Understanding Shareholders vs. Directors: Roles and Responsibilities

Company Law
Written By Niccolo Guastella

Shareholders and directors have very distinct roles within a limited company, although one person may hold both titles. 

  • A shareholder owns and controls a limited company through the purchase of shares. 

  • A director has day-to-day management of the company on behalf of its shareholders.

This article will distinguish between the role and responsibilities of shareholders and directors of a company limited by shares. 

Shareholders 

Who are shareholders? 

A shareholder, also known as a member, owns some or all of the company by purchasing shares and having share capital in the business. They are essentially the owners of the company.  

Shares can be purchased in companies, which are business entities that are registered at Companies House. Companies are separate legal entities - meaning they are considered a person in law - this allows companies to enter into contracts in their own name, own property, and can sue or be sued, to name a few. 

A company shareholder can be a natural person or a legal person (a corporation). Most limited companies are ‘limited by shares’. This means that shareholders’ personal liability for company debts is limited to the nominal value of their shares.

Companies, however, can issue different types and classes of shares. The most common types of shares for a private limited company include ordinary shares. Different classes of shares attach different rights, for example, voting rights, dividends rights and the right to capital in the event of winding up. 

A shareholders’ agreement is an optional agreement that is entered into by all shareholders of the company irrespective of what class of share they hold. Although a shareholders’ agreement is not contained in statute, the agreement will generally provide regulations on the relationship between shareholders, the operation of the company, individual shareholder rights and responsibilities, and ownership of shares.

A well drafted shareholders agreement can therefore be beneficial in clarifying individual’s standpoints and potential resolutions in the event of a dispute. 

How is this different to members? 

Shareholders are also known as members of a company. A member is an owner of a company, whose name has been registered on the register of members at Companies House.

In a register of members, inter alia, the name, address and occupation of each member needs to be listed. The rights of members are stated in the Companies Act 2006, the company’s memorandum and articles of association. 

Significantly, every shareholder is a member, but not every member is a shareholder, since a member is registered. 

How many shareholders are required in a company? 

Companies incorporated at Companies House, under the Companies Act 2006 can operate as a private limited company or a public limited company with a minimum of one shareholder to form and run a limited company. 


What are the roles of shareholders/ members? 

Shareholders are not involved with the everyday business activities. This is reserved for directors. Members can delegate certain powers to the directors to run the company on their behalf. However, shareholders do have a significant role. For instance, shareholders duties may include:

  • providing capital investment to the business;

  • appointing company directors;

  • choosing which powers and rights are granted to directors;

  • deciding whether to change the company’s name or structure;

  • changing the company’s articles; or

  • voting and passing resolutions at general meetings.

Passing resolutions in general meetings is a vital role.

  • Ordinary resolutions (a vote of a simple majority of not more than 50%) include: approving annual accounts, appointing or removing a director.

  • Special resolutions (a vote of more than 75%) include: making amendments to the company’s Articles of Association or voluntarily winding up the company (which any member can request).

Different types of shareholders – Brief summary of the rights of Shareholders 

  1. Rights of shareholders with 5% shares 

They are able to require directors to call a general meeting under section 303 of the Companies Act 2006; to have an item placed on the general meeting agenda; to circulate a written statement about a proposed resolution to be voted on; or, to prevent the re-appointment of an auditor.


2. Rights of shareholders with 10% shares 

They are able to call for a vote at a general assembly wherein the shareholders have one vote per share (not one per shareholder) and to require an audit 

A proposed resolution generally requires 14 clear days’ notice, this is the days not including the date of notice and the date of the meeting. Where a proposed resolution allows, a may veto the minimum of 14 clear days’ notice of a general meeting in favour of a shorter notice. This must be approved by a majority of the shareholders together holding 90% voting shares. Members in possession of a shareholding of 10% or more are able to prevent a short notice. Though it is important to note that if they can prevent a short notice, it does not prevent the matter from passing in the general meeting. 


3. Rights of shareholders with over 25% shares 

They are able to block the passing of a special resolution.

4. Rights of shareholders with over 50% shares 

They are able to block the passing of an ordinary resolution.

 

Directors 

Who can be a director? 

The minimum age of a director is 16. One cannot be a director if they are an undischarged bankrupt, the auditor of the company or a disqualified director of another company whose term of disqualification has not yet been spent. Like shareholders, a director may be a natural or legal person. 


How many are required? 

 A private limited company must have at least one director in office, whereas a public limited company must have at least two (s 154 CA 2006). 

There is no statutory limit to the number of directors that can be appointed for a limited company, provided the Company’s articles do not impose any such restrictions. 


What is the role of a director? 

A director, or ‘officer’, is appointed by the members to manage the day-to-day activities of the business, on their behalf. A director, therefore, has far more responsibilities than shareholders to manage the company lawfully and ethically. These duties are owed to the company, acting for the members as a whole, and should be held in accordance with the Companies Act (2006) and the Articles of Association, which state how the company will run.

Additional duties may also arise in certain events, for instance, duties owed to creditors in an event of insolvency. These prescribe additional powers to directors or permit the directors to make certain decisions upon written approval from members. For instance, whereas shareholders are only able to view the company’s annual accounts when made available, a director’s knowledge of the company’s financial and operational status should be up-to-date. 

A director may also be a shareholder, so can receive dividends from the company. A director is not automatically entitled to remuneration for their services as a director, therefore, if a director intends to receive remuneration, provisions should be included in the articles of association and employment contract. 

A director has 7 general duties which are specified in sections 171 to 177 of the Companies Act 2006.

In summary, they include the duty to:

  1. Act within their powers 

  2. Promote the success of the company, 

  3. Exercise independent judgment 

  4. Exercise reasonable care, skill and diligence as a director.

  5. Avoid conflict of interest

  6. Not accept benefits from their parties

  7. Declare interest in proposed transaction/ arrangement. 


Since a director must act in the best interests of the company, a director may be removed and disqualified if they are incompetent, display ‘unfit’ conduct, or breach their contract in any way. 

If a director is found to be in breach of the above list of duties they may be disqualified from being a director and could have to bear personal liability for payment of damages and restitution of profits. 

Decisions are usually taken during board meetings. A good way a director may demonstrate they have fulfilled these duties is by recording certain decisions and rationalising their thought processes through official board meeting minutes.


Roles of a director include: 

  • Ensuring the company adheres to all statutory filing and reporting requirements: like registering the company for Corporation Tax and VAT and paying this, preparing annual accounts and tax returns, paying business taxes to HMRC, filing confirmation statements;

  • Accurately maintaining all business and accounting records;

  • Maintaining company registers;

  • Employing staff;

  • Avoiding conflicts of interest; 

  • Maintaining permits, licences, and certifications;

  • Ensuring creditors are paid; 

  • Reporting changes to Companies House and HMRC;

  • Make decisions at board meetings, and organising general meetings of the members;

  • Keeping shareholders up-to-date with the state and practice of the business; and

  • Issuing and recording dividends paid to shareholders.

Since a director must act in the best interests of the company, a director may be removed and disqualified if they are incompetent, display ‘unfit’ conduct, or breach their contract in any way. 

Importance of the separation of roles and responsibilities

Understanding the differences in the roles between a director and a shareholder is essential to the running of a company. While shareholders manage the large decision-making of the company, directors are concerned with the day-to-day affairs of the company. This allows the operations of the company to run smoothly. 

Further, this separation of roles improves accountability within the company. Both bodies are responsible for each other to act within their granted powers, reducing the risk of fraud and dishonesty. 

Author: Neha Tavra -

Author: Neha Tavra -

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DISCLAIMER

This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.

Niccolo Guastella
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