GETTING LEGAL WITH GODWIN: WHO DIRECTS THE BUSINESS OF A COMPANY?
Godwin Amadi
A company is a legal person in the eyes of the law. It must act through human agents elected by the shareholders, appointed by the directors, or hired by the officers. No shareholder, not even one who owns 99% of the shares, can act for the company or bind it by contract merely because of such ownership. Shareholders indirectly control the affairs of a company by appointing or electing the directors. They also have the power to vote on major issues, such as changing the articles of association, merging with another company, or selling out in a corporate take-over.
The powers of the directors are regulated by the Companies & Allied Matters Act (“CAMA”) and the Articles of Association. CAMA clearly provides that except as otherwise provided in the Articles of Association, the business of the company shall be managed by the board of directors. The only powers directors will not exercise are those specifically reserved for the shareholders by CAMA and/or Articles of Association.
The shareholders are required to act for the company in the following circumstances:
1. Act where directors are disqualified or are unable to act because of a deadlock on the board, or are unable to act because of a quorum cannot be formed;
2. Institute legal proceedings in the name and on behalf of the company if the board of directors refuse or neglect to do so;
3. Ratify or confirm any action taken by the directors; or
4. Make recommendations to the board of directors regarding action to be taken by the board.
If the board of directors of a company permits an agent to act in the management or conduct of the company’s business, they thereby represent to all persons dealing with the agent that he has authority to enter on behalf of the company into such contracts. Unless the Articles of Association otherwise provide, the board of directors, when acting within the powers conferred on them by CAMA, shall not be bound to obey the directions or instructions of the shareholders: provided that the directors act in good faith and with due diligence.
Directors are managers of the company. They are not “employed” by the company and are therefore not as such employees of the company. They are officers for the purpose of making a company vicariously liable for their negligence while engaged in the business of the company. Since a director is not an employee of the company, he is not entitled to the privileges granted to employees.
Directors are trustees of the company. As trustees, they have control of the company’s property to be applied for the purposes specified and in the interest of the company. They are trustees of their powers and must exercise them bona fide and for the benefit of the company and not in their own interest.
Directors are agents of the company, and the relationship between them and the company is governed by the general principles of the law of agency. When they act within the scope of their authority and on behalf of the company, they may be regarded as agents of the company. Like other agents, they incur no personal liability, and are accountable for any secret profits made. But if they exceed their authority, they may become liable for breach of warranty and they will also be liable if they contract in their own names or otherwise assume liability as agents.
As their name indicates, directors are responsible for overall direction of the company. Appointed or elected by shareholders, they serve as the company’s board of directors. They are fiduciaries and as such are duty bound to act in good faith and with due care, oversee the company, and formulate general policies. They must not act fraudulently or illegally. This requires that the director acts “in a manner he reasonably believes to be in the best interests of the company, and with such care as an ordinary prudent person in a like position would use under similar circumstances.” Failure to do so can make director liable in damages to the shareholders.
The directors are the top officials of the company. They set major goals and determine basic policies (e.g., whether to sell for cash, credit, or both and whether to expand or reduce operations in a given area). They appoint and set the salaries of the top officers of the company. Acting together, the directors have the power to make contracts for the company, but they delegate the day-to-day duties of running the business to the officers they have selected. However, the directors are expected to exercise their own best judgment in appointing the officers and overseeing their work. The directors alone may declare dividends and authorize major policy decisions. Therefore they may not have other persons serve as substitutes at board meetings, and deliberate and vote for them.
The number of directors varies among companies. However, CAMA provides that every registered company must have not less than two directors. Any company whose number of directors falls below two must, within one month of such fall, appoint one or more new directors. If a company fails to appoint directors to make up the statutory minimum within the time limit, it cannot thereafter carry on business. If a company carries on business after the number of directors has fallen below two for more than sixty days, every director or shareholder who is aware of that fact is liable for all the liabilities and debts incurred by the company during the period it so carried on business.
Directors generally employ other officers and delegate to them necessary authority to conduct the company’s day-to-day business. These managing officers commonly include a managing director, a deputy managing director, a general manager, a company secretary, an auditor/accountant, etc. However, the duties of two or more of these positions may be combined. Other positions may be created as required. Officers are usually appointed by the board of directors, although in some cases, they are elected by the shareholders. Neither directors nor officers are liable for honest errors of judgment – however costly. But they are legally accountable for willful or negligent acts that cause loss to the company.
Godwin Amadi is the Lead Counsel at Semper Fidelis Attorneys and Solicitors- a full service law firm based in Ikoyi Lagos. You can reach him on 08035622578 or email godwin.amadi@semfilaw.com
