Civil and Commercial Guide | Do shareholders have more power than directors? (2024)

What is the difference between directors and shareholders?

Generally, the role of a board of directors is to manage a company and its affairs, providing strategic and commercial advice. Directors oversee the company’s daily management and adherence of regulations, with a duty to consider the best interests of the companyas a whole ratherthan the interests of particular shareholders. Directors have the legal power to act on behalf of the company, subject to any restrictions found in law or in the company’s articles of association. Decisions made under the general powers of management of the company’s business are usually reserved for the directors, with the managing director having the most power of them all. It should be noted that the directors do not actually owe their duties to the shareholders of the company, but rather to the company itself.

Shareholders form the ultimate owners of a company. Their level of ownership and control depends on the number of shares they own and the percentage of voting rights they hold. However, such a clear-cut distinction between ownership and management does not always apply in practice, especially in small and medium size companies where shareholders often wear multiple hats simultaneously.

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Can shareholders overrule decisions made by the board of directors?

Under company law, only certain decisions need to be approved by the shareholders, such as:

• Changing the name of the company

• Amending the company’s articles of association

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• Voluntarily liquidating the company.

Shareholders do not usually have a right to be involved in the daily decision-making on behalf of the company, as this is within the remit of the directors.

The company’s articles of association(or shareholders’ agreement if there is one)may grant the shareholders further powers and rights to make decisions for the company, butmostdecisionsare taken by the board of directors and cannot simply be overturned by the shareholders. However, shareholders with at least 5% of the voting rights can force the company to call a general meeting of shareholders. The shareholders can then propose resolutionsthataddress the decisions taken by the board and they can ask the board to reconsider or overturn an earlier decision.

Shareholder power depends on the level of ownership

A shareholder’s power is very much dependent on the number of shares and percentage of the voting rights that they have, and on theinfluencethey have over other shareholders. This is because company resolutions,which constitute legal binding decisions made by member,require certain voting thresholds to be reached in order to ‘pass’. Whilst an ordinary resolution requires a simple majority (more than 50%) to pass, special resolutions require at least 75% of votes infavour.

As such, a shareholder with only 10% of the voting rights and no influence over other shareholders would in practice have much less power over the company than its board of directors. On the other hand, a majority shareholder who controls more than 50% of the voting power is, in theory, able to pass any ordinary resolution they propose. And shareholders who have at least 75% of the voting rights are normally able to pass special resolutions,thus rendering them able to, single-handedly, make changes that are fundamental to the company. This includes:

• Amending its articles of association

• Changing the name of the company

• Reducing the company’s share capital

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As such, although directors are legally not allowed to give preferential treatment to some shareholders over others, in practice a majority shareholder can have a great deal of influence over the company and the decisions taken by its directors. Minority shareholders can nonetheless protect their interests by way of a shareholders’ agreement, whichisused to limit the power of the majority shareholder. This is especially the case in relation to amending the company’s articles of association or dismissing and/or appointing members of the board of directors. If no such provision exists, a majority shareholder can, in theory, pass an ordinary resolution asking the board to reconsider a decision they disagree with and ultimately remove any director whom they disagree with.

Can shareholders remove a director?

Asmentionedabove,shareholders canremove a director before the expiration of his or her period of office by way of an ordinary resolution. However, written resolutions cannot be used to remove a director,the voting must take place at an actual general meeting of the shareholders. This can be done as a final resort if the shareholders believe the director in question is not acting in the best interests of the company.

Special notice is usually requiredbya resolution to remove a director (unless specifically stated otherwise in the company’s articles of association, which may include an additional removal processthatmakes it easier to remove a director). What this means is that a notice of the intention to remove a director must be given to the company at least 28 clear days prior to thegeneral meeting where the resolution is being voted on. The company must then send a copy of the resolution to the director concerned.

Thedirector has the right to defend themselves and put their case forward,regardless of whether they are also a shareholder or not. Directors who are also shareholders of that company might have additional protections against removal,for example, theBushell v Faithclause, in the articles of association. This grants additional votes to shares held by a director in the event of a proposed resolution for his or her dismissal.

The importance of workingtogether

Most successful companies have a board of directors who work well together with the shareholders. It is not within the interests of the company if there is to exist a lack of trust or power struggles between these two groups. As such, it is hugely important that disagreements over key decisions are resolved early and quickly, preventing them from escalating into a potential legal dispute which might lead to a company’s downfall. A well-drafted shareholders’ agreement is often a key factor in preventing disputes from escalating or arising in the first place.