Who has control over the management of a business can quickly determine whether it will be successful or not. Establishing clear lines of control and understanding the role of directors and shareholders is fundamental to this issue. Our team can help, whatever your enquiry.
A limited liability company is managed by its board of directors. Directors have the ability and the powers to make decisions concerning the running of the business on a daily basis. Directors powers come from a mix of
- the company’s Articles of Association;
- from legislation;
- from resolutions by the company’s shareholders (also known as members); and
- if there is a service level agreement (SLA) in place, then directors may be given specific powers and responsibilities under that.
Read more on our web pages about making of decisions by directors generally.
The board of directors must run the company following their duties of corporate governance. Directors should hold board meetings on a regular basis to resolve matters that arise concerning the company and to ensure that a strategy that supports the company’s aims and goals is set out and clear to all of the directors for the management of the company.
Shareholders are investors in the company. In many small or medium enterprise companies, shareholders and directors can often be the same, and so shareholders will have a role in managing certain aspects of the company and the control of the company’s directors. However, if they are not also directors, then shareholders have limited powers of management.
Shareholders generally owe a duty to other shareholders not to prejudice their interests, but where they are also directors, then they will share all of the duties and responsibilities that a director has and be subject to any remedy for breach of these duties, including directors disqualification. Shareholders sometimes cross the line into acting as directors, particularly in small family run businesses and if they do act as either de facto or shadow directors in these cases, then they have the same responsibility as other directors and can be subject to the same penalties.
Control over the company and its directors
If directors fall out or act contrary to their duties, then this is inevitably prejudicial to the company’s interests as a whole, and will be a concern to shareholders. Shareholders have limited methods of control over the board of directors.
- there are certain decisions that require a shareholders resolution rather than simply going through the board of directors, and in this way shareholders have some control over the management of the company.
- shareholders may be given additional powers under a shareholders agreement which may assist. For example, there a power to veto specific decisions.
- shareholders have certain powers, including the power to remove a director. No breach is necessary for this to occur, there must just be a majority resolution.
If directors breach their duties, to either the company or to the shareholders, then shareholders have some rights and remedies to rectify the situation. These include to bring a derivative claim against a director who is not acting in the best interests of the company. This claim is brought in the place of the company.
To avoid having to use costly remedies however, preventative measures can be taken. For example, in a larger company, where there is a clear delineation between the directors and the shareholders, there are often more procedures in place to avoid problems in managing and controlling the company. These might include clear SLAs and shareholder agreements.
It is also advantageous to have several directors, as this can avoid the risk of one director dominating and making decisions about the company that are not in the best interests of the company but left unchecked.
If there are an uneven number of directors then decisions that need to be taken by way of a majority vote can be easier as a deadlock between directors can be avoided.
Ultimately there are a number of remedies that are available if a director is in breach of their duties. If a claim is made by the company (or by a shareholder by way of a derivative claim) then the court has very wide powers to make any order it sees fit. This could be to
- remove a director;
- claim compensation or restitution regarding a transaction that they have erroneously made;,
- or to injunct a director from doing something that would prejudice the interests of the company.
At Francis Wilks & Jones our team of experts can advise shareholders and directors on all aspects of the control and management of their company. We act both in an advisory capacity for companies setting up, and also in shareholder and director disputes, using the method of mediation if possible, to keep down costs and avoid negative publicity. If you have any areas of concern that you would like to talk through, contact one of our friendly team today.