Who’s really the boss? The question of control of owner-managed companies

18/05/2016

It is not uncommon in owner-managed companies for the distinction between the roles of directors and shareholders and the powers which attach to each to become blurred, or simply to be overlooked altogether. However, the differences are important and need to be kept in mind when considering who, if any single person at all, controls a private company limited by shares (being the most common form of corporate vehicle). You may take the view that by virtue of a majority shareholding, you have control, but if push comes to shove, will the law agree with your assessment? Powers of the directors

Most day to day decisions taken in connection with the running of the company will be taken by the directors, whose powers will principally be conferred by the articles of association. They may also be regulated by a shareholders’ agreement, if there is one, by specific shareholders’ resolutions or possibly even by unwritten agreement. Unless bespoke articles have been adopted, the powers of the directors are delegated to the directors collectively, not to individuals, and the principle of majority decision making applies. In the absence of agreement to the contrary, the directors will also have equal voting rights. Specific powers can however be delegated to specific directors and weighted voting can be implemented by making appropriate provision.

 It is important to note that when it comes to decisions taken at board level, an individual director’s shareholding in the company is irrelevant. So, a director who has a majority share in the ownership of the company, and who may view them self as “the boss”, may find themselves outvoted at board level, unless special arrangements are in place. Furthermore, it is worth noting that decisions taken by a director acting alone in a company which has multiple directors are always open to challenge by the other directors and shareholders, unless authority has been granted to that director to take such a decision.

Powers of the shareholders

To complete the picture, as a matter of law, certain important decisions concerning the affairs of a private company limited by shares can only be taken by the shareholders by way of a shareholders’ resolution.

Those decisions are too numerous to list here in full but include, for example, approving the payment of final dividends, removing directors, altering the company’s share capital, authorising certain financial transactions and changing the articles of association.

Some of these decisions require an ordinary resolution (simple majority), others require a special resolution, (75%  majority). Whether that is a majority of those persons voting, or a majority of the votes held by those voting – another important distinction – depends on how the vote is taken. If the resolution is being taken in ordinary circumstances at a shareholders’ meeting, the principle of ‘one person, one vote’ applies so if care is not taken, a majority shareholder could find themselves voted down, despite their shareholding.

Tackling the issues

It is, therefore, important to understand the effect of both the law and of your articles of association and to consider whether it may be desirable to make suitable provision to counter some of the potential pitfalls, either by amending the articles appropriately or putting in place a shareholders’ agreement. Ideally this should be done at the outset of any venture involving more than one shareholder while goodwill exists, rather than at a point where dispute has arisen and it may no longer be possible to reach agreement.

For more detailed information or specific advice, please contact James Westwood on 01482 485020 or via james.westwood@mytonlaw.co.uk

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