, or
c. Represented by a proxy.
 Notice of Meetings
• Notice must be in writing
• Indicate the date, time and place of meeting
• Indicate the general purpose of the meeting
• Contain a statement that a shareholder is entitled to appoint a proxy.
• Be accompanied by a copy of any proposed resolution to be discussed at the
meeting
• Notice of electronic meeting must indicate possibility of electronic
participation.
 Proxies
• Requirements for a valid proxy sec171:
 The appointment must be in writing and must be signed by the shareholder
 The appointment is valid for 6 months, unless otherwise provided for in the proxy appointment
or Articles of Association.
 Appointment may be for two or more persons concurrently.
 A copy of the proxy appointment form must be delivered to the company before the
shareholder’s meeting.
 A director or officer of the company may not act as a proxy for a shareholder.
 Where a company/body corporate is a shareholder it must send a person with authority to
represent the company sec 173
 Quorum
• A quorum is required for a meeting to begin.
• If a quorum is not present the meeting shall be adjourned.
• A meeting that has been adjourned because of lack of quorum may be
reconvened with the same proposed agenda for a date not later than
twenty days from the date of adjournment.
• To reconvene the meeting there shall be at least 25%of the votes of
shares entitled to vote.
 Types of meetings
1)Statutory meeting
2)Annual General Meeting
3)Extra-Ordinary General meeting

It is mandatory for Public Companies to hold a statutory meeting, while

private companies are exempted from holding these meetings. Annual
general meetings are mandatory for all types of companies . However, it is
discretionary to hold an extra-ordinary general meeting.
 Statutory Meeting
• It is a meeting held by a public Company in terms of sec 166. A private company is exempted from holding this
meeting .
• It must be held within 3 months of the Commencement of business.
• At least 14 days before the meeting is held, at least 2 directors must compile and forward a certified report
called the statutory report to all he company members.
• Statutory Report, certified by 2 or more directors “must” be filed with the Registrar within 1month of the date it
was certified.
STATUTORY REPORT SHOULD STATE:
i. Total number of shares allotted .
ii. Amount of cash received by a Company in respect of shares allotted.
iii. Abstracts of receipts of Company, receipts from Company shares debenture etc…
iv. Addresses & descriptions of Directors , auditors , if any, company secretary and others in managerial positions.
 Objectives of the statutory meeting
• To acquaint members with the assets & property acquired by the Company.
• To discuss matters relating to the formation of the company (members cannot pass a
resolution without a previous notice of 21 days).
• Discuss the success of the floatation (floatation Definition- process of offering a
company‘s shares for sale on the stock market for the first time).
• To approve /modify contracts which were specified in the prospectus.
• Make accessible &available for Inspection , a list of members of a company & number
of shares held by them.
NB – Failure to hold a Statutory meeting is an offence in terms of section 166 (9)
 Annual General Meeting (AGM) s167
• Every Company is required to hold general meetings known and described in the notices as the Annual General meeting, once every 12 months period.
• According to section 167(4) only matters within the scope of the circulated notice and agenda of the annual general meeting may be voted on except in
the case of essential or urgent matters that arose.
ISSUES TO BE PLACED ON THE AGENDA sec 167 (5)
i. Election of board members who are to be elected during that time. Also the removal ,appointment or reappointment of auditors to hold office in terms of
section 191(2) .
ii. Setting and approving of director’s emoluments (s207), salaries or past director’s pensions as well as any compensation to directors or past directors
in respect of loss of office (s215)
iii. Reviewing the Report of the board with respect to Statement of financial position & Statement of comprehensive income & financial year of the holding
& Subsidiary
iv. For Public Companies – Report of the Audit Committee (audit Committee established in terms of section 219).
v. For Public Companies- Reviewing the board’s Report on the Company ‘s Corporate Governance guidelines as stated in sec220).
vi. Reviewing the External Auditor’s Report.
vii. Appointing the Company’s external Auditor (Except where the external Auditor Is not required).
viii. Review of the board ‘s recommendations & actions in authorising any distributions or relating to the issuance of bonds or other borrowing by the
company.
 AGM cont…
• A company that fails to hold an annual general meeting will be liable
to a civil penalty .
• The annual general meeting enables the shareholders to satisfy
themselves that the business of the company is being conducted in a
satisfactory manner by the board of directors.
 Extraordinary general meeting s168
• Annual general meeting is conducted once, yearly – so if/when an important
business arises in between the annual general meetings that require shareholder’s
approval, then an extra-ordinary General meeting can be called.
• Any one or more Members who represent not less than 5% of the total voting
rights ,shall at all times have the right by written requisition to the Board of the
Company to request an Extra- Ordinary General meeting to be called.
• The company directors are then supposed to issue a notice to members convening
an extra-ordinary general meeting within 21 days of receiving the Requisition letter
& they must choose a date not less than 14 days or more than 28 days from the date
of the notice
 Extraordinary general meeting cont…
• The Requisition letter must state the Following:
i. Must be in writing/electronic mode
ii. State objects of the meeting
iii. Signed by the requisitionists & sent to the Registered office of the company.
After receiving the requisition the board will have a period of 21days to issue a notice.
NB – Section 203 states that a vacancy on a board of directors shall be filled by election @ a general meeting
@ which directors are to be elected, however if at any time the vacancies on a board are 25% or more of the
total number of board seats, the board shall convene an extraordinary shareholder’s meeting for the purpose
of filling the vacancies.
Only business within the scope of the notice and agenda previously sent may be voted on.
Failure to comply with the regulations of this section carries a civil penalty.
 Matters to be voted for in a special
resolution:
a) An adoption of amendment to the
memorandum;
b) Adoption of a plan and contract for
merger;
c) Approval of a major transaction;
d)Decision to dissolve the company
e) Section 26 states that a company can
Change name (by a special resolution
filed with the Registrar) and the Registrar
grants a written approval.
 Special resolution cont…
• A notice of not less than 21 days must precede the meeting, specifying
the intention to propose the resolution as a special resolution.
• However , a meeting can be held at shorter notice if members who
hold at least 95% of voting rights agree s175 (3).
• Within one month of passing of a special resolution, a copy of that
resolution must be submitted to the Registrar, who shall register the
resolution. Before its registration it is of no force s 178.