Apr 8, 2025
Company Law: Competence, Authority, and Representation
For a company to operate in the market and enter into agreements with third parties, it must be represented by physical persons acting on the company's behalf. The rules on external representation concern who can bind the company through legal dispositions, and what effects occur when these persons act in conflict with their internal competence. This article provides a thorough introduction to the representation rules for limited companies, public limited companies, and general partnerships.
Basics of Corporate Authority and Power of Attorney
For the company bodies to be able to bind the company in relation to third parties, they must have representation rights. This representation right generally follows directly from company legislation:
In limited and public limited companies, the board represents the company externally and signs its firm (asl/asal § 6-30).
In general partnerships with a board, the board represents the company externally (sel § 2-21 second paragraph).
The managing director has the competence to represent the company externally within their authority area – the daily management (asl/asal § 6-32 and sel § 2-21 third paragraph).
Signature and Firm Signature Right
The most extensive representative right a company body can have is the signature or firm signature right. The signature right provides a general competence to bind the company in any contractual relationship without substantive limitations. In both limited, public limited companies and in general partnerships (which have a board), the signature right belongs to the board, but it can be delegated to others.
Prokura and Powers of Attorney
In addition to statutory corporate authority, representation rights can also be established through:
Prokura - A broad power of attorney to bind the company through agreements, but not as extensive as a signature. A holder of prokura cannot sell or mortgage the company's fixed property.
Special Power of Attorney - A company body can obtain extended representation rights through specially assigned power of attorney, for instance, when the board grants the managing director the authority to enter into an agreement outside the daily management.
Position Power of Attorney - An employee has by virtue of their position the competence to act on behalf of the company within the natural scope of their position.
It is important to distinguish between corporate authority under company law on one side, and power of attorney under contract law and the Prokura Act on the other, even though the rules have certain similarities and the terminology is partly overlapping.
Rights and Legitimization in Corporate Law
Competence, Legitimation, and Binding
In corporate law, it is crucial to distinguish between what a representative is entitled to do (competence) and what the representative appears to be authorized to do (legitimation). As long as the person acting on behalf of the company stays within their competence, conflicts with counterparties rarely arise.
Challenges arise when the representative acts beyond their competence. This can happen when:
A person without competence acts on behalf of the company
A person with competence exceeds the limits set for competence
A person acts in violation of the articles of association or contrary to the company's purpose
In these cases, the question arises whether the company is nonetheless bound due to legitimation effects. The fundamental condition for this to happen is that the counterparty was acting in good faith – that they neither understood nor should have understood that the company representative was acting in conflict with their competence.
Considerations Behind the Legitimation Rules
The legitimation rules in corporate law balance two conflicting considerations:
The need to protect the counterparty and ensure effective turnover
The need to protect the company and its shareholders from competence breaches
The Norwegian rules are influenced by the EU's "Publicity Directive," which provides strong protection for the counterparty, particularly concerning agreements in violation of the company's purpose or internal limitations on the representatives' competence.
Representation Rules in Limited and Public Limited Companies
Board and Managing Director's Competence and Legitimation
The Board
The board has the general competence to manage the company (asl/asal § 6-12). The board's internal competence can be limited through:
Articles of association provisions
Instructions from the general meeting
The board's external representation right, however, is unlimited and covers any disposition on behalf of the company towards third parties.
Managing Director
The managing director manages the daily leadership (asl/asal § 6-14), which does not include matters that by the company's circumstances are unusual or of great importance (asl/asal § 6-14 second paragraph). The managing director’s external representation right is limited to matters included in the daily management (asl/asal § 6-32).
The managing director can be granted further authority through:
Signature (asl/asal § 6-31)
Prokura
Other power of attorney from the board
Legitimation Effects Under the Companies Act § 6-33
If the board or managing director acts contrary to their competence, the disposition is still binding for the company, unless the company proves that the counterparty understood or should have understood that the authority was exceeded, and it would contradict honesty to enforce the disposition (asl/asal § 6-33).
