Director vs Shareholder...
what if you are both?

In most larger corporations, directors duties are a given and something that is closely monitored, however, for some small-medium enterprises (SMEs) and businesses, while the directors are very much focused on the business itself they are often the shareholders as well, making the distinction between acting as a director and being an owner a little blurred.

The Fine Line between acting as a Director and being a Shareholder

There is so much information to be found and opinions that can be sought on what makes a good director. Some of that is common knowledge known by many, some of it could be considered common sense, and some can be easier said than done, but there are responsibilities that often get overlooked especially when a person is carrying out two very different roles, namely, being a Director AND a shareholder at the same time.

We have worked with numerous clients where the director may be a sole director or just one of two or three partners and their sole focus is just keeping their company afloat or in some cases using their company to create the best work-life balance that they can for themselves. Unfortunately, sometimes this greyed line can come at the cost to the business itself, and they end up overlooking the legal roles they owe to the company.

The Distinction

For some directors, they may be a shareholder as well as a director of the company. This can be particularly the case for small-medium businesses and in these situations, it is so important that a distinction is kept between acting as a director and being an owner – and it is crucial that you act appropriately for the job in hand, keeping a clear line between the two roles. But how is this possible if you are both – you will always hold some bias towards running the company in a way that benefits you as the shareholder, rather than the company as a whole.

What is a Shareholder?

A shareholder owns a percentage of shares in the company and while they may have a hand in making some decisions, including those reserved for the shareholders to make either by the Articles of Association of the company or a Shareholders Agreement, generally they have no role in running the business day to day.

They appoint directors for this role as they will be the ones who have the expertise, experience and business know how. While it is often thought that the shareholder holds no power, they can have significant influence over the director’s actions – especially if they are a majority owner.

What is a Director?

Every private limited company must have at least one company director, this must be an actual person as opposed to another company. A director is essentially an agent of the company that is appointed by the company’s shareholders to manage the day-to-day business, however it is important to stress that the directors must work for the best interests of the company itself, not the shareholders themselves and this is where relationship breakdowns and director-shareholder disputes can arise.

A group of directors is known as the board of directors; they will often delegate certain roles, powers, responsibilities to specific directors (usually executive directors) for the more efficient running of the company; this allows for the best qualified individual to focus on their area of expertise (without the tangle of other matters interfering from on high). The board may also obtain the advice of non-executive directors who support the company in a different capacity as executive directors but are no less liable to the duties imposed by the law.

A Director is any person who is a:

Company Officer / Statutory Director - Someone who has been officially appointed to be an officer of a company and registered at Companies House

De Facto Director - Someone who acts as a director without having been officially appointed or holds themselves out to be a director (e.g. has Director in their job title)

Shadow Director - A person who, in accordance with whose directions or instructions the directors are accustomed to act

Alternate Director - An alternate appointed by a director to act on his/her behalf or in their absence

Bear in mind, the duties still apply to you even if:

  • You are not active in your role as a director
  • Someone else tells you what to do
  • You act as a director without being formally appointed as one
  • You control a board of directors without being on it

Solutions

So, what do you do when the roles between the director and shareholder become blurred or disintegrate entirely?

If you hold both roles in your company, we would recommend seeking independent advice in the form of a non-executive director, a business operations advisor or management consultant in order to offer an objective perspective, analysis or business intelligence on the direction you want to take your business.

Alongside your own view point, aims and objectives for your business, and of course your experience and expertise in your business industry, unbiased observations can offer a fresh look on any challenges you are facing or that are on the horizon, and lead you to opportunities you may not have considered.

This can be especially effective where there are two or three partners or shareholders working together as directors of a company. It is all too easy for disagreements to arise due to differing opinions and ambitions for the business, not to mention in some case personal agendas.

Keeping an open and transparent dialogue and clear intentions between you can create an atmosphere that has less ambiguity and more clarity helping to separate a shareholders’ struggle between running the company as a director and owning the business.

