The Relationship between company directors and shareholders
In the web of corporate governance, the relationship between company directors and shareholders stands as a pivotal axis. Navigating the relationship between directors and shareholders can be a minefield leading to disputes. Although the Companies Act 2006 (‘CA’) underpins this dynamic, however it is still mired in misconceptions and misunderstandings.
Our clients’ cases often show that the source of directors and shareholder conflicts or shareholder disputes often result from the lack of clarity as to how their roles differ.
What is the role of the company director?
Directors are appointed to manage the company’s affairs; they owe fiduciary duties to act in the best interests of the company. This encompasses making decisions that promote its success while considering the interests of shareholders and other stakeholders.
What is the role of the shareholders?
Shareholders are the owners of the company, they hold equity in the business. Their primary role is to elect directors, approve significant corporate actions, and ultimately, benefit from the company’s success through dividends and capital appreciation. Depending on the level of their shareholdings they have a right to greater or smaller involvement in the life of the company.
In years of advising companies, directors and shareholders, we have noted that a number of disputes originate from the lack of understanding what each role encompasses. We have identified a number of misconceptions.
Dispelling Misconceptions
1. Directors Have Sole Loyalty to Shareholders
Contrary to popular belief, directors’ duties extend beyond solely prioritizing shareholders’ interests. While shareholders are undeniably crucial stakeholders, directors must balance their interests with those of employees, creditors, and the broader community. The Companies Act 2006 enshrines this principle, mandating directors to act in the best interests of the company as a whole, section 170 (1) CA 2006 states that ‘the general duties specified in sections 171 to 177 are owed by a director of a company to the company’, this restates an old common law position set out in Percival v Wright (1902).
2. Shareholders Dictate Company Direction
Although shareholders have powers to elect directors and vote on significant resolutions, they do not micromanage day-to-day operations. The autonomy to manage the company’s affairs, make strategic decisions, and drive its long-term vision is with the directors. Whilst shareholders exercise influence through voting and engaging in dialogue with the board, they do not usurp the directorial function.
3. Directors Are Immune to Shareholder Scrutiny
Directors are not immune to shareholder scrutiny; in fact, accountability lies at the core of their responsibilities. Shareholders have avenues to hold directors accountable, including voting on director re-election, raising concerns at general meetings, and, in extreme cases, pursuing legal action for breaches of fiduciary duties. Lack of transparency and communication between directors and shareholders often lead to disputes.
The Companies Act 2006: Safeguarding Interests
The Companies Act 2006 is pivotal in the director-shareholder relationship. Sections 172 to 177 of the Act codify the directors’ duties, which are:
- To act within their powers.
- To promote the success of the company for the benefit of its members (shareholders) as a whole, having regard to a non-exhaustive list of factors.
- To exercise independent judgment.
- To exercise reasonable care, skill and diligence.
- To avoid conflicts of interest.
- Not to accept benefits from third parties.
- To declare certain interests they have in a proposed transaction or arrangement with the company.
These seven duties, so-called “general duties” to promote the success of the company for the benefit of its members. If the directors do not discharge their duties properly, in certain circumstances the shareholders can bring derivative claims for breach of these duties.
Such proceedings are long and costly and can often be avoided if the parties understood their roles and responsibilities.
Cultivating a Collaborative Relationship
In essence, the relationship between company directors and shareholders is symbiotic. It should be built on mutual trust, accountability, and alignment of interests. Directors must navigate often competing interests while upholding their fiduciary duties. Shareholders, on the other hand, should understand their rights and engage with the company exercising their rights judiciously.
Conclusion
As stakeholders in the corporate ecosystem, directors and shareholders play complementary roles in steering the company towards its goals and ultimate success. When they know their role, the company constitution and goals and avoid common misconceptions by embracing the principles enshrined in the Companies Act 2006, both directors and shareholders can foster a robust and harmonious relationship, ultimately contributing to the long-term prosperity of the company and avoid disputes.
To ensure that you have appropriate guidance while navigating the company legal affairs, contact Kate Boguslawska at KateBoguslawska@cartercamerons.com for advice and support.
