Company Law (CPL511S)

Unit 7 Internal relations

Internal Relations

Introduction
Corporate functions must of necessity be performed by human functionaries. Even though the general meeting
of members is sometimes seen as ultimately being in control of a company, it is in fact merely one of the entities
within the corporate structure performing corporate functions. Other such entities are the board of directors,
committees of directors, the managing director, the secretary, employees of the company, and the company's
agents who may, but need not be, appointed from the ranks of the abovementioned.

In the following 6 units we will examine the legal status and interaction between such parties and bodies both
internally, as between themselves, and externally, towards outsiders.

Objectives
Upon completion of this unit you should be able to:

• describe what is meant by an “organ” of a company

• name the most important organs of a company
• explain the role of the articles of a company in regulating the relationship between the general meeting
of members and the board of directors
• determine in a given scenario whether the board of directors is obliged to follow the instructions of the
general meeting
• summarise the steps the general meeting can take in order to exercise control over the board of
directors
• list the instances where the general meeting of members can intervene in the management function of
the board of directors
• apply the contents of this unit to solve problems

Additional reading

Cassim, F.H.I, Cassim, M.F., Cassim, R, Jooste, R.D (2011). Contemporary Company Law. Claremont: Juta. (Pages
153-178)

Davies, D., Cassim,F, H.I, Geach, W., Mongalo,T., Butler, D., Loubser, A., Coetzee,L., Burdette, D (2010).
Companies and Business Structures in South Africa. Cape Town: Oxford University Press. (Pages 61-70)

1 Internal Relations
The term “organ” means something more than a mere functionary of the company.

When an organ of the company acts, it is for all practical purposes the company itself which acts - within its
designated scope of operation the organ is then the company.

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Unit 7 Internal relations

In the internal structure the board of directors, the general meeting of members and, in certain instances, the
managing director may be organs of the company, while the others are not.

2 Division of Power
The most important interaction in the internal company structure is that between the general meeting of
members and the other organs, namely the board of directors and the managing director.

As it is usual to confer the powers of management on the board of directors, we can ask the question whether
the members in general meeting have the power to instruct the directors as to how they should carry out this
managerial function.

3 The Role of the Articles of Association

The relationship between the owners of the company (the shareholders in general meeting) and the
management of the company (the board of directors) was discussed in the matter of John Shaw & Sons (Salford)
Ltd v Peter Shaw & John Shaw ((1935) Z KB) where it was stated that:

“the general body of shareholders) cannot themselves usurp the powers which by the articles
are vested in the directors any more than the directors can usurp the powers vested by the
articles in the general body of shareholders.”

In other words the board of directors and the general meeting are both organs of the company, each having its
own original powers, and the directors do not receive their powers as agents of the company. Therefore in the
absence of a contrary provision in the constitution of the company, even a unanimous resolution of the general
meeting does not override the directors' powers.

To conclude, it can be said that those matters falling within the exclusive jurisdiction of the directors and of the
general meeting of members respectively have to be determined by reference to the articles.

4 Control of Directors by Members

It is apparent from the aforegoing that the board of directors, the general meeting of members and, sometimes,
the managing director, may therefore all be managing organs of the company, each with its own separate
function as determined by the articles of association.

The general meeting does, however, have a final say over the board of directors in the sense that it can always
resolve, in terms of section 228 of the Act, to remove the directors from office.

In terms of section 216 however, every company is required to have directors, and the new board of directors
will possess the same independent powers as the previous board unless the articles have also been amended to
the contrary.

It is not feasible to place too many restraints on the powers of the board as it is designed to manage the affairs of
the company and it can do that effectively only if it is granted a certain degree of independence.

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 Company Law (CPL511S)
Unit 7 Internal relations

5 Powers of the General Meeting

Although it is now accepted that when certain matters are assigned to the board of directors by the articles, only
the board has the power to deal with those matters, there are certain exceptions to this general rule. The general
meeting may intervene:

1. when the board of directors refuses or is unable to institute legal action on behalf of the company;
2. when the board of directors cannot or will not exercise the powers conferred on it, for example when a
deadlock has developed among the directors or a quorum cannot be obtained;
3. when certain powers have been reserved for the board of directors, but the particular act is voidable
because the board has exceeded or abused its powers, for example by exceeding its borrowing powers
or allotting shares not bona fide for the benefit of the company.

Summary
In this unit you learned that a company acts through two bodies, also known as “organs’. The one is the
members in general meeting and the other is the board of directors, which is usually tasked with the
management of the company. The relationship between the general meeting and the board of directors is
based on the articles, which determines the extent of the powers of the board. The shareholders cannot
interfere with a power conferred by the articles, except by altering the articles.

References

Cassim, F.H.I, Cassim, M.F., Cassim, R, Jooste, R.D. (2011). Contemporary Company Law. Claremont: Juta.

Davies, D., Cassim,F, H.I, Geach, W., Mongalo,T., Butler, D., Loubser, A., Coetzee,L., Burdette, D (2014).
Companies and Business Structures in South Africa. Cape Town: Oxford University Press.

Pretorius, J.T., Delport, P.A ., Havenga, M., Vermaas, M. (2012). Student Case Book on Business entities.
Claremont: Juta.

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