Having an independent consultant on board can help solve strategic, operational or technical problems in your existing business model, help you devise business plans for your growing business, and recommend long-term goals that can improve efficiency or cut costs.

By freeing the conflict of interest between the two roles, it can allow you to focus on the responsibilities of being a director, and avoid overlooking the duties a director is obliged to follow for the best interests and long term success of the company.

A reminder of your duties as a Director

As a director of a company, you have certain duties you must adhere to. Failure to do so, can result in being fined, banned from serving as a Director for several years, and/or face a prison sentence of up to 15 years. Not a situation you want to find yourself in!

Please note that the following does not necessarily relate to a director in a public company or a company who is in a regulated industry.

Your Duties as a Director

In addition to a director’s general responsibilities to the company and day to day role, under the Companies Act 2006 (“CA”), a director has a duty to:

  1. Act within Powers
    • Only act in accordance with the company's Articles of Association and board decisions/resolutions
    • Only exercise powers for the purpose they have been given
    • There may be other documents which restrict or give powers to the board, such as a shareholder’s agreement.
  2. Promote the Success of the Company
    • Must act in good faith
      1. Act in a way that promotes the success of the company in a fair way that benefits its members/shareholders as a whole
    • Have regard and consideration for:
      1. long term consequences
      2. employee interests
      3. business relationships
      4. impact on the community and the environment
      5. maintain business standards
  3. Exercise Independent Judgement
    • Exercise powers independently
    • Must not rely on the advice of others or for others to make decisions on the director’s behalf
  4. Exercise Reasonable Care, Skill & Diligence
    • Acting in a way that a reasonably diligent person would act with the same skill and knowledge that the director processes, and would be reasonably expected of someone in the same position
    • Act in a way that is not deemed to be negligent
    • Perform your role to a high standard and to the best of your ability; the more qualified and experienced you are, the higher the standard required
  5. Avoid Conflicts of Interest
    • Must avoid any situation where you have or could have, direct or indirect, interest that conflicts or could potentially conflict with the interests of the company
    • Includes a conflict of duties and the interests of close family members
    • The duty continues after resignation and maybe strengthened by any personal restrictions held in a service or employee agreement or shareholders agreement
    • There is no set of guidelines for what situations would determine or potentially give rise to a conflict, but some could be:
      1. Multiple directorships
      2. Personal interests
      3. Advisory positions
      4. Using company information for own person gains
      5. Connected relationships
  6. Not to accept benefits from 3rd Parties
    • Prohibiting personal benefits as a director from any act or omission
    • Applies to former directors
    • Comply with Bribery Act 2010
  7. Declare interests in proposed and current transactions
    • Declare the nature and extent of interest in an existing transaction
    • Declare the nature and extend of interest in a Proposed transaction
    • Mitigating steps to avoid conflicts arising
    • Includes the interests of family members

In addition to the duties imposed by the Companies Act 2006, some additional duties have developed through case law, such as:

  • Duty of Care and Skill (i.e. acting without negligence)
  • Duty to act in the bona fide interests of the company (i.e. acting in good faith)
  • Duty to act for a proper purpose (i.e. not be for an improper motive)
  • Duty of Confidentiality
    • Directors owe a duty of confidentiality across all the companies they may act for, including their subsidiaries and any joint venture companies.
  • Duty for ensuring the company’s compliance with health, safety and welfare of its employee’s
  • Duty to comply with obligations arising under environmental, anti-bribery, forced labour legislation.

After you leave a company

A director’s duties may continue to apply even after leaving a company.

For instance, if you still exert influence over the board of directors (i.e. a shadow director) following your termination/resignation, you would still be considered as bound by the director’s duties above.

Additionally, leaving a company does not stop you from being liable for actions or omissions that occurred during your role as a director. For this reason, many companies will take out Directors and Officers insurance.

View More Articles