What is the difference between shareholders and directors?
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Shareholders and directors have two completely different roles in a company.
The shareholders (also called members) own the company and the directors manage
it. Unless the articles say so (and most do not) a director does not need to
be a shareholder and a shareholder has no right to be a director.
The separation in law between directors and shareholders can cause confusion in private companies. If two or three people set up a company together they often see themselves as 'partners' in the business. That relationship is often represented in a company by them all being both directors and shareholders. The problem with this is that company law requires some decisions to be made by the directors in board meetings and others to be made by the shareholders in general meetings. To complicate matters further, some decisions have to be made by the directors, but only with the shareholders' consent.
Whether a particular decision has to be made by the board meeting or the general meeting, or both, depends on the Companies Acts and the company's articles. Most companies have the following provision from Table A:
Powers of directors
70. Subject to the provisions of the Act, the memorandum and the articles and to any directions given by special resolution, the business of the company shall be managed by the directors who may exercise all the powers of the company.
In other words, the directors can decide unless the Act, the articles or a
(previously passed) special resolution says to the contrary. In effect, the
directors are in control of the day to day running of the company, but must
obtain approval from the shareholders for some of the more important decisions.
Most companies do not have special articles and most have not passed special
resolutions to restrict the directors' powers, so the reality is that in most
companies the directors can make any decision unless the Act says it needs a
resolution in general meeting.
The following is a list of the more commonplace decisions which must be made by the general meeting (and the type of resolution required):
Change company's name (special resolution): CA 1985, sec28
Change objects (special resolution): CA 1985, sec4
Change articles (special resolution): CA 1985, sec9
Increase authorised share capital (ordinary resolution): CA 1985, sec121
Exempt the company from holding AGMs (elective resolution): CA 1985, sec366A
Wind up the company (type of resolution depends on the circumstances) Insolvency
Act 1986, sec84
The following decisions should be made by the directors but usually also require
a resolution of the shareholders:
Some loans to directors (see related topic: Can
a company lend money to a director?)
Directors' fixed term service contracts for more than 5 years (see related topic:
Are directors entitled to be paid?)
Substantial property transactions in which directors have a personal interest
(see related topic: What is the position if a director
has a conflict of interest?)
Issue shares (see related topic: What are pre-emptive
rights?)
Some things, such as the appointment of additional directors, can be done by the board or the general meeting.
If the directors are actually or potentially in breach of their fiduciary duties,
a resolution in general meeting, properly passed, may be used to authorise a
transaction or give the company's consent to a profit or interest of the director.
Serious potential liabilities can arise if the directors do not obtain the approval of the general meeting when this is required. The relationship between directors and shareholders is a complex one. The directors are subject to the general fiduciary duty to act bona fide for the benefit of the company as a whole. They are also required to account to the shareholders for their stewardship of the company, in particular by supplying annual accounts and by reporting to them at the Annual general Meeting.
While the directors are in control of the day to day running of the company,
with access to information about its business and effective control over the
calling and conduct of meetings, the shareholders have an ultimate source of
power: any director can be removed from office by ordinary resolution: CA 1985,
sec303. (See related topic: How can a director
be removed from office?)
Related topics
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