It is often the case
within small to medium enterprises that a company's Directors and Shareholders
are the same people. This is only sometimes the case, as the two may differ, especially
in larger companies. Generally, a company is owned by its Shareholders but run
by its Directors, who have the power to:
- Deal
with customers and suppliers.
- Act
in a legal capacity to deal with various laws and regulations.
A Director’s
obligations are described in the Companies Act 2006 and are, in principle to:
- Promote
the success of the company.
- Exercise
independent judgment.
- Exercise
reasonable skill, care, and diligence.
- Avoid
conflicts of business interest.
- Not
accept benefits from third parties.
- Declare
personal interests in arrangements or transactions with the company.
Shareholders have
limited powers derived from the Companies Act 2006 and the company's Memorandum
of Association, Shareholders' Agreement, Articles of Association, or other
Resolutions that a company's Board of Directors may have passed. Different
classes or types of shares may define shareholders' rights. However,
Shareholders' rights are principally concentrated on the following within
private limited companies:- Attend
general meetings and vote.
- Receive
a share of the company's profits.
- Receive
specific documents from the company.
- Inspect
statutory books and constitutional documents.
- Any
final distribution on the winding up of the company.
Shareholders within
public limited companies have duties that extend to include the following:
- Deciding
company Directors’ powers and remunerations.
- The
levels of company investment.
- Authorising
dividend structure.
- Appointing
and removing directors.
- Authorising
the transfer and/or the allotment of shares.
The principal duty of
shareholders is to exercise their ultimate control over the company and how it
is managed by passing resolutions on a show of hands or through a poll vote
that is proportionate to the number of shares held at company general meetings
by voting in their shareholder capacity. Two resolutions can be voted on at a
shareholder’s meeting:
- Ordinary:
An ordinary resolution is passed by shareholders where the majority votes in
favour of a proposal at the meeting. Usually, more than 50% of the votes cast
must be in favour.
- Special:
A special resolution may be required by the Companies Act, for example, to
change the Articles of Association. The Articles can also require more than 50%
majority to vote in favour of a special resolution for it to be passed.
Suppose a director of a
company breaches their obligatory duties. In that case, the company can take
legal action against the Director, an act usually instigated by the
stakeholders seeking restitution for financial loss or damage. The company has
a variety of legal options available, such as requesting the Director to:
- To
account for any profits.
- Rescind
the Directors contract.
Some of a Director’s
breaches of duty may be considered a criminal offence, resulting in
disqualification, fines, or even imprisonment for the more severe cases. Other
company Directors may claim for a breach of directors’ duties, or an individual
Director can bring a claim against a board of directors if the claim is in the
company’s name to recoup company losses.
A company has a legal
entity separate from its Directors, so usually, a Director cannot be personally
sued for a company’s debts. But if Directors have mismanaged a company that
becomes insolvent, they can be personally responsible in certain situations:
- Wrongful
trading occurs when directors continue trading after there is no reasonable
prospect of a company avoiding liquidation. A court can order a Director
committing illegal trading activities to be personally responsible for a
company’s debts.
- Fraudulent
trading occurs when directors manage an insolvent company to defraud creditors,
which is a criminal offence. A court can order a Director to repay any
fraudulently obtained monies to the company.
- Directors
who breach any duties they owe can be personally liable for misfeasance, which
covers unauthorised loans or payments to directors. In this case, a court may
order a director to repay the company for the misused money.
Any person can trade as
a self-employed Sole Trader. They run their business as an individual but may
employ staff. A Sole Trader is solely responsible for their business, its tax liabilities,
and debts. Any financial loss in the business's profitability is the total liability
of the Sole Trader.
A Partnership is a
business venture formed by two or more people who retain total liability for
their share of the business. However, this may not be in equal shares. The business’s
profits are split between each Partner. They are individually responsible for
paying their share of any tax liabilities and retain liability for their share
of any losses and the business’s debts.
A Limited Liability
Partnership is a business run by two or more people who are not personally
liable for the business’s debts. Their liability to the company is limited to
the amount of money they invest in the business. A Limited Liability
Partnership (LLP) agreement determines the Partner's profit, shares, and
responsibilities.
A Limited Company is an
organisation set up to run a business where the business’s finances are the
sole liability of the Limited Company, in which the Limited Company acts as a
separate legal entity from the company’s owners. Once tax liabilities have been
fulfilled, the profits can be distributed to Shareholders as dividends. There
are two types of Limited Companies:
- Private
Limited Company (Ltd) whose shares cannot be traded through a stock exchange.
- Public
Limited Company (PLC) – whose shares can be traded through a stock exchange.
Private Limited Companies,
Limited Liability Partnerships, and Public Limited Companies operating within
the UK must be registered with Companies House, which is legislated under the
Companies Act 2006.
The EU has similar business
laws that legislate and control business operations throughout the EU to protect
shareholders and parties with legitimate interests. EU legislation requires EU
company reporting, auditing, and transparency rules to complement the UK's
business legal framework.
EU countries operate under
separate legislation, which is amended to comply with EU Directives and
Regulations as required. However, EU public companies can incorporate as
“Societas Europaea (SE)” organisations by the corporate law of the European
Union introduced in 2004, allowing the business to operate across the EU.
Market Abuse is when a
person or group of people act to the disadvantage of other market investors
using confidential private company information that is not publicly known.
There are three types of market abuse:
- Insider
dealing is trading company stock or other securities by people internal to the
company or who have access to confidential and private company information.
- Market
manipulation occurs when there is a premeditated attempt to influence the
pricing of company stock or other securities or with the operation of a stock
market to create a false or misleading impression of market pricing.
- Unlawful
disclosure occurs when a person possesses private company information and
passes it to someone not authorised to receive it.
Insider Dealing is a
civil offence under the UK Market Abuse Regulation (UK MAR) in the UK. Under
the Criminal Justice Act 1993, it is also a criminal offence under part V. In
the EU, Regulation (EU) No 596/2014 on market abuse (the EU Market Abuse
Regulation) prohibits:
- Unlawful
Disclosure of Inside Information.
The EU Market Abuse
Regulation legislation has been maintained in the UK post-Brexit. However, it
applies to stocks traded across all EU venues if not listed or traded in the UK
to support the pre-Brexit scope to deal with market abuse across both UK and EU
markets. The challenge for the UK and EU post-Brexit is to ensure that Market
Abuse legislation is seamlessly incorporated to protect the interests of the
public, companies, and trade to the financial benefit of all parties without creating
bottlenecks to free trade.
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