Directors and Shareholders – who holds the power?

It is a common misconception that the founder of a company will always have the final say in how the business is run. In fact, this is only the case if they are also a Director.
Whilst the Shareholders own a company, the Directors quite often are the company. The Directors deal with the day-to-day running and act as they see fit to develop the business, and of course to increase profitability.

As employees of the company, Directors should have appropriate Directors Service Agreements in place setting out exactly what is expected from them in their roles, the responsibilities that they have and should carry out and the rules under which they should operate. These agreements are also the key to enforcing any post-termination restrictions. For example, you would not want your MD leaving the company to work for a competitor and taking all the staff and customers away!

While Shareholders don’t have a right to get involved with the day to day running of the company, they aren’t left entirely unprotected. If a Shareholder feels as though a Director (or indeed the Board of Directors), is prejudicing their position (and dividends!) they can bring a legal claim for Derivative Action. This is a claim on behalf of the company against a Director for a breach of duties which has resulted in a loss to the company. This would be in breach of a Director’s Fiduciary Duty to act in good faith and in the best interests of the company.

If the Shareholder is a minority Shareholder, and the Director in question is also a Shareholder, they can bring a legal claim for Unfair Prejudice. This is a complicated area, but essentially the shareholder would need to show the company’s affairs have been conducted unfairly and in a way which is prejudicial to their interests.

Finally, Shareholders also have the right to dismiss Directors by passing an ordinary resolution at a General Meeting of the company. This just requires a majority (>50%) of eligible votes, but bear in mind that removing a Director this way doesn’t prevent them from bringing an Employment Tribunal or contractual claim for compensation.

Shareholders collectively hold the ultimate source of power as they can influence company decisions and policies by voting in resolutions in addition to owning the company.

If you need a Director’s Service Agreement for your business or are having trouble managing relationships between Shareholders and Directors, then please get in touch with our expert Business Law team who will be able to help.

Tel:          01245 893400
Email:     info@backhouse-solicitors.co.uk
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