Director or Shareholder, what really is the difference?
Whilst Whilst the shareholders and directors in a small business may be the same person, the roles and relationship to the company are distinct under English company law. In the main Directors owe duties to the company, whilst shareholders as owners have rights.
Directors:
As a director you are the heart of the company, charged with day to day management and decision making. Under English law you also owe a fiduciary duty to the company, this requires that you always act in the best interests of the company.
Key duties of directors:
- Duty of care and skill: You must exercise reasonable skill, care and diligence in carrying out your responsibilities. This can include engaging with external experts where necessary (i.e to ensure legal compliance and safeguarding).
- Duty to promote the success of the company: All acts you undertake must promote the success of the business for its shareholders. This includes both short and long term planning.
- Duty to avoid conflicts of interest: You must avoid situations of a conflict of interest. We know this can be difficult in a small business where you may utilise family and friends. In all instances taking a transparent approach and correctly documenting relationships will mitigate any risks.
- Duty to exercise powers for a proper purpose: Whilst you are entrusted with managing the company’s affairs you must do so appropriately, and not for an ulterior motive.
- Duty of Loyalty: this one is self-explanatory.
Shareholders:
Shareholders are the owners of the company by virtue of the shares they own. They are beneficiaries of the company’s profits and assets and generally are not involved in the day to day affairs. In small businesses this can be clouded with shareholders and directors as the same person, however the hat that you are wearing when you make decisions matters.
Key rights of shareholders:
- Right to vote: Each shareholder has the right to vote on significant corporate decisions such as director appointments, amendments to articles of association and substantial transactions.
- Right to receive dividends: Shareholders have a right to receive a dividend in relation to the profits of the company and their share of ownership.
- Right to Information: Shareholders have rights to access certain corporate information allowing them to make informed decisions and hold the directors to account.
- Right to bring a derivative action: Shareholders can bring a claim on behalf of the company against a director who has breached his/her duty.
- Right to attend meetings: A shareholder has the right to attend general meetings of the company.
A caveat, in some companies there will be multiple share classes which give different rights to shareholders. These may include non-voting shares, or preferential shares, receiving a higher dividend payment. This is why it is important to have clarity over your company structure as set out in your articles of association.
The interplay between these positions:
Whilst directors and shareholders occupy distinct roles, their interests are inherently intertwined. Directors are appointed by shareholders to manage the company on their behalf and those actions direct impact shareholder value. Conversely, shareholders hold directors accountable for their stewardship of the company and have the power to influence its decisions.
If you would like to discuss the roles within your company structure or would like advise on how to structure a shareholding, please contact us.