A company acts through two bodies of people – its shareholders and its board of directors. Shareholders (aka members) and directors (aka company officers) are two very distinct roles within a limited company, with different responsibilities and requirements.
Shareholders are the owners of a company, holding shares that represent a stake in the business. The nature of control and percent of ownership of the company depend on the number, value, and class of shares held.
Depending on the number of shares owned in the company, a shareholder, by himself or together with other shareholders, may through his vote/s:
- change the company name or the nature of the business;
- issue shares;
- appoint or remove a director or a company secretary and choose which powers and rights are granted to directors;
- take on investment opportunities; and
- appoint an auditor to inspect the accounts.
It is important to note that the above rights are, generally, reserved to shareholders only.
The directors are effectively the agents of the company, appointed by the shareholders to manage the company’s day-to-day affairs. The directors’ role in a company is usually much more hands-on, and their duties generally include:
- employing and managing staff;
- ensuring that the company complies with the law;
- managing the day-to-day running of the business in accordance with the Companies Act 2006 and the company’s articles of association;
- making sure company accounts and reports are properly prepared;
- promoting the success of the company with a view to making a profit for the benefit of the company and its shareholders; and
- making decisions for the overall goal and benefit of the company
While shareholders have significant influence through their voting rights as well as the ability to approve major decisions, they do not have the authority to directly instruct directors on how to manage the company on a day-to-day basis.
The difference between shareholders and directors is important to know because:
- When you are a sole director and shareholder, you have full ownership and complete control of the company. That is not the case when you decide to bring new directors or shareholders, allowing you to grow your business.
- Company law requires some decisions to be made by the directors in board meetings, and others to be made by the shareholders by written resolutions or by resolutions passed at general meetings. Whether a particular decision has to be made by the board meeting or at a general meeting, or both, depends on the provisions of the Companies Act 2006 and/or the company's articles of association.
- Depending on the size and nature of a company, a shareholder’s access to company information may be limited, unless the shareholder is also a director. Beyond receiving annual accounts, additional information is available to shareholders only if voluntarily provided by directors.
- A shareholder is not involved with everyday business activities or management, unless he is also a director because, unless the articles of association state so, a shareholder has no legal right to be a director.
Therefore, distinguishing the roles can help avoid conflicts of interest, particularly when the same individuals act as both directors and shareholders. It also ensures that the company is run effectively and in compliance with the law.
If you wish to discuss this further, or if you have any other Corporate Law enquiries, please contact Diana Sarghea of Rowberrys on 01344 959164 or d.sarghea@rowberrys.co.uk.