Shareholders beware: Ostensible authority and the Duomatic principle
A recent BVI case has shown that the Duomatic principle, which allows shareholders to informally approve a company’s actions provided they act unanimously, can apply even where actual authority has not been granted and where the ensuing action by the company is against the best interests of the shareholders.
What is the Duomatic principle?
The Duomatic principle allows the shareholders of a company to informally approve the company’s actions without the need for a general meeting, provided that such approval is unanimous.
Primarily of use for urgent issues or in instances where shareholder resolution formalities cannot be followed, the Duomatic principle can provide a more flexible option for decision-making at shareholder level.
The facts of the case
In Ciban Management Corporation v Citco (BVI) Ltd  UKPC 21, a company’s sole shareholder, Mr Byington, wished to remain “in the shadows” and consequently authorised (albeit informally) one of his business associates, Mr Costa, to act on his behalf in giving various instructions to the company. However, after a disagreement between the two men, Mr Costa, without Mr Byington’s knowledge, requested the company to sign a power of attorney. The company, used to following Mr Costa’s instructions, acceded to the request and as a result, certain real estate assets of the company were sold.
The decision of the Privy Council
The Privy Council held that given the previous course of dealing between Mr Byington, Mr Costa and the company, Mr Costa had ostensible authority in relation to the contested power of attorney. Further, they concluded that the Duomatic principle can be applied to ostensible authority on the basis that, “[I]f actual authority can be conferred informally by unanimous shareholder consent the same should apply to ostensible authority”. As a result, the company was able to rely on the ostensible authority of the business associate and the power of attorney was found to be valid.
Limitations to the Duomatic principle
There are several limitations to the application of the Duomatic principle, some of which were considered by the Privy Council:
- Insolvency. The Duomatic principle will not apply if the resulting transaction could result in loss to the creditors of the company or the company’s insolvency, but this was not a relevant consideration in the Ciban case.
- Shareholders’ awareness. Where the shareholders are unaware of what is happening, the Duomatic principle will not apply. However, in this case Mr Byington had set up the structure purposely so that he could stay in the background and therefore it would be inequitable for him to argue that he hadn’t authorised Mr Costa to act on his behalf.
- Dishonesty. Although the Duomatic principle can’t be used where there is dishonesty, the Privy Council were of the view that the relevant question was whether Mr Byington or the company’s sole director had been dishonest and this was not the case.
- Beneficial shareholders. Mr Byington actually only held the shares beneficially with their legal title being held by a third party on his behalf. The question arose as to whether the Duomatic principle applies where the consent is given by the beneficial, rather than the registered, shareholders. The Privy Council held that the Duomatic principle can apply in respect of the beneficial shareholders where, as in this case, they (rather than the registered shareholder) took all of the decisions.
Points to consider
Although the Duomatic principle can be a helpful tool when applied in the right circumstances, shareholders should take care and consider its potential consequences before using it. In particular:
- Should any specific matters require written shareholder approval? To sidestep the risk of the Duomatic principle applying to significant decisions, a list of matters requiring written shareholder approval could be included in the company’s articles of association.
- Be cautious when bestowing authority. Ensure that any authority is given in writing and be specific as to what such authority covers. This should reduce the risk of ostensible authority arising due to a previous course of dealing.
- Review the company’s articles of association to ensure that the formalities for passing a shareholders’ resolution are not unduly onerous. Although the process is laid down in statute, the articles may require additional steps to be taken.
- Keep abreast of who the company’s shareholders are.
- Ensure that any filing requirements are dealt with in the event that any informal shareholder decisions are made.
Tasneem is an Associate in the Corporate team.
This note reflects our opinion and views as of 5 October 2020 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.