The Roles of Directors and Shareholders in a Company
In any corporate structure, the roles of Directors and Shareholders are distinct but complementary, but what actually is the difference between a Director and a Shareholder in a company?
Both groups have a significant impact on how a company operates, but their responsibilities, rights, and powers are governed by different legal frameworks. Understanding these roles is crucial for anyone involved in a company, whether as a Director, Shareholder, or as a potential Investor. In this document, we will explore the roles of company Directors and shareholders, the differences between them, and the legal responsibilities of each group within the framework of UK company law.
What is the Difference between Directors and Shareholders: The Role of Company Directors
Company Directors are individuals who are appointed to manage the day-to-day operations of a company, and for limited companies, are listed on Companies House. Under the Companies Act 2006, which governs the operation of companies in the UK, Directors are legally responsible for ensuring the company is run in compliance with the law, including fulfilling financial obligations, adhering to health and safety standards, and managing the company’s affairs properly. Their decisions should be in the best interest of the company and the shareholders (whom they ultimately report to), and should not be for the purposes of self-interest.
Directors are responsible for many key aspects of the company’s operation. They have the power to manage and run the company, making decisions related to business strategy, operational execution, and financial management. This includes overseeing the preparation and timely submission of annual accounts and tax returns, managing the company’s cash flow, and ensuring compliance with other legal requirements. They are also responsible for ensuring that the company operates in accordance with its Articles of Association and in the best interests of its shareholders.
The legal responsibilities of company Directors are outlined in the Companies Act 2006, particularly Sections 171 to 177. These include, but are not exhaustive of:
S.171 – Only make decisions within the scope of their powers;
S.172 – Exercise a duty in their decisions for the success of the company. This means considering the long term implications of any decisions, and taking into account: the interests of the company’s employees; relationships with suppliers and customers; any impact on operations and reputations; and, ensuring any decision is fairly made.
S.173 – Ensure independent judgment is exercised and not for personal gain;
S.174 – Exercise the skill, care and experience of a reasonably diligent person;
S.175 – Avoid to the extent that is possible, conflict of interests with the company;
S.176 – Duty not to take benefits from third parties, which would ultimately trigger a potential conflict of interest under s.175;
S.177 – Declaring interests in any proposed transactions
Furthermore, Directors must adhere to the provisions of the company’s Articles of Association, which serve as a constitutional document governing the internal affairs of the company. These articles may define how Directors are appointed, removed, or how decisions are made within the board of Directors.
In larger companies, Directors are also responsible for overseeing the annual shareholders meeting, a key event where major decisions are made. Shareholders are typically given the opportunity to vote on significant company matters, such as the appointment and removal of Directors, approval of financial statements, and the distribution of profits in the form of dividends.
In terms of compensation, Directors often receive a salary for their work. The amount of their salary is typically decided by the board of Directors and can be subject to shareholder approval, depending on the company’s articles and shareholders’ agreements. A Director can also be a shareholder of the company, which can often be seen as a motivator for the Director to ensure the ongoing success and profitability of the company.
In certain cases, shareholders may seek to remove Directors from office if they believe that the Directors are not performing their duties adequately. The process for removing a director is outlined in the Articles of Association, and it may require a vote of the shareholders during a meeting. In a limited by shares company, shareholders generally have the power to remove Directors by a special resolution.
It is also important to note that, in cases of inappropriate conduct, an individual can be disqualified as acting as a Director, preventing them from holding such a role for a certain time period or indefinitely.
What is the Difference between Directors and Shareholders: What is the Role of Shareholders?
Shareholders are the owners of a company. A shareholder’s ownership is represented by shares, which are usually issued in exchange for capital or assets. The value of a shareholder’s ownership in the company is proportional to the number of shares they hold. Shares can have a nominal value, often set at £1, though the actual market value of the shares can fluctuate depending on the performance of the company and the stock market.
This is often exemplified in publicly traded companies, whereby the value of an individual share can rise and fall dependant upon the current or expected performance of a company. Shares in limited companies work in a similar fashion, in that there is a value per share which may increase/decrease over time however, it is not subject to the pressures of being openly purchasable by the general public.
The primary role of shareholders is to invest in the company, with the aim of earning a return on their investment, typically in the form of dividends (payments from profits) or capital gains from the sale of shares. Shareholders are entitled to vote on major decisions that affect the company, including the appointment and removal of Directors, changes to the company’s Articles of Association, mergers or acquisitions, and other significant corporate events.
Shareholder rights are generally outlined in the shareholder agreements, which are legal contracts that govern the relationship between the company and its shareholders, as well as among the shareholders themselves. Shareholders agreements can cover a wide range of issues, including the transfer of shares, decision-making processes, and dispute resolution procedures. These agreements may also provide a mechanism for shareholders to collectively vote on key decisions or for protecting the interests of minority shareholders.
One of the most important rights of shareholders is the ability to attend and vote at shareholder meetings. These meetings may be held annually or periodically, depending on the company’s size and structure. At shareholders meetings, shareholders can express their opinions on company policies, elect Directors, approve financial statements, and vote on matters such as issuing new shares or deciding on dividend payouts.
In a limited by shares company, shareholders also have the right to receive dividends if the company generates profits. However, dividends are usually paid out at the discretion of the Directors, subject to the company’s financial performance and legal obligations. In the case of a liquidation, shareholders may also be entitled to a share of the remaining assets after all liabilities have been settled. It is important to note that there can be different types of shares held in a company, with different entitlements, voting rights and value.
Another key function of shareholders is to decide on the buying and selling of shares. In a publicly listed company, shareholders can purchase or sell shares through the stock market, whereas in a limited company this can be completed through a private transaction. The value of shares can be affected by many factors, including the company’s financial performance, changes in management, and market conditions.
What Are Common Legal Disputes that can Arise for Directors and Shareholders?
Breach of fiduciary duty – Directors may be accused of failing to act in the best interests of the company and shareholders, such as through self-dealing, manipulation of company value, conflicts of interest, or negligence.
Mismanagement and negligence – Shareholders may claim that directors have mismanaged company affairs, leading to financial losses or reputational damage.
Disputes with Directors or other Shareholders – Disagreements can arise over shareholder rights, such as the right to vote on key decisions, or disputes over the issuance or transfer of shares. Shareholders may also contest decisions regarding the distribution of profits, particularly if they feel the board is unjustifiably withholding dividends.
Minority shareholder oppression – Minority shareholders may allege unfair treatment or decisions that disproportionately benefit majority shareholders, such as exclusion from management or voting rights.
Death of a Sole Director and Shareholder – The passing of a Director or Shareholder can cause significant issues for a business, particularly in the event of there being a sole Director and Shareholder, where succession planning or alternative operating arrangements may not have been put in place for the company.
How can AFG Law Assist with Director and Shareholder Issues?
Differences between a Director and Shareholder, and the relationship between the two, can sometimes lead to complex legal disputes for which a steady legal hand is required.
At AFG Law, our experienced dispute resolution team are adept in the handling of director and shareholder legal issues. If you need to speak a specialist solicitor who deals with director/shareholder matters, please contact our expert team by email to disputeresolution@afglaw.co.uk, or speak to a member of our team on 01204 377600.