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The Key Differences between Director and Shareholder Decisions

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The information contained in this article is for information purposes only and is not intended to constitute legal advice. If you require further information or advice in relation to any corporate matters our corporate team at Greenaway Scott would be more than happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our experienced legal advisors.

Directors and shareholders each have very distinct roles within a company. It is often thought that shareholders have little or no control over a company, despite being the owner of the shares. This is a common misconception as shareholders have various decision making powers within a company.

Here, Greenaway Scott considers looks at the distinct roles directors and shareholders play in a company. If you require any further information on any of the matters discussed in this article, please contact us at [email protected] or alternatively, please submit a query through our website at https://www.greenawayscott.com/get-a-quote and a member of our team will get back to you.

Director Decisions

Who are the directors?

Directors have the responsibility of managing the company on behalf of the shareholders. They are afforded various power and duties, which are outlined in sections 171 to 177 of the Companies Act 2006. It is important to stress that the directors owe a duty to the company itself, rather than the shareholders.  This is the case for both executive and non-executive directors. As such, they must act within the powers granted by the company’s constitution and seek to promote the success of the company at all times.

Directors make a number of decisions, including, but not limited to the following:

  • general decisions for the running of the company;
  • entering the company into binding contracts with third parties;
  • providing authority to change the registered address; and
  • authorising the appointment of directors with a term less than 2 years.

How do directors make decisions?

Directors make decisions by calling board meetings. During the board meeting, each director is required to declare whether they have any interest in the proposed business of the meeting and if so, to what extent.

How do directors implement their decisions?

Once a board meeting has happened and the proposed business has been approved, the nominated directors will implement the transaction. This includes internal administration, for example upon appointment of a director the board will update the register of directors and update any correspondence. Further, external administration will then need to be filed at Companies House within 14 days of the appointment.

Shareholder decisions

Who are the shareholders?

Shareholders are the owners of a company. They allow the board of directors the responsibility of the day to day running the company. This said, shareholders retain some power for significant decisions relating to the company.

What decisions can the shareholders make?

The Companies Act 2006 reserves a number of decisions which affect the company to the shareholders. These decisions highlight the reality that it is in fact the shareholders who own the company and not the director.

Shareholder decisions in the Companies Act 2006 include, but are not limited to:

  • amending the companies articles by special resolution;
  • changing the name of the company by ordinary resolution;
  • approving a substantial property transaction by ordinary resolution;
  • approving a director’s service contract for a fixed term of two years or more by ordinary resolution;
  • authorising director’s to allot shares by ordinary resolution; and
  • disapplying shareholders’ pre-emption rights by special resolution.

How do shareholders make decisions?

The majority of shareholder decisions require an ordinary resolution of 50% of shareholder approval. This means that a simple show of hands is sufficient in a shareholder meeting to approve a substantial property transaction, or if a ballot is called, 51% or more of the votes to be in favour. Decisions which affect the constitution such as amending the articles and changing the name of the company require a special resolution which means a higher benchmark of shareholders to approve. For example, the Model Articles require 75% or more of the shareholders to approve amendments to the company’s articles of association.  Unlike ordinary resolutions, special resolutions are to be filed at Companies House within 15 days of approval.

Who can approve investment for the company?

When a company is looking to obtain further investment, they can either transfer existing shares to the investor, or choose to allot more shares within the company. When a company wishes to transfer existing shares, the articles of association must be consulted to determine whether there are any pre-emption rights. This means that there may be a clause in the articles which states that shares must be offered to existing to shareholders before they can be transferred to anyone else. If this is the case, the shareholders may either choose to purchase the said shares, or they may choose to pass a special resolution to disapply the pre-exemption rights. Further, as with allotting shares for employees, if the shareholders decide to allot further shares for the investment, a shareholder ordinary resolution is required. Following this, the shareholders will instruct the directors to allot the shares.

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