In any company, clarity around who holds decision-making power is fundamental to good governance. While shareholders and directors both play critical roles, their responsibilities differ significantly and it is important to understand where authority lies.
In this article, Will Talbot-Davies explores how companies make decisions in practice and the considerations directors need to be aware of.
What are the roles of shareholders and directors when it comes to company decision-making?
Shareholders own the company but may have limited involvement in its day-to-day operations. Their influence is primarily exercised through approving major decisions that affect the company’s structure, capital or ownership.
Directors, on the other hand, are appointed by the shareholders to manage the company’s affairs and make operational decisions on their behalf. Typically, this will include day-to-day decisions such as entering into standard contracts, opening and managing bank accounts and managing risk and compliance frameworks.
In reality, it is common for early-stage or small companies (i.e. startups) to have overlap between directors and shareholders and founders often wear both ‘hats’. Therefore, it is important for the relevant individuals to think about which role they are fulfilling when making decisions for the company.
When do directors need to obtain shareholder approval?
When directors are acting on behalf of a company, they must first establish whether any of the decisions they are making require prior shareholder approval.
This typically involves a three-step review of the following:
- statute – decisions that legally require shareholder approval are set out in the Companies Act 2006
- the company’s articles of association - these represent the company’s constitution and may impose additional restrictions on directors’ decision-making ability.
- shareholder / investment agreements – these are contracts entered into between the shareholders and the company (usually all of the shareholders but occasionally just one shareholder or a specific group). They often contain bespoke shareholder consent matters (also known as ‘Reserved Matters’), requiring specific shareholder or investor approval.
What must directors consider before making company decisions?
Even if directors are able to make decisions independently on behalf of the company, they must always be aware of the seven statutory directors’ duties in the Companies Act 2006.
All seven of these duties are fundamental but three of the most relevant for directors to consider during company decision-making are:
(1) the duty to promote the success of the company (s172);
(2) the duty to avoid conflicts of interest (s175)
(3) the duty to declare an interest in a proposed transaction (s177)
The subject of directors’ duties is too lengthy to go into any more detail here however please feel free to contact us if you would like further advice. There can be serious personal consequences for directors who breach their duties and we would be happy to assist if you have any concerns.
Our key takeaway and how we can help
In light of this, the key principles for directors to be aware of when making decisions on behalf of a company are as follows:
- consider whether there are any shareholder approvals or consents required pursuant to the Companies Act 2006, the company’s articles of association or any separate shareholder or investment agreement
- ensure they have considered their directors’ duties under the Companies Act 2006
Please contact us if you require guidance on any aspect of company decision-making as our experienced corporate law team would be happy to help.
About Will
Will Talbot-Davies is an associate in the corporate and commercial team.
Get in touch
If you would like to speak with a member of the team you can contact our corporate and commercial solicitors by telephone on +44 (0)20 3826 7511 or complete our enquiry form.
