The doctrine of the undisclosed principal is an age old doctrine that has troubled many legal minds over the years. It has been described as odd, anomalous, unsound and inconsistent with legal principles not only in South Africa but also in England. Despite the constant battle associated with the implementation of this doctrine, our courts have confirmed that the existence of the doctrine is in fact justified on the grounds of commercial convenience. Whilst it is trite law that the doctrine is justified in certain instances, what does not appear to have been explored in any detail is how this doctrine fits in with section 56 (Beneficial Interest in Securities) of the Companies Act, 71 of 2008 (“Companies Act”).

The doctrine of the undisclosed principal is an exception to the established doctrine of privity in that it allows a party (“agent”) to enter into a contract with another party (“third party”) in his/her own name on behalf of someone else. The identity of this unnamed Party (“undisclosed principal”) may not necessarily be disclosed to the third party at the time of conclusion of the agreement. Despite the anonymous nature of the undisclosed principal in that they are an unnamed Party to the contract, an undisclosed principal enjoys certain rights and entitlements akin to him having been a “named Party” to the contract. The principal may effectively reveal himself and enforce the rights flowing from the agreement, he may pursue the available enforcement remedies such as litigation and, similarly the third party, upon becoming aware of the undisclosed principal, enjoys the same rights and entitlements against the undisclosed principal as he/she would have against the agent (i.e. The person who actually entered into the agreement).

In light of the above, the undisclosed principal’s right to sue can, in certain circumstances, result in prejudice to a third party who at all material times thought that he was dealing only with the agent. As a result and in an effort to avoid such prejudice, certain limitations have developed over time in order to restrict the implementation and ambit of the doctrine. Ackermann J, in Karstein V Moribe And Others 1982 (2) Sa 282 (T), had the following to say:

“…the doctrine is generally acknowledged to be anomalous and at complete variance with the basic principles of the law of contract and justifiable only on grounds of commercial convenience. The doctrine is therefore one which ought to be ‘rigorously controlled by the law’ ( vide Fridman (ibid ) ). When a doctrine is ex hypothesi anomalous and at variance with basic legal principle it is inevitable that exceptions to such a doctrine will be as difficult to categorise and as elusive to accommodate in one consistent theory as the main doctrine itself.

This statement made in obiter by Ackermann J was in reference to the various exceptions which have developed over the years and have been applied by various judiciaries and legal authors. The various exceptions referred to in his judgment have been summarised by Treitel The Law of Contract 5th ed at 552 as follows:

  1. Consistency with the terms of the contract: An undisclosed principal can only intervene in an agreement where such intervention would not result in an inconsistency with terms of that agreement.
  2. Personal Considerations If the third party can show that he wanted to deal with the agent and with no one else, the undisclosed principal cannot intervene.
  3. Other safeguards: An undisclosed principal can only sue the third party subject to any defenses which the third party has against the agent.

Ackermann J then goes on to say that, in respect of the “Personal Consideration” limitation, where mere personal and thus entirely subjective objection by the third party to the principal’s intervention is unconnected with any prejudice, this could not serve to exclude the principal’s intervention.

Despite the exceptions to the doctrine, it is trite in our law that this doctrine is valid and justified in the interests of commercial convenience. What is also justified in the interests of commercial convenience is Section 56 of the Companies Act (“Section 56”).

Section 56 provides that unless a company’s Memorandum of Incorporation (“MOI”) provides otherwise, the company’s issued securities may be held by, and registered in the name of one person for the beneficial interest of another. The section then goes on to state that only if the company is a public company is there an obligation to disclose the beneficial interest as well as the identity of the person on whose behalf that benefit is held. In respect of a private company however, such information is only required to be disclosed in the event of the company knowing or having reasonable cause to believe that any of its securities are held by one person for the beneficial interest of another and demanding that the identity of the beneficial owner be disclosed.

The effect of Section 56 is that a shareholder could hold shares of a private company on behalf of someone else (as the beneficial owner), retain his name on the securities register and not have to disclose this relationship to the private company or the other shareholders. The beneficial owner could be (dependant on the arrangement) entitled to (acting through the registered shareholder):-

(a) receive or participate in any distribution in respect of the company’s shares;

(b) exercise or cause to be exercised, in the ordinary course, any or all of the rights attaching to the company’s shares (such as voting rights); or

(c) dispose or direct the disposition of the company’s shares, or any part of a distribution in respect thereof.

The company, not being a party to the Section 56 arrangement, would only recognise the person cited on the securities register as the shareholder of the relevant shares. This type of an arrangement is similar to the doctrine of the undisclosed principle in that the beneficial owner could be viewed to be in a situation akin to the position of an undisclosed principle insofar as the beneficial owner essentially has all the rights and entitlements however is undisclosed to the company.

Due to the fact that Section 56 is subject to the company’s MOI, one would assume that most private companies exclude the application of Section 56 in their MOI. However, if one takes note of the majority of standard MOI’s in circulation, Section 56 is in fact rarely excluded. Despite the application of Section 56 not being expressly excluded, there are still mechanisms in place which restrict the intervention of the beneficial owner that are similar to the established restrictions that are in place to limit the intervention of an Undisclosed Principle.

Section 56 contains an inherent restriction in that it does not extend the beneficial owner’s rights and entitlements to his shares to include an entitlement to demand the transfer of the relevant shares from his nomino beneficio’s name into the beneficial owner’s name. If such a transfer took place it could potentially contravene terms of a company’s MOI which restrict the transfer (meaning the registration of the relevant shareholder’s name on the securities register) of shares.

Section 56 does, however, differ from the doctrine of the undisclosed principle when it comes to the enforcement of rights against the various parties, namely the company, the nomino beneficio and the beneficial owner. If, to illustrate my point, a dividend was to be declared on a particular day by the company and that day came and went without the company declaring the dividend, the beneficial owner would not have be entitled to proceed against the company directly. Instead, the nomino beneficio, as the registered shareholder, would have to proceed to enforce this entitlement against the company on behalf of the beneficial owner. Similarly, and in the unlikely event that the company would have a claim against its shareholders, the company would sue the nomino beneficio and not the beneficial owner. In this regard, the right of the company and the beneficial owner to sue begins and ends with the nomino beneficio.

And so it would appear that whilst there are similarities between the doctrine of undisclosed principles and Section 56, there are also fundamental differences in their implementation and restrictions. It is important for all parties to take note of the extension of their rights and obligations in terms of a Section 56 arrangement and perhaps some private companies might want to consider incorporating into their MOI the disclosure obligations which are required by a public company in terms of Section 56 if such private company wants to be aware of anyone sitting behind a nomino beneficio.

 

[1] In SA Metal & Machinery Company (Pty) Ltd v Klerck 2005 1 All SA