In many cases, the director of a company will also be a shareholder – but the roles are separate and have different powers and responsibilities. There can also be different levels of control within those roles.
In this article we will look at the differences and discuss how those can be managed to lessen the chances of an impasse on any issue.
The Shareholders of a company have the rights and obligations set out in Part 7 of the Companies Act 1993 (the Act). For the most part, those powers can be exercised by an ordinary resolution passed by a simple majority of those shareholders entitled to vote and voting on the question.
There are, however, certain powers which can only be exercised by a “special resolution”. Those powers are –
a. To adopt a constitution or, if it has one, alter or revoke the company’s constitution:
b. Approve a major transaction:
c. Approve an amalgamation of the company:
d. Put the company into liquidation.
The special resolutions in a, b and c above can be rescinded by another special resolution but a special resolution to liquidate the company cannot be rescinded in any circumstances.
If a formal meeting of the shareholders is held, a special resolution requires the votes of not less than 75% of shareholders, who are entitled to vote, to vote in its favour.
If the resolution is to be passed in lieu of a meeting, the requirement is that not less than 75% of shareholders who, together, hold not less than 75% of the shares, vote in favour of the resolution.
One of the powers given to the shareholders pursuant to section 155 of the Act, is the appointment, by an ordinary resolution, of the company’s directors.
In general terms, the directors of a company make the decisions about the management of the business and affairs of the company and, for the most part, they do not have to seek shareholder approval for those decisions. The directors do however need the approval of shareholders for major transactions, which includes the following –
a. The acquisition of, or an agreement to acquire, assets, the value of which is more than half the value of the company’s assets before the acquisition;
b. The disposition of, or an agreement to dispose of, assets of the company the value of which is more than half the value of the company’s assets before the disposition
c. A transaction that has, or is likely to have, the effect of the company acquiring rights or interests or incurring obligations or liabilities, including contingent liabilities, the value of which is more than half the value of the company’s assets before the transaction.
On the face of it, the shareholders hold the upper hand when it comes to the big decisions – including the ultimate decision to liquidate the company.
However, depending on how the shareholding is structured, unless there is agreement between the shareholders, there can be situations that create an impasse between the shareholders when it comes to making that decision.
If there is only 1 shareholder there is no problem but, in many smaller companies, there might be 2 or 3 shareholders. In those circumstances, to pass a special resolution in lieu of a meeting, to liquidate the company all three shareholders need to agree.
Even if one shareholder holds the bulk of the shares you cannot reach the required 75% of shareholders requirement.
In a recent matter referred to us, the majority shareholder held 65% of the shares with the remaining 35% held by two others. The majority shareholder was not able to appoint liquidators by way of a special resolution.
The structuring of the shareholding in a company can effect the ability of the shareholders to make the major decisions for the company. Amended constitutions and shareholder agreements can be used to try and mitigate those problems but specialist advice should be obtained before finalising and signing either of those documents.