Organs of the Company: the Board and the General Meeting

A company is a legal person, but it has no hands, voice or mind. Every contract it signs, every decision it takes and every lawsuit it starts must be done by human beings. The law therefore says which human beings may act for the company and what each group may decide.

Get this wrong in practice and a decision can be invalid, a contract can be challenged, or directors can be sued.

This topic explains the two organs of a company, the general meeting of members and the board of directors, the powers of each under section 87 of Companies and Allied Matters Act (CAMA), how the two relate when they disagree, and how a company is bound by the people who act for it. It is the foundation for the topics on meetings and on directors.

The company acts through its organs

The syllabus starts from one idea: the company is an artificial person, so it must function and run through natural persons. Two groups of natural persons make up the company’s organs, which are the parts through which the company’s will is formed and carried out.

Individual directors may also act as agents of the company, and the company may act through other agents that it appoints. The Managing Director (the Chief Executive Officer) oversees the day-to-day running of the company, because the board itself meets only from time to time and cannot run the business hour by hour.

Section 87(1): how the company acts

Section 87(1) of CAMA provides that a company shall act through its members in general meeting, or through its board of directors, or through officers or agents appointed by, or under authority derived from, the members in general meeting or the board of directors. This gives three routes:

1. the members in general meeting, for matters reserved to them, such as changing the articles or appointing directors;
2. the board of directors, for the management of the business; and
3. officers and agents, such as the managing director, the secretary, employees and outside agents, whose authority comes from the members or the board.

An officer, in relation to a body corporate, includes a director, a manager and a secretary. Management means either the board of directors that is vested with management powers or top-level managers acting for the board.

The powers of the board of directors

• General management (section 87(3)). The board manages the business of the company and exercises all the powers of the company that CAMA and the articles do not reserve to the general meeting. The board’s power is the residue: it holds everything that is not reserved to the members.
• Independence (section 87(4)). Unless the articles provide otherwise, directors who are acting within their powers and in good faith are not bound to obey, or to take instructions from, the members in general meeting.
• How the board acts. The board may act through a committee of its members or through the Managing Director. The audit committee and remuneration committee are examples of committees of the board.

Why the board has independent powers

The members are often many, scattered and not expert. They cannot run a business by vote. The law gives the day-to-day and strategic management to a small body that can meet, decide and act, and holds that body accountable through the duties of directors and through the members’ power to remove them.

Independence also protects the board from being pushed into decisions by a temporary majority that does not bear the responsibility.

The powers of the general meeting

1. Policy and appointments. The general meeting makes policy for the company and appoints the company’s officers, including the directors.
2. Acting when the board cannot. The members in general meeting may act in any matter if the directors are disqualified or unable to act because of a deadlock on the board or otherwise. For example, the general meeting may act on matters in which the directors have a personal interest and so cannot properly decide.
3. Starting legal proceedings. The general meeting may institute legal proceedings in the name of the company if the directors fail or neglect to do so.
4. Recommendations (section 87(5)). It may make recommendations to the board about action to be taken. A recommendation does not bind the board, though a board will usually give it weight.
5. Removal of directors. The general meeting may remove any director of whose actions it does not approve, by ordinary resolution.

Balancing the two organs

What members can do when they disagree with the board

Because the board is not bound to obey the members on matters within its powers, the members cannot simply order the directors to do or not do something. Their lawful options are these. They may change the articles by special resolution, if they want to reduce or reshape the board’s powers, since the section says directors need not obey ‘unless the articles provide otherwise’.

They may remove the directors by ordinary resolution and appoint others. They may make a recommendation. And they may sue in the company’s name, using the general meeting’s power, if the directors will not. In each case the members act through a properly called meeting and a valid resolution, which is the subject of the next topic.

How the company is bound by those who act for it

The company acts through agents, so the law of agency applies. A person who deals with the company wants to know whether the director or officer in front of him can bind it.

• The board as a whole can bind the company on every matter within the board’s powers.
• The Managing Director has the authority that goes with his office to run the business day to day, and the authority the board delegates.
• An individual director, as such, has no authority to bind the company merely because he is a director. He binds it only if he has actual authority from the board or articles, or the company holds him out as having authority.
• Apparent (ostensible) authority arises where the company, by its conduct, represents that an officer has authority and an outsider relies on it in good faith. The company cannot then deny the authority.

Outsiders dealing in good faith with a company are generally entitled to assume that the company’s internal rules have been followed, because they cannot be expected to check every internal step. This is sometimes called the indoor management rule and it protects those who deal with the company in good faith. The agency chapter treats authority in detail.

Worked examples

Example 1: the directors refuse to sue

1. Identify the power. The company’s right to sue is for the board to exercise. But the general meeting may institute proceedings in the company’s name if the directors fail or neglect to do so.
2. Act through a valid meeting. The members must call a meeting, give proper notice and pass the resolution.
3. Add the other options. They may also remove the directors who are blocking action, by ordinary resolution.
4. Conclusion. The members, in general meeting, can authorise the company to sue the former managing director.

Example 2: an instruction to the board

1. State the rule. Under section 87(4), unless the articles provide otherwise, directors acting within their powers and in good faith are not bound to obey the members in general meeting.
2. Apply it. Selling the warehouse is a matter of management. The directors are acting in good faith, so they need not obey.
3. The members’ remedies. They can make a recommendation, change the articles by special resolution to give themselves the power, or remove the directors by ordinary resolution and appoint others who will follow their wishes.

Example 3: a deadlock

The members in general meeting may act where the directors are unable to act because of a deadlock. They can decide the matter themselves by the appropriate resolution, or change the board by removing and appointing directors.

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Saying that the members run the company. They set policy and appoint officers, and the board manages.
• Saying that directors must always obey the members. The rule is the opposite, subject to the articles.
• Forgetting the words ‘acting within their powers and in good faith’.
• Confusing the primary organ, the general meeting, with the secondary organ, the board.
• Saying a recommendation by the members binds the board.
• Saying an individual director can bind the company merely because he is a director.

Quick revision

• Two organs: members in general meeting (primary, policy) and board (secondary, implementing).
• Section 87(1): act through members in general meeting, board, or officers and agents.
• Board: manages the business and holds all powers not reserved; need not obey members if acting within powers in good faith, unless the articles say otherwise (section 87(3) and (4)).
• General meeting: policy and appointments; acts when directors cannot; sues if directors neglect; recommends (section 87(5)); removes directors.
• Board acts through a committee or the Managing Director. Officer includes director, manager, secretary.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Section A style: multiple choice

Section B style: written questions

Model answers

Spotted a mistake? Tell us and we will check it.