Company Directors and Shareholders
Shareholders provide a valuable source of capital for companies in the United Kingdom. Through their investments, shareholders also gain the power to help guide the company and make key decisions. Although a company's day-to-day operations are delegated to a company's directors and executive officers, these individuals are ultimately responsible to shareholders. Both shareholders and company directors play an important role in ensuring the success of a corporation or organisation.
Shareholders versus Company Directors
A shareholder is an individual or an organisation that invests in a company by buying shares. In business, a corporation may divide its capital into shares in order to offer them for sale. This sale or issuing of shares is used to raise capital for the company. Income received from shares is called a dividend. An individual or organisation may earn income by sharing a portion of the profits made by the company. Shareholders represent a wide range of individuals and organisations, from private investors to large corporations. Shareholders are typically large institutional investors, including insurance companies, mutual funds, pension funds and foreign investors.
By comparison, a company director oversees the activities of a corporation or organisation. Directors are legally responsible for the day-to-day operations of a company, including keeping company records and providing reports to Companies House and HM Revenue & Customs. They typically have technical or business expertise to help guide the company and make decisions that will ensure the success of the company. Directors are appointed by shareholders and sit on a company's governing body, such as a board of directors.
Powers and Responsibilities
Powers and responsibilities of shareholders are generally outlined in a company's constitution. In the United Kingdom, company law also provides shareholders with a range of powers and responsibilities. For example, shareholders have the power to vote to remove a company's board of directors or director with a simple majority. Following a three quarter vote among shareholders, they also have the power to change a company's constitution or liquidate the company. Shareholders also have the authority to veto the sale of a significant percentage of a company's assets and any restriction on the ability to freely trade their shares such as buybacks or poison pills. Shareholders also have the statutory right under the Companies Act, 2006 to call meetings, provide input on directors pay, and make decisions with respect to large asset sales, mergers and takeovers, and political donations by the company.
The powers and responsibilities of company directors are also defined in a company's constitution and the Companies Act, as well as in common law. Provisions in the Companies Act requires directors to act within their powers as outlined in law or a company's constitution, promote the success of the company, avoid conflicts of interest, not accept benefits from third parties, declare interests in a proposed company transactions, and exercise reasonable care, independent judgement, skill and diligence. In turn, shareholders play a significant role in managing the responsibilities and powers of company directors. For example, directors must abide by decisions made by shareholders.
Shareholders also have the power to authorise any conflict of interest declared by a director. They also have the ability to ratify the conduct of a director, such as breach of duty, negligence, default or breach of trust. Shareholders that also serve as a director or have links to a director with a potential conflict are not permitted to vote on these decisions. The Companies Act also gives shareholders the right to pursue claims for misfeasance or transgressions against a director on behalf of the company. In order to do so, shareholders must be given consent by the court to proceed. Shareholders also have the power to authorise certain transactions between the company and its directors, including approving loans from the company to a director.