There are important distinctions between the roles of shareholders and directors even when an individual or a number of individuals occupy both roles. The separation between the two positions should be borne in mind when a company is established because ownership of a company and management of a company entail different rights and responsibilities. The interaction of the two roles plays an important part in the smooth functioning of a company.
Directors’ Management of a Company
Management of the affairs of a company is the responsibility of the directors. Their duties to manage the company are normally set out in the articles of association. The constitution usually entrusts powers to the board and prevents shareholders from interfering in the execution of directors’ duties.
In order to properly carry out their duties, directors have common law rights to inspect the books and records of the company. This right is not extended to shareholders. Directors may also exercise their powers over the management of the company even if it means acting against the wishes of the majority of shareholders.
Shareholders’ Ownership of a Company
Ultimately shareholders do own a company so it is within their expectations that they are able to exert a degree of control over the directors. As noted above however, shareholders cannot exert direct control over directors while they are in office. They cannot simply usurp the powers of the directors. It is for this reason that shareholders often choose, where practicable, to have board representation.
Ultimately though, shareholders can control the board of directors by their ability to appoint and remove directors from office. There may be other circumstances agreed by shareholders in the constitution of the company that further shareholder control. Shareholders may be required to give directors direction at general meetings or consent to directors’ actions. They also have authority to act in default of action by the directors or to ratify breaches of directors’ fiduciary duties.
Conclusion
Clear separation of roles enables directors to manage the day to day affairs of a company without interference from shareholders. Shareholders should generally benefit from this as directors aim to run a company in shareholders’ best interests. The ultimate element of control rests in shareholders’ ability to appoint or remove directors from office. Measures beyond this must be contained within the constitution of the company.
It is important that the rights and responsibilities of shareholders and directors are understood and properly incorporated into a company’s constitution at the outset. Rollingsons has lawyers who can assist you with this process; for more information please contact James Crighton via e-mail jcrighton@rollingsons.co.uk or by telephone on 0207 611 4848.