The provision provides strong protection for the counterparty, who normally has no duty to investigate. The company must prove the counterparty's bad faith to avoid being bound.
In practice, it is particularly when the managing director exceeds their authority that the question of legitimation effects becomes relevant. A counterparty without particular grounds for suspicion will normally be able to rely on the managing director having authority to enter into agreements typically within the daily management.
Specific Questions About Legitimation Effects
Actions Contrary to Prescriptive Competence Allocation
A debated question is whether the legitimation rule in asl/asal § 6-33 applies in cases of breaches of the law's prescriptive allocation of competence between the company bodies.
In Rt 2015 p. 600 (Inkognitogaten), the Supreme Court held that legitimation rules apply also in violations of the law’s prescriptive functional division. The decision is controversial because it may conflict with the EU's Publicity Directive article 9 no. 1, which seems to assume that the company is never bound by such violations.
Actions Contrary to Articles of Association or Instructions
When exceeding competence limitations in the articles of association or instructions, the Companies Act § 6-33 exists in tension with the Publicity Directive article 9 no. 2, which seems to assume that the company is always bound in such cases, regardless of the counterparty's good or bad faith.
The Norwegian solution is nonetheless considered not to violate conventions, as it supplements the directive with general power of attorney principles, something that is accepted by the EU Council and practiced in several member states.
Dispositions Contrary to Purpose
For dispositions contrary to the company’s purpose, the main rule in Norwegian law is that the purpose does not have particular significance as a competence barrier towards third parties. It is fundamentally of no concern to the counterparty what the company representative is entitled to in relation to the company.
The fact that the company's purpose is registered in the Commercial Register does not mean that a third party should be considered to have knowledge of whether a specific disposition is contrary to purpose. This aligns with the Publicity Directive's requirement that registration of the articles is not in itself sufficient evidence for the counterparty’s bad faith.
Representation Rules in General Partnerships
In general partnerships without a board and managing director, the participants individually represent the company externally and sign its firm (sel § 2-21 first paragraph). It can be agreed that only certain participants may represent the company, or that representation should occur collectively. Such limitations can be registered in the Commercial Register.
If the company has a board, it is the board that represents the company externally. If a managing director is employed, they have the authority to represent the company in matters within the daily management.
The legitimation rules for general partnerships (sel § 2-22) are modeled similarly to those for limited companies. Dispositions are not binding for the company if the counterparty realized or should have realized that the authority was exceeded, and it would therefore contradict honesty to enforce the disposition.
It is worth noting that the EU's Publicity Directive does not apply to general partnerships, so the issues that arise concerning the directive and the legitimation rules of the Companies Acts are not relevant for general partnerships.
Practical Advice and Recommendations
For Companies
Clarify Competence Allocation: Establish clear guidelines for who can enter into agreements on behalf of the company and within what parameters.
Document Limitations: Ensure that instructions limiting representation rights are clear and documented.
Inform Counterparties: For specific limitations in representation rights, explicitly communicate this to the other party before entering into an agreement.
Consider Delegating Signature: Carefully assess who should be granted signature rights, and whether it should be required that the signature right be exercised by several together.
For Counterparties
Check the Commercial Register: Verify who is entitled to represent the company by checking entries in the Commercial Register.
Assess the Nature of the Agreement: For agreements that clearly exceed what may be considered daily management, ensure the right person represents the company.
Document Representation Rights: In case of doubt, request written documentation of representation rights or board decision.
Be Particularly Cautious with Unusual Transactions: Be extra vigilant with dispositions that appear unusual for the company.
Conclusion
The rules on external representation are important because they regulate the company's ability to enter into binding agreements through its representatives. The Norwegian rules provide strong protection for good faith counterparties but also contain mechanisms protecting the company from obvious competence breaches.
For practical purposes, it is important to be aware of the distinction between internal competence and external legitimation. While the company internally can limit the authority of a body or a person, these limitations often cannot be asserted against a good faith third party. This emphasizes the importance of good internal routines and clear communication on who is entitled to represent the company in different contexts.
