What can lead to ostensible authority of a director?

Ostensible authority, also known as apparent authority, arises when a person appears to have the authority to act on behalf of another, based on the perceptions created by the other party. In the context of directors, this occurs when they are presented as having authority by other board members. If a board member is portrayed in such a manner to third parties, it can create an assumption that this director has the power to make decisions or enter into agreements on behalf of the company.

This concept rests on the idea that the representation by the board members, whether through actions, statements, or conduct, creates a reasonable belief in third parties that the director indeed has the authority to act.

In comparison, a decision made by the board, a written agreement, or formal election by shareholders typically provides a clear and direct grant of authority but does not necessarily imply ostensible authority, which relies more on perceptions and representations made to third parties rather than formalities or written documents. The distinction is essential, as ostensible authority can bind the company to agreements made by a director, even if that director does not hold actual authority, provided that third parties relied on the perceived authority in good faith.