Directors and Shareholders: Whose Decision Is It Anyway?

A reoccurring theme, when advising directors and shareholders of small and medium sized enterprises, is whether a particular decision rests with the board of directors or with the shareholders. 

This distinction can be academic, particularly if the directors and shareholders are one and the same and there is agreement on what the course of action should be. However, where this is not the case, it is very easy to fall foul of company law if a director or shareholder forgets which ‘hat’ they are wearing for a particular decision.

Directors

The board of directors are responsible for the management of the company. A company’s constitution will usually say that the directors are empowered to exercise all the powers of the company. These powers must usually be exercised by the board collectively at a properly convened meeting. Unless otherwise stated in the company’s constitution or shareholders’ agreement, each director present at the meeting will have one vote. In the case of a deadlock, the chairman may or may not have the casting vote, again, depending upon what the company’s constitution or shareholders’ agreement says.

Typically, a board will delegate decisions to committees or to individual directors. So, for instance, the finance director, sales director or operations director will each have responsibility for certain areas within the business and delegated authority to make decisions concerning those areas.

Shareholders

A shareholder owns shares in a business but this does not mean that the shareholder automatically has any managerial control over the affairs of a business. Indeed, a shareholder may not necessarily be a director of the company and may not even be an employee.

A shareholder’s power derives from the fact that certain types of shares carry an entitlement to vote at shareholder meetings or on shareholder written resolutions. Some shares do not carry voting rights so it is important to check the company’s constitution or any shareholders’ agreement to ascertain the position.

There are two main types or resolution that a shareholder can vote on: ordinary and special resolutions.

An ordinary resolution is passed at a meeting on a show of hands by a simple majority or, if a poll vote is requested, by the shareholders representing a simple majority of the total voting rights of the shareholders.

A special resolution is passed at a meeting on a show of hands if it is passed by a majority of not less than 75% of the votes cast by those entitled to vote or, if a poll vote is requested, by shareholders representing not less than 75% of the total voting rights of the shareholders.

Common shareholder decisions

Below is a list of matters which commonly require shareholder approval although this is subject to the company’s articles of association and shareholders’ agreement.

Ordinary resolutions

•    Removal of directors
•    Approval of director’s long term service contracts
•    Approval of loans to directors
•    Ratification of acts by directors
•    Authorising political donations
•    Removing an auditor from office
•    Authorising a share buy-back, sub-division or consolidation of shares

Special resolutions

•    Amendment of articles of association
•    Change of name
•    Disapplication of share pre-emption rights
•    Reduction of share capital


Stephen is head of the Corporate & Commercial team at Verisona Law having joined in April 2016 after a number of years with Bond Dickinson. He specialises in acquisitions and disposals (including MBOs and MBIs), group reorganisations, financings, joint ventures, shareholders' agreements and EMI schemes. He also advises corporate clients on corporate governance and other risk and compliance related matters and regularly provides training to company directors on these subjects.

In addition to his corporate finance practice, Stephen undertakes a wide range of commercial work including advising on IT agreements, intellectual property rights, data protection, outsourcing agreements, distribution agreements and contracts for the supply of goods and/or services.