The difference in law between directors and shareholders sometimes causes confusion in private companies. Shareholders and directors have different roles. The shareholders (also called members) own the company and the directors manage it. This is where the confusion arises as private companies are often owned and managed by the same people and when they act on behalf of the company, they will be acting (sometimes without realising the distinction) either as a director or as a shareholder.
It is important to understand such distinction as company law requires some decisions to be made by the directors in board meetings and others to be made by the shareholders in general meetings. To complicate matters further, some decisions have to be made by both directors and shareholders.
Whether a decision has to be made by a board meeting, a general meeting or both, depends on the Companies Act 2006 and/or the company’s Articles of Association. The Companies Act has detailed provisions on the rights, duties and powers of both directors and shareholders. A company’s Articles will have provisions that may supplement, replace or amend those in the Companies Act.
Whilst the directors are in control of the day to day running of the company, the shareholders hold the ultimate power. For example, any director can be removed from office by an ordinary resolution (ie a simple majority of votes of the shareholders may remove a director).
In general, the directors are in operational control but, for some important decisions, approval is needed from the shareholders. You might think that this is not important where the directors and shareholders are the same people but, if decisions are taken in the wrong forum and there is a subsequent dispute between the individuals concerned, it can cause complications, not to mention significant expense.
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