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As a limited company, you may have company directors who also happen to be shareholders in your business. This is sometimes referred to as a director-shareholder and can cause some complications in decision-making processes in your business. Often, it is essential to distinguish between an individual’s director and shareholder capacity, as it can lead to a conflict of interest. This article will explain what a director-shareholder is and how to mitigate conflicts of interest.
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What is a Company Director?
A company director is an individual who sits on a company’s board and is usually involved with the management and strategy of the company. Directors are joint in private companies and tend to have votes in board meetings. As a result, they contribute to board resolutions which usually concern essential decisions. Directors also have specific legal obligations concerning shareholders of the company, as well as certain legal rights as a result of their position.
For example, director duties include:
- a duty to act within the powers given to the director as part of the company’s articles of association;
- a duty to promote the company’s success;
- a duty to avoid conflicts of interest;
- a duty to not accept benefits from third parties; and
- a duty to declare any personal interests in a proposed company transaction.
Directors also have corresponding rights, for example:
- the right to inspect financial records regarding company debts and company profits;
- the right to delegate powers to a person that they see fit; and
- the right to stay as a director until they are removed.
What is a Shareholder?
On the other hand, a shareholder owns shares (sometimes referred to as a company’s stock) in a company. Company shareholders do not share the same rights as directors. For example, they cannot vote in board meetings. Shareholders generally have a right to dividends and voting rights for certain company decisions but usually do not get involved in a company’s operations beyond this.
Although a majority shareholder can pass a shareholders agreement unilaterally and have a significant degree to have significant influence over the company’s strategy, many shareholders are simply investors seeking a return on their investment. Company shareholders can pass shareholder agreements on decisions, including:
- appointing and removing company directors;
- changing a company’s constitution;
- approving a director’s loan; or
- issuing or transferring shares in the company.
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What is a Director-Shareholder?
A director-shareholder is a company director who also holds company shares. This is a common feature among company directors, especially among directors who were also integral in the company being created.
Notably, a person can have multiple positions within a company and acceptably act in different capacities at different points. As a result, a director-shareholder can advocate for a specific decision to be made as a director and advocate for the opposite position in their capacity as a shareholder.
Shareholders are typically free to vote in whichever way they see fit and to vote in their own interests. However, directors have certain obligations. If the director fails to fulfil their duties, the director can be liable to shareholders for violating their duty.
How Can Conflicts Arise?
Because of the high standard imposed on directors, it could be the case that they are in breach of their duty because they are also shareholders.
Conflicts often arise concerning remuneration and payment of dividends. It can also arise because of a proactive director-shareholder who acts in a way that blurs the line between their shareholder and director capacities. There are several ways of avoiding this problem, such as through shareholder agreements.
Using Shareholder Agreements to Mitigate Conflicts of Interest
In many cases, it can be helpful for the shareholders of a company to pass a shareholder agreement which outlines the decisions that can only be made by shareholders and the decisions that directors can make. Similarly, having clear rules on when a director has to disclose a decision to other directors and shareholders can help transparency and prevent a director from abusing their power.
Alongside this, the details of the powers of a director can be set out in their employment contract and the company’s articles of association. By delineating roles in this way, you are less likely to have an ambiguous situation where it is unclear if a person is acting as a director or a shareholder.
Key Takeaways
As a private limited company with director shareholders, you may run into situations where it is unclear if a person is acting in their director capacity or shareholder capacity. This can create problems, as a director is legally accountable to shareholders and must act in their best interest, while shareholders are free to make decisions in their own interest.
An effective way to minimise potential conflicts is to delineate between decisions that can be made by directors and decisions that can be made by shareholders, as well as having a clear exposition of the powers of a director contained in a formal legal document.
If you have any questions about director-shareholder rights and duties, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A company director is an individual who holds a position within a company’s management and has certain rights and obligations outlined in the company’s constitution.
A shareholder is an individual who holds shares in a company.
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