Directors and Shareholders – What’s the Difference? Explained by Farleys Solicitors
Farleys Solicitors a local firm explain the difference between directors and shareholders:
Every company must have at least one director and at least one shareholder. It’s not uncommon for the company’s directors and shareholders to be the same people, especially for SMEs (small and medium sized enterprises).
Whilst the directors and shareholders may be the same people, it is important for these people to understand the difference between the two roles. In my experience, confusion between the two roles is one of the key areas which lead to disputes between the relevant parties.
A director is an officer and an employee of the company. They are appointed to deal with the day-to-day management of the company, for example, buying / selling stock, signing contracts on behalf of the company etc.
As an officer of the company, a director owes a number of duties to the company. These include: a duty to always act in the best interest of the company and to avoid a conflict of interest. These duties should not be taken lightly, and failure to comply with them may be a criminal offence.
It is a common misconception that, as a director of a company, you have a share of the ownership of the company. A director will be paid a salary in the same way as any other employee of the company. Unless they are paid a bonus, they will not participate in the profit share of the company. In other words, a director is not able to be paid a dividend unless they are also a shareholder of the company.
A director is entitled to access any financial records of the company.
A director can be appointed or removed as a director by a decision of a majority of the directors, or a majority of the shareholders.
The shareholders (together) hold the entire ownership of the company. This entitles them to be paid dividends (if any are paid), receive the proportionate percentage of any sale proceeds if the company is sold etc.
As a shareholder, your shares are your personal assets and, subject to any contrary provisions in the company’s articles of association, you can sell these at any time, to any person, and you can’t be forced to sell them by the other directors / shareholders
As a shareholder, you will generally have no involvement in the day-to-day management of the company. You will have limited rights to have access to company records and will have no right to see the company’s financial records, unless they are publically available.
As a shareholder, you will be required to vote on some key decisions relating to the company including: amending the share capital of the company, amending the company’s articles of association etc.
Having a shareholders’ agreement in place can be essential for everyone to understand their individual roles, rights and duties.
A shareholders’ agreement is a private contract between the shareholders, setting out how they intend on running and managing the company. For companies with its shareholders and directors as the same people, this agreement is even more important.
Without a shareholders’ agreement in place, you will be reliant on the provisions of company law, which will often contradict the way in which you intend on running your company. For example, there may be a list of matters which are so important to your business that you believe the consent of at least a majority of the directors is required. However, the reality is that under company law, a director acting on his own would be able to carry out these matters, without the consent of the other directors. The shareholders agreement can override the provisions of company law and you can therefore dictate how you want to run and manage your company between all of the shareholders / directors.