What is the difference between shareholders and directors?

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 provisions of the Companies Act and/or the company's articles of association.

Companies Act provisions
Under the Companies Acts some decisions, such as changing the company's articles, can only be made by the shareholders. Many others are decisions for the directors but the directors may need the shareholders' consent, by means of an ordinary or special resolution.

The following decisions should be made by the directors but usually also require a resolution of the shareholders:

Some loans to directors
Substantial company transactions in which directors have a personal interest
Issuing shares

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 in the company's best interests. 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 annually..

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 2006, sec168.

 

Provisions in the articles
Most companies have the following provision from the Model Articles or (for older companies) from Table A.

Model Articles

DIRECTORS' POWERS AND RESPONSIBILITIES

Directors' general authority
3. Subject to the articles, the directors are responsible for the management of the company's business, for which purpose they may exercise all the powers of the company.

Shareholders' reserve power
4. (1) The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action.

(2) No such special resolution invalidates anything which the directors have done before the passing of the resolution.

Directors may delegate
5. (1) Subject to the articles, the directors may delegate any of the powers which are conferred on them under the articles-
(a) to such person or committee;
(b) by such means (including by power of attorney);
(c) to such an extent;
(d) in relation to such matters or territories; and
(e) on such terms and conditions;
as they think fit.

(2) If the directors so specify, any such delegation may authorise further delegation of the directors' powers by any person to whom they are delegated.

(3) The directors may revoke any delegation in whole or part, or alter its terms and conditions.

Provisions in 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.

Related topics

clearFloats