The Company’s Power to Bind: Who Can Bind Your Business?

The company’s rules governing the power to bind have significant practical importance in determining who can legally bind your business in relation to third parties. Read on to learn more about who can bind a company, how the power to bind can be restricted, and why the internal allocation of authority is not always decisive in relation to third parties.

A limited liability company, i.e. a public or private limited liability company (A/S / ApS), is a separate legal entity, but naturally cannot itself enter into agreements. It does so through natural persons acting on behalf of the company.

The persons who, under the Danish Companies Act, are authorised to bind the company are referred to as persons authorised to bind the company. As a general rule, the power to bind entails a general authority to enter into agreements on behalf of the company.

However, this does not mean that all agreements entered into by the company must be signed by a person authorised to bind the company. Members of the executive board and employees who do not have the power to bind the company may also, depending on the circumstances, bind the company under the general rules on authority, for example by virtue of the authority inherent in their position.

The main distinction is that the power to bind the company generally confers general authority to bind the company, whereas an authorisation is limited to the scope resulting from the authorisation or the position held by the person concerned.

What are the rules governing the power to bind the company?

A company is bound by agreements entered into on its behalf by the entire central governing body, by a member of the board of directors or by a member of the executive board, cf. section 135(2) of the Danish Companies Act.

As a general rule, each individual member of the board of directors and each individual member of the executive board may therefore bind the company acting alone. The power to bind may consequently be restricted in the articles of association, cf. section 135(3) of the Danish Companies Act.

Typical provisions governing the power to bind may, for example, provide that:

• the entire executive board binds the company,

• a member of the executive board binds the company jointly with the chair of the board of directors,

• two members of the board of directors bind the company jointly, or

• the entire board of directors binds the company.

  
  

If the company has a board of directors, the board’s right, acting collectively, to bind the company cannot be altered. It cannot, for example, be provided that the company may only be bound by the entire board of directors acting jointly with a member of the executive board. A provision stating that the company is bound by a member of the board of directors acting jointly with a member of the executive board must therefore be supplemented by a provision stating that the company may also be bound by the entire board of directors.

The Danish Companies Act does not contain a corresponding rule providing the executive board, as a body, with an unrestricted power to bind the company. In companies with a board of directors, the power of members of the executive board to bind the company may therefore be restricted so that, for example, a member of the executive board may only bind the company jointly with one or more members of the board of directors, or so that only a specific member of the executive board may bind the company alone or jointly with a member of the board of directors.

Only members of the board of directors and the executive board may be included in the company’s provisions in the articles of association governing the power to bind the company. Other persons cannot therefore be registered as persons authorised to bind the company under the articles of association, but may instead, for example, be granted a power of procuration, cf. section 135(5) of the Danish Companies Act.

Pursuant to section 135(1) of the Danish Companies Act, members of the board of directors and the executive board may furthermore always represent the company in relation to third parties. This right of representation is general and cannot be restricted in the articles of association. The right to bind the company by agreements, on the other hand, follows from the power to bind the company.

The power to bind the company and internal authority are not the same

It is important to distinguish between who is internally authorised to make a decision and who may bind the company in relation to third parties.

Where a company has both a board of directors and an executive board, the executive board is generally responsible for the day-to-day management of the company. Decisions which, having regard to the circumstances of the company, are of an unusual nature or of major importance fall outside the scope of day-to-day management and may, as a general rule, only be made pursuant to specific authorisation from the board of directors, cf. section 117 of the Danish Companies Act.

A member of the executive board may therefore, for example, be subject to an internal requirement to obtain the approval of the board of directors before making a major investment. If that member of the executive board is also authorised to bind the company acting alone, the company will, as a general rule, nevertheless remain bound by the agreement even if the required internal approval has not been obtained. This does not apply, however, if one of the exceptions in section 136 of the Danish Companies Act applies.

The authority of a person authorised to bind the company may therefore extend beyond that person’s internal authority. For example, the company will not be bound if the person authorised to bind the company has exceeded his or her authority or materially disregarded the interests of the company, and the third party knew or ought to have known this, cf. section 136(1)(3) of the Danish Companies Act.

Others may also bind the company

The registered provisions governing the power to bind the company are not the only means by which a company may become bound.

Members of the executive board may, for example, be authorised in other ways, including through a power of procuration. A member of the executive board of a company with a board of directors may also have no power to bind the company under the articles of association and nevertheless, within certain limits, be able to bind the company by virtue of the authority inherent in his or her position.

As a general rule, the executive board is responsible for the day-to-day management of the company. Decisions of an unusual nature or of major importance require specific authorisation from the board of directors. Section 117 of the Danish Companies Act does, however, provide for an exception in urgent circumstances where the decision of the board of directors cannot be awaited without considerable inconvenience to the company’s activities. In such circumstances, the board of directors must be notified of the decision as soon as possible. The urgency exception is narrow and requires that there genuinely be insufficient time to obtain the approval of the board of directors, which in practice limits its scope of application, as approval can often be obtained quickly, for example by telephone or email.

Other employees of the company may also be able to bind the company. Pursuant to section 10(2) of the Danish Contracts Act, a person may, by virtue of his or her position, be authorised to carry out transactions that, according to law or custom, fall within the normal scope of that position.

A salesperson may, for example, be authorised to enter into ordinary sales agreements even though that person is not registered as a person authorised to bind the company, provided that doing so falls within the normal scope of the position.

Ensure that the company’s rules on the power to bind suit the business

The rules governing the power to bind the company should reflect the company’s size, management structure and the need for both control and operational flexibility.

Very broad authority to bind the company may mean that a single member of management can bind the company in relation to significant transactions. Conversely, very restrictive rules may make the ordinary operation of the business unnecessarily cumbersome.

The rules governing the power to bind should therefore be considered in conjunction with the company’s articles of association and internal rules concerning which transactions require approval from the board of directors or other members of management.

It is particularly relevant to review the rules governing the power to bind when new members of the executive board or new co-owners join the company, when a board of directors is established, or when the company’s activities and financial exposure increase.

Contact Romme Advokatfirma

At Romme Advokatfirma, we specialise in company law and are happy to assist with a specific assessment of the company’s existing rules governing the power to bind and advise on whether they should be amended. We can also assist in preparing the statutory minutes of the general meeting and updating the articles of association to reflect the new provisions governing the power to bind the company. You are very welcome to contact our specialists.