Power of management and power of representation in Belgian company law: watch out for confusion!

Simply put, governance relates to the internal functioning of a company and refers to the decision-making process within the organisation. Representation, on the other hand, concerns the external functioning and who is authorised to bind the company to third parties.

The fundamental distinction between these two concepts is designed to protect third parties who come into contact with the company. A company is legally bound by any act done by the representative body, as long as it falls within the limits of their powers. In doing so, the third party does not have to worry about whether the internal decision-making process was followed correctly.

However, this conceptual distinction between board authority and representative authority can lead to an asymmetry between those in charge of the internal decision-making process and those authorised to represent the company externally. This asymmetry can sometimes result in conflicts or contradictions between the decisions of the board leader and the actions of the representatives. This, in turn, may jeopardise the proper functioning of the company.

To clarify this issue, it seems useful to us to look at the bodies charged with exercising powers of management and representation within the two most common corporate forms with legal personality in Belgian law, namely the public limited company (SA) and the private limited company (BV).

Every public or private limited company has at least one mandatory general management body. This mandatory body has the right to delegate part of its management power to an optional body or to special proxies.

The composition of the mandatory board depends on the type of company in question and the choices made by the founders regarding the governance model they wish to adopt within their company.

The Companies and Associations Code (the “CPC”) provides three possible governance models for public limited companies.

The first model, the so-called “monistic” model, is characterised by the existence of a single collegiate governing body: the board of directors.

In the second model, the management of the company is entrusted to a single director.

The third and final model, the so-called “dual” model, is based on the existence of two bodies: the supervisory board, which is responsible for general policy, supervision of the board of directors and all matters expressly reserved to it by the Companies and Associations Code (“CCC”) and the board of directors, which is responsible for operational management and has residual management powers).

A different regime applies to private limited companies: they are managed by one or more directors, who together form a college or exercise individual management powers.

The choice of one of these governance models is mandatory when a company is incorporated, with founders of both public limited companies and private limited companies required to lay down one of these options in the articles of association.

In addition, the WVV provides the possibility for the aforementioned governing bodies to delegate the day-to-day management of the company to one or more persons. These persons may be members of the mandatory management body, but this is not necessary. They may perform their duties individually, jointly or collegially, depending on the terms of the delegation.

It is also permissible for the governing body (including any delegated for day-to-day management) to delegate certain powers to third parties, even if such delegations are not expressly provided for in the articles of association.

It is important to note that these special proxies are not organs of the company, but merely act on the basis of the specific power of attorney granted to them.

A company’s representative bodies are responsible for representing the company in legal actions and court proceedings. In most cases, these bodies are identical to the management bodies. For example, in a public limited company (SA) that follows the monistic governance model, the general power of representation belongs to the board of directors acting collegially and, if applicable, to the delegate for day-to-day management as regards that day-to-day management.

The general power of representation may also be delegated by the managing body, both in the case of a limited liability company and a private limited company. The following conditions must be met for this delegation to be enforceable against third parties:

• The delegation must be explicitly included in the company’s articles of association. If the delegation arises from a simple decision of a body of the company, it is considered a power of attorney and not a statutory power.

• In principle, the power of representation should be granted to one or more directors. The power of representation may also be granted jointly to a director and a non-director, or to a specific category of directors (e.g. a director appointed by shareholders with a certain class of shares). The appointment decision must clearly state the capacity of the director, so that third parties can determine whether he or she can validly bind the company. Statutory provisions granting the power of representation exclusively to non-directors do not meet this requirement and should be assessed under the proxy rules. If such provisions grant general power of representation, they will be considered null and void.

• When the power of representation is granted to one or more directors, the delegation must relate to the general power of representation, i.e. the entirety of the powers of representation that the law allows to be granted.

• The delegation of the general power of representation must be published in the annexes to the Belgian Official Gazette.

As mentioned earlier, it is absolutely crucial for third parties to verify that the company they are doing business with is adequately represented. If this is not the case, the company will not be validly bound, and will not be obliged to fulfil the obligation entered into.

By contrast, any action taken by the representative body within the limits of its legal powers will bind the company, regardless of whether or not a decision has been validly taken by the competent administrative body. This means that the company thus bears the consequences of violations of its internal rules on decision-making. However, such violations can lead to liability of the violator to the company. In turn, third parties cannot rely on the non-compliance with the rules relating to the internal functioning of the company with which they have entered into a contract to discharge themselves from the contractual obligation.

In practice, we find that economic actors often struggle to distinguish between the concepts of governance and representation, and to master their practical implementation.

We therefore conclude this article with some practical guidelines arising from the discussion of these concepts of governance and representation.

It cannot be repeated often enough that it is crucial for board power holders to ensure that those with power of representation have a good understanding of the internal decision-making rules.

In addition, it is equally important for holders of a power of representation, whether general or special, to ensure that any act they perform on behalf of the company is approved internally and in writing in accordance with the company’s internal decision-making process. Ideally, this approval should take place before the representative performs the act. If the representative is faced with logistical or time constraints – which is common in practice – making it difficult to obtain this approval in advance, it is always better to obtain written ratification from the relevant people as soon as possible.

Furthermore, it is important to consider the perspective of a third party when drafting and implementing governance and representation rules.

Finally, that third party would be well advised to verify the capacity of any interlocutor claiming to act on behalf of the company by consulting the company’s articles of association and the published appointment and delegation decisions in the annexes to the Belgian Official Gazette, or by requesting them if the publication is missing.

***

Do you have any questions? Do not hesitate to contact us.