Directors and Shareholders – who holds the power?

It is a common misconception that the founder of a company will always have the final say in how the business is run. In fact, this is only the case if they are also a Director.

The Directors Service Agreement

Whilst the Shareholders own a company, the Directors quite often are the company. The Directors deal with the day to day running and act as they see fit to develop the business, and of course to increase profitability. As employees of the company, Directors should have appropriate Directors Service Agreements in place setting out exactly what is expected from them in their roles. These agreements are also the key to enforcing any post-termination restrictions. For example, you would not want your MD leaving the company to work for a competitor, and taking all the staff and customers away!

Shareholders’ claim for Derivative Action

While Shareholders don’t have a right to get involved with the day to day running of the company they aren’t left entirely unprotected. If a Shareholder feels as though a Director (or indeed the Board of Directors) is prejudicing their position (and dividends!) they can bring a legal claim for Derivative Action. This is a claim on behalf of the company against a Director for a breach of duties which has resulted in a loss to the company. This would be in breach of a Director’s Fiduciary Duty to promote the success of the company.

Unfair Prejudice in Shareholders

If the Shareholder is a minority Shareholder, and the Director in question is also a Shareholder, they can bring a legal claim for Unfair Prejudice. This is a complicated area, but essentially the shareholder would need to show the company’s affairs have been conducted in a way which is prejudicial to their interests, and that the conduct is also unfair.

Shareholders’ right to dismiss Directors

Finally, Shareholders also have the right to dismiss Directors by passing an ordinary resolution at a General Meeting of the company. This just requires a majority (>50%) of eligible votes, but bear in mind that removing a Director this way doesn’t prevent them from bringing an Employment Tribunal or contractual claim for compensation.

If you need a suitable Director’s Service Agreement for your business, or are having trouble managing relationships between Shareholders and Directors, then please get in touch with our employment law team who will be able to help.

The Backhouse Solicitors Team

Tel:         01245 893400

Email:    [email protected]

Web:     www.backhouse-solicitors.co.uk